FLASHBACK -- 1 YEAR AGO -- Ohio's charter schools and... are things really better today?

Who's profiting from Ohio's charter schools?

Cleveland Plain Dealer, Sunday, March 19, 2006
By Sandra Livingston, Scott Stephens and Bob Paynter
Plain Dealer Reporters

Nearly a decade after David Brennan set out to prove he could out-educate the educators and make money doing it, the godfather of Ohio's charter schools is now at the heart of what looks to many like a bungled experiment – of massive proportions.

In the name of reform, Ohio has routed more than $1.4 billion in taxpayers' money away from traditional urban schools – much of it going to profit-seekers like Brennan, the Akron entrepreneur who has dominated the charter scene here.

But with some notable exceptions, the results so far have been dismal.

At the end of the last school year, Ohio's charter schools remained far behind traditional public schools in proficiency test scores. Despite some gains, the charters continued to trail even the maligned urban districts they were supposed to outclass.

Brennan's Hope Academies have faired even worse, records show, especially in Cleveland, where they remain well behind other charters, as well as the poster child for Ohio's failing schools – the Cleveland Municipal School District.

It didn't have to be that way.

Charters elsewhere have done much better – even in some big cities where poverty-wracked school districts have been underserving mostly minority students for years.

In Boston, for example, charter schools caught up with the city's public school district within four years and have been steadily pulling away ever since, according to state test data.

Massachusetts has been recognized for its rigorous charter rules, caution in approving schools and tough regulation. And it has been willing to shutter schools that don't work.

In contrast, many experts describe Ohio's charter program as a hastily assembled, poorly funded and laxly regulated hodge-podge of educational dice-rolls.

It's a “sad situation,” says Columbia University professor Henry Levin, a national expert on privately run public schools. And the culprit, he said, at least in part, was “legislative conniving with one company in particular.”

That company is White Hat Management, the for-profit brainchild of Brennan, a Stetson-wearing tax-lawyer-turned-industrialist who blamed school failure on teachers unions and bureaucrats, and who wanted to prove that profit-seeking private enterprise could do better.

Brennan played a major role in pushing Ohio's school-choice legislation through politically polarized Columbus in the mid-1990s with waves of campaign cash. And he has been trying to capitalize on it ever since.

Today, his White Hat Management operates 34 schools in Ohio, enrolling 15,700 students last year – 5,300 of them in Cleveland – and collecting nearly $109 million in state tax money, plus millions more in federal grants.

The for-profit company's schools have collected about $350 million in Ohio tax money since the program began – roughly one dollar in every four that the state has spent on charters.

And it has earned the deep enmity of public-school educators – teachers unions in particular. As a prelude to its state convention in Columbus two weeks ago, the Ohio Federation of Teachers issued a blistering report that attacks Brennan's “education empire” in painstaking detail.

Not all is well in the empire.

Doubts about the financial viability of some of the company's schools, prompted for the first time by recent state audit reports, raise questions about how long White Hat will be willing to stand behind them.

And records show that some of the historically docile boards overseeing White Hat schools have recently grown restive and rebellious over several issues. Those include lackluster test scores and board frustrations over the company's seeming reluctance to share financial information.

Brennan and White Hat officials declined to be interviewed. They also chose not to answer most of the questions submitted in writing by The Plain Dealer nearly three weeks ago.

But the company did say in a written statement that it exceeds legal requirements for financial reporting, that its Hope Academies “are showing continuous improvement on reading and math scores” and that “we are making a huge difference in the lives of our students.”

Brennan convinced he could do better

Brennan, 74, secured his standing in increasingly Republican Columbus in the mid-1990s with generous campaign contributions. He gave more than $120,000 to – and raised at least $500,000 more for – former Gov. George Voinovich, who appointed him to chair the Governor's Commission on Educational Choice.

Brennan gave hundreds of thousands more to the Ohio Republican Party and its candidates, including key legislators who ushered through various “school choice” proposals that Brennan both lobbied for and has tried ever since to profit from.

