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terrybankert
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Educational Management Companies are stealing the " schooling" from Charter Schools!
We need a change in the state law governing educational management companies.
FLINT CITIZEN- By: Terry Bankert 12/13/2005
The problem.
Educational management , for- profit companies run charter schools in Michigan that are owned by non -profit charter school boards after being authorized by a state university here Central Michigan University are becoming wealthy while our children’s future is impoverished. In many cases the close relationship of the management company has essentially put the company in the position of defacto owner of the Charter Schools they are to manage. In some instances the management company is so irretrievable intertwined with the Charter School board that the School board cannot govern the school, the Educational management company does. Is this private inurement? Yes. Will our government do anything about it NO.
Recently the Governor of the state of Michigan, as reported in the Detroit Free Press 5/10/2005 , has said the Educational Management Companies must clean up their act. This presumes they are dirty and need cleaning. I could not find any Grandholm initiatives. I’ll keep looking.
It does not take much to be a Charter School in Michigan. You need an authorizing chartering college and file Article of Incorporation as a non- profit with the state of Michigan. When authorized , by the University, the Charter School operates as a tax exempt non- profit , until told not to by the IRS who has a handful of agents patrolling thousands of non-profits. The Charter School Board is in control and they contract with a management company. Or at least this is the theory .
" Charter Schools commonly known as academies are independent public schools legalized in Michigan in 1994. The state has 215 Charter Schools with 82,000 students."[ Detroit Free Press 5/10/2005] Parents send their children to charter schools to escape the crowded conditions and poor reputation of Public schools.
Charter Schools are product of Federal and State policy to increase quality education in the United States. Teacher and instructional improvement are critical to improving education.
" The Charter School movement set out to allow groups to open innovative schools."[ Detroit Free Press 5/10/2005] This innovative approach allowed the boards to side step the unions by employing non certified teachers and place a business in charge. No union and a business philosophy running the show. How could it miss! Well it has and our kids are being taken for a ride.
There are few checks on these schools run by money making for- profit management companies."Today profit driven companies run about 75 percent of Michigan Charter Schools because the state law makes it easy to set up shop. But state law does not make it easy to oversee the management firm."[ Detroit Free Press 5/10/2005] There is not a "... comprehensive attempt to monitor how the companies...( Educational management companies)... perform. Instead oversight rests with more than two dozen Universities and school districts that track individual schools. The Universities are not interested in causing accountability of the Management Company to the Charter School Boards and the Board often are not prepared to force the same.
".. Michigan has put thousands of students education in the hands of a few companies that lag behind even faltering districts like Flint and Grand Rapids. Of the 40 companies that run Charter Schools six had lower fourth grade English and math scores than those cities." [ Detroit News 10/26/2003]
Recently Gary Miron Chief of Staff for Western Michigan University Evaluation Center stated " Its not that we’re not doing oversight in this state, its just that the information is not being shared, its not being acted on."[ Detroit Free Press 5/10/2005] Its not being acted on possibly because the Charter School boards are being dominated by the educational Management Company.
Charter schools have not met the challenge of being independent decision makers looking out for the best interest of the children. " Six companies responsible for teaching more than 17,000 of Michigan Charter School students provide an education that falls short even of some of the states most troubled inner city schools." [ Detroit News 10/26/2003]
Non -profit Charter schools for the most part are managed by for- profit management companies. One of these is CSAS.
"The for profit company, also known as CSAS , has paid for hundred of students to go to a mansion called Camp Exposure. The estate • which has lakes, a ball room and an indoor movie theater•is owned by Southfield Millionaire Lecester ( Bill) Allen who also founded the company that runs 10 Detroit - area schools."
[ Detroit Free Press 5/10/2005]
CSAS and Allens ..(intertwined)...non- profit company " Academy of America jointly own and operate at least nine charter schools nationwide, most of which have struggled academically." [ Detroit Free Press 5/10/2005] Note how the author of the News story treats Allen as the owner of the Charter school.
As stated these charters come to the boards through Universities like Central Michigan. Then the board owns the charter. " Our contract is between the University and the charter board, said Jim Goener the head of Central Michigan University’s charter schools office the state biggest authorizer...( And excuser)... We tell the boards how the school is performing. They need to draw their own conclusions about why the school is performing that way ...( poorly) ...and act accordingly. [ Detroit News 10/26/2003] This sounds like a rationalization to me. Board training monitoring and evaluation should be required.
