Embezzlement, violence, nepotism, and a nightclub -- it reads like an advertisement for a blockbuster movie, but what follows is simply a chronicle of some recent charter school scandals.

Financial Fraud and Embezzlement

According to a March 2010 report, the US Department of Education Office of Inspector General (OIG) has seen a steady increase in charter school fraud complaints. Since January 2005, the OIG opened more than 40 charter school criminal investigations resulting in 18 indictments and 15 convictions and $4.3 million in criminal restitution, and it continues to pursue criminal prosecutions in 24 cases, generally against multiple subjects in each case. The OIG only investigates when there are allegations of misused federal funds, rather than just state or local funds, and additional scandals have come to light since the report, so these numbers are growing.

The fraud that OIG has been investigating generally involves embezzlement, such as using school credit cards for personal expenses or creating companies to divert school funds. In some cases, charter school executives have also inflated their schools' student count, thereby increasing the funds available for embezzlement.

News coverage illustrates that this type of fraud is occurring in many charters throughout the country. Examples, some but not all of which are OIG cases, include:

  • Five Philadelphia charter officials have pled guilty to or been convicted of federal fraud charges, and 18 charter schools in the city are currently under federal investigation based on allegations including financial mismanagement, nepotism, conflicts of interest, unusual salary arrangements for chief executives, and complex real estate deals in which charters leased facilities from related organizations.
  • The former executive director of a Minneapolis charter school is charged with embezzling $1.38 million from the school and spending it on houses, cars and nights at strip clubs. As the embezzlement persisted, the school "routinely did not have enough money to finance field trips, supplies, computers or textbooks for the students," and the embezzlement and mismanagement ultimately caused the school to close.
  • The former head of a now-defunct Chicago charter school used school funds to buy Louis Vuitton and Coach bags, hair care products and diet pills.
  • A charter school in Niagara Falls, New York spent thousands of dollars on plane tickets, restaurant meals and alcohol, and more than $100,000 on no-bid consulting contracts while the school's teachers resorted to organizing a fund-raiser to buy playground equipment.
  • A charter leader in Washington, D.C. is under FBI investigation for allegedly using a school credit card for travel, restaurants, liquor, flowers and lingerie.
  • Leaders of a charter school in California's San Fernando Valley have been charged with stealing more than $200,000 in public funds through embezzlement, money laundering and filing false tax returns, among other alleged crimes.
  • A former employee of a charter school in San Antonio, Texas, may have embezzled tens of thousands of dollars from the school district's accounts.
  • The Business and Human Resources Manager/Financial Manager of a New Orleans charter school pled guilty to stealing $660,000 from the school.

The OIG attributes the increase in this type of scandal in large part to inadequate oversight of charter schools.

Questionable Use of Funds and Sweetheart Laws

Other stories provide examples of charter school misbehavior that may not be illegal but, nevertheless, raises questions about appropriate use of public money.

For example, a Brooklyn charter school offered students a $100 reward for each student they recruited who enrolled in the school and remained for at least one term. In Albuquerque, New Mexico, the Albuquerque Public schools have questioned why a charter school superintendent overseeing fewer than 500 students makes $204,000 a year, more than twice as much as the mayor, and not far from the $256,000 earned by the superintendent of the Albuquerque Public School District, who is responsible for 94,000 students.

A group of charter schools in Ohio have filed a lawsuit challenging the authority of the private management company that runs them, White Hat Management, one of the largest for-profit charter school operators in the nation. They contend that the company prioritizes profits over educating students, and improperly spends and comingles state grants, among other allegations. Surprisingly, Ohio law gives White Hat the authority to replace the schools' governing boards if they seek to terminate their contracts with the company. Even more egregious, if they do end their contracts, state law gives White Hat ownership of the school facilities, furniture, and equipment, even though they were purchased with public dollars.

Under the New Markets Tax Credit, a federal program created in 2000 to encourage investment in community projects, an investor or business that lends money to a nonprofit to build a charter school can receive a 39% federal tax credit over seven years, which can be combined with other tax breaks. With this reduction in taxes, along with the interest from the loan itself, lenders can almost double their investment by the end of the seven years. These profits accrue even if the school itself is struggling to stay afloat. In Albany, New York, for example, charters schools have lower enrollments than expected, meaning less state money coming in. Therefore, an increasing portion of their limited budgets are going to skyrocketing rent payments to cover debt incurred during construction by the "nonprofit" that arranged the financing. This situation gets worse with interlocking relationships between the charter school boards and the nonprofit groups that organize and syndicate the loans, along with the fact that the charter lobby has prevented independent government audits of how its schools spend their state aid.

