Think neoliberalism’s over? Consider Chester, PA.

There’s something happening in Chester, Pennsylvania. If you haven’t been following, a judge recently ordered that the school district consider proposals for a charter takeover of the district. There’s a lively debate over this happening in the Delco Times.

I recommend you look up Chester. There’s a lot going on there on the marketization terrain, including a proposal to privatize their water system. The city is a frontline in the continuing privatization of local government and services, even as the commentariat has been declaring the end of neoliberalism in the wake of the American Rescue Plan.

I was even seduced into considering this analysis, but Chester’s a great example of how short-sighted it is.

Anyway, you probably know I’ve been trying to understand how charter school finance works as part of my larger project of figuring out how school and capitalism relate to one another. I’m looking at school funding as a socialist. My method has been to read bond issuance documents, which are publicly available and contain lots of great bits of info beyond just the details on borrowers and lenders.

The largest charter operator in Chester is Charter School Management Incorporated, which runs 60% of Chester’s elementary schools as Chester Community Charter Schools. They’ve been recognized as a likely player in the takeover if it goes through. Their Board of Trustees authored the most recent letter to the editor on the Chester proposal linked above.

What I’ll do here is look a bit at CSMI and then refine that understanding with a 2010 issuance, the most recent they’ve done. The big question really should be: do we want this kind of apparatus running the Chester-Upland School District? Or do we want to go in a different direction? CSMI is an excellent case study in the kind of structures that govern and finance charter schools.

Mansions with bowling alleys

When I think about CSMI, I think about mansions with bowling alleys. That’s because a few years ago, the founder and CEO of CSMI, Vahan Gureghian, sold an $84.5 million mansion in Florida that, indeed, has its own bowling alley. Here’s the house:

Once Asking $84.5M, Oceanfront Mansion in Palm Beach, Florida, Enters  Contract - Mansion Global

Look up Gureghian. He’s a Republican donor, a mover and shaker in Pennsylvania politics. His wife Diane is a lawyer that serves as legal counsel for CSMI. He looks like this:

Power Players: Pennsylvania's top political donors, 2011-2012 #5: Vahan  Gureghian

The Inquirer and then Diane Ravitch and the Washington Post all reported on an audit which found that Gureghian was paying himself $11 million in 2019, the same year he sold the mansion. He and Diane live in another mega-mansion in Bryn Mawr, PA. A regional mainstay, the Gureghians have given lots of money and time to education:

“Mr. Gureghian serves on the Board of Trustees of the University of Pennsylvania and the Board of Delaware County Community College. He is also a Trustee for the Villanova University Business School. Mr. Gureghian is also on the Board of Directors for the Philadelphia Regional Port Authority.

Through the Gureghian Family Foundation, Mr. Gureghian and his wife, Danielle, have provided hundreds of high school and college scholarships to promising Chester students. They are also responsible for donating for than $70,000 in Thanksgiving meals to residents of Chester over the last ten years, and giving $400,000 worth of holiday gifts to CCCS students.”

The other thing that’s been out there about CSMI was its Camden-based charter, whose renewal application was denied in 2017 due to low test scores. (Sidenote: I’m wondering what happened to their facilities. Who owns it now? They had buildings that underwent multi-million dollar expansions. Here’s their financial report from the year before they closed.) They operate Atlantic Community Charter School in Atlantic City, which still exists.

The treasurer

The most recent issuance from CCCS was in 2010. That’s a long time ago. But I did see a note from Fitch’s rating service talking about these bonds late last year. That’s because last year was a ‘maturity date’ by which the borrowers had to pay back a certain amount of the loan. They did, so Fitch’s was like “okay cool.” The next maturity date is 2030.

It was a big loan, nearly $50 million in principal. The bond was issued by the Delaware County Industrial Development Authority on behalf of the Friends of Chester Community Charter School, a nonprofit supporting organization formed for the purchasing, financing, and operating real estate for the school.

George Fieo is listed at FCCCS’s principal officer, since he signed their 990s in 2019, with gross receipts of almost $4.5 million. Fieo is Delaware County’s Deputy Treasurer, the Borough of Norwood’s treasurer, and a partner at an accounting firm. I guess sometimes he goes by Giorgio rather than George, since he’s listed here as making around $90,000/year in his official capacity. He looks like this:

George Fieo

Sort of interesting that he’s both the Deputy Treasurer of the county and the principal officer for the organization that acquires and maintains real estate for the charter operator. It also looks like he paid himself $3,200 for something from FCCCS coffers. Wonder why.

