BASIS Charter Debt: Pyramid-Like Dependence on Opening New Schools?

In April 2017, I began examining the growing debt of Basis Charter Schools, which originated in Arizona and have since expanded to Washington, DC, and Texas. In the resulting post, I explore Basis’s finances in detail. The post is worth a read in its own right, but for now, let me offer some excerpts:

It sounds like BASIS is pretty AP-centered; even on its curriculum/diploma webpage, BASIS counts AP exams as “foundational for learning.”

And for all of its detail, the same curriculum/diploma webpage alludes to BASIS’s founders only in general terms: “founded by two economists.” No names.

Still, one can find those names on the BASIS “about” page:

Michael and Olga Block.

BASIS is a tough school; one gains this sense by reading the ~160 comments on the GreatSchools BASIS Scottsdale page. And for more on the BASIS school story/debate, one can read the back-and-forth between Network for Public Education (NPE) Executive Director Carol Burris and BASIS CEO Peter Bezanson (be sure to read the comments on Bezanson’s opinion piece, which connect to this Washington Post editorial by Burris).

What caught my attention in the above-noted BASIS Schools exchange is the back-and-forth over BASIS’s overhead and alleged financial struggles.

So, I read the BASIS Schools tax forms, which tell an interesting story about Michael and Olga Block and some of their extended family. …

As of December 2015, BASIS also has an LLC on file to manage its schools, BASIS Educational Group, LLC. (One can see this management group listed at the bottom of this BASIS Scottsdale school webpage, for example.) BASIS Educational Group has existed since 2009 (more to come on this history).

The managers of all of the BASIS entities are Michael and Olga Block….

In FY2004, total revenue was $3.1 million; end-of-year net assets were $124,000. No end-of-year negative balance yet. …

In FY2005, BASIS is still in the black: $3.7 million in total revenue; end-of-year net assets of $135,636. …

And in FY2005, Michael and Olga Block begin employing their relatives. Michael Block’s son Robert is paid $13,769 for “IT services,” and Olga Block’s daughter, Michaela Vyborna, is paid $7,453 for “PR material design.” …

Spending cuts it a bit closer in FY2006: Total revenue is $5.1 million, and end-of-year net assets are only $23,000. …

And more Block relatives are added to the payroll. Olga Block’s sister, Katerina, Schmidtova, is paid $36,893 for “accounting services (provided in Czech Republic)”; Olga Block’s daughter, Michaela Vyborna is paid $4,868 for “PR material design”; Michael Block’s son Robert is paid $8,500 in “employee compensation,” and Olga Block’s daughter, Petra Vyborna, is paid $2,550 in “employee compensation.” …

As for FY2007, total revenue is up ($7.4 million), but the end-of-year net balance is in the red for almost half a million dollars….

Note also that in FY2007, the BASIS School tax return first includes a name listed under “five highest paid independent contractors for professional services”: Olga’s sister, Katerina Schmidtova, who “performs her services in Czech Republic via the internet,” is paid $61,461 for “accounting serv. and consultancy.” …

On to FY 2008. Total revenue is up slightly ($7.7 million), as it the negative end-of-year net balance (-$798,000). …

[FY 2009] Total revenue is $9.2 million. And again, end-of-year net assets are in the hole: -$658,000.

Now, pay attention to FY 2010:

In FY2010, BASIS School’s total revenue rises notably: $14.3 million. (In FY2010, BASIS opens a new school: BASIS Oro Valley, which could account for the jump in revenue.) Its end-of-year net assets are still negative, but less so (-$25,604). [Emphasis added.]

Opening a new school helped in-the-red BASIS to land in the black for a moment.

For a moment:

In FY2012, total revenue again soars: $35.3 million.

However, the negative end-of-year fund balance was now in the seven figures: -$2.1 million. …

In FY2013, total revenue is up ($51.8 million), but not as high as total expenses ($56.3 million). Figure in last year’s deficit of -$2.1 million, and now, BASIS Schools has a FY2013 end-of-year fund balance of -$6.5 million. …

In FY2014, BASIS Schools’ total revenue is $68.5 million– and its total expenses are $72.7 million. Plus, there’s the previous deficit of -$6.5 million. Sooo, by the end of the year, BASIS Schools, Inc., has a fund balance of -$15.3 million.

