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Cato Caves In

Photo: Cato Web Site

The Cato School of Reason, once one of the state’s largest public charter schools, abruptly shut its doors last week in the wake of evidence that it had used student rosters of Los Angeles–area private schools to claim millions of dollars in public-school funding. In the process, Cato "engaged in fraud and misrepresentation," according to documents released last week by investigators.

Federal agents are now reviewing Cato’s practices for criminal violations, according to sources in contact with the FBI. Targets of the review include Cato founder Tom Cosgrove and retired Congressman Mervyn Dymally, who was paid to spearhead Cosgrove’s private-school recruitment effort across the L.A. basin.

The findings of fraud stem from an investigation mounted by the Apple Valley Unified School District, which sponsored Cato’s charter to operate. The district investigation, in turn, was jump-started by a Weekly cover story in August.

District investigators contend that until last July, Cato collected millions of dollars in state education funds by entering into agreements with private, tuition-charging schools — including religious schools — to claim, and then split, public-school funds. Through bookkeeping maneuvers, Cato had, in effect, "converted private schools into public schools," according to a resolution approved last week by the Apple Valley school board. Moreover, Cato "failed to conduct" state-required student testing and "failed to meet generally accepted accounting standards of fiscal management."

The school district’s findings were made public on Wednesday, November 18, after Cato administrators virtually forced Apple Valley Unified to present its case against the charter school by publicly accusing district officials of unfairly and unlawfully persecuting Cato. The charter school’s administrators continue to deny any wrongdoing.

It wasn’t evidence of misdeeds that shut down Cato, in fact, but the school district’s control over Cato’s purse strings. Apple Valley Unified has withheld all state funding from Cato — approaching $2 million — since July 1, pending the resolution of questions regarding Cato operations.

The school’s imminent collapse brought out dozens of vocal supporters to last week’s school-board meeting in Apple Valley. Among the speakers was Cato founder Cosgrove, who made a last-ditch appeal to district officials. "You must immediately authorize the release of a minimum of $500,000 . . . tonight," he told the board.

No funds were forthcoming, and Cato has laid off teachers and released an estimated 800 students in mid-semester. Over the weekend, school officials tried to reorganize for the short term as an all-volunteer operation, but the success of that venture as well as Cato’s long-term prospects are uncertain.

The funding cutoff, however, does not necessarily foreclose all of Cosgrove’s education enterprises. Cato’s parent corporation — a nonprofit called the Education Foundation for Ethics and Principles, also founded by Cosgrove — remains active. Already this year the Education Foundation launched a second charter, sponsored by a school system near Fresno. This campus, called the Sierra School, claims an enrollment of more than 200 home-schooled students. Its sponsor, the Eastern Sierra Unified School District, has but 650 students.

Moments before last week’s meeting in Apple Valley, Cosgrove vowed to continue his foray into charter schools with or without Cato. "The other charters will continue . . . absolutely," he said in an interview. As for his school-district sponsors elsewhere: "They love us."

Cato’s closure marks a unique chapter in California’s continuing experiment with charters, which are public schools that operate independent of conventional school districts. The story of Cato underscores both the absence of rules to govern charter schools and lax oversight by outside authorities. Word of Cato’s practices helped spur legislation last year to close legal loopholes available to unscrupulous operators. But in exchange, charter proponents — who tout charters as a vehicle for real school reform — won a dramatic expansion of the program, permitting up to 250 charters next year and 100 new charters per year after that.

Cosgrove, a garrulous libertarian, obtained a charter to start Cato late in 1994. With little more than sheer hubris and a businessman’s bottom-line mentality, he quickly built the school’s enrollment to more than 3,000 students, spread across some 40 locations, most of these over the mountains in student-rich Los Angeles County.

Cosgrove’s initial strategy was to recruit home-schoolers. He provided them with books — many of them free school-district discards — and guidance from a low-salaried "facilitator" who coordinated the parents’ own teaching. He later added a prepackaged, computer-based curriculum. For this, he received the same funding that school districts must apply to maintaining schools, buying new textbooks and paying the salaries of trained teachers. From the beginning, many parents were entirely satisfied with what Cato had to offer. For them, some help with home schooling was better than no help at all, and they much preferred Cato to the local public schools. Cato’s staff included dedicated ideologues who were disenchanted with public education and viewed Cato as the wave of the future.

 

Cato was initially sponsored by the Snowline Joint Unified School District, but senior officials there were prepared to shut it down after a damning audit and numerous problems with the quality and management of the charter school.

