Expansion of charter spurs debt questions
Did Basis use Ariz. money for other states’ schools?
It’s midmorning, and children in Room 101 at Basis Phoenix South Primary are sprawled on the floor and seated at desks, with their faces buried in readers.
The first-graders here, the latest and 20th Arizona location to open under charter-school powerhouse Basis Charter Schools Inc., spend 85 minutes on humanities before heading to math.
They then scurry to another classroom to learn drama, music or art. During the week, they’ll attend phonics, physical education and Mandarin Chinese classes.
Though no child is older than 8, the K-2 school runs like a traditional junior high, with teachers specializing in their subjects.
It’s the Basis way: Primary schools operate like middle schools, middle schools like high schools and high schools like colleges. The results, by most accounts, have been remarkable.
Test scores are through the roof, typically beating traditional Arizona public schools. Kids graduate with numerous college credits. Six of Basis’ Arizona schools were ranked among the top 10 high schools in the country this year by U.S. News & World Report.
It’s a system Basis, a federally approved non-profit corporation with a charter contract to run tuition-free Arizona public schools, is trying to duplicate around the country with new public campuses in Washington, D.C., and Texas. Another campus is planned later this year in Louisiana.
The rapid expansion has plunged Basis into debt, raising concerns from critics and the Arizona State Board for Charter Schools, which could put the brakes on new Basis classrooms in Arizona.
Charter-school watchdogs say Basis could put its Arizona operations at risk to get loans to expand elsewhere, and charter-board staff is not recommending Basis’ planned expansion in Mesa and Flagstaff because Basis has not met state financial expectations.
Charter operators, including Basis, representing 138 of the state’s 538 charter schools showed financial warning signs in the 2016-17 school year, an Arizona
Republic analysis of data from the charter board shows.
But the state cannot intervene in charter schools’ operation for financial reasons alone, even when the numbers charters report to the state show cause for concern.
Arizona schools at risk?
Since 2012, Basis has more than doubled the number of schools it operates in Arizona, to 20, while opening three more in Texas and one in Washington, D.C.
Like many charter operators, Basis has done this by borrowing from private investors.
Traditional public districts, meanwhile, finance new schools by asking local voters to approve bonds that are repaid with property taxes. Charter schools, by law, cannot do this but are given additional dollars by the Arizona Legislature.
Basis, which last year received about $84 million in state money to operate its Arizona schools, secured loans for its out-of-state schools by pledging as collateral future tax dollars and its Arizona campuses.
Basis disclosed it was using its Arizona properties and future state funding as collateral for the out-ofstate schools in documents filed with the Municipal Securities Rulemaking Board, which regulates the municipal bond market.
DeAnna Rowe, Basis’ executive director, acknowledged Basis bundles its Arizona properties with outof-state schools for lending purposes to get a lower interest rate.
But no Arizona tax dollars are spent on out-of-state buildings and operations, Rowe said, and Basis Arizona schools and state tax dollars are not at risk from the loans. Tax dollars in Texas and Washington, D.C., will cover loan payments for those schools, she said.
Kathy Senseman, Arizona State Board for Charter Schools president, said it’s common for charters to pool resources for borrowing purposes.
“This allows the charter to receive bonds at a lower interest rate, ultimately saving the schools money in the long run,” Senseman said.
Two municipal market regulators who reviewed Basis’ loan solicitations for The Republic said the arrangement is not without risks. The Basis bond agreement allows lenders to go after Basis’ Arizona public funding and property if Basis’ out-of-state entities default and are unable to make debt payments.
Rowe said if financial problems were to arise out of state, Basis would sell its non-Arizona properties. She emphasized, however, the charter chain is financially sound.
Great Hearts, another prominent Arizona charterschool operator with classrooms in Texas, avoids pledging Arizona funds for projects in other states.
Bill Odell, the charter-school chain’s spokesman, said Great Hearts expects each state’s operations to be self-sustaining.
“Great Hearts, by operating policy, does not use state dollars from one state to finance, rent, build or purchase property in another,” Odell said.
More public assistance
Basis has relied on Arizona governments in other ways to expand.
It has used government-backed industrial development authorities, which include the state of Arizona and cities such as Phoenix, which act as conduits to sell Basis’ bonds. This makes the investments tax-free to investors.
Basis last August and November also tapped the state’s Public School Credit Enhancement Program, borrowing $35.6 million, records from Gov. Doug Ducey’s office show.
Ducey, who has close ties to Basis board members, pushed for legislative approval of the insurance program, which enhances borrowers’ credit ratings, allowing charter schools to get loans at lower interest rates.
Basis, Rowe said, has a BB credit score, as rated by Standard & Poor’s.
With the state’s help, its credit score improves to AA-, one of the highest ratings, reflecting minimal risks to investors.
An entity with a BB rating “faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions,” and could lead to “inadequate capacity to meet its financial commitments,” the S&P website says.
Basis had $274 million in long-term debt as of June 30, 2017, according to its audit.
