February 28 — 7:19 am, 2019

American Paradigm’s bid for fifth charter raises questions about independence

School board will vote on this charter and two others at tonight's meeting

The school board's hearing officer, Allison Petersen during the hearing for a new charter school in January 2019. Credit: Greg Windle

American Paradigm Schools is seeking to expand, applying to open a fifth charter school under its management in northeast Philadelphia this fall. But at hearings in January, the Board of Education’s representative questioned whether the board of the new school would be truly independent of its charter management company, as required by the state charter law.

The school’s proposed bylaws “allow [American Paradigm] to control and limit the actions of the board” of the new charter school, according to an evaluation by the Charter Schools Office. Of the 10 members on the school’s founding coalition, eight are officers at American Paradigm. The other two are a principal and CEO of another American Paradigm school, Tacony Academy, which the new school would replicate.

Leading the founding coalition is Gerald Santilli, former chief financial officer of the Philadelphia School District. In 2004, he founded Santilli & Thomson, the accounting firm that keeps the books and negotiates contracts for American Paradigm, all of the management company’s schools and the foundations that hold the property of those schools. Before becoming the other founding partner in the firm, Mark Thomson was director of financial systems for the District.

Santilli became CEO at American Paradigm in late 2017, while he was still a partner in Santilli & Thomson. He represented the proposed new charter school at its hearing, where the school  board was represented by hearing officer Allison Petersen.

“You no longer have any interest in Santilli & Thomson?” Petersen asked.

“Correct,” Santilli said, adding he left in May of 2018. “No financial interest and no management role.”

“I believe it’s your daughter, Katie, who is identified as both a founder of this school and also employed at Santilli and Thompson?” Petersen asked.

But Santilli said his daughter left Santilli & Thompson. Since May of 2018, when Santilli became CEO, she has worked for American Paradigm Schools as the Chief Business Officer.

The new school would be called Tacony Academy at Saint Vincent’s, a K-8 school modeled after American Paradigm’s existing K-12 school Tacony Academy. Saint Vincent’s would open with 400 seats in grades K-3 this fall, and expand to 900 seats in grades K-8 in year six, by adding one grade with one hundred students each year. The annual cost to the school district would be nearly $11 million by year five, according to the school’s application.

The board’s bylaws allow American Paradigm to control the school

American Paradigm Schools is the management company contracted by four charter schools, and would be for the new school as well. Under the charter law, each charter school is supposed to be run by an independent board that can choose to contract a management company.

But the bylaws state the new school’s board can only nominate new board members if the board of American Paradigm votes to approve them first. American Paradigm’s board also must vote to approve the removal of any board member, must approve the filling of vacancies, and must approve any change to the bylaws.

The proposed board members were recruited by the founding coalition, fully staffed by American Paradigm. The Charter Office mentioned that they were qualified in general, but do not live in the community surrounding the school. Santilli and his founding coalition recruited the board members.

“The majority of the proposed board members live at least 1 hour away from Philadelphia and as far away as Maryland, raising concerns about their knowledge of the needs of the targeted community,” the Charter Office concluded.

The office also cited inconsistent management fees. At the new school, like most of its schools, American Paradigm will collect 7 percent of the school’s revenue. But at Memphis Street Academy, the most struggling school with the largest portion of high-needs students, that fee is 10 percent.

Under questioning from Petersen, Santilli admitted none of the proposed board members had reviewed the management contract.

A host of contractors

Many contractors listed in the application are used at other American Paradigm schools. Santilli repeatedly insisted that contracts would be “put out to bid” and decided by the board, even in places where the application listed a long-time American Paradigm contractor as if the decision was already made.

Board minutes for the other American Paradigm schools show a common pattern: contractors are not initially sought out by the boards. Instead Santilli & Thomson finds contractors, often with American Paradigm’s legal counsel Sand & Saidel, which is brought on as counsel for each school after American Paradigm takes it over. The firms bring contracts before the board, and are typically authorized by the board to negotiate the contracts themselves, along with the school’s CEO. Contracts are rarely put out to bid.

“The Applicant has not provided a clear rationale why [American Paradigm] was chosen as management organization. Other expert service providers, such as MIP, R & A Personal Touch Cleaning, etc. were listed, but not described or given a rationale.”