Still, BASIS Schools pays BASIS Educational Group (AKA Michael and Olga Block) $10.5 million in management fees and $44.3 million in employee leasing costs.

Basis continues to accrue debt. However, it also continues to try to open new schools.

That seems to be the secret to its financial sauce: Use the revenue generated from opening new schools to make money while forestalling the crash of snowballing debt.

On May 11, 2018, in an article entitled, “Has Basis Used Arizona Tax Money to Open Schools in Texas, Washington, DC?”, AZ Central briefly alludes to this pyramid-styled dependence upon recruiting more clients/investors, or, in this case, opening new schools– but not until the end of the piece.

I think AZ Central has hit on a critical component of the Basis financial strategy without realizing just how critical a component it is to Basis survival.

The AZ Central article first states that school expansion has “plunged” Basis “into debt”; however, AZ Central does not closely examine how the Blocks spent money (on themselves and their relatives) prior to expansion– nor does AZ Central consider that Basis was in the black in FY 2010 likely because it opened a new school.

Yes, Basis’ debt increased, but I think Michael and Olga Black realized they were on to something in FY 2010 with the opening of Basis Oro Valley. From AZ Central:

Since 2012, Basis has more than doubled the number of schools it operates in Arizona to 20, while opening three more in Texas and one in Washington, D.C. …

Basis had $274 million in long-term debt as of June 30, 2017, according to its audit.

In essence, Basis uses governmental entities to borrow funds, and then uses tax dollars to pay back that debt on the property it owns.

Basis’ debt is growing, and it needs increasingly more of those “tax dollars” to keep going.

No problem: Increase the number of schools, increase those tax dollars.

Tax dollar addiction.

Basis tries to blame the debt on expansion. From AZ Central:

During its recent expansion into Texas and Washington, D.C., Basis’s consolidated financial records show it has gone from making a $688,632 profit in June 2012, to a cumulative $32 million deficit as of June 30, 2017, an audit filed with the Arizona Charter Board shows.

Millions of dollars in fees related to its borrowing have contributed to that deficit.

In 2017, Basis reported a $9.1 million deficit, the fifth consecutive year with an operating deficit, records show. During that time, Basis absorbed at least $18.5 million in loan prepayment penalties as it funded growth in Arizona and elsewhere.

Rowe, Basis’ executive director, downplayed the deficit’s significance.

Basis’ deficit was not caused by overspending, she said. Instead, Basis is reporting “book losses” because of depreciation and debt refinancing related to its expansion, Rowe said.

The real test regarding whether or not Basis is dependent upon the tax dollar revenue generated by opening new schools is to put the brakes on Basis expansion and see what happens.

My prediction is that Basis will be crushed under the weight of its profound debt.

The fact that Basis is addicted to opening new schools is not lost on all interviewed for the AZ Central article:

Curt Cardine, who specializes in school finance as a fellow with the Phoenix-based nonpartisan Grand Canyon Institute think tank, said if Basis stops growing and recruiting new students it could face financial trouble.

“What do you call an investment where you have to keep bringing in more investors? That’s what this is looking like,” Cardine said. “They are betting with the revenue that will come in.”

What do you call an investment where you have to keep bringing in more investors?

A fraud.

Consider the following from Investopedia regarding pyramid schemes:

The process continues until the base of the pyramid is no longer strong enough to support the upper structure, and there are no more recruits.

The problem is that the scheme cannot go on forever….

The fraud lies in the fact that it is impossible for the cycle to sustain itself….

In the case of Basis schools, Michael and Olga Block cannot go on opening new schools ad infinitum.

If they are dependent upon opening new schools (as they seem to be), they are setting up all Basis schools for financial collapse.

Basis Schools: 

$274 million in long-term debt as of June 30, 2017, according to its FY 2017 audit.

___________________________________________________________________________________

Want to read about the history of charter schools and vouchers?

School Choice: The End of Public Education? 

  (Click image to enlarge)

Schneider is a southern Louisiana native, career teacher, trained researcher, and author of two other books: A Chronicle of Echoes: Who’s Who In the Implosion of American Public Education and Common Core Dilemma: Who Owns Our Schools?. You should buy these books. They’re great. No, really.

Don’t care to buy from Amazon? Purchase my books from Powell’s City of Books instead.