Race to the Slop

The charter school saga gets more sordid and pernicious from city to city, day by day. The new fiasco involving taxpayer bailouts to Wall Street and the role of junk bonds in financing charter school ‘start-ups’ came to light in Minnesota in November of this year; Minnesota, ironically being the home of the first charter school law in the US in 1991.

Originally, charter school funding in Minnesota offered no extra money for start-up facilities to charter schools, just general aid payments per student.  Former state Senator Ember Reichgott Junge, who wrote the 1991 law, said the intent was to keep charter schools focused on education and out of the real estate business.  Of course many advocates of public schools in opposition to the new law had put a jaundiced eye on the whole mess from the beginning, arguing it was the first step towards the privatization of education.  Never mind, for business and charter support for a ‘lease aid program’ for charter school start-ups crystallized in 1998, after lawmakers discovered many new charter schools were operating in cheap retail storefronts that lawmakers said were unfit for young children (See “State charter schools program is ‘out of control’,” Tony Kennedy, Minneapolis Star-Tribune, November 29, 2009.  In their largesse, they would now begin a formal private sector partnership that would prove to be devastating for Minnesota schools and their citizens.

Charter Schools, owning property and the Minnesota Law

Minnesota state law prohibits charter schools from owning property.  Seedy politicians and Wall Street firms and their consultants and lawyers, found a legal loophole in the law allowing charter proponents to use millions of dollars in public money to build these schools even though the properties would remain in the hands of private non-profit corporations.  Yet another brilliant scam in the ongoing yarn of the American charter school and neo-liberal capitalism.

Here is how it worked.  The state has a lease aid program, which it created 11 years ago that it said would help stimulate ‘competition’ in public education by offering rental assistance to charter groups promoting alternatives to district schools.  The charter proponents argued the schools needed money for new facilities due to the fact that at their inception many charters sprang up in malls or strip malls, as they were not conversion charter schools.  How would they finance the construction of these new start-up charter schools?  By turning to Wall Street and the money-changers, of course.  According to the Star Tribune:

In the past decade, 18 charter schools have been built with $178 million in junk bonds, with financing costs on some projects chewing up nearly a quarter of the funds raised. Twelve more charter schools have taken steps to buy or build facilities, and the state projects annual spending on lease aid to reach $54 million in 2013, up from just $1.1 million in 1998 (State charter schools program is ‘out of control’. Tony Kennedy, Star Tribune Last update: November 29, 2009.

In order to lure the investors they needed for new charter start-up buildings, the administration abandoned the small campus idea which stimulated the movement close to 20 years ago in favor of building large factory style schools that delight in mirroring the more conventional institutions that the families were fleeing from in the first place.  Again, never mind, for that is where construction money is to be made, in large concrete buildings, whether they house kids or stock goods.  With education reduced to simply a ‘commodity vehicle’ for junk bond lenders and developers the interests of students and families become secondary interests while the huge construction financing costs became paramount.

Start-up financing

It all began in the year 2000 when American Express purchased $8.3 million dollars in bonds from the state.  They said the bonds would be used to convert an old Science Museum in Minnesota into a charter school.  It would be called, ironically, the Minnesota Business Academy and what a business it was, at least for some.  In tandem with the junk bonds the charter school also bled the city out of $1 million dollars in community development funds, from the city of St. Paul — government funds paid for by taxpayers.  Not surprisingly, former Lt. Governor Joanne Benson, who headed the Minnesota Business Academy at the time, put the whole crisp multi-million dollar money making deal together.  American Express was delighted with the 8 per cent ‘vig’ it got from the deal and accepted the risk of default and non-payment as a part of the transaction.

It didn’t take more than one year for the school to begin teetering on the edge of financial failure.  Cost overruns and fundraising shortfalls forced the school to turnaround and borrow another $1.6 million from taxpayers.  To pay off its climbing debts, the school dreadfully needed capital in the form of students, bodies – 440 to be exact — with each student representing more than one thousand dollars in annual lease payments.  Unfortunately, the grim recruitment plan backfired and total enrollment never got larger than 292 students in 2004, sending the school into a dizzying economic free fall right into the laps of the public.

Not to worry, the encrusted leaders and city officials approved another bond in 2005.  This time it allowed the school to reorganize its finances with American Express getting $ 6 million, while the city and the working people who comprise it and support it recovered the orts, little more than chicken scratch: a total of a mere $451,352.  The unsecured creditors were paid 10 cents on the dollar.  Ah, the priorities of capital.  As St. Paul City Council Member Lee Helgen, who voted against the bond, said so perspicaciously:
“The corporate folks got their dough .”

