Sept. 11, 2017
Reporting Rich Lord
Illustrations Daniel Marsula
The strongest hands on Pittsburgh’s steering wheel are unelected. They are largely untaxed, and infrequently audited by government. In return, they pledge to be unconcerned with profit.
Nonprofit institutions -- let’s call them the “Uns,” since they are united largely by what they aren’t -- dominate Pittsburgh’s landscape, economy and civic discourse to an extraordinary degree.
Uns now employ 1 in 5 workers in the region, control at least one-tenth of its property, and have amassed wealth that far exceeds the remnants of our profit-driven industrial heyday. From UPMC, which has its initials on Downtown’s highest tower, to foundations that give anonymously, their impact is everywhere.
“They’re the major employers in this town. They are the economic engine, and in some ways, within the city, the economic rudder as well,” said Pittsburgh Mayor Bill Peduto, who added that he consults with nonprofit leaders daily and considers them close partners in envisioning the region’s future.
As a result of their ubiquity, Pittsburghers (if willing to shop at food banks and Goodwill) can conceivably be born, educated, cared for medically, entertained, employed and pampered through their golden years without ever passing through the doors of a for-profit establishment.
While some of the Uns struggle to break even, a few pay top executives million-dollar salaries and create for-profit spinoff businesses, while an understaffed IRS attempts to monitor it all.
“These have become just really complicated financial enterprises with a lot of entanglements,” said Lester Salamon, a Pittsburgh-area native who directs the Johns Hopkins University Center for Civil Society Studies, which recently analyzed the nonprofit sector in Pennsylvania. He said the sector creates enormous benefits, but added that government oversight “is terrible,” bordering on “nonexistent.”
The Post-Gazette analyzed IRS disclosures made during 2016 by 64 nonprofit entities, all based within 50 miles of Downtown, each of which recently reported assets of roughly $100 million or more.
The entities include 14 philanthropic foundations -- call them the Big Givers.
The other 50 are charitable corporations and trusts -- the Big Doers. They include 14 institutions of higher education, and 12 healthcare organizations -- the “eds and meds” credited with the region’s post-steel rebirth.
Other Big Doers are:
The Post-Gazette analyzed IRS disclosures made during 2016 by 64 nonprofit entities, all based within 50 miles of Downtown, each of which recently reported assets of roughly $100 million or more. Collectively, the 64 large nonprofits reported assets of nearly $44 billion.
Collectively, the 64 large nonprofits reported assets of nearly $44 billion. (By comparison, everything U.S. Steel owns, globally, is worth $9.2 billion.) The Uns brought in more than $29 billion in revenue -- a shade below state government’s revenue of $31 billion.
“I think that’s astounding,” said Christine W. Letts, a lecturer on philanthropy at Harvard University’s John F. Kennedy School of Government. If foundations and big nonprofits are leading the region, “that’s great,” Ms. Letts said, as long as “there is an open process, and if they’re going to basically try to influence the public realm, that there are plenty of opportunities for the public, elected officials and the constituency to have input.”
Government has long contracted with nonprofit agencies that meet basic human needs. Now, through taxpayer-backed grants, government counts on them to underpin the economy.
The 50 Big Doers reported receiving $762 million in government grants in a year, and that only begins to describe the amount of public money flowing their way. Some get subsidies for redeveloping old industrial sites and public housing developments. Others run charter schools using state money and local tax dollars that would otherwise go to school districts. The “eds” collect federal student aid and research grants, while the “meds” receive billions in Medicare and Medicaid reimbursements.
Today and in coming days, the Pittsburgh Post-Gazette will explore the size and scope of the nonprofit economy, its interactions with neighborhoods, and government and how it decides what the region does, builds and thinks.
“They do wield tremendous power, but they also have been a tremendous benefit to this region,” said Kevin Kearns, a professor of nonprofit management at the University of Pittsburgh’s Graduate School of Public and International Affairs. “There are always issues around accountability, transparency: Who are these people, who elected them, are they truly running the town?”
They don’t rule by fiat, he noted. “They negotiate. They problem-solve. Yes, they are out of the public eye.”
“Look how much my kid’s tuition is. And you’re telling me that they can’t pay property taxes?”
That is the common lament of the Pittsburgh-area taxpayer upon receiving a big bill from a nonprofit, said Eric Montarti, a senior policy analyst who studies tax exemption for the Castle Shannon-based Allegheny Institute, a tax-exempt think tank.
Of course, it’s not that Uns can’t afford to pay taxes. They just don’t have to. The nonprofits exempted from most federal taxes under IRS section 501(c)(3) must provide some societal benefit, and reinvest their earnings, rather than paying them out to owners. They must be nonpartisan, though some, including the Sarah Scaife Foundation, are certainly ideological (see "Pittsburgh's Sarah Scaife Foundation has Trump ties," Post-Gazette, Jan. 15, 2017). Pennsylvania has a similar, five-part test for exemption from state and local taxes.
Locally, the big losers from that arrangement are those who depend on property taxes.
Last year the 50 Big Doers reported to the IRS that, in their collective histories, they have spent $12.9 billion on real estate, and that when you throw in equipment, they owned $20.8 billion in hard assets.
As they have accumulated land and buildings, the portion of Allegheny County real estate that’s untaxed has crept up to 22.7 percent, from 21.1 percent a decade ago. Some of that is government property, but nearly half is privately owned.
The amount of privately owned, but untaxed real estate in the county inched up over the past decade. Here is what the county would have collected each year if that property had been taxed (Note that Allegheny County temporarily raised millage for 2012 and reassessed property that year. Estimate of privately owned untaxed property is based on county controller's office study showing that around 44 percent of tax-exempt property is privately owned):
“It’s not like it’s a big jump,” said Allegheny County Executive Rich Fitzgerald. “And when you talk about those institutions that you’re talking about, they contribute a tremendous amount to the economic vitality of the region.”
But what if every privately owned acre and building in Allegheny County were taxable? County government could either spend another $48 million, or cut everyone’s property taxes by 12 percent. Add in the municipalities and schools, and local governments would get around $300 million more in annual revenue than they do now, said Mr. Montarti.
Local governments have long argued that since nonprofits and their employees benefit from public safety, roads and schools, they should pay something in lieu of property taxes.
“These nonprofits are getting bigger. They are acquiring more property,” said Ira Weiss, the solicitor for the Pittsburgh Public Schools. “The taxing bodies have no leverage, so it’s become a hat-in-hand kind of process.”
Once upon a time, the hat-in-hand approach worked. Under a deal started under Mayor Tom Murphy, nonprofits paid the city an average of $4.67 million a year from 2005 through 2007. Such payments, though, have dwindled to around $400,000 a year. Since 2015, the city and county have been negotiating with UPMC, Highmark, Pitt and Carnegie Mellon University on a new deal.
They might contribute to early education or affordable housing, said Mr. Peduto, but are hesitant to commit to “the abyss that sometimes becomes the city budget.”
