Who Is Profiting From Charters? The Big Bucks Behind Charter School Secrecy, Financial Scandal and Corruption
This article is part of a two-part series that looks at mass school closings targeting America’s inner cities and the promise of charter schools as a magic solution to alleged “failing schools.” Part I explained how the charter school movement cynically appropriates civil rights rhetoric, but often leaves the most vulnerable students worse off than before. In Part II, AlterNet looks at a more likely motivation for the “reforms”: Profit.
Studies show that charter schools don’t typically outperform public schools and they often tend to increase racial and class segregation. So one must wonder, what exactly is motivating these school “reformers”? And why have they pushed for more and more closure — and new charter schools — at such an unprecedented rate in recent years?
Pro-charter supporters will tell you that it’s time for public institutions like our schools to start competing more like for-profit institutions. Test scores and high enrollment, then, define success. Unsuccessful schools, they say, should close just as unsuccessful businesses do. For neoliberal school reformers from today’s Arne Duncan-led Department of Education to scandal-ridden movement leader Michelle Rhee to billionaire Bill Gates, it is taken on faith that market principles are desirable in education.
But since it’s not clear that market principles are benefiting students on a large scale, it seems likely that something else is at stake. And reformers may be more than a little disingenuous in publicly ignoring that other, less high-minded thing: Profit. Critics of charter schools and school closings point out that proponents may not really be motivated by idealism, but by self-gain.
But who precisely is profiting? And how? Untangling answers to these questions is a more daunting task. Compared to public schools, charters schools are an extremely unregulated business. They contract with private companies to provide all kinds of services, from curriculum development to landscaping. Most of the regulations that bind charter schools are implemented at the state level. And unlike public institutions, the finances of charter schools are managed on a school-by-school basis. Because they are not consistently held accountable to the public for how they distribute funds, charter schools are often able to keep their business practices under wraps, and thus avoid too much scrutiny.
For an article of this scope, it’s impossible to describe the profit issue in anything approaching thorough and accurate generalization. Instead, we will look at a couple of decades-old federal incentives for charter investment that may have helped pave the way for the explosion of charter schools today, and provide some examples and snapshots of what is happening on the ground in those major cities where the charter school movement is most influential.
Hedge Fund Managers and Real Estate Developers
As AlterNet has previously reported, two little-understood policies helped pave the way for the kind of charter growth we are seeing today. One, called the New Markets Tax Credit (NMTC), began in 2000 at the end of President Bill Clinton’s administration. According to the Treasury Department, the credit combines:
…the private sector and the federal government—to bring economic and community development to low-income communities. From job creation to increased access to essential educational, health, and retail services, and from the rehabilitation of blighted communities to the development of renewable energy sources, NMTC projects have benefited neighborhoods throughout the country.
And what precisely is the NMTC doing to restore these so-called “blighted communities”? It’s providing hedge fund managers and wealthy real estate investors with opportunities to cash in on the charter school boom. The government frames it as a useful tool that builds communities up, operating on the assumption that charter schools provide some sort of de facto restoration. But as Part I demonstrated, they don’t.
But they do provide wealthy investors with a 39 percent tax credit that more than doubles returns on these investments within just seven years. As Juan Gonzalez reported for Democracy Now!, “this is a tax credit on money that they’re lending, so they’re collecting interest on the loans, as well as getting the 39 percent tax credit.” And that’s not all. As Gonzalez explained, the federal government “piggyback[s] the tax credit on other kinds of federal tax credits, like historic preservation or job creation or Brownfield’s credits. The result is, you can put in $10 million and in seven years double your money.” So, if you put in a couple million dollars, you’ll have double that amount within just seven years.
Until recently, most of this money has been filtered through large non-profit organizations like the Gates Foundation, but it can also be done through for-profit companies. In order for donors to be eligible for the tax breaks, they must give to something classified as a Community Development Entity. The federal website explains this can be either a “domestic corporation or partnership.” And it must have “a primary mission of serving LICs [Low Income Communities].”
Maybe this helps explain why, in 2011, former tennis champion Andre Agassi helped set up a $500 million startup fund for his Canyon-Agassi Charter School Facilities Fund, the first for-profit organization of its kind. In addition to any profits to be made from this for-profit CDE, how much did Agassi himself contribute? How much will he see doubled on the taxpayers’ dime within about seven years? He’s never said. The credit may also explain why Facebook CEO Mark Zuckerberg donated $500 million in stocks to a variety of organizations that distribute charter school funding in 2012, or why he opened his own foundation, called Startup: Education, to build new charter schools.