Cosgrove hastily switched his affiliation to Apple Valley Unified in the 1997-98 school year. His key ally in the move was veteran administrator and former Apple Valley Mayor Robert Turner, who rushed a Cato charter through the school district while reassuring any school-board members who harbored misgivings. The problems in Snowline were merely philosophical, he told board members. At year’s end, Turner retired from the school district to move to Cato full time. Soon after, he reportedly was instrumental in obtaining Cosgrove’s Fresno-area charter.

Around the same time, Cosgrove apparently became impatient with the plodding pace of home-school recruitment. Wouldn’t it be more effective to pump up his official Average Daily Attendance (ADA) by recruiting whole blocks of students at once? As recorded in the draft minutes of a May 1997 "Cato Council" meeting, "Cosgrove explained to the Council the reasons for recruiting satellite schools: 1) to increase ADA." (No other reason was recorded.)

Cato’s enrollment exploded — from 200 in January 1997 to more than 3,000 students by October. Former Congressman Dymally, an old acquaintance of Cosgrove’s, was instrumental, personally bringing in half a dozen L.A.-area schools. But Turner, Cosgrove’s new colleague, quickly became uncomfortable with the setup, most notably at the Dymally schools.

On August 1, 1997, Turner sent a memo to Cosgrove that would become central in the Apple Valley district’s case against Cato. Turner expressed concerns that Cato was claiming funding for private-school students whose families didn’t know they were enrolled in Cato, and that religious instruction was taking place at some schools. Moreover, Turner alluded to auditors who’d already alerted Cosgrove to such matters, meaning, in effect, that Cosgrove already knew of the problems but appeared unwilling to lose the state funds these students generated. (Cato records indicate 23 affiliated schools that charged tuition, and at least 13 that taught religion.)

Turner’s memo brought an immediate handwritten response from Dymally, in which he noted, "I really don’t like the tone of Turner’s memo — as if I planned this effort by myself."

Turner also referred to the lack of student testing, which was required under Cato’s advertised system of assigning grade levels based on student achievement. Auditors recently concluded that few of the student files in the Cato "satellite" campuses contain such tests. At a Cato satellite in Orange County, for example, only two of 478 students had assessments in their files.

Both the Turner memo and the Dymally memo first surfaced through the Weekly’s investigation. In fact, the same day that the first Weekly article appeared, the school district shot a list of 328 questions over to Cato, including queries about major issues raised in the article. Cosgrove conceded numerous points, but denied many others. He also refused to sign a provision asking that he supply his answers under oath.

By the fall of 1997, Cato was flying high, with projected annual revenues approaching $10 million. Private schools were joining as quickly as Cosgrove could process them. Most were struggling, well-meaning outfits that served minority working- and middle-class families in the Los Angeles area. These private-school owners saw the gold of state funding dangling before them and were all too willing to rely on Cosgrove’s assurances that his activities were state-sanctioned. The ever-creative Cosgrove was exploring other avenues too, such as diploma programs for state prisoners and expansion into Ventura County.

Cato headquarters, in new, remodeled offices on Bonanza Road in Victorville, with its state-of-the-art computer lab had become Exhibit A for visiting political or education dignitaries. The quarterly corporate meeting that year was scheduled for Laughlin, Nevada. And Cato, along with its Cosgrove-controlled parent corporation — the Education Foundation for Ethics and Principles — were proud pledges in the Apple Valley, Victorville and California chambers of commerce. Management had instituted a strict office dress code, and the local High Desert Opportunity Luncheon was de rigueur.

This was a firm gearing up for the transition to the corporate big time. A management note from that period recorded goals of 30,000 students by the year 2000, a student-to-staff ratio of 50 to 1, and a budget of $120 million spread over five charter schools in California and five in other states.

To his staff, Cosgrove spoke of making every department a profit center: The library would double as a bookstore; the personnel department could spin into a temp agency; the selling of computers could be explored.

Yet this was a success story with a secret. A phone script was prepared to deflect questions from the press. An October 1, 1997, memo advised managers: "Train your staff on ‘fishy’ questioning. When they feel uncomfortable about the questions they are asked, tell them to transfer the calls . . . BE AWARE of incoming calls." Employees were not allowed to release enrollment numbers or give specific details about the satellites.

 

One staffer remembers being puzzled by the organization’s secretiveness. "We knew something was terribly wrong," said the former worker. "We understood a school is also a business, and businesses have secrets. They have to. But this was more than that. Cosgrove was so silent about it, it was loud."

The silence of one satellite, the Anita Oaks School in Duarte, was purchased. Anita Oaks was complaining to local and state officials that it had been ripped off by Cato, in terms of both promised services and cash compensation. The private school apparently did not realize that its agreement to receive public-school funding was itself questionable. To hush the squeaky wheel, Cato paid Anita Oaks $97,744.64 — the full amount it was seeking — in exchange for a gag clause that forbade the private school from discussing the matter.

