EDUCATION

Dozens of Arizona charter schools are at risk of closing due to financial woes

The Republic | azcentral.com

Holders of 54 schools fail four financial standards
40 schools' charter holders could close within a year
Operators of more than 180 lost money in 2017
Charter board has little power to act when charters have financial trouble

Discovery Creemos Academy, formerly the Bradley Academy of Excellence, had yellow ribbons on display outside the school for Jesse Wilson, a 10-year-old student who disappeared in 2016 and hasn't been seen since.

Corrections & Clarifications: A previous version of this story overstated Arizona's ability to intervene in financially troubled district schools, and understated the number of schools that had closed for academic reasons.

The abrupt closure of a Goodyear charter school in January left hundreds of parents scrambling to find a new school and teachers without jobs.

An Arizona Republic analysis of charter-school finances statewide shows dozens of other schools could be on the brink of similar financial ruin, and the state has little power to intervene.

Charter holders of 40 schools were labeled as "going concerns" by their auditors in the 2016-17 school year, a subjective measure meaning there was concern that they could close within a year due to their finances, according to The Republic's analysis.

DATABASE: See your charter school's financial performance

Charter holders of 125 schools — 28 percent of those with available data — failed at least three of four quantifiable measures of financial health set by the state charter board, according to the newspaper's analysis of financial reports of operators representing 454 schools.

Financial issues were mentioned as the reason for 30 of the 260 recorded school closures on the charter board's website. Academic reasons were cited in 28 instances.

The audits are overseen by the State Board for Charter Schools, and they rate charters' financial health using various metrics, including how much cash they have on hand and whether they made more money than they spent.

ABRUPT CLOSING: Charter school closes, locking out hundreds of students

Ashley Berg, the board's executive director, said the intent of the reviews, which are accessible online, is to provide the public some transparency into charter finances and to "improve the financial health" of the state's charter-school sector.

Berg said charter schools have become more financially stable over the past several years, based on their data. She said that between 2012 and 2016, the percentage of charter holders that did not meet their financial-performance standard — which includes failing no more than one of the metrics — was reduced from 66 percent to 33.7 percent.

Eileen Sigmund, president and CEO of the Arizona Charter Schools Association, said despite the findings, the state's charter schools are stable and growing.

The Goodyear school, Discovery Creemos Academy, "is an anomaly, and the long-term track record of our charter-school system has been one of stability and growth," Sigmund said. "We want Arizona families to be confident in the choice of their public schools."

QUESTIONABLE SPENDING: Goodyear charter's spending raises questions

Unlike with Arizona's district schools, the state cannot intervene on a charter school's operation for financial reasons alone, regardless of whether its own metrics indicate poor financial standings that would merit attention.

“If there’s 40 schools (labeled as going concerns), it’s a real problem for taxpayers in general because those schools aren’t making ends meet and they’re not spending public money wisely in a way that allows them to keep the school running,” said Jim Hall, a retired principal and founder of Arizonans for Charter School Accountability.

SEARCH YOUR SCHOOL:Republic's charter school financial performance database

How charter schools are audited

Charter schools are public schools and receive a set amount of state funding per student.

Each charter holder is required to submit a financial audit to the state charter board every year that is conducted by an independent certified public accountant, according to charter-board guidelines.

The information from the audits posted on the board's website include six measures on its "financial performance dashboard." The Republic used the following four quantifiable measures for its analysis:

Unrestricted days liquidity: A measure of how long a charter holder could stay open with just its cash reserves and credit lines.
Net income: Whether a charter holder posted a profit or loss.
Fixed charge coverage ratio: How a charter's income compares with its financial obligations.
Three-year cumulative cash flow: How the charter's cash balances changed between 2015 and 2017.

A charter that fails one or two standards in a given year may not be struggling, but if it fails three or four standards or if it fails for multiple years, parents should start to ask questions, said Kevin Camberg, managing partner at Fester and Chapman, a firm that conducts charter-school audits.

"That's a pretty good starting point at least, if I were a parent, to make me inquire with the administration," Camberg said. "There could be explanations, but that's a good place to start."