In 1995, lawmakers created a limited voucher program in Cleveland, earmarking $5.25 million in tax money for student “scholarships” to private schools. Brennan opened his first Hope schools to take advantage.

Two years later, the legislature authorized tax-supported charters in Ohio's eight urban school districts. Brennan converted his Hope schools to charters – noting that they could get about twice as much per student in state money as voucher schools did – and started opening more.

From that foundation, Brennan launched in 1998 what has since become a multistate enterprise, fueled by tax dollars, that describes itself as “one of the premier education service delivery organizations in the United States.”

But to some, at least, White Hat seems to embody forces that help explain Ohio's lackluster charter performance so far.

Seeking a profit from education

Regardless of how much money he and his company actually make on charter schools, Brennan has made it clear from the beginning that profit is what he's after.

Charter researchers say that raises a basic question about every move the school operator makes: Who's being served, the kids or the company?

“There is an inherent conflict,” said Alex Molnar, director of the Educational Policy Studies Laboratory at Arizona State University.

Massachusetts tells would-be charter creators to be cautious when dealing with for-profit management companies. Only two schools in the state employ one. And studies by Western Michigan University's Evaluation Center suggest that states with extensive involvement by for-profit management companies tend to feature less accountability and lower test scores.

With more than half of its charter money going to for-profit companies, Ohio has an unusually heavy reliance on profit-seekers, said Gary Miron, the Evaluation Center's chief of staff.

For-profit school operators aren't necessarily a problem, Miron said, as long as safeguards exist to ensure that they're serving the public good, not just their own.

But that's precisely where both Ohio and Michigan have fallen short, he said, listing these reasons:

The movement in both states was partisan, ideological and divisive. Charters were promoted as a way to undermine urban public schools by people who thought they could never be improved.

Both states jumped headlong into charters, trying to get as many up and running as possible but without thinking clearly enough about how to make them work.

The result was inadequate funding, too rapid growth, ineffective oversight and a lack of meaningful consequences for schools that simply ignored the rules, Miron said.

Ohio education officials were entirely overwhelmed by charter activity, said Jeanne Allen, president of the pro-charter Center for Education Reform.

The state lacked a rigorous evaluation process, so some “real skunks” got in, she said, tainting the charter concept for everyone.

And Ohio has been reluctant to shut them down.

It took state officials six years to close the International Preparatory School in Cleveland, despite the school's failure to meet a single state academic benchmark during its lifetime.

In 2002, four years into Ohio's program, a state audit found “significant systemic problems” because of inadequate charter oversight, prompting several legislative efforts in recent years to tighten things up.

But with about 290 Ohio charters now in operation, it might be difficult to establish more rigorous accountability after the fact.

It's possible “if you have the political will,” Molnar said, but he hasn't seen that here. “What Ohio has is not reform,” he said. “It's the appearance of reform to solve a political problem.”

Conflict of interest in Ohio's system

Ohio faces another potential obstacle – a seemingly built-in conflict of interest involving the state's first line of oversight. Charter-school sponsors are often chosen and paid by the very schools they are supposed to be holding accountable.

Again, White Hat offers a telling illustration.

Of the company's 34 Ohio schools, records show that 19 are now sponsored by the Ohio Council of Community Schools, a Toledo group headed by the daughter of a pro-charter former state legislator who, for most of the last two years, was a registered lobbyist for both White Hat and OCCS.

This year, according to records, the White Hat schools are slated to pay OCCS more than $405,000 – about 42 percent of the agency's most recently disclosed budget – to ride herd on themselves. Through an attorney, OCCS executive director Allison Perz declined to discuss her agency's finances – saying they are not public. In a letter, Perz said Friday she will have no trouble staying loyal to the public interest, despite her agency's reliance on White Hat's schools.

But in tracing the origins and evolution of the company's schools, the question of divided loyalties comes up time and again. Consider their governing boards.

Ohio charters are supposed to be community-based schools, overseen by independent boards. They also must be nonprofit entities in order to get millions of dollars from state and federal tax coffers each year.

