Friday, October 24, 2014

Charter Wolves in Public School Clothing: Buffalo Edition

The Alliance for Quality Education and Citizen Action of New York have released a report that shows in impressive detail how one school board member is raking in money in the charter biz.

Carl Paladino runs Ellicott Development, a large property develop company in the Buffalo area. Ellicott does a big chunk of business with charter operators in Buffalo, having worked with "the private operators of at least five Buffalo charter schools. His preferred money-making technique appears to be either flipping properties back to the operators, or "leaseback" deals.

The report also suggests that Paladino makes money indirectly from properties near new charters, which are now more valuable because the neighborhood has been improved. In one particularly sweet deal, Paladino bought up twenty-two properties on Buffalo's East Side, turned two of them into charter schools, and then started developing the other nearby nineteen as apartments.

Paladino ran for school board on the assertion that he would recuse himself from charter school votes. But the report notes that he has instead acted as "the most vocal proponent" of charters.

It reminds me a bit of the old westerns where the wily politician grabs himself a chunk of land and then colludes with the railroad company to run the new tracks through his property.

Paladino's interest in charter schools is not in dispute-- not even by him. On the question of making money from working with charters, the Buffalo City News quotes him:  "If I didn't, I'd be a friggin' idiot."

The News sat down with Paladino after the report was released and gave him an opportunity to respond. His argument appears to boil down to:

* Charters are only a small fraction of Ellicott's business.
* His investments in charters are crazy risky and yield a paltry 10% ROI, but he's a charter believer.
* Ellicott is a private company and he's not opening his books.
* He'll recuse himself from votes in which he has direct financial interest, but that's it.

The News also found at least charter founder who found Paladino to be an angel. These testimonies include schools in which Paladino is the sole investor; I am thinking they know how to treat that feeding hand.

The report gets into the specifics of how some of these arrangements work. The leaseback is particularly tasty. For those of you who don't play games with money for a living, here's how it works:

* Chris buys a building.
* Pat leases the building from Chris for a buck ($1.00)
* Chris leases the building (which he actually already owns) from Pat for a buttload of money.

Why would anybody even do that? Why pay a buttload of money to lease a building you already own? At least two possibilities come to mind.

1) In some regions, you may get tax breaks on lease payments that aren't available if you outright own the place. If you make the lease "include" features like custodial services and utilities, you can get breaks for basic overhead.

2) It gives a plausible cover for any large sum of money that Chris wants to give Pat without having to explain it. It can also be a way to hire and pay someone to fix your building up-- you could say that one is leasing back the improvements on the property. Of course, it all gets much more interesting if Chris and Pat are business partners-- or the same guy. Like, say, a not-for-profit school operator who still wants to pocket profit-like money.

I don't know what's going on in Paladino's case. He has scarfed up something like $685 K in tax breaks from sales and mortgage tax. Whatever he is, he is not a friggin' idiot.

Paladino may not be a generally shady operator at all-- at least no shadier than the average developer. Much of this likely falls within SOP for developers, and what Buffalo is simply witnessing the predictable shenanigans that come when you turn education from a public trust into a private enterprise. Paladino spent much of the article clarifying and supporting his business practices, but there was not a word about the quality of the charter schools that he has profited from.

The real shame here is that Paladino is on the school board, that he has basically been given a voice in how to run his business's main competitor and the oversight for his charter business. The conflict of interest here is huge, and anybody who says that charter interests and public school interests aren't directly opposed is smoking something. This is like giving a major leadership role at Coke to somebody with a major financial interest in Pepsi. It is like putting a wolf in charge of shepherding.

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