Charter school CEO says Muskegon Heights schools owes company $2 million

Apr 21, 2014

The Muskegon Heights charter school district owes the company that’s operating its schools a little more than $2 million. That’s according to Mosaica Education’s CEO. 

The new charter district was created in Muskegon Heights when severe cash problems prompted a state takeover of the traditional school district by an emergency manager in 2012. Now the charter district is having cash flow problems of its own.

The district couldn’t afford to pay its teachers and staff March 30 or April 15. The state of Michigan fronted the district $422,000 to cover payroll. The money was advanced from the district’s state aid payment, which typically is distributed on the 20th of the month. After debt obligations, that payment is around $455,000.

Mosaica Education’s CEO Mike Connelly says there are “plenty” of times when the company covered the costs of starting a new charter school before it could turn a profit.

“This one is an outlier for us. It’s much less payments to us, zero (this school year) and much more advances to the school, almost a million dollars. So it’s not our normal operation but it’s not a freak of nature though,” Connelly said.

"We consider ourselves social entrepreneurs. We have a double bottom line. Our most important things is the success of the schools we operate," he said.

Teachers and staff at Muskegon Heights schools work for Mosaica. The company is responsible for paying them, but the district, Muskegon Heights Public School Academy (MHPSA) is responsible for funneling the school aid payments to cover operating expenses, Connelly said.

MHPSA school board and its attorney have declined repeated requests for comment on the ongoing cash flow problems.

Mosaica’s view on how the cash flow problems compounded

July 2012: Building repair costs

MHPSA signed a five-year contract with Mosaica Education on July 9, 2012. At the same time, Michigan’s Department of Licensing and Regulatory Affairs (LARA) was completing building inspections of the district’s four schools required by state law. The school buildings were used previously, but inspections were prompted because the buildings were being used by the new charter school district.

LARA reported the inspection results to MHPSA a week after the contract was signed. Connelly says the buildings needed roughly $700,000 in improvements so LARA would agree the buildings were safe to open for students in the fall.

Connelly says they had only budgeted for $150,000 in repairs. He says Mosaica fronted the district money so schools could open in the fall.

All four buildings were granted temporary occupancy permits because some work still needs to be completed. Records show temporary permits were issued and renewed throughout the 2012-2013 school year. Those temporary permits are still in place and expire in June 2014.

"There are disagreements as to what actually needs to be done (to repair the buildings). I'm not even sure that we understand now exactly what LARA wants to have done," Connelly said.

He says the issues need to be resolved before next school year. He could not estimate how much more needs to be spent to bring the buildings up to code. Connelly and the district’s emergency manager say some of the buildings may be closed to consolidate the student population.

June 2013: “Surprise” special education costs

Muskegon Heights had problems complying with laws and rules regarding special education before the state takeover in 2012. But many compliance problems lingered once Mosaica took over.

Mosaica’s  Connelly says special education services cost up to $400,000 more than MHPSA had budgeted for in the 2012-2013 school year.

Then in June, Muskegon Area Intermediate School District sent MHPSA a bill for $267,000 that Connelly says was “a surprise.” The bill was for students who live in the Muskegon Heights district that are enrolled in MAISD’s Wesley School, for students with severe cognitive impairment, autism and other special needs that cannot be addressed with typical education services at the district.

An official with MAISD says the bill should not have been a surprise because it’s noted in the contract between Mosaica and MHPSA. But the official said it’s understandable that Mosaica may not have been familiar with the arrangement because these costs usually aren’t picked up by charter schools, only traditional districts with school boundaries. Because MHPSA replaced the traditional school district, it has boundaries and must pay for special-needs students within those boundaries who attend Wesley School.

“The concept that that might happen was familiar to us but we did not get the bill and did not know what the bill was for until June (2013),” Connelly said.

July 2013: School district ends fiscal year with a deficit

By the end of the fiscal school year, MHPSA school board had not yet covered the building repair costs, causing a deficit in the capital improvement fund. Connelly says the plan was to sell long-term bonds to cover the repair costs, but he says that didn’t happen. The board used money from the district’s general fund to cover the deficit instead. But that caused a deficit of $593,000 in the general fund.

October 2013: Students don’t show up 

To make matters worse, Mosaica and the MHPSA school board expected more than 1,100 students to enroll in the 2013-2014 school year. But only a little more than 900 students actually enrolled.

The state provides MHPSA $7,168 per student. That means the district will get more than $1.4 million less than it originally budgeted for this school year.

Connelly says the company and MHPSA school board did institute some mid-year cuts. He characterized them as “nothing dramatic,” noting the district didn’t get rid of the athletic program as an example. But he says classes were consolidated and the middle school principal was laid off. Together, Connelly estimates the changes amounted to a few hundred thousand dollars.

Data from the Michigan Department of Education
Data from the Michigan Department of Education
Credit Lindsey Smith / Michigan Radio

Emergency manager Gregory Weatherspoon estimated earlier this school year only 1 in 3 school-aged students who live in Muskegon Heights attend their home school district.

“If the enrollment does not come back we need to be intelligent in the way we make the cuts on a going forward basis. We need to find other sources of revenue for the district. But I think it's way premature to give up on the Heights,” Connelly said.

December 2013: Cash flow problems get serious, Mosaica begins to cover payroll

In December, Connelly says MHPSA School Board Chair Arthur Scott, Emergency Manager Gregory Weatherspoon, representatives from Mosaica, Michigan Department of Treasury, Michigan Department of Education, Gov. Rick Snyder’s office “and a bunch of lawyers” met in Lansing.