R & A Personal Touch Cleaning was awarded contracts by the boards of every American Paradigm school – all within the course of one year, according to the schools’ board minutes. Saint Claire CPA holds the contracts for conducting independent audits of each school’s financials. The names of over a dozen different contracted vendors appear throughout the application for facilities services, payroll, accounting, auditing, custodial services, food services, special education therapy and legal services. And American Paradigm will provide curriculum from 9 different vendors.

“Would it be the charter school itself directly contracting those vendors, or will American Paradigm directly contract them?” Petersen asked.

“American Paradigm Schools will solicit the [Request for Proposal], collect the information, and try to negotiate prices,” Santilli said. “But the actual contract is between the school and vendor, approved by the board of trustees at the school level. So we just facilitate the contract.”

But American Paradigm seems to have already made many of those decisions. Santilli said the food service contract would be put out for a bid, but Petersen noted that the application already included a contract with Maschio’s Food Service, a contractor used by three other American Paradigm schools. Petersen said that contract, along with others included in the application, appeared to have been copied and pasted from a contract with one of the other American Paradigm schools.

American Paradigm’s application agreed that board members would follow the typical non-profit policy for disclosing financial conflicts of interest. But this is a policy that each school’s board regularly violates, according to regular evaluations by the Charter Office. Members of the boards submitted financial conflict of interest forms, but on many sections sections were left blank, such as income and gifts.

Part school, part real estate deal

Another source of controversy is the property: a massive 13-acre campus on the Delaware river at 7201 Milnor Street owned by the Archdiocese that once housed an orphanage called St. Vincent’s. It is surrounded by industrial facilities and adjacent to a superfund site – designated by the Environmental Protection Agency as temporarily remediated.

American Paradigm first tried to buy the property in 2013. It planned to put a new high school there. But the Archdioceses changed its mind, not wanting to sell to a charter school that would compete with their Catholic schools in the Northeast. So it broke the “gentlemen’s agreement” and American Paradigm settled on a smaller property, as Santilli told the Northeast Times.

A letter of intent to sell states the price will be $5 million, though it also states it is a non-binding document. The school’s budget shows American Paradigm plans to spend $1.3 million renovating some existing buildings for the new school to use.

The renovations leave buildings and space unused. The school won’t have an auditorium, but it will have a small cafeteria, media room, a large gym and a science lab. Plans also show a huge area reserved for baseball and football fields.

Santilli also mentioned that the city is building a river-path through the campus that connects to planned waterfront parks along the Delaware river. The project is a partnership between a group of estate developers, the city of Philadelphia, and the William Penn Foundation.

“They are going to come in with eminent domain and take a portion of our property along the river,” Santilli said. He added, “there is a property owner suing over the eminent domain, so it’s in court right now.”

Selling bonds to buy the property

Though American Paradigm would spend just $6.3 million acquiring and renovating the property for the new school, Santilli said at the hearing that American Paradigm plans to issue between $20 and $22 million in bonds. He plans to issue these bonds through BB&T bank. If BB&T does not immediately agree, American Paradigm will loan the new school the money it needs at the low rate of 3 percent interest.

American Paradigm would raise money through tax-exempt bonds with the same circular real estate arrangements it made at its other schools. Bonds are issued using the school’s assets as collateral and American Paradigm will establish a foundation that would own the building. The foundation leases the building to the charter school, allowing it to collect state lease-reimbursements that are available only to charter schools that rent.

Santilli called it a “mother-daughter relationship.” The foundation would hold the bond money. The new school would pay $2 million annually in debt service to the foundation by year five.

The president of each school’s foundation is Mark Piech, a member of American Paradigm’s board.

Petersen noted that this arrangement was not described in the application and asked what entity would incorporate the foundation. Santilli said it would be American Paradigm’s counsel, Sand & Saidel.

Sand & Saidel incorporates all the schools and associated nonprofits, holds legal contracts at each school, and helps negotiate individual contracts for the schools along with Santilli & Thomson. It is also run by Daniel Saidel, brother of former Philadelphia city controller Jonathan Saidel who has long been rumored heir to Bob Brady’s seat as chairman of the Philly Democratic party.