A Michigan newspaper this year raised concerned about the intertwined nature of these for profit management companies and the non- profit schools. [ Detroit Free Press 5/10/2005] The article said, Money making charters have few checks, Its is easy for a for profit company to receive a Michigan Charter but Michigan does not make it easy to oversee the management companies. Since 1995 Allen...(CSAS).. has been paid millions in taxpayer dollars to educate students in those 10 schools. [ Detroit Free Press 5/10/2005] The state auditor general said last year "... many boards are tied too closely to their management companies.. Including cases where companies nominated their own board members and where the companies actually owned the
school buildings, making it virtually impossible for the board to replace a company that failed to deliver a good education." [ Detroit News 10/26/2003] If the management company is too close to the board and benefits financially is this private inurement.? If benefits flow to Allen because of their relationship and not the educational process is this private inurement? Or if not for the educational process but because of the close relationship his profits are above a comparable market rate is it private inurement? Yes on all counts.
Why is this an important issue? Charter schools I would argue are sealing the fate of public schools by taking revenue and the best or most mobile students away. They are a detriment to our public policy of improving public education . If accessible public
education is our goal as a society this once good idea, charter schools may keep us from this objective as costs rise and services diminish while for profit educational management companies grow and operate more like a monopoly.
Charter schools are established in poor communities. Low achieving students from household where the parents were low achievers are academically behind and the parents have few options. The at risk students when in a charter school cause the school to receive additional funding for the special challenges of these students . " David McDonnell ( attorney for CSAS said the academic struggles ...(of the school)... stem from the fact that they serve low income, urban students who often have academic problems when they arrive.[ Detroit Free Press
5/10/2005] leaders argue that "..they want more scrutiny of management companies including performance and financial reviews but say limited money and staff make that impossible." [ Detroit News 10/26/2003]
Charter school management companies when acting like a business will take special needs students for the additional income yet spend little additionally to serve this special population.
Educational Management Companies " such as CSAS run all operations at a charter school, teachers and administrator including principals are CSAS employees. Each CSAS student brings in $7,000 in state aid. That was about $42,000 million for 6,000 students last school year.
CSAS gets about 12 percent of those funds as management fees, plus audits show the company charges administrative fees."[ Detroit Free Press 5/10/2005]
Can CSAS usurp the legal powers of the school boards that have hired and contracted with the companies? If they have, what implication does this have for the non profit status of the Charter School?
Why is there such minimal scrutiny of the charter school non profits. " A Detroit News analysis shows those shortcomings are hidden by minimal scrutiny of how the companies manage more than $123.7 million in tax money each year." [ Detroit News 10/26/2003]
"The low performing companies include three of the biggest for profit charter school managers in the state, whose students often fall far below minimum standards in reading writing and math, state education records show. The companies schools also spend a smaller share of their budgets in the classrooms than others." [ Detroit News 10/26/2003]
The educational management companies act like an owner in a for -profit which they are. The charter belongs to the school board not the management company yet what is at risk when the board does not exercise this ownership right by defers to the management company? What are the implications of weak charter school boards and domineering management companies.? If the result is that they, the management company acts like the for -profit it is and the charter school acts the same way should the charter school continue to receive the benefit of tax exempt status? NO.
The tax exempt status and the receipt of public monies allows the charter school board to compete against the public schools and private schools.
What is the impact of the close arrangement between the management company and the charter school bard when financial decisions are being made."
