Are char­ters in danger of clos­ing?

The Arizona Republic - - Front Page - Craig Har­ris

Fol­low­ing the abrupt clo­sure of at least three Ari­zona char­ter schools over the past year, a new re­port con­cludes more than 100 of the state’s char­ters are in danger of clos­ing be­cause of ex­ces­sive debt and other fi­nan­cial trou­bles.

It’s a “near cer­tainty” that more than 50 of the state’s 544 char­ter schools will close in the near fu­ture, ac­cord­ing to the re­port by the Grand Canyon In­sti­tute, a self-de­scribed cen­trist think tank.

As a whole, Ari­zona’s 544 char­ter schools owe more to cred­i­tors than they’re worth as busi­nesses con­tracted with the state to ed­u­cate kinder­garten

to 12th-grade stu­dents, the re­port states. “Like any busi­ness, an over­lever­aged char­ter is fi­nan­cially vul­ner­a­ble and could fail if it then suf­fers an in­come loss,” the re­port states.

“You will see a bunch of char­ters fold­ing sud­denly,” said Curt Car­dine, the study’s main au­thor and a for­mer char­ter ex­ec­u­tive for EdKey Inc., a large Ari­zona char­ter chain that had a $7.74 mil­lion net deficit as of June 30, 2018.

Car­dine didn’t pre­dict when the schools would close, and the names of those schools were not in­cluded in the re­port.

The re­port, the third from the group on char­ter schools, fol­lows a year-long Ari­zona Repub­lic in­ves­ti­ga­tion that ex­am­ined how min­i­mal state reg­u­la­tion and over­sight has pro­duced multi-mil­lion­aire char­ter op­er­a­tors — some­times through trans­ac­tions that add sig­nif­i­cantly to the schools’ debt.

The Repub­lic also found 1 in 4 char­ter schools had sig­nif­i­cant fi­nan­cial red flags, and that when com­pared to dis­trict schools char­ters spend much more on ad­min­is­tra­tion than in the class­room, even though char­ters re­ceive more per-stu­dent state fund­ing than dis­trict schools.

Dif­fer­ing opin­ions from state’s char­ter groups

Kathy Sense­man, chair­woman of the Ari­zona State Board for Char­ter Schools, which reg­u­lates the schools, dis­puted that so many char­ters will close, say­ing Grand Canyon In­sti­tute’s es­ti­mates are “a lit­tle in­flated.”

But, she said, she con­sid­ers the in­sti­tute’s re­search to be “fair.”

Ari­zona Char­ter Schools As­so­ci­a­tion, a non-profit that rep­re­sents the in­dus­try, was less di­plo­matic, call­ing the re­port “The Grand Canyon In­sti­tute’s lat­est un­sub­stan­ti­ated, anti-char­ter screed.”

“Let’s be clear: there is ab­so­lutely noth­ing in our state’s long char­ter his­tory that sup­ports GCI’s as­ser­tion of a com­ing wave of char­ter in­sol­ven­cies,” said Matt Ben­son, a spokesman for the as­so­ci­a­tion. “In fact, go­ing back a decade, Ari­zona’s track record for char­ter clo­sures has been sta­ble and con­sis­tent with ap­prox­i­mately one school clos­ing each year due to fi­nan­cial dis­tress. That’s one school out of more than 500 op­er­at­ing statewide, a fi­nan­cial fail­ure rate of less than 0.2 per­cent. Epi­demic? Hardly.”

The re­port noted four char­ter schools that have closed since 2016 had for sev­eral years filed fi­nan­cial re­ports with the Char­ter Board show­ing they were in fi­nan­cial dis­tress. The Char­ter Board al­lowed the schools to stay in busi­ness de­spite their fi­nan­cial prob­lems be­cause the board lacked the author­ity to shut them down.

One of those schools, Dis­cov­ery Creemos Academy, abruptly closed a year ago.

Daniel K. Hughes, the school’s pres­i­dent and chief ex­ec­u­tive, ad­mit­ted in Mari­copa County Su­pe­rior Court to de­fraud­ing the state and fed­eral gov­ern­ment by in­flat­ing stu­dent en­roll­ment fig­ures to get ad­di­tional funds. He is sched­uled to be sen­tenced Tues­day and faces up to five years in prison.

The num­bers be­hind the study’s find­ings

The re­port’s au­thors ex­am­ined fi­nan­cial records, in­clud­ing loan doc­u­ments and school au­dits sub­mit­ted to the state for all Ari­zona char­ter schools be­tween fis­cal 2014 to 2017. The Grand Canyon In­sti­tute found:

❚ Char­ter schools have $2.56 bil­lion in debt, while their prop­erty and as­sets are val­ued at $1.4 bil­lion.

