Investigating thousands of dollars but not millions: Scottsdale Unified CFO accused of self-dealing — That’s the norm at most Arizona charter schools

January 31, 2018

Investigating thousands of dollars but not millions: Scottsdale Unified CFO accused of self-dealing — That’s the norm at most Arizona charter schools 

 

Jan. 31, 2018 – Phoenix – Alleged self-dealing by a Scottsdale Unified School District (SUSD) employee has outraged local residents. In charter schools, self-dealing is standard practice.

 

SUSD’s Chief Financial Officer (CFO) Laura Smith, who resigned last week, previously served as president of a consulting firm that does business with the district.  Smith was accused of self-dealing due to payments made by the district authorized by her to a firm she claimed to have cut ties with.

On Tuesday the attorney Susan Segal, hired by SUSD, reported to the Governing Board that the now former CFO did, in fact, violate state law by signing checks to the consulting firm which the CFO had a financial and family (her sister) interest in.

 

The Republic obtained documents Tuesday (January 30) that show Smith’s signature on five change orders in 2017 that increased the amount the district would pay PGPC. The documents show costs increased to:

  • $5,863 from $5,000 for work at Pima Elementary on March 30.

  • $7,210 from $2,000 for work at Hopi Elementary School on April 26.

  • $9,210 from $7,210 for work at Hopi Elementary on May 16.

  • $7,900 from $5,900 for work at Hohokam Elementary on May 16.

  • $11,400 from $5,400 for field upgrades at Chaparral, Saguaro and Coronado high schools on May 16. (AZ Republic)

The contracts total $43,766 and were increased by $16,072 under the CFO’s tenure.

 

Meanwhile, it’s not thousands but millions of dollars in related-party self-dealing going on in the state’s charter schools.

If Laura Smith had done the exact same transactions for a charter school she would not be violating the law and no attorneys or law enforcement agencies would be investigating. Because most charter schools lack the open meetings of district schools, the issue might never even be known.

 
Self-dealing, also known as related-party transactions, is common practice and legal in the charter school sector. A policy report by the centrist think tank the Grand Canyon Institute (GCI) revealed that up to 77 percent of Arizona’s charter school holders use their state taxpayer funds for potentially questionable related-party financial transactions.

 

The policy report, Following the Money: Twenty Years of Charter School Finances in Arizona, also found that related-party financial commitments were worth half a billion dollars of state taxpayer funds, representing 48 percent of charter school expenditures for contracts, leases and rents. Unlike public district schools, nearly all charter schools in Arizona operate outside the rules of the public procurement process, freeing them from the need to conduct competitive bidding.

 

The most egregious illustration of a questionable financial transaction involving related party self-dealing involves Primavera Technical Learning Center.

 

In 2014, the online charter school Primavera Technical Learning Center paid a flat fee of $12.2 million for software and curriculum services to The American Virtual Academy, a for-profit company owned by the school’s charter holder. The school had 5,172 students during the 2013-14 school year amounting to a per student expense of $2,364. In comparison, Mesa Unified School District spent less than 10 percent of this amount on their proprietary online learning management software. Jim Hall, with Arizonans for Charter School Accountability, has done a full examination of Primavera and its insider dealings here.  Nearly $100 million of taxpayer dollars over the years have been funneled to the owner’s for-profit business.

 

The most well-known charter operation, Basis, Inc., founded by Olga and Michael Block, is the nonprofit organizations that holds the charter to run their schools.  Olga and Michael Block have formed a for-profit entity, Basis.ed, that manages the schools and leases teachers to the schools.  In 2015-2016, 71 percent of the expenses for Basis, Inc. were funneled through Basis.ed.  The for-profit company is not required to disclose its financials to the Arizona State Board for Charter Schools. Though the for-profit Basis.ed receives tens of millions of dollars from taxpayers annually, how much the Blocks are profiting is not known. However, it is known that the non-profit Basis Inc. has been in the red for years.  Is the for profit owned by the same people who founded the nonprofit driving the nonprofit into the red?

 

Another flagrant example that Jim Hall has extensively researched is Glenn Way and American Leadership Academy. Hall has found extensive financial irregularities in the reporting of ALA which recently was detailed in a Washington Post blog:

The ALA is one of the largest charter chains in Arizona, growing from 300 students in 2008 to over 6,000 enrolled in 2017.  Year after year, ALA has failed to list any supply expenditures outside of instructional supplies, and for three years ALA did not report any spending at all for plant operations. The space asking for numbers of teachers is often left blank, and administrative expenditures in 2016 were underreported by more than $4 million.

There is also the omission of more than $4 million in lease payments in 2015 made to companies owned by ALA founder Glenn Way. (Way has not disclosed any related party transactions to the Arizona State Board for Charter Schools.) ALA added the $4 million instead as assets to the company, allowing it to purchase an additional $6 million in land and equipment.

Scottsdale residents should be concerned that their bond monies are being used appropriately and not mired in a conflict of interest. Taxpayers across Arizona should be concerned about the potential conflicts of interest plaguing 77 percent of charter schools due to the high rate of related-party transactions.

 
Public funds paid to charter schools should be protected similar to the bond funds raised for public school districts. GCI and Arizonan’s for Charter School Accountability recommend that charter schools be required to conduct public competitive bid processes similar to public district schools. This recommendation has been incorporated into legislation that is currently before the Arizona Legislature.

If that legislation becomes law, bids would become public information.  Charter schools wishing to avoid competitive bids would be incentivized to bring these transactions back in-house so expenditures can be scrutinized during the audit process.

 

For more information:

Dave Wells, Research Director

602-595-1025, Ext. 2, dwells@azgci.org

Jim Hall, Arizonans for Charter School Accountability
arizcsa1000@gmail.com, 602-717-3961

 

The Grand Canyon Institute, a 501(c)(3) nonprofit organization, is an independent, nonpartisan think tank led by a bipartisan group of former state lawmakers, economists, community leaders and academicians. The Grand Canyon Institute serves as an independent voice reflecting a pragmatic approach to addressing economic, fiscal, budgetary and taxation issues confronting Arizona.

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