Charter schools are required to satisfy strict federal guidelines as non-profit organizations

By Doug Livingston

Beacon Journal education writer

AKRON

As a board member of four public schools in Akron and Cleveland, Charlotte Burrell will watch this year as $5.3 million in taxpayer money passes through her financial reports.

She knows most of it will go to White Hat Management — a private, for-profit Akron-based company that runs 32 charter schools in Ohio. But unlike an elected school board member, who can obtain intimate details about spending, her hands are tied. What White Hat does with the money, she says, is beyond her control.

She does, however, control “unrestricted net assets.”

She pointed to the line item on a budget at a joint board meeting in February for two of the charter schools — University and Brown Street academies in Akron. Of $2.1 million in expected yearly funds, unrestricted dollars for both schools totaled roughly $1,500, or less than 0.1 percent.

“That’s what we concern ourselves with the majority of the time,” she said.

She’s satisfied, so long as a school treasurer — employed by White Hat — says the money spent by White Hat adds up.

So, who is in charge of the nonprofit, publicly funded Ohio charter schools that 20 years ago did not exist? This school year, more than $900 million in state and local tax dollars — some of it approved by local voters — will be transferred from local schools to charters.

In Ohio, charter schools are required to satisfy strict federal guidelines as nonprofit organizations under Section 501(c)3 of the Internal Revenue Code, including board autonomy. If the board is not independent of the company, the IRS is supposed to throw up a red flag.

But state law allows private companies to throw out nonprofit boards that challenge them.

At many White Hat-operated schools, this already has happened. Last summer, boards in Akron and Cleveland expressed dissatisfaction with White Hat, so White Hat forced them out and new boards were formed.

The three unpaid board members who attended the February meeting said they were recruited by White Hat to serve. They turn over 95.5 percent of funding to White Hat, which then hires the staff, pays the bills and gives rent to its for-profit affiliates that own the tax-exempt school properties.

Board members recruited

Burrell said she has been asked by White Hat to serve on four school boards. “White Hat asked me,” fellow board member Jean Lee agreed.

David DuBois, the other board member present, shared a similar story with Beacon Journal and NewsOutlet reporters, who visited the February meeting at University Academy.

DuBois said Nancy Brennan, daughter of White Hat founder David Brennan, asked him and his wife to serve. And they did. “Our daughter and her daughter were close friends and went to school together [at Our Lady of the Elms] for eight years,” he said.

DuBois’ wife served as board president of University and Brown Street, then called “Hope Academies,” before Burrell took over this school year.

Burrell continues to serve other White Hat-managed schools: another K-8 school in Cleveland and an Akron Life Skills center for students age 16 to 21 who fall behind.

“How long have I been on the board?” she asked, looking across the table toward the boards’ attorney and a White Hat employee, who each confirmed that it’s been at least five years.

“I don’t keep track of that, as long as I’m enjoying what I do,” she said.

White Hat says it recruits board members only if asked to by an existing member or the sponsor.

“Sometimes we have one or two people that would like to start a school, and they don’t have enough for an entire board. So they want to, they talk to, other board members or ask us to help recruit board, um, recommend board members,” said Maggie Ford, chief academic officer at White Hat.

Ford said the company doesn’t manage the boards. When told about the situation in Akron (board members said White Hat asked them to serve), Ford said she had no knowledge that her company might have selected a board that hires her company.

She also said she has never heard of a Brennan recruiting board members. “And Nancy doesn’t work here.”

An attempt to reach Nancy Brennan was unsuccessful, but White Hat’s lobbyist, Tom Needles, called and said he would speak for the company.

“It takes a lot of effort to identify the right kind of board members to serve. ... White Hat is no different than other [education management organizations] in seeking out qualified and committed board members who care about the community and their families. I would say that that’s true statewide.”

Asked if there are any issues with the company selecting board members who then hire the company, he said: “You might be reading too much into it. There is an ongoing interest among several different parties to found schools that serve a discernable need. ... We view this as a very collaborative objective that has first and foremost the students’ needs at heart.”

