‘Ghost Students,’ Embezzlement and Deregulation: The Shadow World of Charter Schools
Lack of regulation in the charter school industry is turning education into the hottest get rich quick scheme about town.
One of the most crucial differences between charter schools and traditional public schools is how they are regulated. Charter schools are not subject to the same amount of laws regarding financial transparency as traditional public schools and other similar institutions, and their budgets and operations are subject to very little, if any, government oversight. In fact, there are no federal laws addressing the issue of charter schools and the role they play in education. All legislation regarding charter schools takes place at the state and local level.
Without federal oversight and any real regulation charter schools are popping up with creative ways to abuse the lack of regulation to reap hefty profits – from enrolling “ghost students” to politicians funneling money straight into the charter school industry and their pockets.
Who Really Runs Charter Schools?
Only two states, Arizona and Wisconsin, allow for-profit charter schools but that doesn’t mean charter schools in other states aren’t run by for-profit entities. Outside of Arizona and Wisconsin, charter schools are often run by for-profit charter management organizations or education management organizations. Charter management organizations run by philanthropic organizations such as the Walton Family Foundation manage somewhere between 35% to 45% of all charter schools in the United States. These management entities are almost always linked to an organization like the Walton Family Foundation with ties to rich business moguls or other investors who stand to benefit from their association with charter schools and the business models employed.
The manner in which charter schools are built, established and run provides many opportunities for shrewd investors. There are many tax credit and tax cut opportunities for individuals who want to invest in charter schools. For example, the New Market Tax Credits program gives investors who are part of a Community Development Entity a 39% tax credit over seven years in exchange for building a new project or opening a new business in a low-income community. Most charter schools are built in low-income neighborhoods, and it’s common practice for rich investors to use programs like these to collect massive tax credits while appearing to invest in struggling communities.
Education Management Organizations often own the buildings that are “leased” to charter schools, and as a result, can earn huge amounts of profit from the rent that the schools pay to use the buildings. One Education Management Organization in North Carolina “received $1.5 million in rent, as well as almost $549,000 for maintenance during the 2013–14 school year—from one charter school alone.”
Self-Regulation or Deregulation?
Even though he comes from a modest Brooklyn background and was educated in New York Public Schools, accused sexual predator Jeffrey Epstein has also donated massive amounts of money to the charter school movement using his charitable foundation. When referring to his contributions to the charter school movement, Epstein was even bold enough to proclaim, “Charter schools have the freedom to self-regulate. It’s a critical component of their success.”
The deregulation of the American education system favored by wealthy individuals who support charter schools mirrors the deregulation they are working for in the financial industry. When systems that protect the weak and disadvantaged are removed through deregulation, the result is the same whether it takes place in the financial sector or the educational arena: those who are already on top win yet again, while those who are struggling lose even more.
When businesses or individuals are left to regulate themselves, it almost always ends with them taking advantage of the power they wield and using it to benefit themselves often at the expense of others. One can see this in the Enron case, or when regulatory industries in the energy sector are made up of former big oil and gas lobbyists or the case of Arizona lawmaker Eddie Farnsworth, who made millions running his for-profit charter school corporation while it was supported by taxpayer money.
Politicians and Their Ties to Charter Schools
Arizona has bought into the charter school concept almost more than anywhere else in the U.S., in fact, it has more charter schools per capita than any other state. Over 25% of the state’s education budget is spent propping up charter schools, but only 15% of Arizona’s students attend these institutions.
One can look at the case of Arizona state representative Farnsworth to see the complicated financial ins and outs of the charter school industry and who stands to benefit. A small clue: It’s not the students nor taxpayers.
During his tenure as a state legislator, Farnsworth was a staunch supporter of charter schools. This comes really as no surprise since for much of this period he was not just working as a state representative, but also serving as founder and president of Ben Franklin Charter Schools. He recently sold his chain of charter schools to a nonprofit organization formed expressly for that purpose and composed of Farnsworths’ friends, including two former lobbyists. Farnsworth earned a little under $14 million from the sale.
The nonprofit formed to run Ben Franklin Charter Schools has nearly no money, so Farnsworth has structured a seven-year plan for which he will loan the organization money to collect $478,000 in interest at the end of the seven-year period. As part of the deal of the sale, Farnsworth continues to be affiliated with his charter school chain by serving the nonprofit in an advisory capacity although his salary has not been made public.
Farnsworth isn’t the only politician directly profiting from the charter schools he has business interests in while also being involved with legislation affecting those institutions. In Utah’s state senate the “go-to expert” on charter schools is Lincoln Fillmore, who also runs Charter Solutions, a charter management organization. According to its website, the mission of Charter Solutions “is to support education innovators who operate public charter schools—to make it easier, less expensive and more fun!”
Charter Solutions provides charter schools with services such as consulting, assistance in filing reports, legal compliance and financial services. Since charter schools do not have the same established infrastructure as traditional public schools, they often use charter management organizations such as Charter Solutions to help manage and run the schools.
Passing Legislation and Self-Dealing
An investigation by Salt Lake City TV station KUTV found that many other prominent Utah politicians, including former Utah House Speaker Greg Hughes and former Senate President Stuart Adams, serve or have served on the boards of charter schools in the state. This seems to indicate a disturbing trend in the growing conflicts of interest between legislators’ duty to the citizens they serve and their own financial interests.