WHAT STATE OFFICIALS KNEW: State knew Goodyear charter school was failing

Dozens of schools fail to meet standards

The financial-performance reviews indicate that more than a hundred charter schools could face financial trouble in the future.

The state reports financial data for each "charter holder," which can be an individual or a company. Some charter holders operate more than one school.

The Republic compiled the data for all available charter holders to fully understand the financial health of charter schools overall. That analysis found:

Charter holders for 116 schools (26 percent) failed the board's expectation for cash reserves; holders for 35 fell far below this standard.
Charter holders for 182 schools (42 percent) lost money in the 2016-17 school year.
Charter holders for 188 (43 percent) had obligations that were too high relative to their income.
The majority of holders are mostly financially in the black. Operators of more than 270 charter schools (60 percent) met three or more of the standards.

Another 55 charter holders responsible for 82 schools, including those run by BASIS Schools Inc., have until March 31 to report the results of their financial audits, while two schools have reports that were submitted but are under review.

Seven schools run by Arizona State University don't submit audits to the charter board because they fall under the authority of the university and were not included in the analysis.

Berg, the board's executive director, said the financial reports are meant to be analyzed by charter holder and not by school.

When analyzed based only on charter holders rather than the number of schools they operate, the percentage falling below state standards drops between 0.5 and 3.5 percentage points depending on the measures.

It is not currently possible to see how each school is doing financially via the charter board's dashboard.

REVOKED: State revokes charter for shuttered Goodyear school

Small schools at greater financial risk

For many parents and teachers, the first indication of Discovery Creemos Academy's financial distress came in an unsigned letter notifying them of the Goodyear charter school's abrupt closure.

Some parents read the notice as they checked their email inbox before bedtime on a Monday night in late January. Others saw it taped outside the shuttered school's doors the following morning after unassumingly driving their kids to school.

Few had been aware that the charter school, which teachers said had fewer than 200 students when it closed, had a deficit of $3.34 million in net assets, or that the state had flagged the school for not meeting its financial-performance standards for years.

The midyear closure of the school sparked wide condemnation of Daniel Hughes, the school's leader, for disrupting the lives of students and teachers and marked an extreme in how Arizona's charter schools operate.

DATABASE: See your charter school's financial performance

"We do condemn in absolutely the strongest possible terms the irresponsible actions of this (Discovery) administrator," the charter association's Sigmund said. "There's absolutely no excuse for closing the school in the middle of the year with no advance notice to teachers, families and students. That example of what happens with that school is exceedingly rare."

OUTPERFORMING? Are charter school students outperforming the state average?

Small-school operations in the red are at greater financial risk because they do not have the enrollment numbers — and the per-pupil dollars that come with it — to absorb potential losses in revenue, said Curt Cardine, a former charter-school administrator and Grand Canyon Institute Fellow.

For example, StarShine Academy in Phoenix, which enrolls about 170 students, didn't meet any of the charter board's four financial expectations in the 2016-17 school year.

StarShine lost more than $900,000 and has been labeled a going concern by its auditor, meaning that it is at risk of closing within a year.

Trish McCarthy, founder and charter holder of StarShine, said charters struggle more generally with high costs associated with facilities that district schools don’t have to deal with to the same extent.

"If people want charters as an alternative, and if they want a community school that is small and right in their neighborhood, then they need to figure out how to help fund that," she said. "Because you can't build a beautiful school for the same cost that it costs to build a non-charter and have the charter be smaller and also have to pay that school facility's cost. It's just huge. It's just prohibitive."

McCarthy said the school’s current financial troubles are compounded by an ongoing Chapter 11 bankruptcy proceeding that started two years ago when the school was allegedly defrauded by a local bond holding company. Some parents pulled their children out of the school as a result.

Despite the problems, McCarthy said she has no intention of closing the school. She predicts that once the proceedings finish, the school will boost enrollment again and meet the board’s standards.

"I'm a parent, I've got children. I wouldn't want to put my kids in a school that might close," she said. "If people haven't talked directly to us to know that we are not going to close, that would be a fear that would be normal."

Some charters submitted audits that show worse finances.

