Carol Burris: How Charter Operators Get Rich: “Sweeps Contracts”
People often wonder how charter entrepreneurs make money. This article by Carol Burris, executive director of the Network for Public Education, appeared on Valerie Strauss’s Answer Sheet blog in 2019. It’s a cautionary tale that is as important now as it was then. The new regulations for the federal Charter Schools Program would ban “sweeps contacts” in which for-profit corporations control the funding of charters they manage.
National Heritage Academies (NHA), the third-largest for-profit charter chain in the nation, is selling 69 of its more than 90 schools to a new corporation created just for the purchase. Charter Development Co., the real estate arm of NHA, will receive the payout from a sale that requires nearly $1 billion to finance. This massive transfer of public dollars into private wealth is running into some roadblocks, however, in NHA’s home state of Michigan.
Both Charter Development Co. and NHA are owned by J.C. Huizenga, an education reform entrepreneur who refers to himself as “the son of a garbage man.” His father was hardly the typical garbage collector, however. In 1971, his successful business joined forces with those of his cousin, H. Wayne Huizenga, to create Waste Management, a trash disposal company worth almost $64 billion today.
The sale of the 69 NHA campuses in seven different states, like the operation of Huizenga’s charter schools, is wrapped in secrecy, even though taxpayers have paid the mortgages for years.
According to the documentation provided to the Wayne County, Mich., Commission, which was asked to approve the deal for 15 schools, the buyer is Campus Partners 1, which describes itself as a Michigan nonprofit organization.
Campus Partners 1’s charitable tax-exempt status, however, has not yet been granted by the Internal Revenue Service. The corporation has no website. It has no records filed with the Michigan attorney general, which is a requirement for nonprofit organizations in that state. Its November 2020 articles of incorporation provide scant information other than an incorporation date and boilerplate bylaws.
The president of Campus Partners 1, according to the documentation given to Wayne County, is John Grant, who serves as general counsel to J.C. Huizenga and his interests. Campus Partners 1 will contract with NHA’s related Charter Development Co. for a facility maintenance contract and “ground lease” so that the buildings can continue to be a cash cow for the for-profit organization. While ownership may technically change hands for the cash-out, control will still be in the hands of NHA.
One might wonder what organization would loan $853,600,000 to a corporation of unsettled status that is less than a year old. Apparently, one that frequently finances for-profit private prisons will. The Industrial Development Authority of the County of La Paz in Arizona is issuing municipal bonds to finance the sale. National Heritage Academy has no charter schools in that county or even the state.
According to this 2014 report in Bloomberg News, La Paz issues municipal bonds to charter schools and for-profit prisons as a means to raise revenue. Arizona is one of only three states that allow the sale of municipal bonds to out-of-state entities. The bonds, according to Bloomberg, are intended to give “riskier borrowers from charter schools to private prisons access to the $3.7 trillion municipal market.”
This is not the first time an Arizona county has financed a charter school cash-out with municipal bonds. Jim Hall, founder of Arizonans for Charter School Accountability, studies the state’s for-profit charter sector. “Bill Coats sold his Leona charter chain for $72 million,” he said. On his website, Hall detailed the sale of Coats’s charter school real estate in 2007.
Coats sold his schools to a Michigan nonprofit he founded by persuading the Pima Industrial Authority of Arizona to issue $82 million in bonds to pay for the sale of 10 of his charter schools, plus expenses.
Like its counterpart in La Paz County, Pima sold municipal bonds, which are attractive to the wealthy for their potential high returns on which they pay neither federal nor state taxes. From mortgage payments to the tax-exempt payouts from the bonds, taxpayers fund charter cash-out deals.
The questionable nature of these dealings has not been lost on some local authorities — at least two of which are putting on the brakes.
Earlier this month, Mount Clemens City Commission refused to approve the sale of the bonds to Campus Partners 1 when it found out that the board of directors of Prevail Academy had no idea that its building was to be sold and had no input into the new lease.
According to reporter Mitch Hotts of the Macomb Daily, Prevail’s board of directors approached the city manager for details regarding the transaction. The firm representing Campus Partners 1 acknowledged that the board of the supposedly independent nonprofit school might have been left in the dark but said that although the board of the school was not briefed, “the owners were in favor of the sale.” The commission is putting the sale on hold, pending further information.
The board’s concern about the new lease is understandable. If the sale goes through, the board will be committing to a 30-year lease with Campus Partners 1.
