School district revenge fantasy

The amazing Dr. Camika Royal gave a lecture on her research to my program recently. She’s an historian of urban education focusing on Philadelphia and has a book coming out soon. Look her up!

She mentioned that, while researching her book, she found herself reading the minutes of school board meetings from the 1960s, and when she got to the parts about funding she got frustrated—what does this stuff mean? That’s the work I’ve been doing recently, and I asked if she had a sense of any important bond issuances from the minutes she’d been reading.

She and another colleague mentioned a $55 million bond issuance in 2013 that enabled String Theory Charter Schools to purchase a corporate office building on 1600 Vine Street. Reporting at the time called the bond the “largest in the city’s history.”

I haven’t tried looking into charter school finance yet, mostly because I knew it would make me really mad, but also I wanted to wait until I understood the basics of traditional public school finance before wading in. No time like the present!

So here’s a rabbit-hole type post about one case of charter school finance. If you want to read some good research on this, check out Daniel M. Cohen and Emily Rosenman’s work.

Also, I can’t get the song Beauty School Dropout out of my head. Charter school finance has the same phonetic rhythm.

Beauty School Dropout by Floozi Boyz

Charter review

There’s been good reporting on this issuance in the Inquirer. I’m hoping to lift the lid on this String Theory financing deal and detail the players more, do some demystification, and hopefully learn more about charter finance in the process.

Remember that charter schools are tax-funded and nongovernment-operated. Of course, charters still issue bonds to fund all sorts of ‘capital projects’, which I put in scare quotes because, when it comes to charters, these capital projects can just be a way for nongovernment charter operators and their affiliates to get tax-exempt loans to buy and develop real estate.

When public schools issue bonds, school districts take out loans to develop and maintain public property. Sometimes state governments do it. But when charter schools issue bonds, it’s not always clear who exactly is issuing the bond. Lots of other groups get involved.

Take the case of Philadelphia Performing Arts Charter School, managed by String Theory Schools. In 2013, they purchased and moved into GlaxoSmithKline’s former national headquarters. Who was involved in this deal?

The school needed a loan to buy and fix up this building, so they issued a bond. But it wasn’t actually String Theory that did the deal. It was a whole turgid cloud of financial entities. I kind of want to call it a ‘murder’ of entities, like a murder of crows, but that’s an insult to crows.

What I found was nothing less than a miniature semi-private school district-like blob that governs the finance and administration of this single charter school. This quasi-district isn’t accountable to the public through elections or even appointments.

Let’s take a look at the players.

The DeMedicis

First up is DeMedici Corporation II (DM2), a non-profit company based in New Jersey. DM2’s stated goal is to “TO OWN AND LEASE SCHOOL FACILITIES TO NOT-FOR-PROFIT SCHOOLS.”

Okay. They’re described in reporting as an affiliate to String Theory, but they’re listed technically as a subordinate organization of the Performing Arts Charter School itself, almost like a facilities finance department. Their most recent 990 tax forms report more than $4.4 million in receipts.

It also looks like their three executives only work one hour a week and don’t get paid any money to do so. The guy who signed their tax forms is DM2’s listed President, Javier Kuehnle, this guy, the CEO of Spaulding Automotive, a company specializing in specialty car parts. Indeed, Kuehnle the Chair of String Theory’s board.

The Vice President of DM2 is Ronald Pigliacelli, who is String Theory’s treasurer and is the Director of Import Operations for Deb Shops, a women’s clothing retailer. DM2’s secretary is Krista Alexander, a professional funeral services director.

You might be wondering a lot of things. Why is DM2 the second DeMedici Corporation? Is there a first one? Indeed, DM2 is different than DeMedici Corporation, but they’re also similar. DM1 is located at the same address as DM2. They’re also a nonprofit corporation. I can’t find anything else about DM1.