Allens companies also charge the schools up to $170,221 per month plus all repair costs to lease their school buildings. The lease would make it hard for the school board to fire CSAS. State audit department officials and some charter school board member have questioned the lease agreements and whether or not CSAS is getting paid too much."[ Detroit Free Press 5/10/2005]
When challenged on staffing one charter board member said " CSAS was acting like they were in charge, board president Sandra Carte said."[ Detroit Free Press 5/10/2005] The Charter schools are independent entities but the management company runs it like it is a small school district. " State Education officials say they want closer scrutiny of management companies contracts, lease agreements, spending and test scores." [ Detroit News 10/26/2003]
What are the implications of a management company that received governmental funds from title I earmarked for teacher training and state certification and they were not used in this fashion? Is this a whistle blower action? " On average a whopping 62 percent of the teachers at the schools were uncertified last school year, the worst rating among large management companies in the state, according to the Michigan Department of education.[ Detroit Free Press 5/10/2005]
How does one for profit company operate eight or more Michigan charter schools , mostly for at risk students live in a mansion, one of two owned, operating schools across the nation? When will the actions of a for- profit management company risk the tax exempt status of the non profit school board."
The law
A tax exempt educational organization is commonly organized under state law as a non- profit organization. If granted tax exempt non profit status , which is a right not a privilege, the organization is exempted from paying federal income tax. State law may allow the exemption of some state taxes. Tax exemption will give the charter school an advantage over other private schools much like that a public school enjoys.
When organized under state law the organization must have an exempt purpose as its primary purpose of mission. Charter schools have education as their primary purpose. This statement is found in its State Articles of Incorporation. Michigan Charter Schools will meet this test.
What is an exempt purpose? That tax exempt purpose must then be found in the tax code. Specifically 501 ( C) 3 which lists a variety of activities as follows; Religious, charitable, educational scientific, testing for public safety, literary, fostering national and international sport with limitations and preventing cruelty to children and animals. A non- profit organization or entity properly filed as such under state law that in its Articles says is organized for an educational purpose may be granted the right to be a tax exempt organization and with this status contributors may claim their contribution as a tax deduction.
These general terms , categories of the tax exempt organization and here charitable purpose are further restricted through IRS opinions and regulations other statutes and the law of the case in Federal matters.
Non-profit tax exempt educational organizations can earn a profit or have a net income Gross income minus expenses derive net income. "...the definition of non profit organizations essentially relates to requirements as to what must be done with the profits earned." [Hopkins at 7 ] . If the profits go to the Educational Management Company as it reduces per capita expenditures and the Company pays excessive profits, what ever that means, to its owner who dominated the company and the Charter School Board that is private inurement.
Tax exempt Non -profits do have to pay taxes on income unrelated to their primary purpose called unrelated business activity and can lose their status if their income or assets go to benefit a shareholder of individual. Additionally a non -profit tax exempt organization may be taxed on political activity, lobbying, political action and some categories for investment income [Hopkins at 7]
Tax exempt status is a right not an entitlement. Therefore a variety of political considerations may be attached to receiving this benefit by the legislature.[Hopkins at page 7]
"The law of tax exempt organizations has very little to do with any underlying tax policy... it is grounded in a political philosophy as to the proper
construction of a democratic society."[Hopkins at page 9] Here with charter schools we want to improve the quality of education thought not be found in public schools or at least competition to increase the quality of public education.
We have established as a public policy that public services delivery may come from any of the three sectors of our society. The for profit, governmental and non profit. This"... pluralism of institutions is a function of the competition between various institutions within the three sectors of our society.[Hopkins at page 11] Translated we want this completion to bring the price of public service down or increase the quality of the service delivered. Charter school management companies I argue have created a monopoly that are driving costs up and quality down and profits up that go to the management company by a fee and percentages of gross receipts, or profit.
Tax exempt non- profit law is expanding and growing as our society grows and we reap the benefit the competition between our three sectors of society. This law , non-profit tax law, has evolved since 1913 but "... came into being as a consequence of enactment of the Internal revenue Code in 1954 followed by a flood of legislation and IRS opinions procedure and case law. What is needed is a refinement of the law that applies to non-profit tax exempt charter schools.
An organization ,such as a tax-exempt non- profit Educational Corporation does not have to be of a specific organizational design. " Generally the Internal Revenue Code does not prescribe a specific organizational form for its entities to qualify for tax exemption." [Hopkins at page 63] It would be hard to design in board responsibility. How can you make the boards control the management company?
A test of an organization by the IRS to determine the non- profits suitability for tax exempt status is called the primary purpose test. The Primary purpose test is a review by the IRS that the substantial not incidental purpose of an organization is exclusively for an exempt purpose."[Hopkins at page 76] Here it is education but if the management companies compensation is too great at some point the primary purpose test will be violated.