The Uns pay a few taxes, including the employer portions of payroll-based levies that go to Social Security, Medicare, federal and state unemployment pools, and some local governments. The Big Doers reported that they paid more than $456 million in payroll taxes, not counting withholding, in a year. Why so much? Consider their combined 167,300 employees -- 1 in every 6 workers in the region -- and average pay of $58,619.
The region&lsquot;s biggest nonprofit employers, and their average compensation, not including benefits (Note: Because of different fiscal years and reporting practices, disclosures filed in 2016 covered various 12-month periods, ending as early as May 31, 2015, and as late as June 30, 2016):
Add in smaller agencies, and 1 in 5 workers in Allegheny County toil for nonprofits, according to a report released in January by Mr. Salamon’s group at Johns Hopkins. That’s more than the statewide figure of 1 in 6, and far beyond the national figure of 1 in 10. Mr. Salamon calls it “a wake-up call to anybody who is worried about jobs, first of all, to see this as an economic sector of some importance.”
The education and health services sector -- dominated by nonprofits -- now tops all others in the region in terms of employment in the Pittsburgh metro area. Sectors ranked by jobs, February 2017.
You don’t have to take a vow of poverty to run a nonprofit, and the top executives at the Big Doers averaged more than $730,000 in annual pay and benefits. Tops was UPMC president and CEO Jeffrey Romoff, to whom UPMC reported paying $5.75 million, plus benefits worth $680,000. (His package has since increased to a total of $6.99 million.)
“That’s a pretty high salary, but the justification is basically that you want these organizations to be as well run as any other, even more so, because they are operating in the public interest and are stewards of public resources,” said Dennis Young, an executive in residence at Cleveland State University, who focuses on nonprofits. “People have opportunities to make even a lot more money than that in the private sector.”
Pay and other compensation includes receipts from other, related organizations, 2016. Note: Pay and other compensation includes receipts from other, related organizations.
Those salaries don’t approach Mylan chairman Robert J. Coury’s $97.6 million in compensation, or even the $10.9 million U.S. Steel president and CEO Mario Longhi got the year before his May retirement. But the tailor-made perks can make nonprofit service a perfect fit for some.
Point Park University President Paul Hennigan, for instance, got a compensation package valued at $569,065, including a monthly housing allowance, club dues, reimbursement for some spousal travel and “dependent care services” for his children. The university’s IRS disclosure explained the child care as necessary in light of his “unpredictable work schedule and frequent overnight travel.”
Asked about the benefits package, university spokesman Louis Corsaro responded that “as a matter of policy, we don’t discuss the compensation of any employee at the school.”
Elizabeth A. Livingston, an attorney at Griesing Law in Philadelphia who works on executive contracts, said the IRS wants nonprofit boards to create compensation committees, weigh their top executives’ duties, credentials and effectiveness, compare pay packages at similar organizations, and document the process. They have to disclose the resulting salaries but, except in the rare case in which the IRS comes knocking, explaining the rationale is optional.
In the late 1880s, as tensions between workers and wealthy capitalists shook the nation, Andrew Carnegie penned the essay Wealth, urging fellow moguls to give away their money in ways that would “help those who will help themselves.”
His words helped set the stage for the development of the Big Givers, which in turn underwrote the growth of many Big Doers.
“Most of the nonprofit sector would collapse without foundations,” said Jen Bokoff, director of stakeholder engagement for The Foundation Center, based in New York City. “Even hospitals and universities would have to substantively change the way they’d operate without foundation funds.”
Pittsburgh’s 14 Big Givers depend almost entirely on the vast endowments left to them by industrialists (Alcoa, Hillman foundations), food or housewares entrepreneurs (Eden Hall, Grable, Heinz), financiers (McCune, Mellon and Scaife-related philanthropies), fuel magnates (Benedum) or developers (Buncher).
Their top staff “are individuals who operate largely behind closed doors and they wield a lot of power in terms of how their grants are made,” said Mr. Kearns. But they are also “very smart people, they’re very civically engaged, they read the literature, they look at national trends.”
New York City boasts higher foundation giving ($669 per resident per year) than does Pittsburgh. But the region in which Andrew Carnegie set the standard for philanthropy is tops among a dozen metro areas of similar size.
Pittsburgh tops other, similarly sized metro areas in giving by foundations, total and per capita.
When the steel industry collapsed around 1980, the foundations kept the region’s cultural institutions and human services agencies alive, said Jim Roddey, a former Allegheny County chief executive and veteran of some 40 nonprofit boards. “Had we not had that strong foundation base, I think that Pittsburgh would have been damaged perhaps beyond repair.” Pittsburgh’s Big Givers last year reported making donations of $399 million, funded almost entirely through investment earnings on their assets of $8 billion.
Their donations range from the monumental -- like the Allegheny Foundation’s $7.5 million commitment to Point Park University’s playhouse and media center -- to the ethereal, like the Grable Foundation’s $11,500 grant to put WiFi in city recreation centers.
Perhaps the highest profile Big Giver is The Heinz Endowments, which co-owns the city’s largest redevelopment site, in Hazelwood, and has influenced Mr. Peduto’s development philosophy.
That’s something foundations haven’t always done, said Mr. Roddey. “Usually they didn’t get involved in public policy. They left that to the politicians,” he said. “And they weren’t involved in economic development. … That has changed.”
Nonprofits, including foundations, must make sure that no surplus income “inures to the benefit of any private shareholder or individual,” according to the IRS. That limits -- but doesn’t ban -- business deals between Uns and their founding families or board members.
Last year, for instance, the Hillman Family Foundations reported paying The Hillman Company $2.1 million to handle investment of around $408 million in assets. (The company’s payday may soon balloon: The foundations’ assets are expected to grow by some $800 million as a result of Henry L. Hillman’s death in April.)
David Roger, president of the foundations, said it makes sense for the philanthropy to use the investment firm built by the same family. “We can get access to very high-quality investment opportunities at a low rate, and we could not replicate that rate on the broad market,” he said. The company may indeed be giving the foundation a good deal: A study by the Commonfund Institute suggests that the average investment services bill for a $400 million endowment is around $2.5 million.
If a nonprofit entered into a bad deal, though, who would know?
Nonprofits are under no obligation to make public any bids they receive, or even to release their meeting minutes. The IRS has the power to demand documentation but has few people assigned to nonprofits, according to the last detailed study of the tax agency and nonprofits, released by the U.S. Government Accountability Office in December 2014.
| Tax-exempt organizations under IRS 501(c)(3) | 1.08 million |
| Total charitable returns available for examination | 763,149 |
| IRS employees assigned to examining those returns | 493 |
| Returns examined | 5,426 |
| Percentage of returns examined | 0.71 percent |
| Percentage of those examinations that resulted in penalty, revocation or termination of exemption | 31 percent |
Source: U.S. Government Accountability Office | |
“The IRS itself has been stripped of resources,” said Mr. Young. Many in the charitable world “would actually like to see a stronger IRS. … They don’t want the outliers to be able to smear” the entire sector.
In the absence of real government oversight, it’s up to the nonprofits’ volunteer boards to act as watchdogs.