Meanwhile, since 2000, at least 64 public school buildings in the metro area closed because of declining enrollment. Charter schools are responsible for recruiting away some of those students while pushing more finance costs on to taxpayers.

The first charter school start-up (as they are known, as opposed to charter school conversions of existing state buildings) was built with lease aid money and it went to the Minnesota New Country School in Henderson.  The school originally occupied three abandoned storefronts, including a defunct bar, but this was now all about to change. With the help of neo-liberal government policies of deregulation and reregulation, and an analyst with the state Education Department, charter school promoters deregulated the state ban on ownership by forming an affiliated building company.  They then used this non-profit building company to borrow $1.4 million from a bank for the charter start-up construction project. Like subsequent projects, the loan is currently being repaid with lease aid funds financed through bonds passed by citizen voters who never had a clue the money would be illegitimately used and they would be left cash strapped in debt.

In the past decade, 18 charter schools in Minnesota have been built with $178 million in junk bonds, with financing costs and fees on some projects eating up nearly a quarter of the funds raised.  All for the kids and parental choice, remember?  Twelve more Minnesota charter schools have taken steps to buy or build facilities, and the state projects annual spending on lease aid to reach $54 million in 2013, up from just $1.1 million in 1998.  This is all great news for the entrepreneurs and Wall Street, as well as for the insiders, as we will see.  It is simply another example of the great charter school adventure known as school privatization, or as Arne Duncan, Obama’s  Secretary of Education would call it,  “The Race to the Top”, and no better can it be represented than right in the backyard of the state the was responsible for the first law allowing for charter schools.

Enter the Wall Street boys: leveraging disaster capitalism for profits

Wall Street jumped in with both feet as they and their charter school patrons discovered they no longer had to deal with rental properties if they were willing to create building companies overnight through the use of crafty lawyers and consultants and then use junk bonds to fund and finance them.  Junk bonds are high-cost debt bonds issued by borrowers considered to be at a much greater risk for default than regular bonds. Never mind, the bonds are repaid with lease aid money from taxpayers, remember?  This is money that comes from the government in the form of student FTE funds which Minnesota capped at 90 percent of property costs, or $1,200 per student, whichever number is lower. This year, Minnesota will distribute an estimated $42.4 million in lease aid funds, a figure that has doubled in just four years.

On average, it costs more to own land than to rent it (charter schools built or bought with junk bonds cost taxpayers an average of $13.50 a foot, or 17 percent more in lease aid payments than all charter facilities, according to Education Department records begging the question of why charter applicants would prefer to own buildings and start building companies rather than simply rent the buildings they need?).  The answer is simple: the humungous amounts of money to be made on the lending and construction deals for the private interests involved.  Here is a typical example of the havoc wrought by neo-liberal economic policies that slash and burn while allowing government collusion in transferring public funds to private coffers.

Prairie Seeds Charter School in Brooklyn Park and the Faribault Public School District, both in Minnesota, each raised about $15 million through the sale of tax-exempt bonds to investors in March of 2009.  After paying underwriting expenses and other costs, the charter school project was left with only 78 percent of the proceeds of the bonds; the public school retained 96 percent.  The rest of the money went to the private fees of deal makers and Wall Street courtesans.  Records show the Prairie Seeds project generated $928,000 in fees and other underwriting costs, with $630,800 going to Dougherty & Co., the sales agent for the bonds. The Faribault deal generated $200,000 in fees.  All these fees to private firms in the name of helping kids and giving parents a “public choice” while over the next 30 years taxpayers are estimated to pay $32.4 million in lease aid to cover just the interest payments at Prairie Seeds alone, where the interest rate on most of the bonds is a whopping 9.25 percent.  That’s five times more than the interest expense in Faribault Public Schools.  Wall Street must be exuberant, but what about the kids and the taxpayers?

State Education Department officials now say lawmakers should either forbid such junk-bond deals or rigorously regulate them, but where were they when they were authorized?  They were right there, nodding and winking the projects and deal making into existence.  I guess it is easier to ask for forgiveness than it is permission.

Insider Fees: “Top of the world Ma’”

Two years ago, when the Otsego City Council refused to finance a charter school start-up, the school promoters went 35 miles down the road to Falcon Heights, Minnesota where officials were persuaded to authorize the bond issue in exchange for a $45,000 “processing fee”, a handsome payoff.  Of course as is standard in such financial wheeling and dealing, the city of Falcon Heights was indemnified against default. They merely acted as a government “conduit” or better said an “enabler” in an effort to give the bonds tax-exempt status so that the public would be enticed to buy them.  This of course is the role of government under the current economic regime of neo-liberalism, to provide lax regulation and an open ‘free’ market to the privatizers and profit maximizers.