Desert View Academy in Yuma enrolls about 715 students, and its charter operator, Juniper Tree Academy, reported a $2.16 million loss in 2017 and had its three-year cash flow nearly $1 million in the red.

The school — also marked a going concern — didn't respond to a request for comment.

Fountain Hills Charter School, which enrolls about 85 students, failed all four standards as a result of years of declining enrollment.

"The school can't say, 'You know, I really didn't see that coming,' " said Doug Pike, a consultant working with Fountain Hills Charter Schools Inc. "With the financial dashboard, the state charter board has given very strong notice to any school that is showing in the red there that they need to be aware of and have a plan in place to get out of that situation."

Audits are 'a snapshot in time'

Charter officials cautioned that the state board's "financial-performance dashboard" does not give a complete picture of a charter's finances.

“There are so many details and so many variables that go into these numbers and some of these situations," said Heidi Mitchell, CEO of Reid Traditional Schools in north Phoenix.

"Whether a charter organization is growing or refinancing, taking a look at this data without having backup information doesn’t give you the full picture," Mitchell said.

Charters could score negative ratings based on strategic decisions or unexpected events that impact a charter's numbers, Berg said.

"For example, if a charter refinances a loan, in the long run, the charter may save the school millions of dollars," Berg said. "However, on its dashboard, the sustainability measures may be decreased due to the way such transactions must be accounted for and reflected on the audited financial statements."

Berg said a charter that fails to meet the board's financial-performance standards "does not necessarily mean that the charter may be at a higher risk for financial hardship in the future."

Aside from schools labeled as going concerns, Sigmund said none of the other financial measures signal distress by themselves. She called the audits "a snapshot in time."

"They're all in very different situations," Sigmund said. "You need a full framework of financial indicators to consider the context of whether a school is stable."

State is powerless regarding finances

Creemos Academy's closure reignited the debate over how Arizona regulates its 550 charter schools.

Long-standing critics of charter-school oversight say the state needs to assert more authority to ensure charters are properly spending public money.

The state — regardless of how well or how dire a charter school performs on its audits — has no authority to close down a charter for poor finances.

Hall, of Arizonans for Charter School Accountability, called the audits "a fairly useless exercise.”

Cardine, with the Grand Canyon Institute, agreed.

"It’s really, ‘We expect you to do this, but if you don’t, we’re not going to do anything. We can’t,’ ” Cardine said of the audits.

Arizona oversees district and charter schools differently.

The state can close down charters that repeatedly fail academically or if they break the law, but not for financial reasons alone.

The state cannot close down a school district the way it could an academically failing charter school, but can intervene in school districts that chronically earn failing marks or are in financial distress. The state also tracks how districts spend their money in the classroom.

“There are millions of dollars being poured out to charter schools such as (Discovery Creemos Academy), and they give this money away with no follow-up. You don’t know what’s going on," Quacy Smith, an attorney representing former teachers in pending litigation over unpaid wages, has said.

"And when they decide to wash their hands and walk away, this is what you’re left with: unemployed people."

Top performers

These charter holders had the most days of financial reserves, and met all the Arizona State Board for Charter Schools’ financial standards:

Educational Options Foundation, which runs EdOptions High School Learning Center in Tempe and EdOptions Prepatory Academy in Nogales.

Kestrel Schools Inc., which runs Valley Preparatory Academy in Tempe.

AIBT Non-Profit Charter High School–Phoenix, which runs RCB Medical Arts Academy in Phoenix.

Deer Valley Charter School Inc., which runs Deer Valley Academy in Glendale.

James Sandoval Preparatory High School, which runs Crown Point High School in Phoenix.

Bottom performers

Auditors of these charter holders had “going concerns” about their sustainability, and the holders’ finances fell “far below” the reserve standard.

Arizona Academy of Science and Technology, which runs Arizona Academy of Science and Technology in Phoenix.

Graysmark Schools Corporation, which runs Holsteiner Agricultural School in Maricopa.

Ha:san Educational Services, which runs Ha:san Preparatory and Leadership School in Tucson.

Juniper Tree Academy, which runs Desert View Academy in Yuma.

Montessori Academy Inc., which runs Montessori Academy in Paradise Valley.