“I like to encourage organizations to aspire to openness and transparency,” said Susan Flaherty, a Washington, D.C., attorney who counsels nonprofits. “After all, enjoying the benefit of 501(c)(3) status places a certain public trust in boards.
“Steering business to insiders does not fit with this aspiration and position of trust,” she continued. “I always advise boards of client organizations to obtain competitive bids, then make a decision based on what is best for the organization.”
While nonprofits questioned about the subject said that board members recuse themselves from decisions that might affect their own finances, they did not universally use competitive bidding in such situations.
Two universities whose boards included members of the Broadhurst clan of restaurateurs inked new contracts with that family’s Parkhurst Dining Services without testing the competitive waters.
Robert Morris University first hired Parkhurst in 1997. Jeff Broadhurst joined the university’s board in 2003. In 2006, the school and the vendor negotiated a 20-year food service deal that included investments by Parkhurst in the university’s cafes. Last year the university reported paying Parkhurst $8.7 million.
Chatham University has used Parkhurst since 2001, sometimes seeking competing bids, according to university spokesman Bill Campbell. Brooks Broadhurst joined the university’s board in 2011. The most recent contract renewal, inked last year, did not involve bids, and Chatham reported paying Parkhurst nearly $2.4 million annually.
The Broadhursts “recuse for any of those kinds of discussions,” said Kevin O’Connell, chief marketing officer for Eat’n Park Hospitality Group, which includes Parkhurst. He said that four Broadhurst family members and 11 Eat’n Park executives serve on a total of 44 nonprofit boards, and their companies do business with just two of them. “Our goal is not to influence decisions related to us,” he said, but rather to “help these organizations.”
UPMC’s name sits atop the U.S. Steel Building, and the $14 billion in revenues the healthcare giant reported last year easily overleaped those of the metals icon ($10.3 billion).
If they weren’t nonprofit organizations, most of the Big Doers might have called it a profitable year. Their revenues minus their expenses -- comparable to profits in the business world -- totaled $1.35 billion, boosting their total assets to $35.8 billion.
For some nonprofit organizations in the Pittsburgh region, their surpluses (revenues minus expenses) are comparable to profits in the business world.
Surpluses at nonprofits often draw criticism, especially when they mount year after year. Mr. Salamon, though, noted that donors, the general public and government all encourage nonprofits to be fiscally sound, and often they have to compete with for-profit businesses for customers and top talent.
“We are really unfair to nonprofits,” said Mr. Salamon. “We want them to succeed. We created these situations that force them into the marketplace. And then we blame them for doing it.”
Of course, the one thing likely to draw more finger-pointing than a financially successful nonprofit is an unsuccessful one. Eleven of the 50 Big Doers reported negative bottom lines. That doesn’t doom them, as long as it doesn’t continue year after year.
“When things are difficult, they can dip into that reserve fund and try to restore it,” said Mr. Young. Nonprofits “can borrow, and that can be OK, but it can get you into serious trouble if you do it too much.”
Pittsburgh’s most famous nonprofit collapse -- the 1998 bankruptcy of the Allegheny Health, Education and Research Foundation -- led 15 years later to the marriage of Uns and taxable businesses known as Highmark.
The taxable insurance arm controls the nonprofit Highmark Health Group, comprised largely of the Allegheny Health Network. The group reports 14 related tax-exempt entities and 120 related taxable corporations, trusts and partnerships. The taxable parts of the Highmark/AHN conglomerate include medical practices, retailers, dental and vision insurers, and firms that handle property management, facilities support, supply chain management and information technology.
In cases in which AHN “really believed that we would be tapping into a revenue stream that would be beyond our own system, we set [new firms] up right from the get-go as taxable entities,” said Karen Hanlon, executive vice president and chief financial officer of Highmark Health. What if they make a profit? “Either you leave the money in those businesses, because you expect it will need it for some reason,” she said, “or in some cases, you can decide to place the profits back” into the nonprofit parent.
Ms. Hanlon said the IRS has a small office in Fifth Avenue Place in which a few of the agency’s accountants work full time on Highmark, scrutinizing AHN’s transactions with the related tax-exempt and taxable organizations, reported last year at around $323 million.
The 50 Big Doers reported having more than 250 related taxable corporations, trusts and partnerships -- subsidiaries or entities controlled by the same or similar boards, or largely supported by the nonprofit parent.
| Name of organization | Related taxable organizations |
|---|---|
| Highmark/Allegheny Health Network | 120 |
| UPMC Group | 58 |
| Monongahela Valley Hospital | 10 |
| Valley Medical Facilities Inc. | 7 |
| Jewish Federation of Greater Pittsburgh | 7 |
| Carnegie Mellon University | 7 |
| Indiana Regional Medical Center | 6 |
| Excela Health Group | 6 |
| The Landmarks Financial Corp. | 6 |
| Allegheny Valley School | 5 |
| Regional Industrial Development Corp. | 5 |
Source: IRS filings in 2016
| |
The problem: When a nonprofit and a profit-seeking business are related, there is both opportunity and incentive to place costs or revenues on one or the other ledger in ways that enrich somebody, according to Burton Weisbrod, an economics professor specializing in nonprofits at the Northwestern University Institute for Policy Research.
When nonprofits spin off for-profits, and then do business with them, “a red light goes on, because it’s perfectly clear what [their] incentives are,” said Mr. Weisbrod. They “want to make money on the deal.”
Even if the profits from the taxable businesses are flowing back into their nonprofit parent, such arrangements can skew an organization’s priorities, said Mr. Young, resulting in “mission drift” when “in effect, they become businesses in disguise.”
Diana Bucco of The Buhl Foundation poses inside Farmer’s Daughter on the North Side. (Steph Chambers/Post-Gazette)
The oldest multi-purpose foundation in Pittsburgh is adopting some of the newest tactics in philanthropy, just as it did in 1927, when most endowments backed very narrow causes. The 90-year-old Buhl Foundation, once among the largest multi-purpose philanthropies in the country, has spent the last four years shifting the vast majority of its giving to 18 North Side neighborhoods. It has also moved away from the traditional playbook of foundations -- in which they receive grant proposals, review them and write checks -- toward something much more full-contact.
The foundation reports assets of around $80 million, and gives away around $3.2 million a year. Around 2013, leadership decided they could either continue to be small players regionally, or to zoom in on the old stomping ground of retailer Henry Buhl Jr., who died childless in 1927.
Foundation President Diana A. Bucco said her board didn’t want to “assume that because we like this idea, the community wants us to do it.” So they combed the North Side, conducting 400 interviews and distributing a 70-question survey.
The board then committed to spending at least 20 years focused largely on the plan it calls One Northside.
“Some of the North Side neighborhoods are clearly tipping for the better,” said Ms. Bucco. “Some are going backwards.” The foundation’s bid to tip them all forward includes bets big and small.
Big: In Nova Place (the former Allegheny Center Mall) the foundation has committed $6.5 million to help underwrite a super-fast public internet zone meant to incubate technology companies.
Small: The foundation loaned -- as opposed to gave -- $300,000 to the Northside Leadership Conference to buy an East Ohio Street building that was at risk of falling into the hands of absentee landlords. The conference doesn’t have to make payments on the loan for 10 years, but when it does, the money can be invested again.