Peter Seltzer is the President of FCCCS’s board, serves on Atlantic CCS’s board, and was a former City Councilman in Chester. ACCS’s website says he’s an insurance broker with his own firm called Seltzer and Associates, though I can’t find much about him in general.

Owner and CEO?

When it comes to the buildings though, the issuance says that

“The Charter School currently leases a portion of the Facilities, consisting of five elementary schools, two middle schools, two gymnasiums, an administrative building, a maintenance building and two pad sites, all located on two campuses, the East Campus and the West Campus from Vahan H. Gureghian pursuant to several lease agreements,” who also “constructed the Facilities employing conventional financing.”

This means that money from the bond issuance went from DCIDA to FCCCS to Gureghian directly. Indeed, he’s referred to in the issuance as the Owner, since he owned the school’s facilities.

The deal was that the School and DCIDA would purchase the facilities from Gureghian for $50.7 million, using the lion’s share of the bond (the rest of the money goes to a debt reserve fund and the cost of issuance, which is usually around $1.5 million). “The Borrower and the Charter School intend to execute a Purchase Agreement on the date of closing on the Bonds for the purchase of the Facilities at a purchase price of approximately $50,700,000.”

It makes sense, since the yearly gross receipts of the 990 tax form come out to about the yearly rental costs for the facilities reported in the issuance. It’s about $4.4 million/year.

Remember that Gureghian is the CEO of CSMI. So the CEO of the operator owned the building as a private individual. The DCIDA took out a huge loan from an anonymous cabal of ruling class people, gave it to FCCCS (directed by Seltzer and Fieo) who then purchased the buildings from Gureghian. Gureghian made $50 million on the deal, leaving the other orgs with the debt to pay back. The money just went right into his account as the Owner.

Keep in mind, this was a big real estate deal: “five elementary schools, two middle schools, two gymnasiums, a maintenance building, an administrative building (to be used by CSMI, LLC pursuant to its Management Agreement with the Borrower), and two pad sites located on two campuses, the East Campus and the West Campus.” All of it totaling 248,802 square feet. These were deeded to FCCS, who I imagine now owns them given their 990 form.

The Charter takes in revenue from tax grants through the district’s property taxes and state grants (and other sources). If I’m getting this right, then the circulation goes something like: CCCS gets its revenue, pays it to FCCCS, who then pays out money to DCIDA to refund the bond over forty years.

Fieo can skim a little for himself off the revenue since he’s doing all the paperwork, working on the inside from Delaware County. Guerghian took the loan money in 2010. Maybe it went towards the mansion with the bowling alley? Who knows.

Charter School Tax Haven

This is part 5 of a series on String Theory. See the other parts here!

Instead of a relevant image or graph, please enjoy this water color done by my aunt Donna. She’s a great painter.

We’ve come a long way in this series on String Theory and we deserve some good colors, calm scenes, and feeling.

In this final post, I want to talk about exemptions and wrap things up.

Exemption!

Like I said in a previous post, the bond issuance from 2020 is repetitive. Another thing is repeats a lot is that the borrowers (in this case, the DeMedicis)operate exclusively for charitable and educational purposes including making distributions to organizations that qualify as exempt organizations under Section 501(c)(3) of the Code. This includes providing facilities, land, and improvements for the benefit of Philadelphia Performing Arts: A String Theory Charter School.

They’re super clear: this real estate development scheme is done by and for charitable and educational purposes only. Everyone on the school side is non-profit. This is super important because it means everything in the deal is exempt from all kinds of taxes at the local, state, and federal levels. Ballard Spahr put their seal of approval on this.

What’s exempt from what?

Importantly, the interest payments on this bond—the payments that the borrowers send to the lenders, who are lending this money and get it back with interest—are:

  • excludable from gross income for purposes of federal income tax, assuming continuing compliance with the requirements of the federal tax law.
  • exempt from Pennsylvania personal income tax
  • exempt from Pennsylvania corporate net income tax

The buildings themselves are currently “exempt from real property taxation” at the local level also, and the DMs are required to maintain federal tax exempt status as educational/charitable organizations. If they don’t keep this status then it “might trigger a challenge to its Commonwealth income tax exemption,” which means the lenders would have to pay taxes on the interest payments and String Theory would have to pay some taxes on the real estate.

One thing they’re trying to avoid here is the situation where “the assets of either to inure to the benefit of private individuals.” In other words, Javier Kuehnle running away with $65 million of Philly real estate. There’s a little treasure trove of legal protections in place to make sure this doesn’t happen. None of this illegal technically (though it should be), and it might be sort of unlikely, but it’s a really bad look.