White Hat insists that the boards for all of its schools are independent. But during the last seven years, when the company was forming eight Hope Academies in Cleveland and two more in Akron, it enlisted the same five people to serve on the boards of all but one. (Four of the five also served as board members for the Hope Academy in Canton, about 60 miles to the south.)

The newest Hope Academy, the Northwest campus on West 116th Street in Cleveland, has a completely different board and often operates by different rules.

But as the years have passed, records show that the rest of the Hope boards have ceded ever larger chunks of money and power to White Hat, to the point where today, the for-profit company controls virtually every aspect of the schools and practically every nickel that state taxpayers send their way.

Since 2002, those boards have agreed to give White Hat at least 96 percent of all the state tax money they receive.

In return, records indicate, White Hat runs the show.

It hires and pays all teachers.

It can hire, supervise, transfer or fire the school principals – without even having to consult the board. It develops or obtains its own curriculum.

And the company buys – and owns – every book, desk and computer used at the schools, as well as all other equipment and supplies. If the schools and White Hat ever part ways, the school can reclaim this property only by buying back everything the company acquired on a depreciated basis.

Everything, that is, except the “educational model” that White Hat has developed – presumably with the aid of taxpayers' money – and which the company considers “proprietary.”

White Hat declined to say why. But it did say that each of its schools has required up to $1 million in bank loans and money “either contributed or loaned” by Brennan to get started.

Despite being collectively responsible for more than $50 million a year in tax money, the Hope board members declined, through their attorney, to be interviewed for this story.

Before the 2002 agreements, White Hat's control over the schools seemed less complete. Its management fees were typically just 10 percent of the schools' government revenues, and the boards appeared responsible for more school functions.

But records describing the founding of several White Hat schools in the late 1990s raise questions about whose interests were being served even then.

The state approved several of the early Hope schools despite deep concerns by Education Department staffers. Records show those worries included “major weaknesses” in the schools' educational plans and projected student-teacher ratios of 30 to 1. The staff also noted projected teacher salaries that were much lower than average and steady increases in potential profit margins for the company.

In some cases, community members who supposedly were developing the schools didn't show up for an initial interview with state Education Department reviewers, records show. Officials of Hope Academies LLC, White Hat's for-profit precursor, fielded the questions.

Then, there's the matter of facilities.

Thanks perhaps to Brennan's close ties to the Diocese of Cleveland, White Hat got what records show to be highly favorable terms for the use of empty Catholic schools to house its Hope Academies. But the records also indicate that it was White Hat – not the schools – that profited from the deals.

Before 2002, when the company's catch-all management agreements kicked in, records show that White Hat charged its schools at least $1.5 million more in rent than the company agreed to pay for use of the school properties.

(Also, because seven of the eight Hope Academies in Cleveland are in church-owned facilities, they have avoided as much as $700,000 in property taxes, despite being commercial ventures. The eighth school, owned outright by White Hat, does pay property taxes.)

IRS noticed 'one sided' contracts

White Hat's contracts with its schools apparently were skewed in the company's favor in other ways as well. In the late 1990s, while vetting the Hope academies for nonprofit status, the Internal Revenue Service asked the schools to prove that their contracts “are not so one sided as to be considered primarily for the benefit” of White Hat.

For instance, the company had negotiated an incentive fee for itself, apparently for keeping costs down, without regard to student performance. The IRS noted that the 25 percent fee was “completely arbitrary,” unrelated to school services and “not in the best interests” of the school. (The incentive fee was later eliminated, replaced by a “student performance bonus.”)

The contracts also required the schools to pay the company a 2 percent fee for national advertising, which the IRS concluded was “solely for the benefit of White Hat.” (It was later cut to 1 percent, then eliminated.)

The IRS also raised questions about an agreement calling for the company to buy classroom computer equipment and lease it to the schools at cost plus 10 percent. The arrangement, records show, entitled the company to charge the schools $186,500 in interest between 1998 and 2001.

