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| Hell of a nice looking building - How are property values in Burnsville |
One of state’s largest charter schools is at war with regulators, on brink of collapse
STEP Academy, which has campuses in St. Paul and Burnsville, faces a deep financial crisis.
The Minnesota Star TribuneOctober 18, 2024 at 6:00AMOne of the largest charter schools in Minnesota is on the brink of collapse after its leaders gambled on an expensive and allegedly improper expansion into Burnsville that put it in a deep financial crisis.
STEP Academy, which enrolls 783 students at its campuses in St. Paul and Burnsville, has been repeatedly cited for contract violations by Innovative Quality Schools (IQS), the nonprofit that oversees the school as an authorizer for the Minnesota Department of Education.
In an Oct. 4 letter, IQS warned STEP leaders that the school’s finances are in “an incredibly fragile state.” To survive, IQS said in the letter, STEP must take immediate and significant action, such as closing one of its two campuses.
A week later, after IQS accused school leaders of failing to make necessary adjustments, the nonprofit threatened to terminate STEP’s contract in a followup letter. Such actions have typically led to the closure of charter schools because they are not allowed to operate without an authorizer.
If STEP shuts down, it would be the largest charter school failure in Minnesota history. So far this year, nine of the 181 charters schools operating in the state at the beginning of 2024 have closed, the most since the first charter school failure in 1996, state records show.
In a five-page statement to the Minnesota Star Tribune, longtime school director Mustafa Ibrahim blamed STEP’s financial problems on IQS. [...]
Switching oversight
State records show that 99% of STEP’s students are Black. Most students are recent immigrants from Somali and East Africa, according to school employees.
In response to Ibrahim’s allegations, IQS said in a statement that its repeated interventions were aimed at ensuring the school operates within state guidelines and lives up to the promises made in its contract with the nonprofit.
[...] The fight between the school and its authorizer demonstrates the limits of Minnesota’s charter school oversight system, which relies on 12 nonprofit groups and educational organizations to enforce rules aimed at making charter schools successful.
[...] IQS first cited STEP’s board for weak oversight in 2019, saying it failed to respond when Ibrahim repeatedly engaged in “improper management practices.” Despite ongoing concerns, IQS has continued to renew the school’s charter for the past five years.Some of those authorizers oversee extraordinarily successful schools and have received high marks from the state; others have been criticized for continuously renewing the contracts of failing schools. In its most recent state review, IQS placed in the middle of the pack with a satisfactory rating.
The situation didn’t reach crisis levels, however, until the costs of the school’s 2022 expansion into Burnsville wiped out STEP’s financial reserves. Its fund balance, the most critical indicator of a charter school’s financial health, fell from $2.7 million in 2022 to $54,461 in 2023, state records show. This year, the school is operating at a deficit of nearly $800,000.
In a 2023 letter to the school, IQS said STEP “significantly overspent” on renovating the Burnsville facility. It alleged that Ibrahim violated procurement rules by entering into budget-busting agreements without first obtaining board approval.
[...] The school’s enrollment projections turned out to be far too optimistic. STEP officials expected more than 1,000 students to enroll this year, records show, but fewer than 800 showed up, including 288 in Burnsville. IQS said STEP also had to repay $800,000 to the Education Department for overstating its enrollment last year.
In his statement, Ibrahim said both IQS and the Education Department approved the Burnsville addition. He denied breaking any rules.
[...] Traci Moore, who left her job as assistant superintendent of academics at STEP in 2023 to take over a charter school in Maple Grove, said she sought more control over the school’s finances because of Ibrahim’s “unethical” management practices. She faulted him for the recent layoff of several intervention teachers who worked with the lowest performing students instead of doing more to shrink administrative costs, which were nearly twice the state average last year, records show.
“It’s a complete mess,” said Moore, who spent seven years at STEP.
Ibrahim, who earns $170,000 a year as STEP’s superintendent, said in his statement that he recently agreed to a 30% pay reduction to “share in the sacrifices being made during this challenging period.”
[...] Robert Wedl, who served as Minnesota’s education commissioner in the 1990s and recently worked as a consultant to STEP’s board, said other charter schools have recovered after a period of deficit spending.
