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Public School, Inc.: When public education turns into big business

by Loknath Das

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Andrew Sterling thought BASIS Tucson in Arizona was a teacher’s dream when he started working there in 2008. Class sizes at the midtown public charter school were small, teachers were experts with advanced degrees and students were bright and engaged, with few disciplinary issues.

“The kids were excellent – just amazing kids that came from seemingly a variety of backgrounds and variety of interests, quite quirky in a lot of ways,” said Sterling, who taught history and government.

Those quirky kids were the reason he later enrolled his daughter there for fifth grade. He wanted her to be surrounded by good peers. Plus, he’d get to watch her closely. But his concern was growing over the school’s changing climate.

BASIS, which started as a single Tucson charter school and grew into a network of educational facilities, began attracting national attention as an academic powerhouse with soaring test scores by the late 2000s. Riding that momentum, the company pushed to expand, adding charter and private schools nationally and internationally and multiple layers to its corporate structure.

And the pressure grew for students to score even higher to fuel that growth.

Sterling saw his students drowning in schoolwork, which increasingly focused on test results. Some students were built for it, he said. Most struggled. Many transferred out, unable to keep up.

There was a physical change, too.

In 2012, BASIS added a new custom-designed campus in the wealthy Catalina Foothills on the north side of Tucson. The school added more grades between the two campuses, and hundreds more students enrolled. By then, a new management arm of the BASIS corporation had taken over school operations.

Despite his concerns, Sterling stayed, hoping to help his struggling students. Meanwhile, BASIS kept growing.

BASIS today is perfectly poised to capitalize on growing efforts across the country to turn public education into big business. Although it is not the largest charter school network in the U.S., BASIS is one of the only to have successfully expanded into private and international operations. None of the five largest charter networks concurrently operate private schools.

BASIS expanded rapidly, mostly by leveraging its public school status to borrow hundreds of millions of dollars, ultimately paid by taxpayers, while also expanding its private school operations. And in its race to the top, critics say BASIS systematically shortchanged the students who are the most costly to educate, including those with disabilities.

Despite continued criticisms – especially regarding what some consider “cherry-picking” of students, a common complaint about some charter schools – BASIS has continued to attract parents looking for something more than a traditional public school for their children.

“We have a laser-like focus on academics,” said Peter Bezanson, CEO of BASIS.ed, the corporate arm that manages BASIS schools.

As school choice – a movement to give students access to more public education options – continues to gain momentum, companies such as BASIS are seen as the solution to public education’s ills. It brought together people from different ends of the political spectrum – former U.S. House Speaker Newt Gingrich and the Rev. Al Sharpton – to jointly tour the BASIS Tucson campus in 2009. BASIS is also touted as a model for public education by Arizona Gov. Doug Ducey.

This phenomenon has spurred a nationwide debate.

President Donald Trump and his billionaire education secretary, Betsy DeVos, whose family are Republican megadonors, are among the biggest champions of school choice.

“I’m opposed to any parents feeling trapped or, worse yet, feeling that they can’t offer their child the education they wish they could,” DeVos said in a speech at the Brookings Institution in March. She compared school choice with consumers picking Uber or Lyft over traditional taxis.

“What they are trying to persuade the American public of is that public schools don’t belong to the public, that they’re consumer items,” saidDiane Ravitch, a former assistant education secretary under President George H.W. Bush, who once advocated for school choice herself.

Back then, Ravitch envisioned choice as schools within schools that could serve as labs for educational innovation, she said. But school choice became synonymous with big businesses, she said, and big businesses brought about legally questionable practices such as conflicts of interests, nepotism and putting their own interests above those of the public.

How BASIS got its start

As the movement to create independent and innovative public schools spread across the country, Olga Block, an immigrant from the Czech Republic, wanted a more rigorous education for her daughter.

Block decided to start her own school with the help of her American husband, Michael, a Stanford-educated economist. She would combine best of both worlds: the hands-on, slower-paced American learning environment and the rigorous European study habits Olga Block was used to back home.

“BASIS was essentially built on a mother’s love for her daughter,” said Bezanson, the BASIS.ed CEO.

The Blocks, who remain managers at BASIS.ed, declined to be interviewed.

The school opened in fall 1998, renting space at a synagogue in midtown Tucson. It was called Building Academic Success in School, or BASIS.

Today, the BASIS network runs 24 charter schools in Arizona, Texas and Washington, D.C., and seven private schools in California, New York, Virginia, and Shenzhen and Guangzhou, China. It has plans to open more schools in the U.S. and overseas in the near future.

As BASIS grew, so did its corporate structure. In 2009, Olga and Michael Block established a private limited liability company, BASIS.ed, to handle school operations. To manage the assets and equities of various private management arms that run the charter, private and international schools, the founders also established BASIS Educational Ventures.

Such complex corporate structures, also common to other large charter networks, limit risk and maximize profit, said Gary Miron, an expert in charter school finance at Western Michigan University and fellow for the National Education Policy Center.

“It’s just amazing that they are public schools,” he said, “but they are really private in so many ways.”

Reading, writing and reaping profits

Before BASIS’ multi-tiered corporate structure emerged, IRS disclosure forms showed that in 2008, Olga Block earned $197,507 as the chief executive officer of BASIS, which then had two schools and just over 1,100 students. Michael Block earned $156,362 in various roles.

