May 5, 2017

In September of 2016, the Office of Inspector General released a study on charter management organizations (CMOs). The report targeted their research towards how the use of CMO's affected education programs, identified problems and recommendations. Even though these charter organizations received federal taxpayer money, Republican led states (which are the majority of states) have demanded that the federal Department of Education get their grubby little hands off of their schools. Their dreams came true with the election of Trump and his appointment of the deregulation and privatization queen of education, Betsy DeVos.

DeVos incessantly preaches about school choice, charters and voucher programs. In her uneducated opinion, she sees value only in deregulated, privately owned schools. I say uneducated because DeVos readily admitted her ignorance of the public education system during her confirmation, and she has expressed no desire nor any intention of educating herself. Her only goal is to have a Department of Education that is simply a bank for private charter schools. Her claim to support public education is an outright lie since so called public charter schools are actually privately owned and managed. She believes the Department of Education should have no say in how that money is spent, what programs it is used for or if that money is used wisely or within any guidelines.

This might seem like an interesting experiment in education reform if it hadn't already been done. The truth is that the system DeVos is proposing already exists today because states do not bother to follow federal rules and regulations for charters receiving federal grant money. They can't even be bothered to follow the minimal state requirements. No one is being held accountable for these violations. Regulations don't mean a hill of beans if you aren't able to gather data and perform audits. They mean even less when you can't enforce penalties for violations, whether we are talking about the state or federal level. So, in practice, an unregulated education system has existed for decades.

OIG 2016 Report Summary

A CMO is an organization, whether for-profit or nonprofit, that consists of administrators that run the day to day operations of charter schools. They are responsible for hiring, firing, supplies, education programs, funding from state and federal grants, payroll etc. There is not a consistent definition of CMOs from state to state. Some states require a board of directors for each charter, while others allow a bundling of schools under one board. Additionally, states may have state education associations (SEAs) and local areas can have local education associations (LEAs).

The study found many CMOs with major "internal weaknesses." This caused financial waste, fraud and abuse. There was a severe lack of accountability which created performance risks because no one from parents to teachers to administrators to legislators could evaluate whether these charters were even reaching their stated goals:

  1. CA, NY and FL could not tell auditors where their Individuals with Disabilities Education Act (IDEA) funding went after it was given to LEAs.
  2. PA and CA couldn't even tell which charters were using CMOs.
  3. MI and FL knew who was using CMOs, but could not provide any other information because those CMOs would not give them the data.
  4. FL did not bother to collect any data on federal grant allocation.
  5. CA, PA and TX could not provide data on how many students were enrolled in charter schools from 2011-2013. NY did not know how many charter school students they had from 2012-2013.
  6. CMO's, SEAs and LEAs routinely failed to report how they were using federal grants, which is a violation of the Uniform Grant Guidance rules.

How CMO's Can Rip Off Taxpayers

According to guidelines for those receiving federal education grants, officials cannot participate in decisions if they have a personal or financial interest in the outcome. But that didn't stop the conflicts of interest. Since states have no reporting requirements, they have no clue what types of fraud are occurring.

The most popular way some CMO officials have skimmed taxpayer grant money to charter schools is by rental agreements. CMOs often own the land and buildings that house the schools they manage. CMO's can inflate the rental price and therefore take whatever they want for lease agreements. In an effort to distance themselves from the fraudulent inflation of lease prices for schools, CMOs will create a subsidiary company to handle the rental. That subsidiary then sells the property to a partner company that deflates the rent allowing for the parent CMO to keep the extra.

It works like this: ABC Charter School is managed by Great CMO. Great CMO leases property to ABC for $2 million/year. Great CMO creates subsidiary Screw You LLC. Screw You LLC takes over and sells property to a partner firm, You're Suckers LLP. You're Suckers LLP then leases property back to Screw You LLC for $1 million/year. Then Screw You LLC has a profit of $1 million/year that goes to its parent company, Great CMO because the school originally paid $2 million/year. They have just taken $1 million/year more than the value of the property from taxpayers. All the while, transaction fees and such are also added.

Other scams involve CMO officials that also own the companies supplying services to the charter. The CMO managers then are the ones drawing up the contracts with the vendors which are essentially themselves. States are not bothering to ask for itemized receipts because they have not set up any systems for monitoring how education funds are being spent. This way John Doe, who owns the textbook company, can charge and approve those charges since he's also the CMO manager. All this comes from federal and state grants that originate from taxpayers. In TX, an attorney was a member of the CMO while providing legal services to the charter school it managed. When a vote came up regarding how much to pay him for his legal services, he never bothered to recuse himself. As a provider and a member of the school, he used both positions to set his compensation amount.

Many CMO's will charge exorbitant amounts for their services. The industry standard is set at roughly 14% of the charter's costs. But many CMOs have been charging as much as 40%. This leaves schools without money for supplies and basic needs. Teachers end up with less pay and benefits because funds are going to the management companies. This explains why Betsy DeVos has also spent millions trying to break up teachers' unions.


OIG recommended the use of federal oversight, legislative changes, and routine audits. Consistency in the education system is needed to facilitate these recommendations. But none of this is going to happen with Trump and DeVos in office. This confusion and self dealing is exactly what they propose for our children's education system.

The swamp is overflowing. What say you?

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