As a result of the loan, the building houses The Farmer’s Daughter Flowers, instead of, say, a nuisance bar. “Now you’ve got this beautiful presence there,” said Ms. Bucco. “With that, in addition to other investments, the street will tip.”
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Skyline Terrace, which provides housing for low-income residents, stands at the site of the former Addison Terrace. (Pam Panchak/Post-Gazette)
Reporting Rich Lord
It took a nonprofit middleman and million-dollar paydays to an alliance of businessmen to put hundreds of the Hill District’s poor into new homes.
Atop the Hill, on a site with stunning views of Downtown and the South Side, drug-plagued Addison Terrace is gone, replaced by manicured Skyline Terrace. Around 84 percent of its renters get subsidies because of their low incomes.
In February 1967, Addison Terrace was described as "a public housing complex in the Hill District with nearly 1,000 units. Its tallest building is a 15-floor high-rise structure of gleaming white brick and anodized aluminum yellow panels, with 150 apartments for older couples." (The Pittsburgh Press)
Improving their surroundings involved $160 million in public funds -- around $400,000 per townhome -- flowing from the federal government through the Housing Authority, banks, a nonprofit corporation, a dozen private companies and two savvy businessmen. At the center of the process is a 10-year-old Allies & Ross Management and Development Corp., which has grown into one of the region’s 50 most asset-rich nonprofits, while participating in the transformation of low-income housing in Garfield, the Hill District, Larimer and the North Side.
Housing Authority Executive Director Caster Binion, who is also president of Allies & Ross, said it “is not the Caster company. This is the people’s company. ... The end product,” he added, “is affordable housing.”
Including the cost of razing Addison, flattening out a hill and building new infrastructure, Skyline’s costs exceeded the averages found in the few studies of the cost of low-income housing.
Cost is one downside of the complex public and private, nonprofit and for-profit arrangements now used to revamp aging public housing complexes nationwide, said Ethan Handelman, vice president of policy and advocacy for the Washington, D.C.-based National Housing Conference.
Skyline’s cost is “a high number. I won’t deny that,” he said, when told of its cost. If the costs reflect quality design and construction, he said, they may be warranted because “you’re getting a real community asset.”
“I would like to see the industry doing lower costs,” he added, “because then we’re housing more people.”
Kenneth Woods, 67 and a former steelworker, moved to Addison Terrace in the mid-1980s, and raised -- and lost -- a son there.
Kenneth Woods talks about life in his new, one-bedroom house in Skyline Terrace -- formerly Addison Terrace -- in the Hill District. (Pam Panchak/Post-Gazette)
Living on Bentley Drive in the 1980s, he reminisced, “Sometimes, there would be 25, 30, 50 grills going at a time. People were socializing, their kids playing.
“Then I seen it go under.”
Members of rival gangs moved in. A drug market took root. For Mr. Woods, the descent culminated in 2008, when his son, Kenneth Woods Jr., was gunned down in broad daylight on Bentley, at age 30.
Determined not to be driven out by fear or grief, the father stayed on, moving away only for a year-long relocation while the 734 monotonous apartments of Addison were demolished and Skyline constructed.
The 386 replacement townhomes are mostly in the Hill, with the rest under construction in Homewood, and range from one to four bedrooms. They will include 75 for market-rate renters and 311 slated for low-income residents like Mr. Woods. He pays 30 percent of his income for the one-bedroom apartment with its own laundry machines and back porch. “I love it now,” he said. “This is a dream. I always wanted a nice, little place. I’ve got my flowers outside. … It’s just peaceful.”
The process that led to the destruction of Depression-era Addison started a decade ago, when the federal Department of Housing and Urban Development told local housing agencies that they could create nonprofit corporations to redevelop their properties. Pittsburgh’s Housing Authority, which is overseen by a volunteer board appointed by the mayor, promptly created Allies & Ross.
Demolition on Addison Terrace started in 2012. (Darrell Sapp/Post-Gazette)
Before Allies & Ross, according to Mr. Binion, his agency “would have developers come in, they would build these massive places and the Housing Authority would not be in the deal.” Allies & Ross, though, is allowed to do things an authority can’t, such as join partnerships with developers and thereby get a cut of the fees and profits.
First, under the authority’s then-director A. Fulton Meachem Jr., Allies & Ross teamed with Columbus developer Keith B. Key to transform 632-unit Garfield Heights into Garfield Commons, a 225-apartment complex. The cost: $100 million.
For Mr. Key, that was an important step in expanding KBK Enterprises, now a company with more than 60 employees and developments in Garfield, the Hill District, Larimer, Downtown, New Orleans, Harlem, New York and Columbus, Ohio.
In 2010, Allies & Ross prepared for even bigger jobs, and picked KBK, St. Louis-based McCormack Baron Salazar, and Downtown’s Trek Development Group as its go-to partners. KBK was assigned to redo Addison, while McCormack Baron is working in Larimer and Trek in Allegheny Dwellings -- all in collaboration with Allies & Ross.
Allies & Ross, in its last disclosure to the IRS, reported $132 million in assets, including $42 million in cash and $87 million owed to it by others. It has no employees. Since it works only for the Housing Authority, that agency’s employees run the nonprofit, taking only their government salaries.
The deals Allies & Ross inks, though, have resulted in big paydays for private business people, including those responsible for Skyline.
The money flow starts with the federal government. The U.S. Department of Housing and Urban Development subsidizes the Housing Authority. The IRS authorizes low-income housing tax credits, which investors buy in return for equivalent tax deductions.
To transform Addison, the Housing Authority transferred $102 million to Allies & Ross. Tax credits cover almost all of the balance.
To secure the interests of the tax credit investors, Allies & Ross and KBK created around a dozen other entities -- with names like Addison Terrace Phase I General Partner LLC and ARMDC-Addison Terrace III Inc., to take ownership stakes and make various guarantees. Much of the money flows to, or through, KBK, general contractor Mistick Construction Services, or a Columbus-based company created by Mr. Key and Robert Mistick in 2010, called Alliance Construction Group.
For its work on the first three phases of the Addison-to-Skyline project, KBK earned $6.12 million in developer fees. It also got a 6 percent slice of the millions of dollars of site preparation work it agreed to manage.
Mr. Binion justified KBK’s fees by saying it was “a very complicated deal” in which “the developer incurs a lot of expenses.”
Mr. Key said that KBK had to put together financing, sell tax credits, work with politicians and neighborhood leaders, plan transportation links, line up contractors, surveyors, engineers and other professionals, ensure the use of minority-and-women-owned businesses and local labor, among other tasks. “It’s a thousand moving parts,” with significant pre-development costs, he said.
“When we net it out, it doesn’t always seem like we made much,” said Mr. Key, adding that he took on considerable risk. “If any of those phases went belly up or didn’t get completed, we had the obligation to our investors for any shortfall. … If there was a default, we would be out of business overnight.”
In a highly regulated market, there are additional risks. In other cities, he said, “You’ve seen developers go to jail.”