That same year, the superintendent of the Tucson Unified School District, which served more than 56,000 students in more than 80 schools and programs, made just over $200,000.

Tax filings from 2007 and 2008 also show that the founders paid family for work they did for BASIS: Olga Block’s two daughters and her sister, who lives in the Czech Republic, were paid for public relations material design and accounting. Michael’s son, Robert, was paid for technology services in other years.

The founders’ relatives still occupy high-level management positions in various arms of the network. At least three of Olga and Michael Block’s children are on the BASIS payroll.

Arizona law requires all public officers on political subdivisions, boards or commissions to disclose conflicts of interest. It also says public officers should refrain from voting on or participating in any contract, sale, purchase or service from a relative.

The Arizona attorney general’s office said it believes the law applies to charter school officials and board members, but referred to the Arizona State Board for Charter Schools for enforcement of the law.  The charter board said it does not keep track of conflict-of-interest disclosures.

“I think it’s fairly common for family-owned businesses to employ family members,” said Bezanson, BASIS.ed’s CEO.

BASIS.ed provides everything that’s required to run a school – from supplying teachers to buying textbooks on a contract basis, he said. The difference between BASIS.ed and the nonprofit charter holder, BASIS Schools Inc., he added, is that BASIS.ed is private, which allows it to efficiently manage schools in different states.

Once BASIS transitioned to private management in 2009, few details about its schools’ finances remained public. Filings instead show millions in lump sums for management fees and leased employees, including teachers, all addressed to Michael Block, who until 2015 was a BASIS charter board member.

For the 2014 tax year, the most recent tax filing publicly available, the nonprofit housing the network’s charter schools paid BASIS.ed $15.6 million in management fees and an additional $44.3 million for salaries and benefits. In exchange for the fees, BASIS.ed says it handles tasks such as hiring administrators and teachers and buying school supplies.

A 2016 U.S. Department of Education inspector general’s report raised the alarm about charter schools using private management, saying it limits accountability.

But Bezanson said that the structure allows BASIS to run its schools more efficiently and that the BASIS charter school expansion is “wholly separate and not commingled with anything having to do with the expansion of the international or independent schools.”

Bezanson would not provide information about executives’ salaries, saying it’s a private company.

On average, BASIS paid about $3.3 million annually per school to BASIS.ed for salaries and management between fiscal years 2008 and 2014, according to tax filings. In comparison, the average total budget for a school in the Tucson Unified School District for the 2014-15 school year was about $2.5 million.

In tax filings, the fees to BASIS.ed are listed under transactions with related parties – something the Education Department’s inspector general’s report called a red flag because it could mean weak internal controls, alongside conflicts of interest and insufficient division of duties.

As it stands, though, the Department of Education does not have an adequate way to monitor charter management companies to identify and address potential risks, the report concluded.

Big borrowers

BASIS borrowed big to grow big by leveraging its charter schools’ public status, which allows it to borrow tax-free and at lower interest rates.

The network’s charter schools are funded by state governments on a per-pupil basis, like district schools, but there is no dedicated funding for charter school buildings. So BASIS turned to the government bond market to fuel its charter school expansion.

It has borrowed so much that its charter school arm, the only BASIS subsidiary for which financial information is publicly available, had about $230 million in long-term debt at the end of fiscal year 2016, according to its consolidated financial audit submitted to the Arizona State Board for Charter Schools.

BASIS borrowed largely through industrial development authorities of municipalities in Arizona, which are government-affiliated middlemen that help secure funding for projects that benefit the people of that town, city, county or state.

It used loans through the city of Phoenix and Pima County – sometimes to pay back other loans – to build and renovate schools in Washington, D.C., and Texas, using its existing charter school facilities as collateral.

In one instance, a 2016 loan for $84 million for various capital projects across the network – about $31 million of which was used for refunding a previous loan for the D.C. campus – was secured by 14 BASIS charter schools’ state funding and facilities.

The city of Phoenix isn’t fronting the money, nor is it liable for the debt, said Bezanson, the BASIS.ed CEO. The money comes from private investors.

But taxpayers – primarily in Arizona – do pay for the costs of these loans, including transaction fees and interest, through state per-pupil funding for education.

The charter network’s buildings are not publicly owned, either – they are owned by BASIS.

“That seems illogical that we would allow them to use a share of public dollars to acquire an asset with public dollars that is then owned by this private entity,” said Bruce Baker, an education professor at Rutgers University in New Jersey who specializes in charter school business practices.

At the same time, Baker said, charter schools are backed into a corner when it comes to facilities financing. Without a dedicated funding mechanism, they must seek other options.

But many of those options are the result of bad policy design and create opportunities for bad deals and bad debt, he said. Repeated borrowing and refinancing results, Baker said, in a lot of public money being sunk into transaction costs and fees.

The 2016 financial audit shows signs of what looks like financial distress for the BASIS network’s charter school arm. It ended fiscal year 2016 with negative cash flow – a deficit of nearly $23 million, according to the audit.

That distress was caused by refinancing loans for better rates and resulting prepayment penalties, said DeAnna Rowe, head of the nonprofit organization for BASIS charter schools, who previously served as executive director of the state charter school board.


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