City Controller Alan Butkovitz's investigation of 13 Philadelphia charter schools found repeated examples of complex real estate arrangements in which charters leased or rented facilities from related nonprofit organizations.
"The way the charter law is written and not enforced, there is a gigantic loophole through which people can profiteer," Butkovitz said. "This is not supposed to be a vehicle for maximizing profit for operators and related parties."
Butkovitz began his special fraud investigation of charters several months after The Inquirer reported allegations in April 2008 of financial mismanagement and conflicts of interest at Philadelphia Academy Charter School.
His staff has been sharing information with the U.S. Attorney's Office, which is conducting a criminal investigation of at least nine area charter schools, according to sources with knowledge of the probe.
Butkovitz's complete report, which will include findings on the Philadelphia School District's oversight of 67 city charters and recommendations for tightening state law, is scheduled to be released Thursday afternoon.
The charters Butkovitz focused on include Harambee Institute of Science and Technology Charter School in West Philadelphia. He released part of his report March 30 after 6ABC reported that a nightclub operated inside Harambee on weekends.
"The fact there were significant issues at 13 out of 13 raises the likelihood you would see many of these same issues found in a much larger sampling of the schools," Butkovitz said.
Among those 13 schools, four were the subject of extensive focus by Butkovitz for complex real estate maneuvers, apparent conflicts of interest, and salary arrangements for chief executive officers, according to a draft of the report obtained by The Inquirer:
Franklin Towne Charter High School. Franklin Towne, at 5301 Tacony St. in Bridesburg, opened in 2000. After Joseph Venditti, a lawyer, stepped down as board president in 2005, he became the school's chief executive with a $108,173 salary. His salary and benefits rose rapidly, and his total compensation was $236,281 in 2008.
The controller's office found several questionable practices at Franklin Towne in addition to Venditti's more than doubling his compensation in three years.
The charter, with 929 students, owns its building in the former Frankford Arsenal and leases the property to Franklin Towne Holdings L.L.C. Venditti created that for-profit company, which sublets the building back to the school. He signed the lease and sublease as manager of the company and CEO of the school.
The circular arrangement enables the school to obtain state rent reimbursement. Venditti did not respond to e-mail and phone messages seeking comment.
Preparatory Charter School. At 1928 Point Breeze Ave. in South Philadelphia, Prep Charter is a high school known for a program that allows seniors to take classes at Community College of Philadelphia and for its sports teams.
The charter took CEO John Badagliacco off the payroll Sept. 1, 2007, so he could retire and collect his state pension. He remained CEO under a five-year management contract with Education First Inc., a firm he created.
The controller's office found that Badagliacco was paid $198,220 in 2009. In addition, state pension records obtained by The Inquirer showed he collected a monthly pension of $7,100, bringing his total salary and pension to $283,420 a year.
Prep Charter opened in 1998 at 1631 E. Passyunk Ave., a building that Badagliacco had acquired from his mother. In 2003, the charter bought its current facility, a vacant former grocery store, for $875,000. The charter spent $2.6 million to gut it and convert it into a school.
The next year, the school transferred ownership to the nonprofit Friends of the Preparatory Charter School for $1, the report said. The charter and the nonprofit have the same board members.
Badagliacco is on vacation and not available for comment. Joseph G. Caruso, an attorney on staff at the charter school, said Wednesday that ownership of the property had been transferred to the nonprofit before it was rehabbed.
Prep Charter has a 14-year lease with the nonprofit, and records show the school pays $660,000 in annual rent. Caruso said the money paid the construction loans.
According to the nonprofit's records, its only income is charter rent and investments. Before obtaining the Point Breeze property, the nonprofit had zero assets. By 2008, its assets totaled $5.4 million.
Caruso was paid a salary of $79,256, according to 2008 tax records. Like other employees at the school, he participates in the state teachers' retirement system.
Butkovitz's office questioned Caruso's participation, saying the retirement system does not cover school counsels. Caruso said the charter's board had hired him to handle all the school's legal matters. He said no one else had questioned his participation in the pension system.
