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Legal, but unethical – most charter schools use public funds for questionable transactions

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Is it OK to waste public funds if it is done legally?

Sensible people would say no.

On September 17, the Grand Canyon Institute released a policy report that tracks the financial practices of Arizona’s charter schools over the past 20 years.

The product of three years of exhaustive research and forensic accounting, the report documents what people have known for years yet continues to be ignored by policymakers and leaders in the charter school movement.

Susan Gerard

Susan Gerard

A majority of Arizona’s charter schools spend taxpayer dollars on non-competitive business arrangements with for-profit businesses that are owned by the charter holder, board members, or their relatives. Grand Canyon Institute’s research found that 77 percent of charter schools engage in ‘related-party transactions’ in a manner that is not in the best interests of Arizona’s students, parents and taxpayers.

In 2013-14, 48 percent of Arizona’s charter school expenditures for contracts, leases and rents were owed to related-party companies. These commitments amounted to half a billion dollars annually. That figure would be higher if administrative and teacher salaries and benefits to related parties were included.

It is not possible to account for the details of how these public funds are spent because they go to related-party companies outside the scope of the charter school audit process. However, disparities in salaries alone demonstrate that charter schools pay their executives on average 50 percent more than their counterparts at similarly-sized public district schools. Charter school executives are often the charter holder or their relative.

Should you pay your relative more than market price to do a job if public competitive bidding isn’t required and taxpayers are footing the bill?

George Cunningham

George Cunningham

These practices are illegal in public district schools for good reason.

One charter system provides an eye-popping example of why related-party transactions should be subject to a public competitive bid process.

Its charter holder purchased software and curriculum services from his own for-profit business for $12 million in one year. In comparison, Mesa Unified School District spent less than 10 percent of that amount on their proprietary online learning management system.

Leaders of the charter school movement have given assurances that they will look into alleged illegal activity by charter schools.

That is the problem. Related-party transactions aren’t illegal for charter schools. However, they waste millions of taxpayer dollars intended for educating our state’s students.

Meanwhile, parents are given the illusion of school choice. How can a parent choose the best educational environment for their child with inadequate information about how a school is performing financially as well as academically?

Representatives of the charter sector will tell you that charter school financial reports are public information. Curt Cardine, the principal author of this report, took three years to do his research in part because he had to repeatedly request information. In some cases, charter schools submitted their audits to the Arizona State Board for Charter Schools more than a year late. In many cases, the financial information reported in a school’s audit, Annual Financial Review and IRS 990 filing in any given year did not reconcile. A public school administrator would be held accountable and potentially fired under these circumstances.

Notably, 23 percent of charter schools either don’t use related-party transactions or do so to achieve cost savings and efficiencies. These organizations use prudent financial practices. They are the exception to the rule.

We have a long way to go before we achieve true school choice in Arizona. We suggest starting with the report’s key recommendations that aim to strengthen charter school financial accountability and transparency. Specifically, charter schools must:

  • Conduct public competitive bid processes similar to public district schools.
  • Ensure consistency among Annual Financial Reviews, audits and IRS 990 filings.
  • Adopt executive salaries comparable to similarly-sized public district schools.
  • Be subject to annual audits by the state Auditor General’s Office similar to public district schools.

Arizona is well known as a champion of the school choice movement with 16 percent of K-12 students now attending charter schools across the state.

That doesn’t mean we’ve done it right. It doesn’t mean that current policy is in the best interests of students, parents and the state.

It is time that our state legislators acknowledge this and take action to strengthen charter schools through greater financial accountability and transparency. This will offer parents a real choice in selecting the best educational opportunity for their children.

If we continue to ignore the facts, the state’s students and taxpayers will pay the price.

— George Cunningham is a former state legislator and served in the administrations of Governors Rose Mofford and Janet Napolitano. Susan Gerard is a former state lawmaker and is chair of the Maricopa Integrated Health System. Cunningham and Gerard are the chair and vice chair, respectively, of the Grand Canyon Institute.

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The views expressed in guest commentaries are those of the author and are not the views of the Arizona Capitol Times.

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