Plus, it gives Javier Kuehnle a lot of power locally, whether or not he actually can or does cash in on it.

It’s this whole business, combined with the fact that they take from existing district revenues and treat teachers like crap and a lot of other things, that make charters so reprehensible. But how to sum all this stuff up?

Whew

For now, I hope I’ve shown that String Theory is a real estate development corporation. But it’s also kind of a tax haven. Bondholders can park their money in the charter and get tax-exempt interest payments from it. But also private individuals can control sizable real estate development projects in other tax exempt ways, sending all kinds of money to all kinds of consultants and other capitalists.

The thing is, a lot of school districts are tax havens also. It doesn’t distinguish String Theory from traditional school districts to call it a tax haven. What does distinguish it is what kind of tax haven it is.

Whereas most wealthy districts exploit resources through property taxes and inequalities in their regions, String Theory exploits the school district itself, from within the school district.

Whereas traditional school districts are a very sturdy state apparatus (they’ve been around since the Puritans!), the String Theory is new and fragile. It could very well go under like many other charters.

And this brings us to maybe the most important feature of this tax haven. Whereas school districts are led by elected and appointed officials firmly embedded in municipal government, as well as state and federal government, the String Theory Development Corporation is run by a very particular set of individuals. These individuals, namely Javier Kuehnle, control a lot of real estate. There’s only cloud of legal designations and shady entities between Kuehnle and the $65 million of property he controls. To unseat him and the other board members is quite difficult.

In traditional school districts, elected school boards, superintendents, mayors, and assessors distribute their power when controlling school district finance. This ruling class bloc tends to be more diverse, though this guarantees very little. The structure is overall a pretty good thing, since school districts are so intimately wrapped up with property and family.

I don’t like this traditional school district structure (which is not without corruption), but at least it’s tough and includes some democratic accountability. I can’t abide the apparatus of charter finance. It’s absurdly complex, as this series of posts has shown. And I don’t think this group of ruling class people are especially trustworthy when it comes to running schools.

One question I’m left with after all this is dialectical. What’s the dialectic pointing towards here? I don’t think the old school district is going to survive and frankly I’m not sure it should. The charter structure isn’t nearly as sturdy, meaning that’s it’s a transitional apparatus itself. So what comes next? What can we dream of? What can we push for as socialists at this moment in the conjuncture?

This is (not) a school

This is part 3 of a series on String Theory Performing Arts Charter School in Philadelphia. I did a basic history of their massive 2013 bond issuance here. Then I analyzed a 2020 issuance here.

Last time, I dug around String Theory Development Corporation’s 2020 bond issuance to see what it was all about. This time, let’s get to some more amazing details of it as an apparatus: the entities involved and how they relate to one another.

There are a ton of characters in the drama called String Theory Development Corporation. The main characters are the DeMedicis and ‘the Corporation’.

Let’s start with the Corporation.

This is (not) a school

Technically, the Corporation refers to String Theory’s Performing Arts School. But confusingly the corporation is also the non-profit controlling the school. And thus also not the school.

While there isn’t anything to the Corporation other than the School, for legal purposes the School and Corporation are different. But they’re also the same. The way the issuance puts it:

The Corporation was incorporated in 2000 and operates as the public charter school known as Philadelphia Performing Arts: A String Theory Charter School (the “School”)

So the Corporation operates as the school, but is different than the school. I’m laughing right now over my keyboard. The School both is and is not a Corporation.

Where’s String Theory in all this? It’s actually a third thing that provides academic and business services to the Corporation for the School.

The Corporation has entered into an Academic and Business Services Agreement dated June 20, 2011…by and between String Theory Schools (“String Theory”) and the Corporation, pursuant to which String Theory provides academic and business services to the Corporation for the School.

In other words, “The Corporation relies on String Theory for all aspects of operation of the School.” So the corporation operates as the school but isn’t the school and also relies on String Theory for all aspects of operating the school.

Right.

Financially, this means that “the Corporation pays to String Theory a total annual fee of $2,253,562.50 for the 2020-21 school year, increasing year-over-year to $2,468,187.50 for the 2023-24 school year.” So the Corporation, which operates as the school, pays String Theory, its business services provider, millions of dollars to operate the school. Which both is and is not the Corporation.

It’s a late-capitalist postmodern mereological wonderland! And it only gets better. What about these DeMedicis?