Government-funded construction often includes checks and balances. For instance, while contractors may benefit from higher price tags, developers typically have an incentive to control costs.
KBK, though, chose the Key/Mistick firm Alliance as its general contractor, and Mistick Construction as a major subcontractor. Experts said that’s unusual, but not unheard-of. “If you’re a developer who has a contracting arm, there are two advantages. One, you make more money. Two, you have more control over the product,” said Chris Hornig, a former HUD official who is now an attorney specializing in housing transactions.
Such arrangements trigger extra scrutiny.
HUD requirements compelled the Housing Authority to provide an independent estimate of the cost of turning Addison into Skyline. KBK chose Crawford Consulting Services, of East Pittsburgh, which specializes in such estimates, to put together an independent quote. Crawford’s estimates came in slightly higher than Alliance’s, so HUD allowed the Key/Mistick venture to manage the construction. For the first three phases, the total bill exceeded $80 million. On most of that figure, Alliance was allowed to make as much as 6 percent profit -- around $4.8 million -- though Mr. Key said that in the end his firm received somewhat less.
“Alliance is my company, I’m the majority interest owner, and Bob [Mistick] is a partner,” Mr. Key said. Alliance, he added, doesn’t do the work itself, hiring Mistick and others for that. “All of our work is hired out to the lowest bidder.”
Mr. Mistick did not grant an interview despite a half dozen requests.
As the new properties are rented -- some to low-income tenants subsidized by HUD, others at market rates -- the money will continue to flow, to both the profit-seekers and the nonprofit. KBK is entitled to 4.5 percent of the rents, or 5.25 percent if the occupancy rate tops 97 percent. Then, after all of the operating expenses and reserves are covered, KBK gets 25 percent of any cash balance, with the rest going to Allies & Ross. The cash flow to KBK could continue for decades.
Mr. Key said Skyline will arrange services for low-income residents, including summer lunch programs and camps, plus scholarships, for the kids.
“This is not where the riches lie,” Mr. Key said of the low-income housing market. “Developers who do all market rate -- that is more normal -- they make money, they sell [their properties] typically, and they have returns that are much more significant.”
Allies & Ross expects to get $18 million in fees, interest on loans and cash flow from the units that replace Addison. That, said Mr. Binion, will go back into the development of affordable housing.
“You know all the problems Addison had before,” said Mr. Binion. “When you go up there you see the kids playing and you see the type of programs that we have, you see how well built it is. … I think we made a difference, and it’s a community people can be proud of.”
Though affordable for residents, Skyline is unusually expensive for taxpayers. It epitomizes a big question in low-income housing circles: Do complex financing structures and profit-driven partnerships -- in which each player has its own attorneys and accountants -- threaten to make low-income housing too expensive to build, perpetuating a shortage of affordable rental homes?
Mr. Binion said the Housing Authority will eventually build replacements for every unit of Addison that was occupied six years ago. He also said it’s unfair to call Skyline a $400,000-per-unit project, because the costs include $25 million for infrastructure, utility work and massive earthmoving, plus $2 million for community centers.
Remove those costs, though, and Skyline would still exceed $344,000 per townhouse. “It’s unusual that we have a development come in that high” in the state, said Brian A. Hudson, Sr., executive director of the Pennsylvania Housing Finance Agency. PHFA decides which projects in the state get low-income housing tax credits, and tells developers to keep total costs below $250,000 per unit, unless they face unusual environmental, topographical, infrastructure or historic preservation concerns.
It’s unusual nationally, too. A 2014 study by the California Department of Housing and Community Development, which looked at 400 low-income housing construction projects done in that state over a decade, found a median cost per unit of $276,000. Only the San Francisco area saw per-unit costs above $345,000.
Data assembled by the National Housing Conference on low-income housing construction in Denver “works out to about $200,000 a unit on a 100 unit property,” and lower costs when the unit numbers rise, said Mr. Handelman.
Skyline is “a great development,” Mr. Hudson said. He said PHFA approved tax credits in the hope “that this will revitalize that area and our units will still be there to maintain the affordability aspect.”
However, the high cost “does concern me,” he added, because with limited funds, fewer units can be built. “We’re fortunate that we do not have that happening on a consistent basis.”
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Rebecca Flora, principal of ReMake Group, points out some of the details of a small tunnel at the Almono site, formerly the old LTV Coke Works in Hazelwood. (Darrell Sapp/Post-Gazette)
Reporting Rich Lord and Mark Belko
Development in Pittsburgh has long been a who-you-know game -- and sometimes, some say, a pay-to-play business.
These days, though, when it comes to development in Pittsburgh, those who have the ear of Mayor Bill Peduto are as likely to show up in philanthropic circles as they are in city hall or on campaign contribution lists.
Pittsburgh Mayor Bill Peduto and André Heinz of the Heinz Endowments, listened to a speaker at the Energy Innovation Center in 2015. (Andrew Rush/Post-Gazette)
Whether it’s in redeveloping the Strip District’s iconic produce terminal, trying to spark new life at an old coke works site in Hazelwood or even writing novel rules for city subsidies, local foundations are playing a central role in helping to shape the city’s development strategy -- more so under Mr. Peduto than perhaps any other mayor.
“I rely on [the foundations] very much,” said Mr. Peduto, in an interview. “I mean, it is a relationship that I feel that in the future people will look back upon and say that it was critically needed at this point, and helped to define a better Pittsburgh.”
But not everybody sees it that way. To some in the development community, Mr. Peduto has become known as “Mayor Oliphant,” a reference to Heinz Endowments president Grant Oliphant.
“That’s the joke in town -- Bill doesn’t do anything until he talks to Grant,” said one developer, who asked not to be named.
Beyond the punch lines, there’s a practical concern among developers: The very foundations Mr. Peduto is leaning on heavily to help guide development could be competing with for-profit businesses for the same city grants, loans or tax breaks needed to help finance projects.
There’s also skepticism in some corners about the ability of nonprofit grantmakers to match the relative speed of profit-seeking developers. Impatience is especially palpable in Hazelwood, where three foundations appear close to soliciting a developer for the city’s largest empty site -- which they’ve owned for 15 years.
Former Mayor Tom Murphy, who opposed the foundations’ purchase of the Hazelwood site in 2002, called the slow progress there “a huge embarrassment” to the foundations involved, adding it showed that “good intentions might have unintended consequences.”
A view of Signature Boulevard" at the old LTV coke plant site in Hazelwood. (Darrell Sapp/Post-Gazette)
“Yes, this has taken longer than simply slapping up big boxes,” said Mr. Oliphant, whose Heinz Endowments is a co-owner of the site. However, he added, that would’ve “trashed the community” and “destroyed a major economic development opportunity for the region.”
Now, Mr. Peduto is planning to ration out city development aid according to a “matrix” inspired largely by the Endowments’ chairman, André T. Heinz.
In the end, Mr. Peduto predicted that through working with the foundations on development, “we’ll be recognized in the future Pittsburgh for what we’ve done much in the same way that the [David] Lawrence administration is recognized in the Hill, in East Liberty, and in the North Side, for the way urban renewal was done then.”
