The Pennsylvania Cyber Charter School, which was searched by federal agents Thursday, pays tens of millions of dollars a year to a network of nonprofit and for-profit companies run by former executives of the state's largest online public school.
The relationships between the Beaver County-based school and those businesses were a concern to former Gov. Ed Rendell's administration, which late in its tenure asked PA Cyber for better accounting of its payments to spin-off entities. Gov. Corbett's Department of Education, though, opted early on to let the relationships continue without heightened accountability.
The amount of public money that flows to PA Cyber and then out through its spin-offs has grown dramatically as the school's enrollment has surged to around 11,300 students statewide.
During the 2010-11 school year, the last for which data are available, PA Cyber got $103 million from school districts whose students enrolled in its home-based, Internet-delivered program. PA Cyber then paid $44 million to the National Network of Digital Schools Management Foundation, or NNDS, a nonprofit entity that once shared PA Cyber's top executive and three of its board members.
NNDS turned around and paid $6.7 million to for-profit Avanti Management Group, run by four ex-PA Cyber executives, according to NNDS's disclosures to the Internal Revenue Service. NNDS paid millions more to other firms created by former PA Cyber executives.
PA Cyber spokesman Fred Miller said executives, including the school's recently retired founder, Nick Trombetta, recognized years ago that they needed to exercise care in the relationships between the entities.
"Dr. Trombetta had several positions," Miller said. "We had people sitting on different boards. It was pointed out that there were possible conflicts of interest, and the boards were split up."
On Thursday agents from the FBI, the criminal investigations division of the IRS, and the U.S. Department of Education searched the school's headquarters in Midland, its accountants' office in Koppel, and properties rented by its spin-offs in Ohio.
The investigation appears to be aimed at current or former executives of the school. PA Cyber "as an entity, is not a current target," U.S. Attorney David J. Hickton's office said.
Regardless of the direction of the investigation, PA Cyber demonstrates a consequence of the state's charter school revolution: the emergence from schools of profit-seeking spin-offs.
"When the charter school law was written, even if there was some consideration of the prospect of cyber charter schools, I don't believe there was ever the intention that charter schools would become profitable operations that in turn would finance other activities," said Ron Cowell, president of the Education Policy and Leadership Center and a former state representative from Wilkins. "Even if one assumes that [cyber charter schools are] more efficient, the intent of the law [was not to] provide for the use of taxpayer money to basically pay dividends to stockholders."
PA Cyber opened in 2000 to educate students of the Midland Borough School District, which closed its high school due to low enrollment. For a time, Trombetta ran both the traditional school district and the charter. He later had roles with NNDS and with the Lincoln Park Performing Arts Charter School and Lincoln Park Performing Arts Center, built on the former site of Midland's high school.
Charter schools are independent public schools but report to a school district or, in the case of cyber charter schools, the state. They are paid by districts based on the number of students they attract and the home districts' average per-student costs.
On average, charter schools spend $13,411 per student per year, according to a report issued by Auditor General Jack Wagner last month. Cyber charter schools, though, need fewer buildings and can keep staffing costs lower than conventional schools. Cyber charters spend an average of just $10,145 per student, Mr. Wagner found. They do not have to return the balance.
In 2005, PA Cyber found a way to shift some of the work of running the school, and a big chunk of the revenue, off of its books.
The National Network of Digital Schools Management Foundation was created on Aug. 9, 2005, with Trombetta as its president. Seventeen days later, the PA Cyber board voted to contract with NNDS to manage its burgeoning charter school, in return for 12 percent of the school's income.
In addition to Trombetta's dual role, three of PA Cyber's seven board members - Mary Ellen Bellay, Stephanie Pennington and Philip Tridico - were appointed to NNDS's five-member board.
Later PA Cyber turned over the online curriculum it had developed to NNDS, which sells it back to the cyber school.
From 2005 through April of this year, PA Cyber paid NNDS $207.2 million, according to a list of payments provided by PA Cyber to the Post-Gazette under the right-to-know law.
During the 2010-11 school year, PA Cyber paid NNDS $13.1 million as a management fee, and $31 million for curriculum.
It's natural that PA Cyber veterans perform services for it, said Christina Zarek, who is the charter school's spokeswoman and NNDS's communications director. A limited number of people know online education, and many of them learned the business at PA Cyber.
"If you rewind to when PA Cyber started, it was a pioneer," she said. "So the folks that were developing the curriculum, the classroom, the procedure have the best experience because they were in the business from the ground level."
PA Cyber, she added, has rules preventing conflicts of interest but does not bar employees from moonlighting for vendors.