Closer and closer apart

The DeMedicis are two non-profit corporations (DeMedici and DeMedici II) located in New Jersey whose sole reason for existing is to acquire and lease buildings to String Theory.

Sidenote: can you believe they’re actually called DeMedici? Like the Renaissance ruling class Italian family?

Lorenzo de' Medici - Wikipedia

I digress. How do these DeMedicis relate to the Corporation (which is and is not a school)? Bond issuances are long, but they’re very repetitive. One paragraph repeated multiple times throughout this one is:

The Corporation does not exercise corporate control over DeMedici or DeMedici II, but there is certain common membership across the boards of directors of the Corporation, DeMedici, and DeMedici II. DeMedici and DeMedici II are legally separate from the Corporation, but are component units of the Corporation for purposes of financial reporting.

You guessed it: the DeMedicis are both component parts of the Corporation (for financial reporting purposes) but are not part of the Corporation (for legal purposes).

Financially speaking, these things are all connected to one another. Legally speaking, they’re separate.

LOL.

Indeed, Javier Kuehnle is president of all three: DM, DM2, and the School (which both is and is not the Corporation).

So what’s the practical relationship here?

As I wrote about last time, DM is the Corporation’s landlord. DeMedici, which both is and is not part of the school, leases some of the buildings to the Corporation, which, both is and is not the school. DeMedici II acquires and leases some facilities as well.

The DMs are also borrowers. They borrow the money from PAID (who is borrowing it from an anonymous cabal of ruling class people).

Here we have the basic parts of the String Theory Development Corporation, which aren’t really parts of anything but are also all the same thing: a set of corporations that are both component parts of each other and also separate from each other, that are a school but also not a school, acquiring, leasing, and using real estate with/to/from/for each other. And borrowing money from other people.

Of course, they’re not doing this for fun. The postmodern mereological wonderland of this arrangement has very a meaningful purpose: to maintain non-profit status and tax-exemption for everyone involved.

I’ll get to that in a moment. Before I end this section, I want to introduce the ensemble of minor characters in the String Theory Development Corporation drama.

Supporting characters

To get into this complex formation for the bond issuance, all the parties entered into something called an indenture, which is sort of like a guarantee for the bondholders. That indenture needs a Master Trustee, someone to oversee the whole affair. The U.S. Bank National Association, which is a subsidiary of US Bankcorp, is the Master Trustee.

Also on the bondholder side, Truist Securities, Inc. is the Underwriter, or the entity that purchases the bond. S&P Global Ratings assigned a rating of “BB+” to the Series 2020 Bonds, which is actually pretty high compared to the district itself, whose bonds get rated just above junk at BBB.

Don’t forget about the lawyers. Legal counsel is Ballard Spahr, a well-known corporate law firm in the region, and charter school finance experts Sand & Seidel are involved. Then there’s the PAID board:, Evelyn F. Smalls Chairperson. David L. Hyman, Esquire Vice Chairman, Thomas A. K. Queenan Treasurer.

Let’s look at the String Theory Governing Board. I’ve mentioned a couple of them but here’s the whole list and some of what they do. Here’s the composition:

Their bylaws are interesting. Each member serves a two-year terms (without limits, I think). They’re elected by a majority vote of the existing board, so it’s very insidery.

Plus, any potential Corporation Trustee must be chosen from the slate of nominations set forth by String Theory Schools. So not only must the existing board vote for you, but you can’t even be a candidate unless String Theory (which provides the business and academic services for the Corporation which is and is not the school) approves you.

Very democratic! Also, this board controls the school. Make no mistake about their power.

Finally, our friends Santilli & Thomson, LLC, serve as business manager, not just on this deal but to the School in general. Let’s spend a moment with them, since they’re super proud of the school district revenge fantasy they’re enacting in the city. Also, previous reporting said that it’s not clear what S&T does or how much it makes. The issuance tells us both.

First, it says that S&T is the Corporation’s (thing that is not a school but also a school) business manager. They provide the Corporation “with certain accounting, budget, financial reporting, cash management, payroll, and other financial services.” How much do they make on this arrangement?

S&T makes $191/student on basic and fiscal officer services. The issuance says that in 2020-1, the school had 2,641 students. That’s $504,431/year for those services. They also claim “certain additional charges,” so I’m thinking it’s a bit more as well.

All these characters make money on the cost of the bond issuance, which is almost $1.5 million. If you can believe it, all of this non-profit and tax exempt. I’ll go into that next time.