People for People Charter School. The charter enrolls 534 elementary students at 800 N. Broad St. It is one of only two charter schools examined by the controller's office that failed to meet the academic benchmarks of the federal No Child Left Behind law.
The charter is just one of the projects created by the Rev. Herbert H. Lusk II, pastor of Greater Exodus Baptist Church. Lusk, a former Eagles player, founded People for People Inc. as a community nonprofit in 1991 and established the charter school a decade later. He is president of the nonprofit and board chairman of the charter school.
Several of the charter's administrators and board members have ties with the nonprofit and Lusk's church. The nonprofit owns the charter's building. Omnivest Management L.L.C., a for-profit education-management company in Newtown, Bucks County, rents the second through sixth floors from the nonprofit. Omnivest, which has provided services to several charter schools, sublets 41,000 square feet to the charter school.
Lusk has signed the various lease documents as CEO of both the nonprofit and the charter school, the controller's office said. The nonprofit's tax returns show Lusk was paid $155,400 in fiscal 2007 and $162,129 in 2008.
Omnivest was founded in 2001 by B. Robin Eglin, who is the nonprofit's chief financial officer. The charter school pays Eglin's firm 9 percent of its total revenue for management services. In fiscal 2008, the amount was $626,344.
Rather than paying based on a percentage of revenue, the charter should pay fees based on services it receives, the controller said. Otherwise, Omnivest would be entitled to collect 9 percent if the charter received a donation, "even if it provided no services whatsoever."
Eglin could not be reached for comment.
The controller also found that Lusk's charter school had guaranteed the nonprofit's $7.3 million loans, including mortgages for properties the school did not use.
The charter, the draft report says, "is obligating future taxpayer funds to pay off loans on facilities owned by entities not controlled by the school."
Lusk declined to comment on Butkovitz's findings until he had seen the report.
New Foundations Charter School. The school, with 414 elementary students at 8001 Torresdale Ave. in the Northeast, is one of several city charters with ties to a politician. Sheryl S. Perzel, wife of State Rep. John M. Perzel, former Republican House speaker, founded the school in 2000 and served on its board for many years.
The school leases its building from 8001 Torresdale Corp., a related nonprofit, for $750,000. Under the lease, which runs until 2022, the charter is responsible for all taxes, insurance, and utilities.
Paul Stadelberger, New Foundation's CEO, is secretary of the nonprofit. The charter gave the nonprofit a $500,000 advance and guaranteed a $7.1 million loan, which the nonprofit took out on the school facility.
New Foundations has a contract with Santilli & Thomson L.L.C. for consulting, business management, and accounting. The charter declined to give Butkovitz's office a copy of the agreement, but tax filings show the charter paid the firm $122,848 in 2008.
Gerald Santilli and Michael Thomson are former board members of the nonprofit.
In addition to the contract with Santilli & Thomson, New Foundations contracts with the School Therapy Zone L.L.C. for occupational-therapy services for students. In 2008, the bill came to $65,820. Santilli is president of the company; Thomson is vice president.
Santilli said Wednesday that both contracts were with the charter school and not the nonprofit.
"This has nothing to do with the nonprofit," he said. "There is nothing wrong with that."
The controller's office report also pointed out that New Foundations received three grants totaling $529,747 from another charter school, the First Philadelphia Charter School for Literacy, between 2005 and 2007. Santilli founded First Philadelphia and was board president until last year.
The grants came when Santilli & Thomson began providing services to New Foundations, the report said.
"The purpose of the grants and the relationship between the grants and the services," the draft said, "and the services provided by Mr. Santilli's firm is unknown."
Santilli said the money was New Foundation's share of a joint grant the two schools received from the state Department of Education for after-school and tutoring programs. He said Butkovitz's office had not asked for an explanation.
"The city controller under the law doesn't have the right to audit charter schools," Santilli said, adding that his report was based only on public documents and information obtained under the state's right-to-know law.