Charter school found in violation of state regulations

BY LAYLI WHYTE
Staff Writer

The state has given the Red Bank Charter School and its foundation 45 days to come up with a plan to correct violations including incurring “massive debt.” The charter school will also be required to refund $1 million in state aid for failing to put its construction project out to public bid.

In a report made public by the state Department of Education Office of Compliance Investigation May 2, the state examined the legality of board actions specifically in regard to the school’s debt burden and that of the Red Bank Charter School Foundation.

According to a letter from Ray Montgomery, director of the Office of Compliance Investigation (OCI), the investigation “confirmed that the debt is excessive” and in violation of state statues and found that, contrary to state regulations, there was no bidding for the move of the Century House to the charter school’s Oakland Street campus or for the renovations to the charter school facility.

The report requires the charter school to “publicly review and discuss the findings … and either develop a corrective action plan or file an appeal to the findings.”

The charter school board held a special meeting May 3 to discuss the report, but reserved comment until a public meeting scheduled for this past Wednesday.

Board attorney Malachi Kenney read a prepared statement on behalf of the board.

“We have not had an opportunity to review the report in the depth it requires,” read Kenney. “We can assure you that the board will be doing it promptly.”

The OCI findings appear to confirm concerns raised by five of the school’s nine board members who complained to the DOE about the charter school’s debt level and possible violations of regulations.

The report listed five main “allegations and findings” that deal with financial issues, lack of compliance with state regulations, the actions of some board officers, and the school’s relationship with the Red Bank Charter School Foundation.

The OCI report said the K-8 charter school failed to comply with state mandates that limit charter school debt to the “total appraised value of the property or asset by which the debt is secured.” The report said the charter school property was appraised at $3.7 million in 2004, but the school and foundation combined have debt amounting to $3.9 million.

While board president Michael Stasi and treasurer Gayle Horvath maintained that the foundation debt did not affect the school because the two were separate entities, the state investigator found that the school is the sole member of the foundation and operates, supervises and controls the foundation.

The debt, it said, “belongs to the charter school as well as the foundation” and the two entities are “equally responsible.”

In addition, the report indicates that an audit for the foundation expresses “uncertainty as to whether the foundation is a going concern due to the excessive indebtedness compared to its assets.”

The second finding was that the charter school was not complying with public school contract law that requires that contracts for goods or services that exceed the bid threshold must be awarded by the board to the lowest responsible bidder in a public bidding process.

The original budget for the charter school was $3 million, it states, but actual costs were $4.5 million. Of that amount, $2.7 million “should have been put out to bid.”

While Stasi and Horvath claimed the rules didn’t apply because the foundation performed the work, the state found, again, that the school and foundation “are so intertwined as to be the same entity” and the work “should have been subject to the school bidding law.”

Failure to properly manage the project resulted in cost overruns of 51.54 percent, it said.

In addition to not going out to public bid on the building project, the state said ”the charter school board of trustees did not approve contracts or loans taken out in its name.”

The report states that after reviewing board minutes from December 2002 through January 2005, OCI found that there were no resolutions for the purchase of the school property, to approve contracts, or to apply for or assume loans totaling some $2.7 million.

“These activities were done through the foundation,” the report states, “with the board president and treasurer, who are both on the foundation board as well, controlling the project.”

The OCI reported that the documentation for an Economic Development Agency loan includes a statement by Stasi that the board approved the EDA loan at the Oct. 21, 2003, board meeting.

“However,” the report states, “there was no such meeting.”

Another finding faulted the charter school for reimbursing the foundation for real estate taxes due upon purchase of the Oakland Street property. The foundation purchased the property and later turned it over to the charter school.

The state found that the school reimbursed the foundation $19,270 for back taxes due on the property.

“The school should not have assumed a debt that was solely the foundation’s debt,” according to the report.

The OCI report also cited “a serious conflict of interest” regarding the role played by Lawrence M. Fuchs, an attorney who is a trustee of the Zobel Charitable Lead Income Trust and president of the Zobel Foundation, the Red Bank Charter School Foundation’s largest donor. Fuchs also manages Short Term Money, which made loans to the foundation. Fuchs also represented the foundation at the closing on the Oakland Street property.

In citing a conflict of interest on the part of Fuchs, the report notes the Zobel Foundation pledged to give the school a total of $375,000 over five years. Fuchs is listed on the charter school foundation letterhead as a “friend” of the foundation.

The report also noted that Short Term Money loaned the charter school foundation a total of $800,000 without collateral.

The Zobel Foundation checks had been sent directly to the school, but began being mailed to the charter school foundation after a resolution by the board at the Feb. 11, 2004, meeting.

“There seem to be serious conflicts of interest regarding his [Fuchs’] role,” according to the report. “He loaned $800,000 to the foundation and stands to benefit by having the money paid directly to the foundation.”

According to the Zobel Foundation’s tax filings, from November 2002 through October 2003 the charter school received the largest donation — $90,000 — of the 57 organizations and charities to which the Zobel Foundation contributed.

In its conclusions, the report also said Stasi was not acting in concert with trustees.

“The board president seems to be acting independently of the rest of the board,” it states. While Stasi told the state a loan had been approved by the board at an October 2003 meeting, that “was not true as the board did not have a meeting on that date,” the report states. “There were no resolutions approving this debt.”

As a result of the findings, the OCI said the bidding violations require a refund of state aid to the DOE. It directed the Red Bank Charter School to establish and implement procedures to ensure compliance with state public school statutes.

The report said the school must: not add to its debt; immediately institute policies to ensure that the board approves all expenditures and debt; keep all board members informed of any actions the foundation takes for the school; and the board of trustees must vote on expenditures.

The OCI investigation was instigated by a complaint filed in January by trustees Ellen Herman, Josephine Lee, Barbara O’Hern, Vincent Crapelli and Darryl Hughes. The five had questioned charter school finances and said they did not have access to financial documents.

O’Hern said last week that she was never informed of the source of the loans made to the foundation.

“We were never told,” she said.

The board met in closed executive session May 3 for nearly two hours when it received the report from the state, before addressing the public.

According to the statement read by Kenney, the board plans to consider the report, and seek the advice of professionals and experts.

“All the board members recognize that the report creates some difficulties for our school,” according to the statement. “We want to pledge to you that every one of us is united in the commitment to resolving those difficulties and moving the school forward with vigor so that it may continue to serve the families and children in this community.”

The board then voted unanimously to accept the report, but Stasi told the waiting public that the board would not answer any questions concerning the report until the next meeting on May 11.

Stasi said that the board would get together in executive session prior to the meeting to further discuss the report.

Ronald Rice, DOE spokesman, said last week the DOE was not aware of the school’s mounting debt because the debt was accrued by the foundation, which is a private, nonprofit organization, and therefore not within the scope of the DOE.

“The DOE was under the assumption that the charter school and the foundation were different entities,” Rice said.

Rice said that he is not aware of a similar situation at any other charter schools in the state and that charter schools are already closely scrutinized. He said the DOE will do what it can to control the situation.

“We will work with school officials to implement and oversee a viable plan,” said Rice.