Deregulation in education has led to cronyism, corruption and conflicts of interest. Dr. Preston Green sees a familiar pattern and a cautionary tale…
Jennifer Berkshire: Our Secretary of Education is visiting a Florida charter school that is best known for being started by rap-u-preneur, Pitfall. But a lesser known true fact is that the school’s powerful and politically connected management company, Academica, ran afoul of the feds for a little something something called *related-party transactions.* What is a related-party transaction? And why do I have the feeling that Betsy DeVos didn’t drop by to, um, continue the investigation?
Preston Green: Related-party transactions occur when you have two entities that have a pre-existing relationship. For example, if two entities have common management, or in the charter sector context, you could have an EMO that also has a real estate arm, which then leases property back to the charter school at a greatly inflated rate. In the case of Academica, which is the management company that runs the school Secretary DeVos visited, it’s *all of the above.* You see different entities sharing the same board of directors, conflicts of interest and questionable real estate dealings, including charter schools paying rents that are well above the market rate to companies that Academica owns.
Berkshire: Betsy DeVos is a huge fan of charter schools because they remove the shackles of oversight and regulation that have kept our teachers in receive mode for too long and caused the nation’s students to descend to the bottom of the PISA pile. But as you’ve been warning, *shackle removal* in other sectors has led to, oh I don’t know, the subprime mortgage crisis and Enron.
Green: That’s right. My recent research has involved looking at privatization in other contexts, and trying to determine whether the issues and problems you see in these other contexts could impact charter schools. I explored the issue of whether a charter school *bubble* is emerging, akin to what we saw in the lead up to the housing crisis. My most recent paper, with co-authors Bruce Baker and Joseph Oluwole, looks at similarities between what’s happening with charter schools today and what happened in the energy sector. Charter schools were to be freed from the shackles of rules that applied to public schools and those rules were regulations.
The thinking was that by removing those regulations, the industry could tap into innovation. And that’s the same language, by the way, that we saw in the subprime mortgage crisis and that we saw in relation to Enron. By removing all of the shackles that would prevent innovation in the business sector, we would harness that innovation. But instead we enabled private entities with nefarious purposes to take advantage of that. I’m not saying that all charter schools are nefarious, but when you remove the regulations, there may just be too much incentive, and too much temptation for some.
Berkshire: In the past few months, the feds raided the offices of the Los Angeles charter network, Celerity, and recently, Ben Chavis, the head of a charter network in Oakland, was sentenced to prison for money laundering, profiteering and mail fraud. These stories are filled with the kinds of *Enron-ish* behaviors that you identified in your paper. But I noticed another common theme too—charter advocates who seem to imply that a little criminality is OK if the school generates results.
Green: The problem here is that they somehow think that the fraud is decoupled from the students who are being served. Take Imagine Schools, for example. Imagine Schools had a very sophisticated transaction system that led to facilities being rented to charter schools. It turns out that a number of these schools were paying 40% of their budgets for rent. Well if a school is paying 40% of its budget for rent, it’s not spending money on education-related expenses. The schools run by Academica, which runs the charter Betsy DeVos visited, spend 20% of their budgets on rent. That has a major impact on the ability of a school to provide an education.
We also know that these schools are expanding in communities where we often argue kids need more resources if we’re going to provide them with the same level of education that kids get in more affluent neighborhoods. So it stands to reason that a lot of this fraud is going to occur in low-income minority communities, and because of that you could end up with schools that don’t have the resources necessary to educate their students. They’re going to be impacted in a disproportionate way. This is exactly what the NAACP was concerned about, by the way, when it called for its moratorium on charter growth last year, that there need to be gatekeeping and protections in place to ensure that communities of color and low income communities have charter schools that are devoting their resources to educating their children.
Berkshire: Whenever I post something related to charter school fraud, I get the same response: There’s fraud in public schools too. Why don’t you go on a crusade against that?
ACADEMICA FOUNDER FERNANDO ZULULETA
Green: You’ll often hear people say that, and they’re correct. But there is a type of fraud that is unique to the charter school sector. Because of the education management organization relationship, there is this sort of Enron-set up in which these EMOs can then have related party transactions with other companies and work against the interests of the charter schools that they’re serving. This is important because EMOs are primarily in the charter school sector. You don’t see them in traditional public schools. The creation of EMOs that provide educational services to charter schools creates what we call an agency issue. There is an inherent conflict between the charter school boards that want to ensure that charters are operating legally and fiscally responsibility and EMOs, either for profit or nonprofit, that want to make money or cut their expenses.
Because of this inherent conflict, you’ve got to have gatekeepers who are aware of this possibility. In 2016, the US Office of the Inspector General released a reportand noted that a primary flaw of the US Department of Education was that it treated charter schools and traditional public schools the same. The OIG said that this is a major problem, that you cannot treat them the same because of the EMO relationships with charter schools. We need to understand how this type of fraud works in order to better design gatekeeping mechanisms because it ties into everything. It ties into auditing, it ties into examination of the contracts at the charter school authorizer level.
Berkshire: You end your paper with a call to strengthen the oversight role of *gatekeepers* so as to prevent the kind of fraud and conflicts of interest by charter management organization like Academica or Imagine or Celerity. But I don’t have to tell you that *gates,* much like *shackles* are so yesteryear. Meanwhile, you’re seeing the entities whose job it is to keep an eye out for fraud wither away due to budget cuts, resulting in part from charter school expansion.
BEN CHAVIS, FOUNDER OF THE AMERICAN INDIAN MODEL SCHOOLS IN OAKLAND, CA.
Green: This is a big problem, especially as fraud and mismanagement become more and more complex. We need to have gatekeepers that have a certain level of knowledge and sophistication to be able to respond to fraudulent practices. In the case of Celerity, for example, the education management organization has been shifting money around between the EMO and other related parties. But the governor vetoed a bill that would have called for greater controls over conflict of interest. So California may be setting itself up for more related-party problems, especially as charter schools continue to expand and you see the district having to cut back on its oversight role due to financial strains.
If the school districts don’t have the capacity to ferret out fraud and they’re not able to work with other gatekeepers, I think we’re laying the groundwork for more problems. The case of Ben Chavis, the head of the American Indian Model Schools in Oakland who might be headed to jail, is actually an oversight success story. It shows how a state agency with discretionary authority, in this case the state’s Fiscal Crisis Assistance and Management Team (FCMAT), can reveal fraudulent related-party transactions. The local county board of education asked FCMAT to conduct an extraordinary audit of the schools because of multiple allegations of inappropriate related-party transactions, including construction deals and a private summer program paid for by the charter school.
Berkshire: The gentlemen who brought us Enron came to be known as *the smartest guys in the room.* I think of education reform as another *space* in which the *smartest guys* hold inordinate sway, and yet they seem to have learned nothing at all from the dizzying downfall(s) of their counterparts in other sectors.
Green: That is very true. It was somewhat disconcerting to see as we did this research that we went through this fifteen years before and yet fundamental lessons appear to have gone unlearned. It’s definitely concerning that we just don’t remember the recent past and how the problems that occurred at Enron are now appearing in the charter school sector. You even see some of the same people who were involved in Enron then showing up in subprime and now in charter schools. That should tell you something.
Preston Green is the John and Carla Klein Professor of Urban Education at the Neag School of Education at the University of Connecticut.
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