Almono – a foundation comprised of the Heinz Endowments, Claude Worthington Benedum and Richard King Mellon foundations – is redeveloping the 178-acre, former Hazelwood coke works site. (Haley Nelson/Post-Gazette)
“Everybody have good walking shoes on? Because I’m going to take you to a special place,” said Rebecca Flora, as her Subaru rumbled out of the savanna of the former Hazelwood coke works site into a jungle-like strip along the Monongahela River. Under a railroad, down a rutted road, out of the car and up some rusty stairs, and she stood on a dock below an old pump house.
(James Hilston/Post-Gazette)
What will this look like after the redevelopment of the 178-acre site owned by a triumvirate of foundations known as Almono? Ms. Flora, principal of ReMake Group and charged with planning the site’s future, isn’t sure yet. “Is there another rowing center? Is there a kayak launch here? ... Is there a ferry? Do we get back to water taxis again?”
One thing she’s sure of: It won’t be the next Homestead Waterfront, or Mon Wharf. “Water, bike, walk, transit -- then let’s talk about cars,” she said.
The site of the city’s last big steel-related facility, which closed in 1998, could incubate a robot-powered future, or remain empty if the pursuit of perfection stifles progress. Or it could play a role in an expected pitch from city officials for a major project from Amazon, which announced last week it is looking for a home for a new second headquarters.
It may depend on what the Heinz Endowments, Claude Worthington Benedum and Richard King Mellon foundations -- partners in Almono, LP -- decide in the next few months, when they hope to choose developers for parts of the site. If completed, it will be a key step in a very long process.
In 2002, as the foundations moved to complete a two-year-long purchase process, Mayor Murphy publicly mulled thwarting them by taking the site via eminent domain. But he stood down, and the foundations bought the land for $9.9 million. Since then, the site has remained on the tax rolls, but largely undeveloped.
“I have huge respect for Tom,” said Mr. Oliphant. But, he added, the foundations thought they needed to step in and protect the huge riverfront site from “the stupidest possible set of uses,” which were then under consideration, ranging from a new coke oven to a vehicle tow pound.
“You could’ve had a Pep Boys down there in two months, with a big asphalt parking lot around it,” said Mr. Peduto.
“You could’ve had [something like] the Homestead Waterfront,” said Kevin Acklin, the mayor’s chief of staff and chairman of the Urban Redevelopment Authority board, which to him would have been “a development that doesn’t take into account the whole Hazelwood neighborhood.”
Rebecca Flora, principal of ReMake Group, shows a preliminary map of the proposed redevelopment of the site of the former LTV Coke Works. (Darrell Sapp/Post-Gazette)
Instead, Hazelwood residents wake up to a temporary Uber autonomous vehicle test track on one end of the site, a few hulking remains from the mill’s time, one freshly paved boulevard through a lot of rocky ground -- and lots of big plans.
“This is what’s moving, right now, today: Design of Mill Street. New marketing and branding strategy. Finalization of the master plan. Transportation [planning],” said Ms. Flora. “I have probably 10 different paths that are all leading forward right now, leading us forward toward this ability to put a really solid solicitation [for developers] on the street this fall.”
The site, which runs from the Hot Metal Bridge almost to the Glenwood Bridge, is expected to include some mix of homes, offices, light industry, research space and open space, with a smattering of retail.
Ms. Flora, who led South Side’s lengthy rebirth and then ran local and national green building groups, said she’s aware that the 15-year wait has engendered skepticism.
“I understand that there’s rumors that, yeah, OK, yeah, right, uh huh, Almono is just kind of never going to happen,” she said. “I understand people are saying, ‘They’re going to set the standards so high nobody’s ever going to be able to accomplish them.’”
Just preparing the site took a lot of effort and money. In addition to sewerage and utilities, 1 million cubic feet of fill was used to grade the site. The new Signature Boulevard runs 1.5-miles, part of a $27 million road and utility package. The financing for past and future site improvements includes $14 million in grants and $20 million in low-interest loans, plus $80 million raised through tax-increment financing -- borrowed money backed by future increases in real estate levies.
Aerial view of the coke plant’s former site. (Darrell Sapp/Post-Gazette)
In coming months, Ms. Flora expects to invite teams of developers to submit proposals -- after she and the foundations finish outlining their expectations. For instance, the site is supposed to produce as much energy as it consumes, primarily through solar power.
The site’s centerpiece, the so-called Mill 19 building, was transferred in October from Almono to the Regional Industrial Development Corp. That nonprofit corporation is hoping to start construction this year on an $80 million, 65,000-square-foot research facility within the exoskeleton of the industrial past.
Its hoped-for anchor tenant would be the embryonic Advanced Robotics Manufacturing Institute, a Carnegie Mellon University initiative backed by $80 million in Department of Defense funds and a $20 million grant by the Richard King Mellon Foundation.
“We’re all rallying around that building, because right now, that’s the focal point,” said Ms. Flora. “We see that as an iconic building that is really the centerpiece of the site.”
Artifacts of the old coke plant remain, including this spot where barges used to dock. (Darrell Sapp/Post-Gazette)
The process unfolding in Hazelwood could be a preview of a future in which development proposals are tested on a green grid before steel or brick are laid, thanks to a conversation about a neighborhood 4,100 miles northeast of Pittsburgh.
Mr. Peduto said that his first conversation with André Heinz “was supposed to be an introductory meeting and it ended up being more than an hour and a half.” Mr. Heinz had lived in Stockholm, and he and the mayor compared notes about the Swedish capital’s sustainable urban eco-district, Hammarby Sjostad.
“We said, why can’t we have a Hammarby? And we started thinking about the potential for Hazelwood,” the mayor said.
Mr. Heinz, 47, of Fox Chapel, is the son of Teresa Heinz Kerry and her late husband, Sen. H. John Heinz III. He earned a master’s degree in environmental studies at Yale University, ran a nonprofit focused on sustainability in Stockholm, and founded a private investment firm that targets investments in renewable energy and materials. Through the Heinz Endowments, he declined an interview request.
The mayor and the scion agreed that the city could set new rules under which development subsidies would flow to projects which featured not just financial performance, but respect for people, place and planet -- dubbed the P4 principles. The URA has been working with developers for a year to craft a scoring system.
“André’s role has been instrumental in making those things happen,” said Mr. Peduto. When it’s fully implemented, he said, the system will be “revolutionary,” because he doesn’t know of another city in which the public will be able to see every development’s P4 score.
Four city employees, a Heinz Endowments representative, two developers, and representatives of six nonprofits, five professional firms and one labor union teamed up to craft the 12-measure P4 scoring system. The measures focus on community engagement, affordable housing, transportation connections, energy efficiency, economic equity, land reuse, rainwater management, innovation, public space, air quality, design excellence and stimulation of weak markets. The scoring process is outlined in a 64-page document available via http://p4pittsburgh.org/pages/p4-performance-measures.
“That takes away from questions of pay-to-play,” Mr. Peduto said, referring to perennial accusations that developers who make campaign contributions get favorable treatment.