Another test called the operational test used by the IRS which holds " .., resources must be devoted to the purpose to qualify for tax exempt charitable status . This is a a review of how income is actually spent.[Hopkins at page 82] Again the revenue is spend for education and management thereof the question is how much can management cost without affecting the non -profit status of the charter school. The bar is pretty high since there is a small market to compute a market average of costs.
The operational test then will focus on the actual purpose of the organization and how that is advanced by the actual programs of the organization rather than its statement of purpose. Here for instance a business within the Charter School such as a food services will be allowed if it is in furtherance of a tax exempt purpose like education and preparation for employment. See [Hopkins at page 84]
Tax exempt organizations are given flexibility to allow for new services necessary to economic survive in today society. See [Hopkins at page 89] We want our non- profits to evolve but the referenced IRS test are constraints on this evolution.
Other problems an educational tax exempt non- profit may have as it evolves is when the organization operate more like a business. This is a potential problem for Charter Schools with the IRS . When profit ( net income) becomes more of a motive than the service of the organization. They may operate like a business if " it is in furtherance of an exempt purpose."[Hopkins at page93] L. Ron Hubbards ran into IRS problem when her ran his Church of Scientology as a business benefitting himself and his family.
Profit does no bar educational exemption, but a business emphasis on profits not service may. " The pertinent inquiry is whether the organizational exempt purpose transcends the profit motive rather than the other way around." [Hopkins at page 99] Allen and his Charter schools appear to fail this test.
An Educational Organization , such as a Charter School, that is a non profit can be exempt from federal income taxes IRC 501 ©)(3) when operated exclusively for educational purpose."[Hopkins at page 103]
The educational tax exempt purpose is defined as " instruction or training of the individual for the purpose of improving or developing capabilities."[Hopkins at page 193] The entity should not be a propaganda organization, an action organization. Most charter schools qualify. " Non Profit educational institutions such as primary , secondary schools, colleges and universities are educational organizations for the purpose of federal tax law."[Hopkins at page 199]
They , the schools , must demonstrate "they are operated for public rather than private interests."[Hopkins at page 199] If the management company dominates the board which the articles seem to suggest and is entirely predictable with small boards doing their business well out of the public spotlight. Their primary purpose must be the presentation of formal instruction"[Hopkins at page 200] In the text at a footnote an organization that met the formal instruction requirement could give away more that 1./2 its income. [Hopkins at page 200 ] but its tax exempt status survived because of its regular instruction.
An organization that " has as its primary function the presentation of formal instruction, has courses that are integrated and given in a regular and continuous manner ( thereby constituting a regular curriculum) normally maintain a regular faculty, and has a regularly enrolled student body in attendance at the place where its educational activities normally are carried on qualifies as a tax exempt educational facility."[Hopkins at page 200] Non educational activities must be incidental.
When looking at a Charter School as a non- profit educational organization and the for- profit Educational management organizations that run them through a board of directors or chartering authority like a university we see that traditionally for profit activities like a bookstore, restaurant, broadcasting
stations and publishing will be not be taxed as a for profit if run by the educational tax exempt non profit. [Hopkins at page212]
When is a given purpose or activity educational or commercial? The law states " the organization must not be operated for the benefit of private share
holders or individuals." [Hopkins at page 213]. The individual may not benefit from the asset of the tax exempt non profit. He may not inure benefits, not have benefits flow towards him.
If the for- profit entity treats the non- profit like a licensees or exercises a substantial control over the functioning of the non profit organizations the tax exempt status of the educational entity could be challenged.[Hopkins at page 214] With the Educational Management Organization organized for- profit and exercising substantial control over the board of the non profit educational charter school with a substantial commercial purpose the line may be narrow between the profit and non profit jeopardizing the status of the non- profit. This is the case in Michigan with Charter Schools.
If the two entities non- profit and for -profit are sufficiently entangled that commercial ends could be imputed to the non- profit the exempt nature of its other activities may be threatened.[Hopkins at page215] If the educational institution has practices comparable to a private entity, generating increasing profits, and paying substantial increases in salaries to its top employs is status may be challenged."[Hopkins at page 215] This is a problem with Allens Charter Schools.
