The Beaver County-based 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 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. Tom 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 spinoffs, has grown dramatically as the school's enrollment has surged to around 11,300 students statewide.
During the 2010-11 school year, the last one for which data is available, PA Cyber got $103 million from school districts whose students opted to enroll 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," Mr. 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 spinoffs 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 spinoffs.
"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 charters 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, Mr. 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.
When Mr. Trombetta pioneered cyber education, he stumbled on a cash cow.
Charter schools are independent public schools, but report to a school district or, in the case of cyber charters, the state. They are paid by districts based on the number of students they attract and the home districts' average per-student costs. When PA Cyber attracts a student from the Pittsburgh Public Schools, for instance, the district pays PA Cyber around $13,000, or $28,000 if the student has special needs.
On average, charter schools spend $13,411 per student per year, according to a report issued by state Auditor General Jack Wagner last month. Cyber charters, though, need fewer buildings and can keep staffing costs lower than bricks-and-mortar schools. Cyber charters spend an average of just $10,145 per student, Mr. Wagner found. They don't 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 Mr. 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.
It is common for charter schools to hire management companies, but in this case the arrangement was cozy. In addition to Mr. 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.
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.
In 2008, PA Cyber and NNDS split like a dividing amoeba at the suggestion of the state Department of Education. Mr. Trombetta and Mr. Tridico remained with PA Cyber but left NNDS. Ms. Bellay and Ms. Pennington dissociated from PA Cyber while staying with NNDS. Ms. Bellay has also been paid by Avanti in some years.
Still, the arrangement worried Mr. Rendell's administration when PA Cyber applied to renew its charter in 2010, as it must do every five years.
In a June 2010 document, Mr. Rendell's secretary of education, Thomas Gluck, told PA Cyber that it "must provide more transparency in [its] agreement" with NNDS.
NNDS must "disclose relevant details of the services rendered," including listing the people working on behalf of PA Cyber, the dates and times of the services they performed, their hourly pay and their total pay. NNDS-hired subcontractors that work on behalf of PA Cyber should document their work, he wrote.
PA Cyber "must make the corrections identified ... or the Department will begin [charter] revocation proceedings," Mr. Gluck wrote. He gave PA Cyber until March 31, 2011, to comply.
PA Cyber waited until the day of the deadline to respond before declining to part the curtain on its dealings with NNDS. Mr. Trombetta wrote that NNDS's "internal systems and structure are not set up to provide some of the information." Changing its systems "may create a higher cost for services to their customers and put their organization at a competitive disadvantage."
Mr. Corbett's Department of Education, which was newly in place at the time of PA Cyber's response, was "satisfied with the actions they took," said department spokesman Tim Eller. He noted that PA Cyber agreed to allow state agencies to audit its business dealings.
He said the department never had authority to put conditions on PA Cyber's charter renewal, calling Mr. Gluck's letter "a unique request and circumstance."
Asked whether the federal searches of PA Cyber offices would provoke any action by the department, he said, "At this point, I cannot discuss that."
Mr. Cowell said he wasn't surprised that the Corbett administration was less concerned about PA Cyber's business dealings. "This administration is generally supportive of opportunities for [school] privatization," he said.
Mr. Eller said the administration supports choices for students and families, but has been working toward reforming the charter school financing system by demanding that the schools meet achievement and transparency requirements.
In June, the Post-Gazette asked the state Department of Education to provide more documentation of its communications with PA Cyber. On the same date, the Post-Gazette asked PA Cyber to detail its business dealings with NNDS, Avanti and other companies. Both the state and PA Cyber invoked their right under the state's open records law to take a month to comply.
Mr. Gluck, now an official with the Pennsylvania Association of Intermediate Units, declined comment. The other person most involved in demanding more transparency from PA Cyber, former Department of Education Chief Counsel Judy Shopp, could not be reached. She left the state's employ and is now PA Cyber's compliance officer, also getting income from Avanti, according to financial disclosures she filed.
The interweaving of PA Cyber's spinoffs is nowhere more apparent than on a picturesque farm in nearby Calcutta, Ohio.
NNDS bought the farm in 2007 for $457,000, according to online records in Columbiana County, Ohio. It was sold last year for $495,000 to Palatine Development, a Koppel-based company created by Brett Geibel, who was PA Cyber's director of technology through 2006.
Palatine rents the farmhouse to Avanti, of which Mr. Geibel is CEO. A more modern building on the farm houses curriculum development staff of NNDS, for which Mr. Geibel is a consultant.
Federal agents searched the farm Thursday. Mr. Geibel and other Avanti executives could not be reached for comment.
Like Mr. Geibel, Avanti's other three managers have traveled from the charter school to nonprofit NNDS to the for-profit contractors, all the while serving PA Cyber. Their shifting roles have been disclosed in tax filings by NNDS, reports by PA Cyber to the state and on Avanti's website.
Jane Price was PA Cyber's curriculum coordinator, then moved to NNDS before joining Avanti, where she is president.
Avanti Vice President Rebecca Manning was PA Cyber's director of special education, then crossed the street to become the Lincoln Park Performing Arts Charter School's CEO, a post she maintains.
Robert Babish was PA Cyber's director of instruction, and then a consultant to the school before joining Avanti as its other vice president.
Mr. Babish also founded Digital Print Shoppe, which got $39,000 from NNDS during the 2010-11 school year, according to tax filings.
NNDS Management Foundation during 2010-11 also paid $3 million to the separate, for-profit NNDS Corp., which manages property, tax filings said. NNDS Corp.'s founder, George Pacinda, is a member of the NNDS Management Foundation's board and an Avanti employee.
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. There are only a limited number of people who know online education, and many of them got their chops 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.
"We have over 500 employees. Many of them may have consulting jobs," she said. "When they're employed by PA Cyber, we don't ask them where else do you work, or what else do you do to bring in income."education - homepage