In essence, Basis uses governmental entities to borrow funds, and then uses tax dollars to pay back that debt on the property it owns.
During its recent expansion into Texas and Washington, D.C., Basis’s consolidated financial records show it has gone from making a $688,632 profit, in June 2012, to a cumulative $32 million deficit as of June 30, 2017, an audit filed with the charter board shows.
Millions of dollars in fees related to its borrowing have contributed to that deficit.
In 2017, Basis reported a $9.1 million deficit, the fifth consecutive year with an operating deficit, records show. During that time, Basis absorbed at least $18.5 million in loan prepayment penalties as it funded growth in Arizona and elsewhere.
Rowe, Basis’ executive director, downplayed the deficit’s significance. Basis’ deficit was not caused by overspending, she said. Instead, Basis is reporting “book losses” because of depreciation and debt refinancing related to its expansion, Rowe said.
Refinancing its debt will yield long-term savings that will put more money into classrooms, Rowe said, noting the organization had accumulated $18.4 million in cash as of June 30, 2017.
Jim Hall, a charter-schools watchdog, said Basis’ borrowing to finance a “real-estate empire” could imperil the charter chain. Hall, who runs Arizonans for Charter School Accountability, said Basis could become the next Discovery Creemos Academy, the Goodyear charter that abruptly closed this year because of financial problems.
The charter board, the governing body for the state’s 538 charter schools, determined Basis has for three consecutive years failed to meet two of its three key measures of financial sustainability.
Ashley Berg, the board’s executive director, said in a statement that the most recent Basis audit “signals a moderate financial risk to the charter holder and does not meet the board’s expectations.”
Among the board’s findings:
Basis did not meet “sustainability measures” for net income.
Basis did not meet the board’s standard for “fixed charge coverage ratio,” the amount of cash flow a charter holder has to cover fixed obligations or charges.
A Republic analysis of charter records found dozens of charter schools at risk of closing because of financial problems.
Basis is in no danger of closing, Rowe said. She added that demand to attend Basis schools remains high, with hundreds of children on waiting lists.
Plans for more growth
Michael and Olga Block founded Basis in 1998 with one Tucson school and 50 students. Today, Basis has 24 schools and 16,681 students in three states.
Because state funding follows the child, Basis’ expansion has given it a larger amount of Arizona education funds.
In 2017, Basis received almost $84 million from the state of Arizona. A share of that money — about $10 million — goes to Basis.ed, the Blocks’ private company, as management fees. Basis schools in other states pay Basis.ed another $4 million in management fees.
As Basis builds more schools and adds more students, Basis.ed has the potential to make more money. Because Basis transfers those public funds to the Blocks’ private business, it’s not required to disclose how much profit it makes or how much the Blocks are paid.
The drive to expand brought Basis to south Phoenix last fall. Brian Jones, who runs Basis South Phoenix, went door to door and visited libraries and local business to recruit students. The response was overwhelming, he said.
With an enrollment of 193, classes are full and more than 100 students are on a waiting list. Basis plans to add a third-grade class this fall.
Some saw in the move to south Phoenix an answer to critics who have said Basis’ academic excellence reflects its decision to operate in more-affluent areas. Basis South Phoenix is in the heart of the Roosevelt School District, where most of the district’s 9,500 students qualify for the federal free or reduced-cost lunch program.
Jones said 95 percent of the students live near the campus, at 5700 S. 19th Ave. Half are Hispanic, 25 percent are African-American, and the rest are white, Asian or in other ethnic groups.
If all goes as planned, by the time the students reach fifth grade, many will be taking pre-algebra. Most will learn calculus by ninth grade, and they will be taking college-level courses in high school to prepare for Advanced Placement exams.
On Monday, Basis is seeking approval for further expansion in Arizona, in Flagstaff and Mesa.
The board will consider Basis’ finances as it evaluates that request. Basis has not met the criteria for a recommendation to expand, according to staff, who cite “the Board’s Financial Performance Expectations.”
The board cannot close charter schools based on their finances, but it can deny charters’ request to expand because of their finances.
Rowe said Basis provided additional material to the charter board to address questions about its finances.
Basis told the board it had “successfully refinanced all of the higher priced debt into the new debt structure, and we are saving millions in annual debt service that instead is being spent in classrooms at Basis schools.”
Curt Cardine, who specializes in school finance as a fellow with the Phoenix-based nonpartisan Grand Canyon Institute think tank, said if Basis stops growing and recruiting new students, it could face financial trouble.
“What do you call an investment where you have to keep bringing in more investors? That’s what this is looking like,” Cardine said. “They are betting with the revenue that will come in.”
Cardine added that because of Basis’ debt, it will first use state revenue to pay bondholders, potentially leaving fewer dollars for its classrooms.
Rowe dismissed Cardine’s concerns.
“We believe in our model and the ability to operate within the structure of the charter law in Arizona, which has allowed Basis to provide a world-class education to families across the state,” Rowe said.
“We believe in our model and the ability to operate within the structure of the charter law in Arizona.” DeAnna Rowe Basis executive director