Minnesota law prohibits charter schools from owning property, but charter school proponents discovered that they can get around this ban by forming a private affiliated building company, which owns the building and leases it back to the school, and by financing the construction through junk bonds -- high-cost debt issued by borrowers considered to be at greater risk for default. The bonds are then paid back with public funds, through a state "lease aid" program. If the school fails, creditors can get a bailout at taxpayers' expense.

Other charter schools, such as one in St. Louis, Missouri, have been so poorly managed that they have run out of money before the end of the school year so that the public school system had to absorb the costs of educating their students for the rest of the year with no commensurate funding.

"Imagine Schools" Management Company Under Fire

One charter company that has engendered a lot of controversy is Virginia-based Imagine Schools. The largest commercial manager of charter schools in the country, Imagine is under scrutiny by parents, school boards, and state regulators, who question its use of public money and the level of control it exerts over its schools.

School district officials in Florida are battling the company over the future of a St. Petersburg charter school that is losing enrollment and mired in debt, most of which is owed to Imagine Schools, the company that founded it. Districts around the state are raising questions about whether the company is actually running its schools as non-profits, as required by state law, and whether local charter school boards are just fronts for the company itself.

An Ohio non-profit policy research organization issued a report finding that Imagine Schools "has a poor record of performance in Ohio and a business model that includes elaborate school real estate transactions, high management and operations fees, overlapping business relationships, low spending on classroom instruction, and tight control of school finances and board relationships."

Parents of Imagine charter school students in Nevada have been dismayed by the lack of local control over their school and by the money going to the company and its real estate affiliate. State officials say a management agreement that includes power over leases, like the one between Imagine and the school, is intolerable because it gives the outside company too much control over the school's fate. But, there's nothing in state statute preventing such an agreement.

An Indiana Imagine charter school is on probation for violating state law and a lack of local control by the charter school board, while a former Imagine charter school in Georgia paid Imagine almost half a million dollars to terminate its relationship with the company because they were so unsatisfied with the arrangement.

Violent School Discipline

A number of charter schools have also gotten into trouble for abusing students.

Students at a charter school in Harlem, New York were punched, thrown to the floor and even dragged around by their hair by "behavior management specialists," and the school covered up the abuse. The principal of a KIPP charter school in Fresno, California resigned amidst allegations that he was using inappropriate forms of discipline including "slamming students against the wall, placing trash cans over their heads, forcing kids to crawl on their hands and knees while barking, and enforcing unreasonably strict bathroom rules, resulting in students having accidents and vomiting on themselves inside the classroom."

While these sorts of egregious behaviors are not necessarily limited to charter schools, a beating in a Houston, Texas charter school that was captured in a cell phone video and went viral on YouTube illustrates why violent discipline can be especially problematic within charter schools. Because Texas law does not require most charter school teachers to be certified, the state has no power to sanction them, and the State Board for Educator Certification does not maintain a record on them. The teacher in this case was uncertified, so certification could not be rescinded and another school could potentially hire her without being alerted to past behavior.

Employment Discrimination and More . . . .

Charter schools in a number of states have also been accused of discriminatory employment practices. For example, the federal Equal Employment Opportunity Commission sued a charter school in Kansas City, Missouri in a pregnancy discrimination suit. Employment discrimination can be particularly difficult to counter in the charter context, as the federal Ninth Circuit Court of Appeals found in January that an Arizona charter school was not a "state actor," and therefore was not subject to federal non-discrimination laws.

Other charter scandals include a Philadelphia school that moonlighted as a nightclub and a charter school in Albany, New York that is accused of rejecting or waitlisting students with learning disabilities in order to boost its test scores even though it was under-enrolled by a third, and of course this list is far from exhaustive.

Federal Policy Pushes Expansion of Charters

While most charter schools have not been caught in scandals, this partial litany of examples calls into question the emphasis on rapid charter expansion in Race to the Top, School Improvement Grants (SIGs), and the Obama administration's Blueprint for reauthorization of the Elementary and Secondary Education Act (ESEA). It also illustrates the need for many states to address the lax oversight and regulation governing their charter schools.

Prepared: June 25, 2010