“I have respect for both IQS and also Dr. Ibrahim and find the current situation to be highly regrettable,” Wedl said.
Dumped money into renovating the Burnsville property. Nice salary, even if cut. The consultant says ... well ...
With that change in operating funds, the building upgrade, internal disputes, etc. as a hypothetical which IQS can ask its lawyers about, with title policies or court proceeding certificates reasonably priced, would IQS be liable for negligence if it did not check at even this early stage who might show up as having redemption positions on the land and building?
Things could come to a separation of secured and general creditors, and knowing who IQS might be dealing with in what capacity is always prudent.
Sooner is better? Presuming there may be due diligence considerations later, acting early seems prudent.
___________UPDATE__________
Real public schools, as opposed to charters called in statutes "public schools" differ.
Real public schools have elected boards. Having to face voters, sometimes seats are contested. Charters pick whoever. For governance. For oversight.
FURTHER: The lawyers could also advise that if IQS has any lien contract rights IQS should assure that the lien is perfected by recording. A pocket lien could end up inferior to a recorded lien for delayed compensation, should the IQS - STEM contract have allowing provisions that way. Besides taking things public with Strib, taking it up in detail with the lawyers is simple due diligence to avoid surprise. And, "due" seems to have been reached in things.
___________FURTHER UPDATE_____________
KARE 11 adds:
The new proposed budget would call for $325,000 in reductions at the St. Paul campus, $225,000 in cuts at the academy's Burnsville site and a $225,000 reduction in operations/office staffing.
STEP is also working to add $600,000 from renegotiating building leases at both locations and its transportation contract.
“As STEP Academy’s authorizer, we continue to provide oversight of the school and its board," said IQS in a released statement. "The recent corrective action plan and direction to the school included improving financial controls and expanding board membership to increase the board’s capacity to provide effective oversight of the school. In the coming weeks, we expect STEP’s leadership and board to continue implementing the agreed-upon corrective actions, which were developed to create stability while maintaining a strong academic program. We will continue to advocate for STEP’s students and serve as their authorizer for the remainder of the school year.”
Buildings are leased by STEP. Who from? Crabgrass has no knowledge. Cutting lease contract liability by $600,000 suggests leases, before any belt tightening, are a major budget item. STEP is lucky to have adaptable landlord-tenant relations.
Perhaps an insider is landlord at one or both sites. If so, there is a possibility of conflicts of interest, particularly if the school financed building or site improvements at either campus. Crabgrass has no access to contract documents at present, and access is not yet requested. The IQS - STEP 72p contract is online here. The contract footer, "Revised 03/2024". Lease contracts were not seen by Crabgrass online. Possibly, they may not be posted.
FURTHER: Reasonable lease rates in Burnsville, per sq ft, or otherwise should be a known market factor, a range if not a pinpoint value, and then, was rent excessive before being negotiated down? That is a semi-quantifiable thing, at least over a range. If Burnsville site rent was excessive, and the school paid upgrading the building, a title policy might or might not prove helpful. Shell corporation ownership could frustrate researching title. If an insider is owner, or by some chain the de facto landlord, is the lease truly showing an arms length status, or fiscal favoritism? IQS seems positioned to have a duty to taxpayers to police things, but if negligent, who'd sue?
Is the Attorney General positioned to protect the public interest with regard to charter school potential fiscal abuse? To prevent or pursue a remedy against fraud or IQS potential negligence? Crabgrass has not studied the revised IQS oversight contract it has with STEP. With parties reportedly semi-hostile, or uncertain of each other with finger pointing, the lawyers on both sides are likely being consulted.
FURTHER: The National Council of Nonprofits has posted, "Financial Transparency and Public Disclosure Requirements," discussing required IRS Form 990 disclosure, among other topics about best practices, such as having a written employee compensation policy. Possibly Strib has pursued fiscal disclosure. Follow-up reporting may be likely. The news outlet has published an ongoing series of items on charter school situations in Minnesota.
Presumably IQS as the public's fiduciary has copies of Form 990 filing for all of its stable of policed charter schools.