IRS has rules

The IRS’ checklist to qualify for federal tax-exempt status draws a bright line between the charter-school governing board and the management company hired to run the school. The company should not create the board or recruit the members, and any evidence of boilerplate contracts from one school to the next suggests the company may be in control.

Richard Schmalbeck, a Duke University professor of law and a former tax law attorney, said the description of relationships between private companies and Ohio charter schools may be problematic.

“The charter schools appear to be run by a for-profit organization,” he said.

Because the private company creates and owns the nonprofit school, then recruits a governing board that would give a favorable contract to the private company, “There may be a private benefit problem. Charities are supposed to operate exclusively for charitable purposes, and not for the purpose of advancing for-profit business ventures.”

Schmalbeck is disappointed but not surprised that the IRS, buried in applications, might carelessly grant tax-exempt status to a nonprofit created or controlled by a private company. “If these facts are accurate and fully disclosed to the IRS, I think the IRS should withhold 501(c)(3) status,” he said.

Ohio law requires schools to obtain 501(c)(3) status. The federal government allows 27 months to apply. Some charter schools are created and disappear in less than two years.

University and Brown Street were created by a White Hat attorney in September 2011, or 28 months ago. The board for each school, represented by the same attorney, had yet to file as of mid-March.

White Hat questioned

Last year, the Ohio Department of Education barred the creation of four White Hat schools when the state determined that boilerplate contracts would strip to much power away from the boards.

“So directors who owe their position and continued appointment to White Hat are voting a lucrative operator contract to White Hat. Since a community school is a public entity, ODE feels this is not permissible,” ODE’s Mark Michael wrote in an email rejecting White Hat’s applications.

This was a rare event, though, because the Legislature has shifted direct regulation of charter schools from the state to school-choice friendly groups known as sponsors — such as Buckeye Community Hope Foundation, a two-time sponsor of the school.

Initially sponsored by ODE and known as Hope Academy University Campus, the state handed over control after State Rep. John Husted — now Secretary of State and a recipient of at least $139,033 in campaign contributions from the Brennans — sponsored legislation that effectively stripped ODE oversight.

Buckeye Community Hope then took over. Peggy Young, director of the group’s Education Division, takes the position that the boards have ultimate authority.

“We’ve seen boards fire management companies, so in that sense they have ultimate control of the school,” Young said.

However, when 10 school boards attempted to fire White Hat, it didn’t work out so well. Because White Hat had trademarked school names and bought up real estate through affiliate companies, the renegade boards couldn’t force White Hat out of the building.

All but one has since contracted with another private company, this one a Delaware-based affiliate of a Florida company founded by a former White Hat employee.

Young saw that as the board maintaining control.

“I’ve had boards do that. They move next door. They have the students. The records,” Young said.

The old buildings didn’t stay empty. They have students and teachers, and board members who say they were recruited by White Hat.

And their attorney, Amy Goodson, whose name is on incorporation papers for several White Hat managed schools, said it’s “pretty typical” that lack of wherewithal forces boards to enter contracts with big name companies.

“What happens is, I can’t say broadly, but in the case of University and Brown Street, those were education models that White Hat creates,” said Goodson, who is paid by the board. “It’s kind of a chicken and an egg thing because you have to have someone start this.”

Burrell is unaware of her predecessors’ disapproval of White Hat. To the contrary, it’s been “fabulous” working with White Hat, she said.

When asked if she could provide some of the financial information that prior boards continue to seek in court, she replied: “That comes under the management company, not the board. So you would have to interview those persons at White Hat.”

Contributing to this story were NewsOutlet reporters Matt Hawout and Sara Rodino.

TheNewsOutlet.org is a collaborative effort among the Youngstown State University journalism program, University of Akron, Cuyahoga Community College and professional media outlets including WYSU-FM Radio and The Vindicator, The Beacon Journal and Rubber City Radio (Akron).