At St. Croix Preparatory Academy, a K-12 charter school that opened in its new space this year near Stillwater, according to the Star Tribune, three insiders rewarded themselves with $140,000 in fees related to the $21.7 million bond deal that financed the facility.  Former computer software salesman Jon Gutierrez, who co-founded St. Croix Prep and serves as its executive director, took $25,000 in fees, on top of his annual salary of $110,000. His wife, Kelly Gutierrez, the school’s chief financial officer, received $15,000 in fees.  Jim Markoe, a board member of both St. Croix Prep and the building company that enabled the financing said the insider payments were cleared by bond lawyers involved in the deal.  The lawyers did it, is the defense.  “Everybody has done everything morally, ethically and legally, and I’ll stand by that until the day I die,” Markoe said.

Yet according to the report in the Star Tribune, the largest piece of the cash pie went to Carroll Davis-Johnson, chairperson of the school’s building company.  She received $100,000, this although she served as a project manager on the new school.  The project’s architect told school officials the payment to Johnson was “unnecessary.”  Architect Ed Kodet, was another fortunate financial recipient, earning about $1 million on the school.  Evidently he was one of several construction experts overseeing the failed project. Add to all this fact that the general contractor had a full-time supervisor at the job site and the school had a four-person facilities committee to evaluate “progress” on construction and we’ve got a real public feeding trough.

Speaking with the Star Tribune, Davis-Johnson who also served on the school’s board of directors, stated she and Gutierrezes earned the money and deserved it “based on the huge number of hours” they worked.  Gutierrez said he had “no idea” how he received his management fee, even though he was present at the board meetings when it was authorized and approved. He abstained from the vote, which Davis-Johnson approved. Similarly, Davis-Johnson abstained from the vote on her bonus, which was approved by Gutierrez’s wife, according to the Star Tribune..  A nice  business relationship all subsidized, condoned and neatly rolled up by the neo-liberal charter reform agenda.

Not according to Representative, Jim Abeler a Republican from Anoka:
“When district schools are closing, should we allow charter schools to build new buildings?  These are being built with 100 percent state moneys, but who is minding the store on using that money well?”

Good question. The champion for people’s rights, Jim Abeler himself couldn’t be held responsible could he? After all he was cleared in 2001 of legislative ethics charges for voting to boost lease aid even though he personally received the funds from a charter school he helped start.

Neo-liberalism: socializing the costs while privatizing the profits

Unlike 26 other states that have imposed caps on charter school start-up expansion, Minnesota has no limits on the size of its program or on state support. There’s nothing in any law that would return the facilities to the public once they are paid for.  This is true even if the schools were to fail. In fact, school backers can continue to obtain lease aid even after construction bonds are paid off.  Even though the state’s top education official must sign off on new construction projects, few charter school start-ups are ever halted because of state interference.  That would be an anathema, blasphemous and counter to free market fundamentalism and scant oversight.  And as for taxpayers, their approval is also unnecessary. All a charter school needs to do is simply find a municipality willing to lend its name to a financial deal (as we saw above with Falcon Heights), even if that community is far removed from the school, and then: bango, bingo, bango the public money start to flow into private coffers.

While junk-bond promoters always claim taxpayers will never be forced to cover the costs of a failed charter school built with state lease-aid funds, that’s exactly what happened in St. Paul.  They call it “restructuring” now, when Wall Street can reorganize its business plans in face of catastrophe and the government is more than willing to help.  The recent restructuring lowered the St. Paul Minnesota Business Academy’s long term debt from $10.7 million to $6.6 million.  However, much to the chagrin of the parent and students, less than 12 months from the restructuring date the school went belly up and closed.  What great news for the new bondholders!  They now had downtown land paid for by taxpayers and improved buildings and equipment then valued at $7.4 million dollars.  So what did they do?  They sold the land and improvements for $3.5 million dollars to the Church of Scientology.  This is truly a race to the slop.

DANNY WEIL is soon to publish “Charter Schools”, dissecting neo-liberalism’s plan for reforming education in America. He can be reached at WeilUnion@aol.com


DANNY WEIL is soon to publish “Charter Schools”, dissecting neo-liberalism’s plan for reforming education in America. He can be reached at WeilUnion@aol.com