Legislation introduced by an influential Republican state senator would require charter schools to disclose more about their finances. But the bill contains a large loophole that would allow the state’s biggest chains like Basis Charter Schools and Great Hearts Academies to avoid revealing how they spend their money.

State Sen. Kate Brophy McGee, R-Phoenix, said Senate Bill 1394 would accomplish the biggest reform to charter schools since they were created by the Arizona Legislature in 1994.

“It’s an enormous amount of progress, and this is not my last stop,” she said.

She said there’s bipartisan support for the measure, which follows a yearlong investigation by The Arizona Republic that revealed how charter operators have exploited the state’s lax charter regulations to become wealthy from the taxpayer-funded schools.

Brophy McGee acknowledged, however, that her bill would not prevent charter chains from giving large, no-bid management or construction contracts to their founders. Nor would it prevent charter CEOs from paying themselves exorbitant amounts, as Primavera online charter Chief Executive Damian Creamer did by receiving $10.1 million from the school over the past two years.

Democrats, whose past efforts to more tightly regulate charter schools have failed, and Republican Attorney General Mark Brnovich’s Office both said the bill is a step in the right direction. But they said it needs additional work.

Arizona’s 500-plus charter schools are largely privately owned and the choice of more than 200,000 students, or 17 percent of public school students. The state spends $1.2 billion a year funding them.

State law doesn’t prohibit conflicts of interest in charter-school contracts or impose the strict reporting of expenses as it does for district schools. Charter school boards can also be staffed with the friends and relatives of school executives. And there’s no limit on how much money charter schools can spend outside the classroom.

Brophy McGee’s bill, which has not been scheduled for a hearing, could change some of that. It would:

• Require every charter school to have at least a three-member governing board, with no more than two immediate family members serving. Family members cannot constitute a majority of the board.
• Prohibit in, certain instances, buying goods or services from a charter owner or family member, governing board member or a related business.
• Require that any purchase of more than $50,000 be in the “best interest” of the charter school and follow generally accepted accounting principles.
• Prohibit charter schools from retaliating against an employee who reports violations. Currently, nearly all charter employees can be fired at any time for any reason.

The new procurement regulations, however, would not apply to management contracts between a charter holder and a management company. Charter management companies, popular with major charter chains like Basis and Great Hearts, also would be exempt from the procurement regulations.

Loopholes in the bill

That loophole for charter management companies gives Democrats heartburn, said Rep. Reginald Bolding, D-Phoenix.

Charter operators could avoid the new requirements by simply transferring all or nearly all of their state funding to a management company that runs their schools, he said.

Ryan Anderson, a spokesman for Brnovich, said the attorney general also has concerns about the exemption, as well as language that would require prosecutors to get permission from a charter sponsor in order to investigate wrongdoing.

“We still have a lot of questions,” Anderson said, adding that this is a work in progress.

Brophy McGee said it was not her intent to allow charter operators to avoid procurement restrictions, and she would consider fixing the language. She declined to say whether the Charter Schools Association, which has blocked past reform efforts, or major charter operators with powerful allies in the Republican establishment had inserted the exemption language in her bill.

She said the legislation is a work in progress that ultimately won’t make everyone happy. But, she said, the charter school industry needs more oversight.

Matt Benson, a spokesman for the Charter Schools Association, said the intent of the exemption was “to protect the school brand so that the founder of a charter school doesn’t risk losing control of his/her creation.”

Benson acknowledged the bill may be too broadly worded and that the association will work with Brophy McGee to refine the language. He said the association would oppose any law that requires charter operators to accept open bids for management contracts, as school districts are required to do.

Bolding said the loopholes will allow charter operators to continue self-dealing and enriching themselves. The bill also won’t stop charter operators from using Arizona tax dollars to expand outside the state, he said.

Basis, which has some of the top-ranked high schools in the country, transfers nearly all of its state funds to a management company owned by its founders, Michael and Olga Block.

Basis officials have stated because a closely tied private company, Basis.ed, runs the schools it isn’t required to disclose how much the Blocks or other executives are paid.

Basis has used its Arizona schools as collateral to fund operation of its schools in Texas and Washington, D.C.

The Attorney General’s Office also has expressed concerns that the legislation does not give its office enough additional power to investigate charter schools.

Brnovich wants subpoena power over charters and broader authority for the auditor general to investigate charter finances. Further, Brnovich wants charter schools to segregate public funding from private dollars in businesses related to the charter school.

“The big question is what happens with the public’s money,” said Anderson, the AG spokesman. “The bill does not appear to deal with that issue…We now have difficulty on the civil (enforcement) side on investigating misuse of public money when all money is commingled together.”

Benson said the legislation allows the Attorney General’s Office to investigate procurement related complaints. However, that would not occur for private management companies.

More disclosure?

Bolding said he likes that Brophy McGee’s bill requires charter schools to disclose more information about their finances and governance.

The bill would require charter operators to post on a public website the names of voting members of the governing body, the number of independent voting members, total annual state revenue, as well as expenses, assets and liabilities.

Charter schools already are required by state law to disclose much of that information to the Arizona State Board for Charter Schools. That information is available on the Charter Board’s website.

The bill also would require charter operators to adopt a conflict-of-interest policy and to provide a written statement that describes the services provided by a management company and the cost.

The bill, however, does not require a charter operator to release the actual contract or precise financial expenditures of its private management company. Further, the bill does not require the private management company to disclose how much its executives are paid with public tax dollars.

School districts, which receive less in per-pupil state funding than charter schools, have to abide by much stricter procurement and disclosure laws.

Brophy McGee said she will not seek to have charter management companies disclose financial information, stating that they are private companies and should not be subject to that level of transparency. Republicans in past years have blocked Democrats’ efforts to force charter management companies to comply with state public records law.

The bill also requires the state Charter Board to provide training courses on the state open meetings law, public records requirements, enrollment laws and regulations, applicable procurement rules and discipline.

Charter schools already are required by law to follow the open meeting law and public records requirements. The Republic has found some schools refuse to comply with those laws.

Reach the reporter at craig.harris@arizonarepublic.com or 602-444-8478 or on Twitter @charrisazrep.