School district revenge fantasy

But DM2 didn’t actually acquire the building. The firm Santelli and Thomson (S&T), whose entire reason for existing is to consult on charter finance, was the firm that acquired the building, which they announced on their website. Founded by two former Philly school district officials, it’s projected to be making millions of dollars every year.

The Inquirer reporting on this, as always, is quite good. As of 2015, there’d been a corruption case brought against S&T but no one was found guilty. No one really knows what they do but they have a big staff and big reach.

But it seems likely that String Theory exists because Gerald Santinelli met Angela Corosanite at a School Board meeting in the 1990s. Corosanite, a ballet teacher, was there to propose an after-school program. Santinelli suggested she apply for a charter. S&T became close partners of the school.

S&T is interesting since they like to boast of the number of students their client schools educate. At this point, they’re bigger than a lot of school districts in PA. Given that they were founded by former district officials, it makes sense that they would think of themselves as a district, like in this graphic on their website.

So rather than a school district owning and leasing school buildings, a private firm does. I bet Santinelli and Thomson had some kind of libertarian revenge fantasy against the Philly school district. Just my guess. What they ended up doing was recreating their own district without any of the safeguards or democratic processes of traditional districts, very shadily.

George and the Authority

But S&T doesn’t do the underwriting, or actual issuing of the bond. George K. Baum & Company (GKB) does, as the investment banker Jason Appelt discussed the sale alongside Jason Corosanite from String Theory (the brother of Angela, I’d guess). GKB was recently acquired by Stifel Finance Corporation, the announcement of which tells us a bit about the firm:

Founded in 1928, GKB is headquartered in Kansas City, Mo., and maintains 24 offices nationwide, including public finance offices in 22 cities. The firm has consistently ranked as a leading underwriter and financial advisor in many areas of the country including Colorado, Kansas, Missouri and Utah and has strong nationwide practices including housing, higher education and independent schools.  Since 2000, GKB has provided underwriting or financial advisory services to more than 7,796 municipal bond issues totaling more than $320 billion.

But also, you can’t really say that GKB issued the bond, because the entity that filed the bond issuance itself was the Philadelphia Authority for Industrial Development. Their acronym—get a load of this—is PAID.

PAID is a public authority incorporated by the City of Philadelphia and organized to undertake three main activities. PAID is a vehicle through which PIDC manages properties and industrial sites on behalf of the City including property acquisition, improvement, environmental remediation and/or sale. PAID also issues taxable and tax-exempt bonds on behalf of non-profit organizations, qualified manufacturers, other exempt organizations, and the City of Philadelphia. PAID serves as a conduit for governmental contract and grant program funding for economic development projects throughout the City. 

On the bond issuance itself, PAID is the entity issuing the bond. GKB consults on this issuance. PAID loans the money to DM2, who acquires the building. S&T consult on the DM2 side. String Theory is the center of the entire ring. I think?

I’m just renting to myself

How does all this work together? What actually happened in this bond issuance?

Let’s not forget this is a municipal bond issuance. Profits on interest and money going back and forth are tax exempt in Pennsylvania. So a lot of people are making a lot of money.

PAID issued a bond for the DeMedicis, who are both separate and not separate from the school. They acquired the building and continue to lease it to the school. They’re also paying out fees to consultants like GKB and S&T.

Let’s think about the school and the DeMedicis. According to the issuance, the school does not exercise corporate control over DM1 or DM2. They are legally separate. But they have common members across all their boards. Also, the DeMedicis are legally separate from school. But they are “component units of the corporation for tax filing purposes.” Lol.

Wigglesworth and Briggs say that String Theory, through DM2, “effectively “rents” its building from itself, collecting $188,000 a year through the state’s Charter School Lease Reimbursement Program.” Auditor General Eugene Pasquale called this a circular arrangement where the school creates different entities that acquire the building and then lease the building to itself.

The funniest part of all this: school districts do all this stuff, but in a way more streamlined, democratic, and scalable way. Districts lease property, acquire and maintain property, and issue bonds—except they do it for everyone using property taxes.

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