The number of politicians who are actively involved in drafting and approving education legislation but are also directly involved in the business of charter schools is staggering. Nearly every state legislature seems to be filled with enterprising politicians who are tailoring education policy in their respective states to line their pockets.
In Florida, Hialeah Republican Rep. Manny Diaz Jr. is a member of the Education Committee and the K-12 Appropriations Subcommittee while also earning a six-figure salary from his position as the chief operating officer of charter school Doral College. Miami Republican Michael Bileca heads the state’s House Education Committee and also serves as the executive director of a foundation that funds charter schools in the state. He has also founded charter schools in the past.
In 2017 Bileca, Diaz Jr. and other republican legislators devised a devious scheme to help them and their pals in the charter school industry financially while simultaneously defunding public education across the state. This scheme led to the writing of HB 7069, which was drafted in almost complete secrecy, a move which some have claimed violates laws related to government transparency. HB 7069 provides for $140 million dollars to be spent expanding charter schools at the expense of public education and also requires public schools in certain districts to share their federal Title 1 funding with charter schools in their districts.
HB 7069 effectively funneled tax-payer money into the pockets of Bileca, Diaz Jr. and their friends by forcing government funds to expand charter schools.
‘Ghost Students’ at Charter Schools
Epic Charter Schools is a massive virtual charter school company in Oklahoma that is currently the largest virtual charter school system in the state. Epic has been accused of multiple wrongdoings over the years, with some teachers claiming that Epic attempted to incentivize them to withdraw students and that Epic management had a threatening and aggressive attitude when teachers refused to follow controversial procedures.
Most recently, the Oklahoma State Bureau of Investigation accused Epic’s co-founders, David Chaney and Ben Harris of using nonexistent “ghost students” to create the illusions of higher enrollment counts and, in turn, embezzle millions of dollars from the state.
Epic is free for students to attend, and as a result, receives massive amounts of state funding designated for education. Epic Charter Schools received $112.9 million in funds from the state during the 2019 fiscal year, money that was allocated based on enrollment records that are now alleged to have been tampered with.
The “ghost students” who supposedly were enrolled in Epic schools were typically students being educated through homeschooling or enrolled in small religious schools. Epic Charter Schools would court these students and their parents with promises of “annual learning funds” that could be worth as much as $1000, and then use these students to bolster their enrollment statistics.
Everyone involved knew these students would never receive actual instruction from Epic and were only enrolling in the free charter program to receive that “annual learning fund.” In fact, teachers who worked for Epic at the time claim that the parents refused the teachers’ offers to provide online instruction while still receiving money from the company. These students were so prevalent that teachers even had a name for them and jokingly referred to the students and their families as members of the “800 Club.”
Epic Charter Schools files tax returns as the nonprofit Community Strategies Inc., which was not founded to address education-related topics. According to a 2009 tax return filed by Community Strategies Inc., “The original purpose of Community Strategies Inc. was to increase public awareness and educate consumers about the way energy, telecommunication and electric utilities operate and the significance of such operations.”
When this tax return was filed, the total revenue for Community Strategies Inc. was $666,326. It dropped to $60,024 the following year. In 2011 the same year Community Strategies Inc. added the name Epic Charter School to its tax return, its revenue increased to a whopping $4.2 million.
After an initial investigation into Epic in 2013, the attorney general’s office didn’t pursue it due to insufficient evidence, and Epic continued to prosper, netting $9.9 million that financial year. By 2016 Epic’s revenue increased to a staggering $29.3 million. Throughout this roughly seven-year period when Epic’s revenue multiplied nearly 500 times, tax reports that were filed did not mention employees being paid nor offered evidence of where its money was going.
Despite its massive profits in 2016 Epic still only had about 6,000 students enrolled in its virtual charter schools. The number of students attending online classes through Epic Charter Schools has since nearly quadrupled, and over 21,000 students currently are enrolled in the school. However, given the issues with “ghost students,” no one can be entirely sure what the real enrollment statistics are. An investigation into Epic is ongoing – who knows what other skeletons will turn up in Epic’s closet.
The Next Enron
America’s education system is in drastic need of repair, and new innovations could speed its recovery and create schools that will finally serve the needs of all America’s students. However, the secretive, shadowy nature of the charter school industry and its lack of financial regulation threatens to attract more conniving investors looking to abuse education to turn massive profits. Allowing politicians to pass legislation to funnel millions of dollars into the charter school industry while also profiting financially from their positions in the charter school industry only worsens the situation.
In fact, an article in the Indiana Law Journal titled, Are Charter Schools the Second Coming of Enron?: An Examination of the Gatekeepers that Protect Against Dangerous Related-Party Transactions in the Charter School Sectors, compared the charter school industry to the infamous corporate fraud practices employed in the Enron scandal.
“Unscrupulous individuals and corporations are using their control over charter schools and their affiliates to obtain unreasonable management fees for their services and funnel money intended for charter schools into other business ventures,” wrote the article about the dangers of the charter school industry.
The article compared the management of charter schools to the way Andrew Fastow, who was the Chief Financial Officer at Enron when it declared bankruptcy in 2001, used his position at Enron to collect millions of dollars for himself using the Special Purpose Entities linked to the company he controlled. Eventually, Enron’s fraudulent practices were discovered, leading Enron to file for bankruptcy, which could happen to the American public education system if such flagrant conflicts of interest and abuses of power go unchecked.
Considering the growing trend of charter schools, the United States is in drastic need of federal oversight and regulation of the industry, before students in the United States fall further down the education ladder.