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LA School Report has learned that ‘fiscal mismanagement’ and a host of other irregularities are the reasons behind the sudden closure last month of two LA Unified charter schools, Magnolia Science Academy 6 and Magnolia Science Academy 7, according to a letter sent from LAUSD’s Charter Division.

Both are considered high-performing schools; MSA-6 is a middle school in Palms serving about 140 students, and MSA-7 is an elementary school in Van Nuys which serve 300 students.

The document was sent by the district on June 27, to the schools’ non-profit parent organization, Magnolia Public Schools (MPS) which operates 11 schools across the state, some of which have also been subject to scrutiny.

Mehmet Argin, Chief Executive Officer of MPS says the decision by LAUSD to rescind their charters came with no warning, leaving families with few options. “Shocked. I was just shocked and surprised,” he told LA School Report.

In the letter, the district outlined the results of its recent audit that found ‘significant’ problems including what it said was a state of financial insolvency, accounting and reporting irregularities, and governance issues. In all, the district says the schools were “unlikely to successfully implement program[s]” and therefore did not meet the bar for their conditional renewal.

According to the letter, the audit revealed that:

• The parent company, MPS, met the IRS definition of being insolvent as of June 2013 and owed money to its schools. One of the schools Magnolia 6, also met the definition of insolvent, the other, Magnolia 7, operated in a deficit mode.
• The parent company did not document what the letter calls ‘inter-schools borrowing.’ The district said it was “not aware of any other CMO (Charter Management Organization) that borrows substantial money…from its schools.”
• The parent company paid more than $206,000 in immigration fees and lawyers in the past four years for non-employees.
• The parent company paid another non-profit called Accord $3 million dollars to carry out services, what it says is a third of its budget, and which has overlapping responsibilities with the charter operator such as accountability, curriculum development and professional development.

In response to the closures, MPS filed for an injunction last week in LA Superior Count to block the closures of the schools. A hearing is scheduled for July 24.

LAUSD would not comment on the letter due to the pending court hearing, and would not make the actual audit available to LA School Report for review.

Argin, Magnolia Public Schools CEO, said he was surprised that the district acted so swiftly in shutting down the schools. He says the district issued the notice of non-renewal just a day shy of the deadline, leaving the schools with no opportunity to discuss or appeal the decision.

“It was impossible for us to respond. To explain that they are wrong,” he said.

Argin categorically disputes all of the district’s material findings as they have been reported to MPS. In a letter to the district, MPS refutes the findings, arguing:

• The parent company is financially solvent, has nearly $5 million in net assets and expects to have $7 million by the end of the year. MPS contends the district is mistaken in evaluating the financial health of the individual schools because the parent company files a single consolidated tax return that includes the eight charter schools in LA Unified. With that understanding, a consolidated audit that was commissioned a year ago by Magnolia “clearly demonstrates that there is no danger of insolvency.”
• As for the the practice of inter-school borrowing, MPS does not classify the exchange of money as “loans,” but rather as “advances.” As such, it maintains there is no need for documentation.
• MPS does not deny that the non-profit Accord, provides instructional support and curriculum development for its schools. But MPS says the $3 million it paid Accord represents only 2.75 percent of the organization’s $110 million consolidated revenues, not the 30 percent the District alleges.
• The district’s allegation that the two charter schools paid more than $206,000 in immigration lawyers and fees in the past four years is completely unfounded. “To state or imply immigration related expenses were paid with school funds for non-school related activities or costs is factually incorrect”.

“We have no idea how they arrived at these numbers,” says Kim Onisko, MPS’s accountant, expressing frustration over not being able to access LA Unified’s internal audit. “Nowhere in their books and records could they tie out to that number.”

“These are not schools that are on the verge of shutting down. This is a company that is doing very well,” he said.

The abrupt nature of the closures is “highly unusual,” according to Ricardo Soto, general counsel of the Charter School Association. While both schools had been awarded charter renewals in a March meeting of the LAUSD school board, those renewals were contingent on one ‘condition’: that the schools undergo and pass a fiscal audit.

In recent memory Soto says he has “never seen a charter school have their renewal rescinded base on district staff determining that a condition hasn’t been met.”  If a district finds reasons to close a school it would typically start the process of revoking its charter, a sometimes lengthy process that allows feedback and is overseen by state law.