Santilli & Thomson has been in business with Sand & Saidel for years, negotiating bond issues for charter schools to buy and renovate school buildings. The firms collect a cost of issuance fee, which increases with the amount issued in bonds. One of these schools, String Theory, had to lay off teachers and discontinue elective courses due to large debt service payments, according to an investigation by the Inquirer.

Like the new charter that American Paradigm is applying for, Santilli & Thomson typically helps found these schools before the bonds are issued.

Large cash reserves, bigger debt

The schools have large amounts of cash reserves, far higher than the charter school average and the ratio recommended by the District.

But the schools that bought their own buildings through bonds also have large debts. As of 2017, when they were last audited, the foundations of those two schools were $162 million in debt including interest.

Michael Masch, a former chief financial officer for the District, said,“The merit of charter schools is that they only get renewed, in theory, if they perform. There is a built in contradiction between that and taking on long-term debt.

“You are loaning money for 20 or 30 years to an entity that’s given a 5-year contract to run a school. It seems to me there is a potential for default on the bonds.”

Tacony Academy is $69.8 million in debt, including interest. The principal is just over $31 million.

First Philadelphia Preparatory Charter high school has $92.7 million in debt left from its most recent bond issue in 2014, including interest. That comes from a bond issue of $41 million in principal, which was used to expand the school facilities and refinance the school’s remaining $16 million in debt from its 2014 bond issue, which was in turn used to refinance $15 million in debt remaining on bonds issued in 2007. In the process of refinancing, it pushed back the end-date of the debt from 2037 to 2043.

Masch, now the Treasurer of Howard University, added that refinancing is not ideal in recent years when interest rates have been rising. He was particularly concerned with pushing the term of the debt years into the future.

“Believe me, I’m always looking for opportunities to refinance, but this is not a good environment for that,” Masch said. “They’ve actually extended the terms of the debt so the burden on the organization has to be carried for a longer and longer period of time.”

“You should be fully paid off in the original term for which you issued the debt” before issuing more, Masch added.

The Superfund site next door

Christina Grant, interim chief of the Charter Schools Office, was concerned that the application included no information about the adjacent Superfund site that the EPA has deemed to be toxic although temporarily remediated.

The Superfund Site, The Metal Bank, is a former scrap metal and transformer salvage site where oil was drained from used transformers to reclaim their copper parts. The site drained the oil into “various locations” on the property, according to the EPA, with the majority going into an underground storage tank that is still there. In the 1970s, the Coast Guard found the tank was releasing oil into the river, and the owner put an oil “recovery” system in place.

The EPA got involved in 2008 to further remediate the site, but concluded the “remedy” is only effective “short-term.” This concerned Peng Chao, senior director of the Charter School Office.

The 2013 report from the EPA said that at the time there was not a present danger, but there were concerns from the EPA about the ongoing upkeep of that facility,” Chao said. “The 2018 report was not accessible, and we were not able to reach the EPA in the last month.”

Petersen asked if Santilli had determined if the site was currently safe.

“We examined that property approximately 10 years ago for purchase,” Santilli said. “We were told that there were no issues at the time, and we had an environmental consultant evaluate the property.”

Petersen asked if they’ve done an environmental assessment since then.

“We plan to,” Santilli replied. When asked if American Paradigm had taken any steps towards hiring that consultant, Santilli said they had not yet done so.

Recent committee hearing

At a meeting of the school board’s student achievement committee in late February, Santilli testified about the new application.

“We expect to have the contract with the archdiocese of Philadelphia signed next week,” he said. “We also have confirmation from the EPA that the superfund site that was located next door has been remediated and the site is clean.”

The EPA confirmed that the 2018 review has been conducted, and the site is still safe. EPA will conduct another review in 2023 to ensure it remains safe. 

“The contaminated soil and sediment were excavated and/or capped, Building 7 was sealed with epoxy, institutional controls are in place for the upland property, and long-term monitoring is being performed,” the 2018 review concludes.

Santilli criticized the “commentary” from the Charter School Office, referring to the evaluation the office conducts for the school board, which cited insufficient staffing in the budget and also some inconsistencies in the amounts of various line items.

“For people who don’t know me, I was the CFO for this district when it was the fourth largest school system in the country with a $1.2 billion budget,” he said. “I don’t believe there’s anybody in the Charter School Office that could question a budget that my organization prepared.”

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