Then there’s David Brain, head of large real-estate investment firm Entertainment Properties Trust, who appeared on CNBC in 2012 to tell audiences just how profitable charter school investment has become. He explained, “Well I think it’s a very stable business, very recession-resistant. It’s a very high-demand product.” Asked about the most profitable sector in real estate investment, Brain said, “Well, probably the charter school business. We said it’s our highest growth and most appealing sector right now of the portfolio. It’s the most high in demand, it’s the most recession-resistant. And a great opportunity set with 500 schools starting every year. It’s a two and a half billion dollar opportunity set in rough measure annually.”
Real-estate developers have a particularly interesting stake in the business of charter school development. Yes, they receive the standard huge tax breaks. But they can also help charter schools acquire properties in large cities like Philadelphia, Chicago or New York, where prices are high and there isn’t much room for new buildings. In places where acquiring space can involve fierce bidding wars and eminent domain conflicts, well-off real-estate developers profit from charter school growth since they will help new schools get established for a price. Eminent Properties Trust boasts, “Our investment portfolio of nearly $3 billion includes megaplex movie theatres and adjacent retail, public charter schools, and other destination recreational and specialty investments. This portfolio includes over 160 locations spread across 34 states with over 200 tenants.” When real estate developers acquire these charter school properties, they charge charter schools for rent payments, which are not price-capped.
Charter management group Charter Schools USA recommended that rental costs should not exceed 20 percent of a school’s budget, but a 2011 investigation by the Miami Herald found that 19 schools in Miami-Dade and Broward alone spent more than 20 percent of their budgets on rent; one in Miami Gardens spent 43 percent.
This can get especially egregious when the interests of real estate developers and charter management companies intertwine. When this happens, there is no check on escalating fees, as the management companies charged with governance and oversight are motivated to allow higher and higher rental fees. Again, according to the Miami Herald Report:
Many of the highest rents are charged by landlords with ties to the management companies running the schools, The Miami Herald found. At least 56 charter schools in Miami-Dade and Broward counties sit on land whose owners are tied to management companies, property records show.
For example, the Lincoln-MartÃ Charter School in Hialeah paid $744,000 in rent last year — about 25 percent of the school’s $3 million budget, even after the landlord reduced the rent by $153,000. The previous year, the school spent one-third of its income on rent, audit records show.
Records show the landlord, D.P. Real Estate Holdings, and the management company are run by the same man: former Miami-Dade School Board member Demetrio Perez Jr. Perez’s son, Demetrio J. Perez, works at the management company, which operates three Lincoln-MartÃ charter schools.
Real estate holders who acquire charter management firms in Florida and elsewhere are circulating money directly back into their own pockets.
Private Companies and the Lack of Accountability
But the involvement of large corporations goes well beyond the development of for-profit firms like the Canyon-Agassi Fund — or even non-profits with deep corporate interests like the Gates Foundation. Charter schools, unlike most traditional public schools, contract with for-profit companies for everything from curriculum development to construction. It is well-known that charter schools are big business, but it’s harder to pin down concrete numbers. When money leaves a donor’s pocket, it is usually funneled through a CDE, which isn’t required to release information about who its donors are, or how much they’re spending. From there, the CDE donates the money to charter management organizations. The endless cycle of shuffling funds works like money laundering. It functions to hide the original sources of funds. And it’s all legal.
Even though most of the details remain hidden, we do know that privatization in education is a lucrative business. In January, a firm called Capital Roundtable – which touts itself as “America’s leading conference company for the middle-market private equity community” – held a Master Class called “Private Equity Investing in For-Profit Education Companies.” The conference website noted, “For-profit education is one of the largest U.S. investment markets, currently topping $1.3 trillion in value.” The event was hosted by Harold Levy, a former chancellor of the New York City Schools System who promoted charter proliferation during his tenure. Now he manages Connecticut investment company Palm Ventures. One of the major focuses of the firm involves funneling individual investments into for-profit charter-school related companies. As a former finance lawyer for Citigroup, Kaplan and Saloman Brothers, Levy is quite the expert on getting rich this way.
Companies are not shy about promising huge returns on charter school investment. The difficulty lies in the fact that it’s harder to show just how much individual hedge funders and companies are profiting from the investments. There are very few accountability mechanisms, and it can be difficult for the public to protect the public from shoddy job performance.