When she’s not spearheading Almono’s efforts, Ms. Flora coordinates the city’s communication with developers about the P4 scoring system.
A remnant of the old coke plant rusts in the sun. (Darrell Sapp/Post-Gazette)
“Having Rebecca in that role, of being both the one who is creating standards for us to follow and being in charge of development of one of the largest sites in Pittsburgh, or the largest site in Pittsburgh, shows the philosophy and the practicality can go hand in hand,” said Mr. Peduto.
Twice last year, Ms. Flora convened developers to get their feedback on the P4 matrix. “You know what? I didn’t get any pushback from that group,” she said. “They actually kind of welcomed it, because it was just like, tell us the rules, tell us what you want us to do, because right now it’s a moving target.”
“If you don’t want this money,” said Ms. Flora, “you don’t have to do these measures.”
One developer who knows firsthand just how much sway the foundations have over Mr. Peduto’s agenda is Chicago-based McCaffery Interests and its CEO Dan McCaffery, the redeveloper of the produce terminal.
During his three-year odyssey to try to get the project moving, Mr. McCaffery has had to answer to the Heinz Endowments even though the foundation has yet -- and may not -- commit a dime in support of the project.
Heinz got involved because it did not like McCaffery’s early plans for the terminal, which relied heavily on residential construction. It also encouraged a partnership with Pittsburgh Gateways Corp. which later dropped out of the picture.
Mr. Heinz, captivated by McCaffery’s energy efficiency efforts in its Lakeside development in Chicago, wanted to know whether similar solutions might work at the terminal, according to an email from Mr. Acklin.
In an interview, Mr. McCaffery said the kind of foundation involvement he experienced in Pittsburgh with the terminal is not typical of what he has found in other cities where he does work.
“I’ve never been involved with the foundations. This is a little different case. This project has quite a lot of interests. Funny how much interest it has yet it sat there so idle for so long,” he said.
Mr. McCaffery added that he understands the level of scrutiny and doesn’t mind it, particularly when there may be a need to “rely on them to do something community-minded or spirited to help the project out.”
While Mr. McCaffery said he does not need foundation financial support for the terminal development itself, there are public realm improvements involving Smallman Street that could use such an infusion.
“To the extent I can interest the foundations as a whole, I’m going to invite them in,” he said.
“The foundation and the university involvement in economic development is not new,” said Dennis Yablonsky, CEO of the Allegheny Conference on Community Development, a nonprofit regional booster steered by leaders of the for-profit and nonprofit business community, and foundation heads. “It’s been that way, certainly since the 70s and 80s.”
What’s new, Mr. Yablonsky said, is the level of “proactivity” by foundations, and their hands-on approach.
Mr. Murphy said the big foundations sought a guiding role during his tenure, from 1994 through 2005. “They wanted to get directly engaged in the planning process for the city. And they had great ideas,” Mr. Murphy said.
However, he had one, overriding idea: “The focus had to be single-minded on how you create jobs. … I don’t see the foundations as directly involved in creating jobs, in a relentless kind of way going after companies.”
Plans call for the development of homes, offices, light industry, research space and open space, with a smattering of retail at the old coke plant site. (Darrell Sapp/Post-Gazette)
Nonetheless, he accepted a foundation offer to fund an architecture competition that led to the David L. Lawrence Convention Center’s unique, and green, design. And despite the Hazelwood spat, Mr. Murphy characterized the foundations -- along with the big nonprofits and the business community -- as part of a civic fabric that seems unique to Pittsburgh.
“We’ve built a structure where we sit down and have conversations whether we agree or don’t agree,” he said. “I have been to over 100 cities since I’ve been mayor, and there’s not a city I’ve been to that has the kind of partnerships that we have.”
Those partnerships waned from 2006 through 2013, when Luke Ravenstahl was mayor, according to foundation heads.
“We had an experience under the previous mayor where he was not in alignment with our vision around riverfront development and urban design,” said Mr. Oliphant. The foundations, he said, offered to work with Mr. Ravenstahl in those areas. “The message that we got was, ‘No thanks.’”
Mr. Ravenstahl did not respond to requests for comment.
Mr. Peduto’s approach, along with that of County Executive Rich Fitzgerald, has been the polar opposite, Mr. Oliphant said.
“With some exaggeration, I would describe it as a golden age” of collaboration between local government and the philanthropic sector, said Mr. Oliphant.
With new rules and philanthropic input, developments may take a little longer, said Mr. Peduto -- but he thinks they’ll be worth the wait.
“If it were like the 1990s when Mayor Murphy was in charge, the necessity of time would have been a more critical factor,” said Mr. Peduto. The city is no longer in an economic and fiscal crisis, he said. “Time is not one of the biggest factors. Getting it right is.”
Tina Checkan, right, CEO and superintendent of Propel Schools, addresses families, community members and employees at a community forum for the charter school. (Haley Nelson/Post-Gazette)
Reporting Rich Lord
The five-story brick and concrete building overlooking Brighton Road in Perry South features a Propel schools banner over its front door, with signs for the charter network at every approach.
The 99,155-square-foot Propel Northside is owned, though, by School Facilities Development Inc., a nonprofit corporation with a very narrow role: Leasing property to Propel.
SFD’s ownership allows Propel to collect around $322,000 in annual lease reimbursements from the state -- money it wouldn’t get if it owned its school buildings. It’s an arrangement that had drawn criticism from the state’s top auditor and is threatened by proposed legislation.
“You’ve created this nonprofit and sort of in a sense, you control it,” said Auditor General Eugene DePasquale, a critic of the state’s charter school law. “You’re getting a lease reimbursement for renting to yourself.”
Since 2004, SFD has spent $32.6 million buying a portfolio of seven schools, comprising most of Propel’s 11 locations. With no employees and just a few volunteers and part-time consultants, the nonprofit receives $3 million in annual lease payments from Propel schools, and after debt payments runs annual six-figure surpluses.
From 1965 to 2006, the Pittsburgh Public Schools owned the Brighton Road building, maintained it and used it as Columbus Middle School. That simple arrangement isn’t mirrored in the charter school world, where specialized nonprofits take on various roles and receive millions of dollars in public money.
Heather Hazen, second from right, raises her hand to ask a question at a Propel Schools meeting. Her daughter, Aria, and her son, Atlas, are Propel students. (Haley Nelson/Post-Gazette)
“Real estate is held in a separate company,” said Propel Executive Director Jeremy Resnick, recounting the advice he’s gotten from attorneys and financiers during Propel’s 15-year history. “This is how it’s being done.”
The ability to tap state reimbursements is “certainly a factor” in Propel’s lease arrangements, said Mr. Resnick. “I’m not going to say it’s not an important amount of money. It’s a lot of money. But it’s being spent on kids.”
Charter schools in Pennsylvania are universally led by nonprofit entities, but some also do business with separate tax-exempt corporations created to serve their specific needs. Sometimes, that has raised questions. A nonprofit was part of the money trail at the center of the successful prosecution of the former CEO of the Pennsylvania Cyber Charter School.