❚ The state’s char­ter mar­ket holds 33 per­cent of all pub­lic school debt while ed­u­cat­ing just 16 per­cent of Ari­zona’s 1.1 mil­lion pub­lic-school stu­dents.

❚ Ari­zona char­ter schools pri­mar­ily bor­row for build­ings and class­rooms us­ing what are deemed as “junk bonds” with high-in­ter­est rates guar­an­teed by pro­jected en­roll­ment growth. If the growth does not oc­cur, char­ters have to spend more on mort­gage pay­ments and less in the class­room.

❚ One-third of char­ter schools are los­ing en­roll­ment. While the char­ter sec­tor has grown sig­nif­i­cantly dur­ing its quar­ter-cen­tury of ex­is­tence, three-quar­ters of the growth from fis­cal 2014 to 2017 was cap­tured by 10 char­ter com­pa­nies, with Ba­sis Char­ter Schools Inc. be­ing the big­gest win­ner with 5,683 ad­di­tional stu­dents.

❚ Char­ters re­ceive “ad­di­tional as­sis­tance” funds from the state that are in­tended for build­ing debt be­cause char­ters can­not get lo­cal voter ap­proval for bonds. All char­ters, in­clud­ing on­line schools, re­ceive the money whether they need it or not.

The think tank rec­om­mended char­ter com­pa­nies not be al­lowed to in­cur new debt be­yond the value of their prop­erty un­less they can doc­u­ment years of stu­dent growth.

The or­ga­ni­za­tion also stated the char­ter ad­di­tional as­sis­tance funds (up to $2,100 per stu­dent) should only go to schools with “sat­is­fac­tory aca­demic per­for­mance” and only to pay for fa­cil­ity fund­ing at no more than fair mar­ket value.

The Grand Canyon In­sti­tute also rec­om­mended char­ter com­pa­nies with debt be re­quired to dis­close whether they have met their en­roll­ment pro­jec­tions.

Lastly, the group rec­om­mended that on­line schools only re­ceive ad­di­tional as­sis­tance money if it is used to cover the cost of com­put­ers that stu­dents could use in their homes or for sub­si­diz­ing stu­dents’ in­ter­net ser­vice.

As part of its in­ves­ti­ga­tion, The Repub­lic found Pri­mav­era on­line char­ter school Chief Ex­ec­u­tive Damian Creamer paid him­self $10.1 mil­lion the past two years, as his on­line school had dropout rates in ex­cess of 40 per­cent, low test scores and small por­tions of its bud­get ded­i­cated to teacher pay.

‘Leg­is­la­ture should ap­prove ... over­sight and trans­parency’

Sense­man said the Char­ter Board suc­cess­fully sought from the Leg­is­la­ture changes to the law that al­low the board to shut down char­ter schools with sig­nif­i­cant fi­nan­cial prob­lems. She said the board also has de­vel­oped rules to im­ple­ment the re­forms, and it could be­gin tak­ing ac­tion against char­ter schools per­haps later this year.

Sense­man said the board likely would place a fi­nan­cially fail­ing school on a plan of as­sis­tance to keep it open and not dis­rupt the ed­u­ca­tion of stu­dents. If a school will not agree to state as­sis­tance, the board has lever­age to shut it down, she said.

Sense­man ex­pects law­mak­ers this year will make ad­di­tional changes to the char­ter school laws, and her or­ga­ni­za­tion will be seek­ing leg­isla­tive ap­proval for eight ad­di­tional staff to reg­u­late char­ter schools. The agency cur­rently has 11 em­ploy­ees.

Ge­orge Cun­ning­ham, Grand Canyon In­sti­tute chair­man, agreed that the Char­ter Board needs more staff for its reg­u­la­tory du­ties.

“If Ari­zona is go­ing to al­lo­cate about $1.5 bil­lion per year to char­ter schools, then our Leg­is­la­ture should ap­prove leg­is­la­tion and in­vest the re­sources to en­sure they op­er­ate with suf­fi­cient fi­nan­cial over­sight and trans­parency,” Cun­ning­ham said.

Ben­son said the Char­ter As­so­ci­a­tion is work­ing with law­mak­ers to pro­duce a “pack­age of smart, char­ter-backed re­forms.”

“These con­sen­sus and tar­geted re­forms will im­prove trans­parency and ac­count­abil­ity in the key ar­eas of char­ter gov­er­nance, fi­nances, pro­cure­ment and over­sight while main­tain­ing the es­sen­tial au­ton­omy and free­dom that has en­abled Ari­zona char­ter schools to flour­ish over the past quar­ter-cen­tury,” he said.

The Char­ter As­so­ci­a­tion the past sev­eral years has fought the re­forms sought by Democrats, who are the mi­nor­ity party.

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