As originally written, the contracts also allowed the company to retain title to the equipment even after the schools had paid off the leases. That was changed only after the IRS raised questions.

Records also show that White Hat collected at least $288,400 in additional interest from its Hope schools on operating loans it extended to the schools at 10 percent interest, a higher rate than was available elsewhere.

White Hat declined to address such contract provisions, except to say that it made changes suggested by the IRS and that it has amply demonstrated its commitment to its schools – even those that lose money.

But others specifically warn against taking operating loans from for-profit management companies, saying the loans can make the schools overly dependent on those companies.

“It's a problematic relationship,” said Arizona State's Molnar. “It gives them [the companies] a kind of unlimited hold on the schools.”

When the for-profit companies are involved in starting a school, adds Western Michigan's Miron, they can enjoy the upper hand in contract negotiations with school boards. And with oversight as lax as Ohio's, he said, there may be no one to ensure that the public is being properly served.

Little access to 'community schools'

One way of serving the public is by giving it easy access to the school board.

In 2000, state officials noted the lack of parents at Hope meetings. White Hat said it would try to schedule the board meetings in the evenings or on weekends to accommodate parents. (The Cleveland school board meets at 6:30 p.m. on Tuesdays.)

But five years later, records show that the boards for all Hope schools but one have continued to meet on weekday mornings.

Unlike many nonprofit schools, the Hope boards also pay their members tens of thousands of dollars a year to attend these daytime meetings and perform other duties.

White Hat officials also attend in abundance, minutes show. But parents rarely – if ever – do.

(Hope Academy Northwest, on West 116th Street, has a different board and does hold some of its meetings in the evening. But more often than not they are in Akron, near the White Hat headquarters, 40 miles away. That school's board has chosen not to pay its members. Its president did not return a phone message.)

Perhaps most significantly, however, the possibility of divided loyalties crops up in White Hat schools on the issue of student performance.

Last year, in an effort to address the persistently lagging test scores at several Hope schools, minutes show that White Hat officials tried to interest the boards in hiring two company subsidiaries – Brilliant Learning and NCLB Tutors – to help with remediation efforts.

The boards declined to hire the White Hat affiliates, according to board attorney April Hart, one of several examples of what she described as board attempts to establish more independence from the company.

According to minutes, at least one board member seemed to voice a deepening frustration with White Hat's performance.

Why, the board member wanted to know, was the company suggesting these extra services when the schools are “still trying to get the basics right.”

Low teacher pay a common criticism

A common criticism of Ohio's charters – often lodged by teachers unions, which have an incentive to keep teacher pay high – is that they compromise quality to save money by putting inexperienced, unqualified and underpaid teachers in the classroom.

If that's true, it appears especially so for White Hat.

Last year, charter teachers made an average of about $20,000 less per year than teachers in Ohio's urban districts, according to data submitted by schools to the state. Teachers at Hope schools made nearly $26,000 less. And board minutes show that teacher turnover has been a recurring problem since the first Hope schools opened.

White Hat says its teacher-pay schedule is competitive with the districts in which it operates, even though its schools get no local tax money. With potential student-performance bonuses, the company says, its starting teachers have the chance to make more.

But at one of White Hat's oldest and most stable schools – the Hope Academy Cathedral campus, on Cleveland's East Side – recruiting and retaining teachers has been a problem for years.

And unlike in Boston, where charter students as a group have been scoring well above those in Boston's traditional public schools, scores at Cathedral and the other Hope Academies in Cleveland have lagged well behind the public school district.

You don't need to go all the way to Massachusetts to find alternatives, however.

White Hat says its students were behind when they first arrived, failed by Cleveland's schools. But not far from Hope Cathedral, Citizens' Academy, a nonprofit charter, gets its students from the same place.

Records show its students are more likely to be poor than Cathedral's, and more likely to suffer some form of disability.

Citizens' teachers are paid an average of $7,500 more than those at Cathedral, according to state data, and tend to have considerably better credentials.