Casandra Ulbrich, president of the Michigan State Board of Education, is concerned with the terms of the lease as well. “Most charter schools are authorized for five-year intervals,” she wrote in an email on Aug. 25. “What happens if a school closes or isn’t reauthorized? Who will end up ‘holding the bag’?”
Mount Clemens was not the only location where NHA encountered a roadblock. NHA wants to sell 46 of its Michigan charter schools, 15 of which are in Wayne County.
When advocates of the sale made their pitch to a standing committee of that county’s commissioners, they were met with skepticism and resistance to the sale.
“I just can’t help but think that for every charter school that opens up, one of our public schools closes. … I am going to be a no vote on this one,” council member Irma Clark-Coleman said at the meeting. The Arizona lawyer representing the deal pushed back by describing the requested action as “a technical, administrative thing.”
Council members in attendance unanimously approved a motion to reject approving the bonds for the sale, making it clear that they did not want to be what they called a “one-stop-shop” for the 15 schools.
After the meeting, I spoke with council member Tim Killeen, who was outspoken in his opposition to the deal, and asked him why. “It did not pass the smell test,” he said. “This was not a normal request. It felt like they thought we were going to roll over.”
The representatives of NHA told the Wayne County Commission’s standing committee that if they did not approve the sale, they would ask the localities where the schools are located, or if need be, use private bonds that do not need approval. Denial would just slow the deal down. They also said they might approach the full commission but never did, perhaps not wanting to draw attention to their multi-state efforts.
Can the boards of the charter schools themselves block the sale? In theory, any NHA schools that might not like the new lease agreements should be able to negotiate with the new owner or find another home. They should also be able to fire the for-profit management company pushing the sale. But theory meets reality when charters run by for-profits try.
In 2014, the Detroit Free Press reported what occurred when one NHA school, Detroit Enterprise Academy, attempted to break free of NHA. The board had questioned why the school spent almost $1 million a year on its building lease. According to the story, when the board sought financial information, they were “treated as a student council.”
The board president resigned when she pressed for financial details and was told by NHA that it was “none of the board’s business.” When the board tried to fire the for-profit management company, the school’s authorizer, Grand Valley State University, said the school would not have its charter renewed if the board fired NHA.
According to the letter from the authorizer, the evaluative measures that Grand Valley would use would “cease to exist” because “NHA employs the faculty and administration, NHA owns the building, curriculum and all of the equipment.”
According to reporter Jennifer Dixon, when NHA’s Metro Charter Academy sought a cheaper lease and asked for financial records, Grand Valley “suggested the entire board resign — and summarily reduced the term of office for two who refused.”
Detroit Enterprise Academy is now up for sale for $14.5 million and Metro Academy for $16 million, according to the document presented to the Wayne County Commission.
How does absolute control of a school that a corporation is supposed to work for happen? It happens because NHA operates its schools via sweeps contracts, in which the nonprofit board turns over school control and taxpayer funding to the for-profits. Such contracts are not uncommon in the for-profit-run charter world.
Other examples of sweeps contracts include the contract between the Ohio Distance and Electronic Learning Academy and the for-profit chain Accel Online Ohio, a Nevada limited liability company; the contract between Northeast Raleigh Charter Academy and its for-profit management Torchlight Academy Schools, and the contract between Ohio Virtual Academy and K12 Virtual Schools.
While agreements between for-profit management companies and their schools are hard to find because of the lack of transparency built into state charter laws, as we searched across states, we found the contracts for chain schools and the for-profit management companies to be consistent.
In most cases, for-profit management is an attempt to get around Title 20 of the Elementary and Secondary Education Act, which requires schools to be nonprofit organizations to be eligible to receive federal funding. The nonprofit school is a facade for the for-profit corporation.
And it is the reason the charter lobby unsuccessfully fought so hard to defeat Section 314 of the Departments of Labor, Health and Human Services, and Education 2022 appropriations bill. If adopted by the Senate, it would close the loophole that allows nonprofit schools to be cash cows for for-profit operators.
Ultimately, Huizenga’s charter school cash-out financed by the taxpayers will probably go forward. Unless Congress acts and closes the loophole, the 139 for-profit corporations that manage more than 1,100 charter schools in the United States will continue to put profits before taxpayers and kids. And more cash-outs funded at taxpayers’ expense will occur.