Gary Moriello, an educator since 1970 and Chicago principal between 1987 and 2007, tells AlterNet of an alarming experience visiting a Chicago charter school in what he calls a “notorious housing project on the near North side.” The school occupied what looked on the outside like a nice, shiny new building, but it wasn’t really equipped to serve students properly. Why? The private company that had provided the construction had no real stake in serving students or making education better. Moriello remembers:
As soon as I went inside, I could see that it was built on the cheap. There was no gym; students just had to go outside throughout the winter. There was no lunchroom. Instead, tables were set up in a hallway, and lunches were brought in from outside the school.
It’s no surprise that for-profit companies, which are motivated solely by maximizing profit, might want to keep overhead costs as low as possible.
And even by the flimsy legal standards in place to protect the public against charter school industry corruption, charter schools across the nation are failing. They are mired in financial scandal—and have become synonymous in many districts for mismanagement. A frequently updated blog called by California-based researcher Sharron Higgins, called Charter School Scandals, provides a running tally of these scandals throughout the country, and they are vast. A quick perusal of the blog suggests that these scandals are happening over and over again, even if few mainstream media outlets are willing to connect the dots about what is going on.
Here are just a few examples of what seems to be a pretty large-scale problem:
In February 2012, an audit showed that Las MantaÃ±as Charter School of Las Cruces, New Mexico had over-estimated its actual 2011 assets, including land and large equipment. It must have taken heroic measures to over-estimate anything, since the school also under-reported assets like expensive equipment that cost up to $5,000. On top of this, the school was unable to account for almost $85,000 spent that fiscal year.
In 2013, Keystone Education Charter Center of Pittsburgh came under fire when the Pennsylvania State Ethics Commission found that a Mercer County charter school director was leasing properties to the schools with no management company approval.
The same year, Houston Gateway Academy was found charging illegal fees for student enrollment.
These are not isolated cases of cronyism, misjudgment, mismanagement or treating children unfairly for profit. Higgins’ website suggests that it’s happening over and over, week by week, in every region of the country where charter schools are operating. Chicago Teachers Union (CTU) researcher Sarah Hainds tells AlterNet that lack of transparency makes it hard to untangle all the corruption and mismanagement underway. She says it’s difficult provide a thorough analysis of the effects of public-private contracts in the Chicago area alone, and that it all comes into play in a complicated “web of construction contracts and testing contracts.”
In addition to the work of the Chicago Teachers Union, Hainds says several people are researching profiteering in charter schools, including multiple Chicago reporters, a coalition of more than 100 professors across 25 local universities, called Chicagoland Researchers and Advocates for Transformative Education or CREATE, and a local non-profit called the Better Government Association. She says,“Everyone is trying to figure this out. That’s how hard it is.”
One company that comes up over and over in discussions about charter education is K12 Inc. or more commonly referred to as simply K12. K12 is particularly influential in Chicago and Philadelphia charter schools, contracting with the school system to provide online schooling with links to the rightwing Christian homeschool movement.
K12 got off its feet under the leadership of Bill Bennett, the frequent CNN commentator and conservative Christian who once offered this crime reduction platform on his radio show: “[Y]ou could abort every black baby in this country, and your crime rate would go down.” Bennett had to resign from the company over this comment, but it’s not clear that his influence has waned. K12 notoriously treats creationism as legitimate science and the Bible as a useful history book. Other educators report racist language and glorification of the Confederacy — again, in a curriculum designed for school proliferation in inner cities.
And more than any other single company, K12 has provoked national outrage on both left and right for poor school performance and questionable financial practices. A 2011 report, for example, showed that K12 had been spending millions in taxpayer funding every year on private advertising rather than actual education. And strangely enough, they were marketing to the Christian homeschooling crowd, not the inner city children for whom these online charters are allegedly being set up. The company has stayed true to its roots, in any case; Bennett’s base has always been Christian homeschoolers, not actual public education.
Wealthy Foreign Nationals
But you don’t have to be a citizen, resident or domestic business executive to get a break from the federal government when you invest in charter schools. Since the Immigration Act of 1990, investors have had the opportunity to purchase visas for their families by investing in hotels, ski resorts and you guessed it — charter schools. It’s called the EB-5 visa for Immigrant Investors. That’s right, wealthy foreigners can contribute just $1 million toward urban charter school development — or $500,000 to a rural area or area with high unemployment — and get visas for the whole family.