PA Cyber is now “in a dramatically better place,” said Mr. DePasquale. But the outsourcing of charter school functions to special-purpose nonprofits is still a problem, he said, because the organizations sometimes claim to be outside of the scope of laws governing open records and state auditing.
“When they say, ‘we’re a private business,’ I somewhat chuckle at that,” he said, “because some of them have been set up simply to get the management of the charter schools out of the public view.”
When traditional school districts want to build or improve schools, they typically ask the state to pay part of the cost. Charter schools, though, are not eligible for school construction reimbursements from the state, nor for payments related to buildings they own.
When Mr. Resnick launched Propel and sought to open a school in Homestead, he cast about for someone to construct an appropriate building, which he’d rent from them. He couldn’t find anyone interested in the job.
So Mr. Resnick helped to create SFD, which has a board separate from Propel’s, but has shared the school’s mailing address, lawyers and accountants. Since then, SFD has worked with the Allegheny County Industrial Development Authority to borrow money by issuing tax-exempt bonds, then bought schools in Homestead, Munhall, Turtle Creek, McKeesport, Braddock Hills, Kennedy and Perry South, all of which it leased to Propel.
For instance, SFD bought the former Columbus Middle from the Pittsburgh Public Schools for $930,000 in 2014. That year SFD and Propel entered into a lease under which the school pays $120,000 a year. For that school’s lease cost, the state reports reimbursing Propel $30,809, a figure based on a formula driven largely by the student count.
Jacquetta Rawlings, a fourth grade science teacher at Propel Braddock Hills Elementary School, discusses the importance of the school and community coming together. (Haley Nelson/Post-Gazette)
While Propel gets lease reimbursements that last year totaled $322,000, SFD runs annual surpluses. SFD netted $521,442 last year and $302,718 in 2015. Its chief financial officer Larry McKee did not agree to an interview, but wrote in response to questions that “a healthy balance sheet ... enables SFD to make the necessary capital investments and improvements and to reduce outstanding debt.”
Propel’s leases with SFD came under fire a year ago, when Mr. DePasquale’s office, in an audit, accused the school network of “essentially leasing the buildings to itself,” creating “potential conflicts of interest.” The audit recommended that the Department of Education try to recover money already paid, and stop reimbursing for leases between a charter school and “a related party.”
The department has not sought to recover any of the money or change its reimbursements. “Until revisions are enacted, the Department has no choice but to continue to operate in accordance with current law,” which allows the reimbursements, wrote spokeswoman Casey Smith. She added that the department “intends to place additional resources behind monitoring and evaluating the integrity of programming and finances” at charter schools.
Mr. Resnick argued that Propel’s leases with nonprofit SFDI reflect “an arrangement that has been vetted across Pennsylvania.”
Charter schools are publicly funded, but run independently from the state’s 501 districts. The state Department of Education lists 176 charters statewide, including 22 located in Allegheny County, three in Beaver, and one in Westmoreland. State law requires that they be organized as nonprofit corporations.
Run by eight separate nonprofits, supported by a fundraising Propel Schools Foundation and aided by SFD, the Propel schools are approaching 4,000 students, making them the dominant charter system in Allegheny County.
When you add the eight Propel nonprofits, the foundation and SFD, the network last year reported paying 831 employees nearly $34 million in salaries, and reported $90.3 million in assets and a surplus of $7.8 million.
Mr. Resnick is paid by one of the nonprofits, Propel Schools Inc., and his $162,336 salary and $50,592 benefits package last year trailed those of two other leaders of Allegheny County charter schools, and that of Pittsburgh Public Schools superintendent Anthony Hamlet, who earns $210,000 plus benefits.
When a student opts for a charter, that school receives payments, at the expense of the traditional district, based on a state formula. Propel collected nearly $52 million in tuition that would have otherwise gone to traditional school districts.
Mr. Resnick noted that the formula does not factor in school facility costs, which are only addressed through the lease reimbursements. He said that in some other states, charters receive flat per-student facilities reimbursements, regardless of the ownership of the school buildings.
Would such an arrangement help Propel? Mr. Resnick said it “would make a huge difference for Propel if this issue wasn’t being slung around by the auditor general because of what might appear to be a problem, or might actually be a problem, somewhere else.”
In Philadelphia, newspapers have probed complex, expensive bond deals and leases that charters there have used to secure buildings. State Rep. James Roebuck Jr., of Philadelphia, said he’s concerned that lease arrangements can “produce a surplus for which there’s very little accountability.”
In April, he introduced a bill aimed at ending reimbursements to any charter which leases from a landlord with which it has ties. A separate bill introduced in May in the Senate by Jim Brewster, D-McKeesport, Jay Costa, D-Forest Hills, and Wayne Fontana, D-Brookline, also aims to ban reimbursements for lease payments to building owners with business or family connections to the charter school.
“You’re finding increasing amounts of public dollars being diverted,” Mr. Roebuck said, “from educating young people and into other things, like creating profits.”
Exhibit one in the case alleging profits from charters may be Nick Trombetta, founder of PA Cyber, currently awaiting sentencing in federal court. He pleaded guilty a year ago [Aug. 24, 2016] to tax conspiracy related to the siphoning of $8 million from the school, through a nonprofit, to a network of other entities he created.
PA Cyber founder Nick Trombetta pleaded guilty last year to directing $8 million from the school to entities he owned. (Darrell Sapp/Post-Gazette)
PA Cyber, which teaches some 10,800 students who learn via their home computers, has consistently collected over $100 million a year in tuition that would otherwise go to traditional schools. (It reached $122 million last year.) Before Mr. Trombetta left the school in 2012, PA Cyber paid more than 40 percent of its receipts to the National Network of Digital Schools. That nonprofit and the online school were then led largely by the same clique from around Midland, Beaver County.
At the time, NNDS paid around 13 percent of its receipts to for-profit Avanti Management Group. That company covered purchases which benefitted Mr. Trombetta, including a plane, a luxury vacation home in Florida, and an Ohio residence for a girlfriend, FBI investigators concluded.
During the investigation of Mr. Trombetta, Avanti folded. NNDS changed its name to Lincoln Learning. PA Cyber and Lincoln Learning have moved to a strictly-business, client-vendor relationship, said the school’s new CEO Brian Hayden.
In its most recent IRS disclosures, PA Cyber reported spending roughly 26 percent of its funds with Lincoln Learning. Mr. Hayden predicted that would further decline.
In contrast to NNDS, which once handled nearly everything except the actual teaching, Mr. Hayden said Lincoln Learning will have more limited roles -- providing curriculum and strategic communications, cleaning buildings, removing snow and carpentry. “We have continued to pull some of the services they provided in house,” he said.
Mr. DePasquale said recent audits of PA Cyber have been comparatively benign. “Whatever issues we found, it wasn’t somebody using taxpayer money to buy a jet airplane,” he said.
The auditor said he’s still worried about the creation of separate nonprofits that take on important functions for charter schools -- and often resist scrutiny.
“The idea that some of these nonprofits are running management of actual schools, and we don’t get access into it … is a big problem for me,” he said. “At the end of the day, it is taxpayer money.”
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