For years in Ohio all sorts of people have been siphoning off profits from online charter schools—the giants like ECOT, smaller online schools, and private companies with which the schools contract for management and curriculum. There have also been overpayments to nonprofit charter school sponsors, the organizations that Ohio pays as a percentage of any school’s enrollment to authorize the opening of the school and subsequently to oversee its operations.  Perhaps it is more accurate to say that the state pays the sponsors to pretend to oversee charter schools while they pad their operating budgets with state money.

Now, suddenly, Dave Yost, Ohio’s state auditor, has stopped looking the other way. In a story this blog has been tracking, the state has now halted a 2003 practice of paying online charter schools a per-pupil fee merely for providing 920 hours of curriculum per year.  Beginning in 2015, the state has instead demanded that the schools prove students are actually actively engaging with the online curriculum for 920 hours per year.  In other words, the state has begun to demand accurate attendance reporting. The ensuing scandal has primarily involved the giant Electronic Classroom of Tomorrow, ECOT, which has been over-reporting enrollment by 60 percent.  The state is trying to claw back $60 million in overpayments to ECOT for the 2015-16 school year alone, and is gathering data to bill ECOT for over-reporting its enrollment during 2016-17 as well.  ECOT has responded by trying to block the claw-back in court but has lost in a series of decisions. A final decision is pending from the Ohio Supreme Court.

In the meantime, Dave Yost, Ohio’s state auditor, once an ECOT supporter, has cracked down in an effort to protect what Ohio’s major newspapers have now established is a huge theft of Ohio tax dollars. Patrick O’Donnell of the Plain Dealer recently clarified what have become the stakes involved: “With ECOT cutting staff and losing students as a result of the state’s ‘clawback’ of funding, worries are growing that the school would declare bankruptcy to avoid repaying the money.”

Last week, Yost demanded that not only a charter school—in this case ECOT—must pay back the tax dollars it has overcharged the state, but also the private management companies with which the charter school has contracted must pay back any dollars they have collected due to the charter school’s misrepresentation of its enrollment. And the sponsoring agency which authorized the school and supposedly oversees it on behalf of the state must return funds it earned from the school’s misrepresentation of its enrollment.

Even while Ohio awaits a decision from the Ohio Supreme Court in ECOT’s case, Yost and the Ohio Department of Education have begun deducting into an escrow account a percentage of ECOT’s state reimbursement for the 2017-18 school year as a way for the state to recapture what ECOT owes taxpayers.

Here is Jim Siegel of the Columbus Dispatch explaining Yost’s demand that for-profit charter management companies and nonprofit charter school sponsors must also begin returning overpayments back into state coffers: “If a charter school must repay the state for unjustified enrollment figures, state Auditor Dave Yost wants the sponsor and for-profit companies that oversee and run the school to share the burden. Charter school boards… need to recoup payments made to management companies, software developers and sponsors that are paid based on a percentage of school revenue, he said.”

Siegel quotes Yost: “I understand that this may produce significant difficulty for some… (charter) schools, and for their management companies and sponsors… But if a school was over-funded, it must not result in a windfall profit for a private company, while the school itself suffers with reduced funding.”  Yost warns schools that they are responsible for going after the dollars overpaid to their sponsors and contractors: “(Y)ou have an obligation to go and retrieve a portion of that revenue… This isn’t an option, in our view.  You are a public entity, a public school.  You owe this to taxpayers, the state and to children to retrieve those resources.”  He continues: “I’m sure the private companies are not voluntarily going to write a check for several million dollars and send it back.”

Siegel adds that William Lager’s privately held companies, IQ Innovations (which provides curriculum for ECOT) and Altair Management (which operates the school), have profited, just as ECOT’s nonprofit sponsor has also over-collected from ECOT: “The state Board of Education this year, following a department attendance audit and a ruling from a state hearing officer, ordered ECOT to repay $60 million to the state after the school was unable to verify roughly 60 percent of its enrollment for 2015-16.  Yost said that means ECOT should recoup $9.6 million from IQ, $2.4 million from Altair and about $900,000 from the Educational Service Center of Lake Erie West in Toledo, the school’s sponsor, which gets 1.5 percent of its revenue each year.”

Is there reason to fear that ECOT will declare bankruptcy to avoid paying back the tax dollars the state has overpaid?  Siegel reports that in late July, “ECOT”s board voted to slash spending by $56 million for the coming school year, including the layoff of 250 employees.”  Then last Friday, ECOT’s superintendent, Rick Teeters announced that he will resign next month to spend more time with his family.  Dave Yost worries that William Lager, the owner of the private, for-profit companies that run ECOT, will try to protect his profits by having ECOT declare bankruptcy.  In the Plain Dealer, Patrick O’Donnell reports, “Yost… questioned whether ECOT has the ability to declare bankruptcy.  He called it a public entity subject to different bankruptcy rules that individuals or companies and said it would need permission from the state tax commissioner to do so.” O’Donnell speculates as well that, “Yost’s stance may give other boards legal cover to demand re-payment from contractors, since they have now been ordered to do it.”

Overpayments by the state to ECOT for the school’s apparent gross inflation of its enrollment figures are much larger than for smaller online charters, but Jim Siegel reported on Saturday that, “(O)ther online charter schools also face repayments, and a few others have shut down. One school, TRECA Digital Academy, recently reached a tentative settlement to repay $5 million, to be deducted over five years… The Department of Education also reached a smaller settlement with the Massillon Digital Academy… Akron Digital Academy is awaiting a decision from the hearing officer. Appeals are ongoing for Buckeye Online School for Success, Findlay Digital Academy, Quaker Digital Academy and Reynoldsburg-based Virtual Community School, which was just taken over by the state.”  Three online schools have closed—Provost Academy (which paid back the state in full), Marion Digital Academy, and Southwest Licking Digital Academy, which still owes $140,500 to the state for inflated enrollment figures it submitted.

The state’s overpayment to the Educational Service Center of Lake Erie West in Toledo—ECOT’s nonprofit sponsor—is only a tiny piece of the ECOT scandal. But Ohio’s reliance on nonprofit organizations as charter school sponsors—agencies often located across the state from the schools they supposedly oversee—agencies that frequently lack any experience in education—agencies poorly regulated by the state—is an enormous problem. In ECOT’s case, one can only imagine the sort of lax oversight imposed by the Educational Service Center of Lake Erie West when one observes the massive theft of state dollars paid to ECOT for phantom students. Last week this blog covered other serious problems with Ohio’s nonprofit charter school sponsors.