Second charter school fails this year, more predicted, better oversight needed

March 21, 2018

Media Release

Contact:
Dave Wells, Research Director
602-595-1025, Ext. 2, dwells@azgci.org
Curt Cardine, Fellow
602-595-1025, Ext. 11, ccardine@azgci.org
Amy Pedotto, Communications Manager
602-595-1025, Ext. 3, apedotto@azgci.org

Second charter school fails this year, more predicted, better oversight needed

March 21, 2018 – Phoenix - Warning signs in the financial data of Arizona’s charter schools are examined in a new policy report that recommends greater oversight of the sector as two schools have failed in the past two months and audits show that more than half of all charter schools are in financial distress.

The report’s call for greater charter school oversight coincides by chance with the charter regulator’s issuance of an ‘intent to revoke’ the charter of StarShine Academy, which is alleged to have “committed or engaged in gross incompetence or systematic mismanagement of the school’s finances and financial records.”

Within the fine print of StarShine’s alleged waste of taxpayer dollars is the fact that the charter board tried to close the school in 2012 for academic and financial problems but changed course when it was threatened with legal action by the charter holder and instead renewed its charter for 20 years. The following year, StarShine took out $12.7 million in loans to purchase and upgrade its facilities that will now most likely become the property of its bondholders. In 2014-15, StarShine reported a net loss of $803,397 and filed for bankruptcy in 2016.

The US Bankruptcy Court stated it has moved to close the school to stem the tide of the state’s assets being squandered for the charter holder’s personal use, prevent the further mismanagement of state taxpayer dollars provided to operate the charter, and assess and pursue potential fraudulent actions by the charter holder.

Red Flags: Net Losses, the new policy report by the independent think tank the Grand Canyon Institute (GCI), finds that charter holders are able to engage in questionable and potentially unsustainable financial practices due to the Arizona State Board for Charter Schools’ (ASBCS) limited authority and minimally detailed financial scrutiny. GCI’s report provides recommendations for ensuring future sustainability of the sector. Red Flags is the second in a series of policy papers that examines charter school financial practices and their oversight in Arizona.

The report’s key findings are based on data found in the financial reports submitted by charter schools including audits sent to the ASBCS, Annual Financial Reports (AFRs) provided to the Arizona Department of Education and non-profit Form 990s filed with the IRS. Key findings include that:

  • Half of all charter schools have cash flow issues or other serious financial shortcomings. Audits of 228 out of 407 charter organizations did not meet financial performance expectations or the cash flow standard of the ASBCS.
  • One quarter of the state’s charter schools reported net losses in 2013-14. Ninety had an annual net loss greater than $100,000.
  • Most charter schools have stagnant or declining enrollment. While Arizona’s overall charter school enrollment is growing, three-fourths of that growth was captured by 10 charter organizations during FY2014-FY2017. This has negative financial implications for the remaining charter schools, which commonly borrow money based on expected enrollment growth and have financial problems when enrollment expectations are not met.

“Red flags emerge in a charter organization’s financials well before they fail financially,” says Curt Cardine, GCI Fellow and the report’s principal author. “However, there is a delay in when current ASBCS financial performance criteria detects these issues. Most concerning is that the ASBCS cannot close schools for financial reasons. As was seen in the case of StarShine, Discovery Creemos Academy this January and Hillcrest Academy in October 2016, these financial collapses can and do occur during the school year and are a major disruption for students, teachers and families.”

Discovery Creemos Academy abruptly closed after years of accumulated losses resulting in a $3.3 million net deficit. It had also demonstrated poor and deteriorating financials for years but could not be closed due to Arizona’s current legislatively-mandated charter school oversight rules. Hillcrest Academy had a net deficit of $4,084,353 in 2016 and closed its doors in October of that year.

“We should not wait for a child’s education to be disrupted by the sudden closure of a charter school due to financial mismanagement, which is why a more proactive ASBCS is so critical,” says Dave Wells, a report co-author and GCI’s research director.

GCI found that debt obligations are a key factor contributing to charter school net losses. Due to its debt obligations, Phoenix Advantage Charter School put half as much money into its classrooms compared to ASU Prep Phoenix Elementary in FY2017. StarShine’s classroom spending also suffered due to the school’s debt payments.

Net losses are not restricted to small charter organizations; Imagine and EdKey with 7842 and 5409 students respectively have both reported net losses. BASIS, which has captured 20 percent of charter enrollment growth from FY2014 to FY2017, does not meet the ASBCS Financial Performance Dashboard expectations due to issues with its debt. GCI recommends that all charter schools, including those that are high academic performers, should be more carefully monitored to ensure they can remain an innovative, viable part of Arizona’s school choice system.

Part of that monitoring would involve requiring audits for affiliated for-profit education management organizations (EMOs) that manage charter schools when those charters are running net losses. Research for this report found that the ASBCS’ efforts—either due to limited legal authority, ideological mindsets or lack of resources—have favored charter holders over taxpayers’ interests and the state’s children. It is time to revisit and strengthen the ASBCS’ mandate and its ability to proactively oversee charter schools.

The report’s recommendations aim to improve financial oversight of Arizona’s charter schools and ensure that dollars are more likely to end up in the classroom. The report’s key recommendations include that the ASBCS:

  • Be given greater financial oversight power by the Arizona Legislature to put charters on probation and, if necessary, revoke charters from schools unable to meet financial improvement plans.
  • Revise its Financial Dashboard to identify charters with financial problems earlier than the current dashboard does and that they more closely scrutinize the financial operations of these charters and any affiliated subsidiary corporations.

“GCI’s policy report aims to introduce accountability into the financial monitoring system of Arizona’s charter schools,” says George Cunningham, GCI chairman. “Taxpayer dollars allocated to public education should be spent educating the state’s students. Through our research, GCI has identified concerns with the current legislatively-mandated oversight of Arizona’s charter schools. As a result, GCI’s report makes several recommendations to improve oversight and sustainability of the state’s charter schools, ultimately improving education options for all children.”
Click here for the Executive Summary and Findings & Recommendations.

Click here for the Full Report. 

 

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.