Junk bonds fuel a building spree, but schools are more crowded, insiders are taking fees, and state regulators can't do much about it.
Minnesota's charter school movement, which sparked a national rethinking of public schooling nearly two decades ago, has been infected by an out-of-control financing system fueled by junk bonds, insider fees and lax oversight.
State law prohibits charter schools from owning property, but consultants have found a legal loophole, allowing proponents to use millions of dollars in public money to build schools even though the properties remain in the hands of private nonprofit corporations.
The key to making it all work is the state's lease aid program, which was created 11 years ago to help spur competition in public education by offering rental assistance to groups promoting alternatives to district schools. In the beginning, many charters were located in dumpy strip malls and received no real-estate grants.
But the once-obscure program has snowballed into one of the fastest growing expenses in the state, with building projects receiving little of the vetting that typically accompanies other public works. One school project was being led by a convicted sex offender until this month, when the Star Tribune exposed his past....
State lawmakers are frustrated by the building boom. 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.
"When district schools are closing, should we allow charter schools to build new buildings?" said Rep. Jim Abeler, R-Anoka, who 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. "These are being built with 100 percent state moneys, but who is minding the store on using that money well?"
Taxpayer approval also remains unnecessary. A charter school simply needs to find a municipality willing to lend its name to a deal, even if that community is far removed from the school.
That is how it worked two years ago, when the Otsego City Council balked at financing a charter school. Undeterred, school promoters went 35 miles down the road to Falcon Heights, where officials were persuaded to authorize the bond issue in exchange for a $45,000 "processing fee." As is standard in such deals, the city of Falcon Heights was indemnified against default, merely acting as a "conduit" to give the bonds tax-exempt status.
At St. Croix Preparatory Academy, a K-12 charter school that opened in new space this year near Stillwater, three insiders rewarded themselves with $140,000 in fees related to the $21.7 million bond deal that financed the facility, records show. 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.
But the biggest chunk went to Carroll Davis-Johnson, chairperson of the school's building company, who received $100,000. She served as a project manager on the new school even though the project's architect told school officials the expense was "unnecessary," records show.
Charles P. Schumacher also slipped through the cracks.
Although he was convicted on two counts of criminal sexual conduct in 1995, Schumacher, 40, wound up on the board of North Lakes Academy in Forest Lake. He also served as chairman of the school's affiliated building company.
Schumacher, who taught at Lourdes High School in Rochester 15 years ago, pleaded guilty to groping two of his students. The girls also accused Schumacher of forcing them to touch his groin.
Wall Street soon caught on, and charter school advocates discovered they no longer had to deal with ill-suited rental properties if they were willing to create building companies and use junk bonds -- high-cost debt issued by borrowers considered to be at greater risk for default -- for construction. The bonds are repaid with lease aid money, which is capped at 90 percent of property costs or $1,200 per student, whichever is lower. This year, Minnesota will distribute an estimated $42.4 million in lease aid, a figure that has doubled in just four years.
Prairie Seeds Charter School in Brooklyn Park and the Faribault Public School District each raised about $15 million through the sale of tax-exempt bonds in March. But after paying underwriting expenses and other costs, the charter school project was left with only 78 percent of the proceeds; the public school retained 96 percent.
Over the next 30 years, taxpayers will pay $32.4 million in lease aid to cover interest payments at Prairie Seeds, 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. 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.
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