Auditor Has Eye on Charter School Building Leases

Not-So-Hidden Costs
Posted on 01/23/2019
Image of Important Stamp(From Ohio.com/Akron Beacon Journal)

Millions of Ohio tax dollars flow through charter schools each year, not for books or teachers but to for-profit companies that charge rent.

That’s the upshot of a special report released this month by Ohio Auditor Dave Yost in the days before he became Attorney General. Yost examined exorbitant lease agreements over the past three school years after receiving a complaint that charter school management companies had been “diverting public dollars away from educating students and into the pockets of private companies and the individuals who run them.”

The statewide findings, which include a review of leases for schools in Akron, Canton, Cleveland and other major cities, come five years after the Beacon Journal and public policy groups in Ohio reported that these high rents negotiated by out-of-state landlords and school management companies with overlapping staff could pose potential conflicts of interest.

Yost looked at lease agreements with eight charter schools managed by Michigan-based National Heritage, 13 by Virginia-based Imagine Schools and 17 by Chicago-based Concept Schools, finding that the average rent paid per pupil ranged from $1,472 at Concept to $2,325 at Imagine, considerably higher than the $848 paid by a random sampling of six other Ohio charter schools without management companies.

Orion Academy in Cincinnati paid National Heritage $1,451,040 in 2016, or $867,000 more than the annual rate at comparable buildings in the area, according to the report.

Yost’s accounting found that schools managed by National Heritage, Imagine and Concept spend more than twice their state revenue on facilities than the sample of six other schools — and for Imagine, it was triple the amount.

For National Heritage and Imagine, the payments are going to their affiliate companies.

“Our study found that some charter schools are entering into lease agreements that are costing them far more than the market would dictate,” Yost stated in a summary of his office’s findings. “Sometimes these lease agreements are with management companies whose officers also have served on the boards of the charter schools with whom they contract. We also found that Ohio law creates difficulties for charter schools that seek to build or buy facilities, thus forcing many to lease facilities instead.”

Yost’s report used an Imagine Schools operation on Romig Road, which the state ordered to close due to poor academic performance, as an example of how companies can reset the school boards that hired them, find a new sponsor and avoid accountability in Ohio. The school continues to operate four years later under a different name with the same owner, management company and lease agreement.

Yost sent his report to lawmakers and the Ohio Ethics Commission, highlighting loopholes and explaining that Ohio charter schools face a unique challenge in obtaining facilities. Three in four rent, often through contracts that give third-party companies more control.

Yost’s found that Harvard Avenue Performance Academy in Cleveland saved 26 percent, or nearly $240,000 yearly, when it dropped Imagine. When the company came to Ohio, it had to “secure high-quality facilities that would enhance the educational experience of the students served,” spokeswoman Rhonda Cagle told the Dispatch.

Schoolhouse Finance, she said, funded all upfront costs and assumed the long-term risk, which is high in an industry where 43 percent of all Ohio charter schools have failed and closed.

“We did so at market costs at that time, primarily in the 2006-08 time frame, and entered into commercially reasonable lease arrangements that reflected the size and quality of each special-purpose school facility, the credit quality of the school tenant and the market conditions at the time each lease was entered into,” Cagle said.

The $200 per pupil the state gives charter schools for facilities only covers about a quarter of the actual cost, said Chad Aldis, vice president for policy and advocacy for the Thomas B. Fordham Institute, which sponsors a dozen charter schools. That, he said, allows deep-pocketed entities affiliated with for-profit management companies to do leases “that end up not being friendly to the charter school. It’s extraordinarily harmful.”

Charter schools that are already operating with less money than traditional schools should be looking for the best facility deals possible, Aldis said.

William Phillis, executive director of the Ohio Coalition for Equity & Adequacy of School Funding and a longtime charter school critic, said management companies are turning a profit while kids lose.

“The auditor’s report findings are not surprising. These schemes have been reported widely without much, if any, response from state officials,” Phillis told the Dispatch.

A wide-ranging charter school law upgrade that passed in late 2015 included a provision that prohibits an operator from leasing property to its school until an independent real estate professional verifies the lease is “commercially reasonable.”

But Yost’s report said lawmakers should address a number of problems, including inadequate funding to buy property, potential conflicts of interest, no requirements for public bidding before leasing property, a lack of cooperation among competitive charter school operators, no cap on leases than can last 30 years (in some cases) and weak school boards that give up the right to find property by signing contracts with companies like National Heritage and Imagine.

Yost’s report also said the state doesn’t require enough transparency from charter operators, allowing them to “develop shady practices which skirt community school compliance regulations.”
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