Other measure of inappropriate educational tax exempt non profit institution actions are; When the cost of services to the management company are not fair in relation to actual cost. If the school, operates in a business manner, is there a profit motive.? Education is not the most important objective or profit for the private educational management company is then private inurement may be found by the IRS .see[Hopkins at page216]
As stated above a tax exempt organization is a non- profit organized under the laws of its state for a tax exempt purpose. This purpose may be challenged if somebody enriched them selves from the assets of the tax exempt non profit.
" The doctrine of non -profit organization essentially relates to requirements as what must be done with the profits earned or otherwise received. This fundamental element is found in the doctrine ( school of thought) of private inurement. [Hopkins at page 3] no part of the tax exempts net earnings goes to or inures to the benefit of any private shareholder or individual. [Hopkins at page 4] This is the most common limitation on non profits that seek tax exempt status.
The entity must be " operated exclusively for its exempt purpose.[Hopkins at page 82] The IRS will apply several tests to evaluate an entity. The IRS " operational test looks to determine if the resources of the organization/entity are devoted to the purpose that qualify as exclusively charitable within the means of the IRS code . A substantial party of the entity resources must be applied to the exempt purpose."[Hopkins at page82] The private benefit of the entity or non- profits assets will cause an entity to ..(flunk)... this test. " see[Hopkins at page3]
Individuals who exercise too much control can also threaten non profit tax exempt status giving a more intangible inurement to the individual." An organization can be substantially dominated by its founder who for that reason alone causes the tax exempt non profit to fail the operational test. "[Hopkins at page82]
Likewise it was held that an organization was not entitled to exemption because the affairs of the entity and the individual who was founder, sole director and officer were irretrievably intertwined . Salvation Navy inc v. Comm’r T.C. Mem 2002-275 [Hopkins at page 82]
An organization then cannot or should not qualify for tax exemption where one individual controls all aspects of the organizations operations and is not checked by a governing body.[Hopkins at page 82 see footnote 147] Allen and CSCA appear to be out of compliance.
The limitation of private inurement is one of the most important set of rules within the law of tax exempt organizations,..." it is the fundamental defining principal distinguishing nonprofit organizations from for profit."[Hopkins at page 483] Allen will fail this test is evaluated closely.
The " private incurment doctrine forbids (1) the flow or transfer of income or assets from a tax- exempt organization that is subject to the doctrine through or away from the organizations and (2) the use of such income or assets by one or more persons closely associated with or for the benefit of one or more persons with some significant relationship to the organizations for an inappropriate purpose."[Hopkins at page 485]
How then do we determine when a line is crossed. " In ascertaining the presence of private inurement the law looks to the ultimately to the purpose of the organizations involved."[Hopkins at page 485]
To review private inurement we note net earning are gross income minus expenses and an insider is a person with a special close relationship with the tax exempt entity."[Hopkins at page 488]
Excessive compensation is one type of private inurement. Others are sales of assets, rental of property, lending of money, use of facilities, and involvement in partnerships and joint ventures."[Hopkins at page 494]
The IRS will test for reasonableness of how someone close to the non-profit is treated in commercial transactions. " The factors commonly applied in the private inurement... to ascertain reasonableness of compensation are generally the market rate for same and similar service or action be it sale of assets, loans, or compensation. See [Hopkins at page496]
If a person close to the corporation rents assets of the corporation or receives rent from the corporation the rent must be reasonable as determined by the local market. [Hopkins at page 501] The article cited state the state of Michigan has concerns that the rents are excessive.
Loans to insiders will be scrutinize closely and the mere existence may be a private inurement.[Hopkins at page502] Net assets distributed to a manager by tying income to entity profits will appear to be an equity distribution and closely scrutinized.[Hopkins at page 506]
Other inurements are purchase price from an insider in excess of market value, Unequal distribution of employee benefits i.e. Interest free loans to officers not employees, and scholarship to the children of executive and not all employees. See [Hopkins at page 507]
The solution.
Assuming the news articles to be factual applying the concepts and test of non profit law to Charter schools in Michigan raise serious questions of whether charter school should retaining the benefit of tax exempt status or recieve state funds to educate our children.