For a piece of legislation that has been around for 23 years, EB-5 is not very well understood. Among people who do know about it, the popular perception is that it’s fairly new; even the headline of a 2012 Reuters article about the subject called it a “new U.S. visa rush,” even though there is nothing new about it. Its justification? Investors are “job creators” whose donations will ostensibly create a whole 10 new jobs with that $1 million. Every year, the federal government hands out 10,000 of these visas.
The perception that it’s new may have something to do with the fact that charter schools have proliferated quickly in the past 23 years. Though foreign nationals may have previously focused on, say, opening new ski resorts, charter school demand has risen in recent years, particularly since the 2008 financial crisis — and ensuing austerity — led policymakers to start looking for more private solutions to traditionally public institutions.
Last October, Reuters reported that:
Wealthy individuals from as far away as China, Nigeria, Russia and Australia are spending tens of millions of dollars to build classrooms, libraries, basketball courts and science labs for American charter schools…And Florida, state business development officials say foreign investment in charter schools is poised to triple next year [in 2013], to $90 million.
A total of 150 schools located in Texas, Ohio, Illinois and various urban inner cities are funded by Turkish investors affiliated with “followers of Fethullah GÃ¼len, a charismatic Turkish preacher of a moderate brand of Islam whose devotees have built a worldwide religious, social and nationalistic movement in his name,” according to the New York Times. That means he’s been instrumental in creating the largest single charter school network in the entire country. And the New York Times doesn’t provide the whole story, but what GÃ¼len claims on his own website. According to himself, GÃ¼len is also a big proponent of interfaith dialogue and world peace. But any detailed reporting on him finds that his followers operate more like those of Lyndon LaRouche’s political cult than like actual proponents of interfaith dialogue, world peace or any other cause.
Even so, GÃ¼len is championed in the world of corporate education reform. He’s even garnered accolades from Bill Clinton and Barack Obama. Maybe GÃ¼len’s influence in charter school policy is in part what inspired Falun-Gong cult member Lotus King Weiss to try opening six charter schools in Manhattan’s Chinatown in April.
In any case, it doesn’t appear that GÃ¼len’s schools have created the American jobs promised in the visa loophole. Instead, Turkish teachers and employees have been shipped to the United States to fill charter school jobs. Meanwhile, with each wave of school closings, schools lose hundreds of teachers, staff and administrators from these communities for good. Some get rehired in other schools, but many remain unemployed. Corruption in these schools has brought investigations into financial and hiring decisions. But all of this is immaterial to foreign investors with big money to spend. Even if they’re not getting the huge tax breaks afforded to residents of the U.S., America’s for-profit education industry is big business on an international scale. It’s no wonder that more and more people are adding education to their investment portfolios.
More Research Still Needed
Ultimately charter school profiteering happens in very different ways throughout the United States. It’s all under-regulated, but never in exactly the same way. In some states, charter authorization organizations must have non-profit status; they simply contract with for-profit entities. In others, private companies are free to set up charter schools. Some states have oversight in place that prevents the proliferation of the charter movement’s worst examples, like K12 cyber schools. In some school districts, there are many teacher-led charter schools that do have better records; these tend not to partner with huge companies or set up large charter organizations.
The geographical differences from place to place are so vast that it’s very hard to generalize. The details must be sorted out piece by piece, in a systematic way, by a well-funded organization with as much institutional support as CREDO if we’re ever to get a useful macro-study. For now, what we have is a growing body of snapshots that are beginning to suggest similar themes, like lost public accountability and corporate overreach.
But ultimately, we do know there isn’t much evidence that this corporate wealth ever trickles down in education — or that it creates jobs, revitalizes communities or saves education. Like every other business, profit is its endgame, and profit will always trump the interests of students, educators, parents and public good. Companies may have discovered something they call “corporate social responsibility” over the past decade, and for a time their interests sometimes match up with the good of most people. But this doesn’t last forever.
The scariest thing about charter schools is the lack of accountability. Over and over, the interests of profit are trumping the public good. The unregulated business model does not work for education. It works for profit, but as Part I showed, it disenfranchises vulnerable communities. And cities that have been in the school charterization business for a long time now, like Chicago, Philadelphia and New Orleans, should provide ample warning of what is to come in education if it continues to go in this direction. The barely regulated business of charter education is so corrupt that it’s hard to keep all the misdeeds hidden, even when you’re legally permitted to hide many of them.
We’ve all been fed the lie that this is about equality of opportunity and civil rights. But the more the charter school industry undermines equality and civil rights, the clearer it becomes that this was never about helping children in the first place.