"I basically said 'look here's the situation, we have not received any payments this year for our management fee, or for anything else for that matter," Connelly said. "So we're working for free. And we were willing to continue to do that but we need to figure out some relief."

He says the group came out of the meeting with a Deficit Elimination Plan (DEP) that MHPSA submitted to the state in December.  He says the DEP called for MHPSA to borrow $650,000 from Charter School Capital (a charter school finance company, the same group he says financed the state anticipation note to improve the buildings in summer 2012) to cover the deficit MHPSA’s capital fund.

Connelly says the DEP also called for MHPSA to refinance a loan it got in the summer of 2013 from the Michigan Finance Authority (MFA) to begin the school year. The loan works as an advance of the district’s monthly state aid payments to help with cash flow.

Connelly says MHPSA only owed about $900,000 to MFA at that time. “So the plan was to borrow the $650,000, refinance the $2 million, which would give us another $1.1 million, so we’d have $1.8 million in cash to get us through the school year,” Connelly explains. “Effectively (Charter School Capital) was relying on Mosaica’s credit rather than the PSA’s credit.”

MDE declined to immediately provide a copy of MHPSA’s deficit elimination plan to Michigan Radio.

January 2014: A plan in place but nothing happens

Michigan’s Department of Education (MDE) is charged with approving or rejecting a school district's DEP. But Connelly says “the state came back to us and said we’re swamped with Deficit Elimination Plans. We won’t have time to look at yours during January.”

No one panicked because, Connelly says, MDE told the district the delay would not affect MHPSA’s monthly state aid payments. In the meantime, Connelly says, Mosaica began fronting MHPSA cash to cover payroll. Sometimes the company was repaid, sometimes it wasn’t, he says. He estimates MHPSA owes Mosaica between $700,000 and $1 million for payroll advances this school year.

March 2014: Mosaica can't front any more cash, MHPSA turns to the state

Connelly says MDE told MHPSA in early March it would approve the DEP if the school board got a commitment letter from Charter School Capital and the board formally voted to request the loans.

“MDE said ‘submit those things; if there are no surprises this will be formally approved by the Department of Education. Then you can go to get formal approval from treasury and borrow the money and close and everything will be hunky-dory,” Connelly said.

But just as the school board was set to vote, Connelly says they encountered another hiccup. The emergency manager send school board a letter before the March 17 board meeting.

“When I say just before, I mean within a half hour of when the meeting was supposed to start or something like that, asking for more detailed information about the loans and about financing and operations and what not,” Connelly said.

So the board didn’t vote on the financing. Mosaica couldn’t front the district any more cash and that’s when the district turned to the state because it could not pay teachers and staff on March 30.

Michigan’s Department of Education weighs in

Michigan’s Department of Education disagrees with parts of Connelly’s view of the events. MDE’s Bill DiSessa replied with this written statement:

The statement that we did not respond to the Deficit Elimination Plan (DEP) until March is incorrect. In late January, a Michigan Department of Education (MDE) employee discussed the DEP and whether to borrow to eliminate the deficit with a Mosaica finance executive by phone and email. At that time the same MDE employee sought input from Treasury on the academy’s ability to borrow.

It is true that the MDE indicated it had to be satisfied with the academy’s ability to borrow from an outside lender, and that a copy of a commitment letter from a lender was needed before the DEP could be approved. We did receive the commitment letter, but Treasury indicated it had some questions about the letter.

This Monday an MDE employee emailed the same Mosaica executive requesting a revised DEP that would, as part of due diligence, accurately identify the funding source for repaying the borrowed funds. We have not received a response to the email.

The MDE understands the seriousness of deficit districts and the importance of responding timely. Our record speaks for itself.

DiSessa says it’s “very uncommon” for the state to provide an advance of state aid payments. It did it three times in 2012 for Highland Park Schools. In 2013 advances were provided for Pontiac and Detroit schools and the Education Achievement Authority. This year an advance went to Flint schools and, so far, twice to MHPSA.

State law allows the state superintendent, state treasurer and state budget director to sign off on advances when certain conditions are met, including proof the need is “temporary and nonrecurring nature.”

DiSessa says State Superintendent Mike Flanagan signed off on the advances “based on an understanding from MDE conversations with Treasury and MHPSA, that MHPSA will not be requesting additional state aid advances in order to meet payrolls every two weeks, and that Treasury is working with MHPSA on other funding options to cover these payroll obligations.”

Plan to pay teachers on April 30 and beyond still not clear

MHPSA Emergency Manager Gregory Weatherspoon did not respond to requests for comment for this updated story.

“We’ve been advised that (MHPSA) have alternative financing to take care of cash flow for the rest of the year and eventually repay our advances and we’re looking forward to working with them to make that happen,” Mosaica Education CEO Mike Connelly said.

MHPSA school board has a regularly scheduled meeting tonight, but a source within the Michigan Department of Treasury says there’s still no financing lined up at this time. The source, who asked not to be identified, indicated the refinancing option through Charter School Capital “is not a likely option.”

“It’s very frustrating that these adult issues, if you want to call them that, it’s not just that they overshadow (academic improvements at the schools) it’s that they eliminate any discussion of what’s going on in the school,” Connelly said.

The company put out a release detailing the academic turnaround late last week.