"Nobody has a handle on this, and it’s a question taxpayer in Michigan need to ask; Are you satisfied with this use of your tax dollars." [ Detroit News 10/26/2003]
We need a change in the state law governing educational management companies.
Terry Bankert
12/12/05
BIBLIOGRAPHY
1. The Law of Tax-Exempt Organizations, 8th edition by Bruce R. Hopkins 2003 Published by Wiley and Sons Inc. Hoboken New Jersey. Cited as [Hopkins at ]
2. Detroit Free Press May 10 2005 CLASSROOMCRISIS : Money making charters have few checks. By Chastity Pratt , Free Press Education writer. Cited as [ Detroit Free Press 5/10/2005]
3. Detroit News October 26 2003 Substandard charters fail 17,000 pupils by Brasd Heath. Cites as [ Detroit News 10/26/2003]
The Flint Citizen is a publication of Attorney Terry R. Bankert (Family Law ) of Flint Michigan USA. http://enewsblog.com/terrybankert/
attorneybankert@yahoo.com
Terry R. Bankert P.C., 1000 Beach St., Flint MI 48503 810.235.1970 fax 234-5080 |
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Tue Dec 13, 2005 4:42 am |
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mysearchisover.com
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Tue Dec 13, 2005 1:28 pm |
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Wittgenstein's Poker
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Wow. Just, wow. I hope you went to Cooley and not Wayne, MSU, or U of D because there are so many unsubstantiated claims and logical fallacies within this exegesis that I do not even know where to begin.
You state, "Is this private inurement?" as if this being private or "for profit" was somehow indicative of "bad" or "evil;" that is rudimentary equivocation.
Again, you make the claim, "This innovative approach allowed the boards to side step the unions by employing non certified teachers and place a business in charge. No union and a business philosophy running the show. How could it miss! Well it has and our kids are being taken for a ride."
Now, I come from a long line of educators. My mother and father were educators in Michigan for over 30 years and my fiancé is currently teaching in a public school. These teachers, among many others, can tell you that the idea that the MEA is somehow beneficial to either the students or teachers is a joke. The MEA is a leech on entry-level teacher salaries and the public, and their grip on those within the profession can only be described as Mafioso-like. I really think you have no understanding of how devastating the MEA is to the salaries and mental well being of new teachers. Take some time to investigate teacher burn-out rates in public schools in comparison to those in private schools.
The teacher certification test in Michigan is also dubious at best; any student with a decent high school education could pass it without college preparation. The idea that certification is a necessary condition of being a good teacher is an elementary logical fallacy. Nothing about having the property of "certification" guarantees or even promotes the likelihood that a teacher will be effective in connecting with his or her students. I hate to break it to you, but effective teaching is not endued through a rigorous certification process or education. Teaching is as much an art as painting. One can easily see this if one examines the current academic literature on teaching styles.
As for your misleading press clippings, the Detroit News (how is this a reliable source for the success or failure of charter schools?) reported on Jan. 4, 2004:
“The story is even more impressive in Grand Rapids, where the scores of all local charters outpaced traditional schools in all grades and subjects by a remarkable 4 to 27 percentage points — by more than 10 points in eight of 10 categories.
Statewide, charters showed greater gains than the Michigan average. About 25 percent of Michigan charters have improved student knowledge enough to exceed fourth- and fifth-grade state averages, while an even larger 33 percent passed the averages in 7th and 8th grades.
This supports numerous state and national studies that have found the longer students stay in charter schools, the more they will grow beyond the level of their peers.” |
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Thu Jan 26, 2006 5:26 pm |
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Adam Ford
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| O.K. so if Charter schools are just ripping people off than why would someone send there kids to a charter school when there are such wonderful public schools in this state? lol |
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Thu Jan 26, 2006 8:23 pm |
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terrybankert
F L I N T O I D
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The issue is the domination of a non profit charter school boards by a few predatory private business people the owners of educational management companies while recieving public funding.
The issues are the patterns of abuse by these owners while recieving tax benefits.
The issue is the continued desctruction of the public schools and the long term impact when these private money machines for the owners become monoplies.
trb 1/26/06 |
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Thu Jan 26, 2006 10:41 pm |
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