When Charter Schools Are Nonprofit in Name Only

Some charters pass along nearly all their money to for-profit companies hired to manage the schools. It’s an arrangement that’s raising eyebrows.

A couple of years ago, auditors looked at the books of a charter school in Buffalo, New York, and were taken aback by what they found. Like all charter schools, Buffalo United Charter School is funded with taxpayer dollars. The school is also a nonprofit. But as the New York State auditors wrote, Buffalo United was sending ” virtually all of the School’s revenues” directly to a for-profit company hired to handle its day-to-day operations.

Charter schools often hire companies to handle their accounting and management functions. Sometimes the companies even take the lead in hiring teachers, finding a school building, and handling school finances.

In the case of Buffalo United, the auditors found that the school board had little idea about exactly how the company – a large management firm called National Heritage Academies – was spending the school’s money. The school’s board still had to approve overall budgets, but it appeared to accept the company’s numbers with few questions. The signoff was “essentially meaningless,” the auditors wrote.

In the charter-school sector, this arrangement is known as a “sweeps” contract because nearly all of a school’s public dollars – anywhere from 95 to 100 percent – is “swept” into a charter-management company.

The contracts are an example of how the charter schools sometimes cede control of public dollars to private companies that have no legal obligation to act in the best interests of the schools or taxpayers. When the agreement is with a for-profit firm like National Heritage Academies, it’s also a chance for such firms to turn taxpayer money into tidy profits.

“It’s really just a pass-through for for-profit entities,” said Eric Hall, an attorney in Colorado Springs who specializes in work with charter schools and has come across many sweeps contracts. “In what sense is that a nonprofit endeavor? It’s not.”

Neither National Heritage Academies nor the Buffalo United board responded to requests for comment. (Update: NHA spokeswoman Jennifer Hoff said in an emailed statement, “Our approach relieves our partner boards of all financial, operational, and academic risks – a significant burden that ultimately defeats many charter schools. Freed from burdens like fundraising, our partner boards can focus on governance and oversight … NHA and its partner schools comply fully with state and federal laws, authorizer oversight requirements, and education department regulations – including everything related to transparency.”)

While relationships between charter schools and management companies have started to come under scrutiny, sweeps contracts have received little attention. Schools have agreed to such setups with both nonprofit and for-profit management companies, but it’s not clear how often. Nobody appears to be keeping track.

What is clear is that it can be hard for regulators and even schools themselves to follow the money when nearly all of it goes into the accounts of a private company.

“We’re not confident that sweeps contracts allow [charters schools and regulators] to fully fulfill their public functions,” said Alex Medler, who leads policy and advocacy work at the National Association of Charter School Authorizers, a trade group for charter regulators. The organization discourages the arrangements. “We think this is an issue that needs attention.”

Officials have gotten glimpses of questionable spending by some firms using “sweeps” contracts.

Take the case of Brooklyn Excelsior Charter School, another National Heritage Academies school. In 2012, state auditors tried to track the $10 million in public funding given to the school, only to conclude they were ” unable to determine … the extent to which the $10 million of annual public funding provided to the school was actually used to benefit its students.” From what auditors could tell, the school was paying above-market rent for its building, which in turn is owned by a subsidiary of National Heritage Academies. They also had concerns about equipment charges.

The auditors couldn’t ultimately tell whether the charges were reasonable because National Heritage Academies refused to share the relevant financial details. The firm also refused to provide detailed documentation for $1.6 million in costs recorded as corporate services, claiming the information was proprietary, according to the audit. The board president of Brooklyn Excelsior did not respond to our request for comment.

While the auditors in New York were disturbed by what they found, they could do little more than issue reports with advisory recommendations. “We can’t audit the management company,” said Brian Butry, a spokesman for New York Comptroller Thomas DiNapoli.

In Michigan, where NHA is the largest charter-school operator, state education regulators have voiced similar frustrations about the degree to which these private firms are shielded from having to answer to the public about how money is spent.

“I can’t FOIA National Heritage Academies,” said Casandra Ulbrich, Vice President of the Michigan State Board of Education, referring to the right to request public documents from public agencies. “I don’t know who they’re subcontracting with, I don’t know if they’re bid out. I don’t know if there are any conflicts of interest. This is information we as taxpayers don’t have a right to.”

Last year, Ulbrich and the State Board of Education had called for more transparency to be brought to the financial dealings of charter-management firms. They specifically asked the legislature to outlaw sweeps contracts. “Unfortunately,” Ulbrich said, “it fell on deaf ears.”

The Internal Revenue Service has questioned some cases of sweeps contracts, but has not taken a consistent stand on whether the contracts are appropriate.

It’s not just charter regulators and auditors that have reason to be wary of such setups. Some charter-school boards that signed sweeps contracts have found themselves shut out of the operations of their own schools.

In Ohio, ten charter-school boards sued their management firm, White Hat Management, in 2010 after they couldn’t get answers to basic questions about why their schools’ performance lagged and how the school’s money was spent.

Even so, it was a challenge for the schools to take back control. After handing over the bulk of their money to White Hat for years, the schools had little money of their own, said Karen Hockstad, an attorney who’s been representing the school boards in continuing litigation.

“Their hands are tied. They don’t have the money to build brand new infrastructure and get new desks and books and anything else,” said Hockstad. White Hat Management did not return a request for comment.

Some charter-school regulators – recognizing their limited authority over charter-management companies – are beginning to push back, requiring schools to get more information from management firms. Still, that hasn’t stopped some management companies from putting up a fight.

Regulators in the District of Columbia are seeking more legal authority over management firms after two recent scandals. The DC Public Charter School Board has asked the city council to pass legislation that would allow access to the books of management companies under certain conditions. So far, that effort has gone nowhere.