Cosgrove reportedly confided to one staffer, "I know this won’t go on forever. I know the state will eventually shut us down. I want to have something else going when they do."

To maximize the windfall, Cosgrove directed that satellites bear the cost of any possible expense. "It is imperative that all locations understand that any and all services rendered by Cato will be charged back to them, including photocopies," noted one memo.

Because some satellites never had more than a tenuous connection with Cato, Cosgrove reportedly gave them the option of not using Cato’s curriculum. "He said, ‘You can use it if you want to, but you don’t have to,’" recalled one former Cato worker. "I said, ‘How are we going to track student performance?’ He said, ‘Some schools have their own systems. Let us worry about that.’"

Meanwhile, staff turnover was high, as Cosgrove hired and fired in short order, a practice that left many records in shambles. But Cosgrove wasn’t afraid to spend money to rev up his corporate empire. The loyal and naive ideologues began to be weeded out, replaced by higher-salaried newcomers such as management consultant Walt Gorsey, an old friend of Cosgrove who would later take center stage.

According to former employees, the school, which is registered as a nonprofit agency, also was contributing to political campaigns and politicians — in possible violation of tax law — although it’s not clear what accounts these donations came from. In addition, Cosgrove hired two school-board members from a neighboring school district, perhaps as a hedge against bad developments in Apple Valley. One board member, an accountant, was fired shortly after she lost her bid for re-election. The other stayed on as a secretary, and later — almost overnight, in one of the many staff reshufflings — became the Cato school principal.

"It was a wonderful place to be in the beginning," noted an early staff member. "A few home-schooling parents and a few home-schooling staff. It grew way too quickly and got off track. It became a business. The people running it now never home-schooled their kids. They know nothing about home schooling."

For a year and a half, Apple Valley Unified appeared to have little interest in policing Cato, perhaps because Apple Valley got a 10 percent cut of every public-school dollar Cato generated outside Apple Valley. But attorneys advising the district, including a former prosecutor named Hector Salitrero, apparently persuaded officials that an aggressive inquiry was called for, and that such an effort could limit the school system’s future liability. After all, what if the state demanded a payback of funds given to Cato?

By this summer, under local and state scrutiny, Cato jettisoned nearly all its satellites, but didn’t return a penny of state funding. Meanwhile, for months, Cosgrove and Cato administrators avoided answering directly most state and school-district queries. They asserted either that they had done nothing wrong — as evidenced by clean audits — or that any mistakes were innocent, and largely attributable to the lack of regulations governing charter schools.

Cato’s shaky reputation, they wrote at one point, "has been driven by malicious and false rumors spread by persons with a vendetta against Cato. This has led to three inflammatory articles published in a certain L.A.-based throw- away paper that are false and misleading."

Moreover, in an attempt to placate district officials, Cosgrove even resigned officially from Cato — to be replaced by management consultant Walt Gorsey.

It didn’t work. Apple Valley has been withholding since July 1 state funds "earned" by Cato, while their own auditors and investigators reviewed whatever Cato records they could obtain.

 

Now, instead of spurning state inquiries, Cato appealed to the state for help. "Our desire has always been to resolve any potential problem . . . at the earliest possible time, in order to continue to provide a quality education to our public-school students," wrote new CEO Gorsey. "It is imperative that we immediately meet with a decision maker from the [California Department of Education] to resolve the matter."

Gorsey characterized Apple Valley’s actions as arbitrary and added, "We believe it is illegal for public schools to be shut down by withholding funds, as is presently occurring." Soon, however, Gorsey himself was on the outs, having been unceremoniously dumped by Cosgrove and his Cato Council for making too many concessions to Apple Valley in the attempt to keep Cato going.

On Cato’s behalf, Gorsey and Cato attorneys had agreed to give the school district control over Cato accounts and to return unearned state funds.

Such conditions were unacceptable to Cosgrove given what Apple Valley auditors were uncovering. They already had concluded that $3.2 million of Cato’s funding claims last year were questionable. Beyond other overriding issues, Cato records were just plain unacceptable. For example, auditors found a 45,000-day attendance-count discrepancy in different versions of school records for the same period. Auditors also found several instances of satellites that recorded no student absences for the sampled months. In addition, Cato acknowledged this month that it owed satellites $470,000.

But Cosgrove and a Cato attorney had no rabbits to pull out of the hat other than to call for a new deal, defend Cato and accuse Apple Valley of duplicity.

Last Wednesday, the school board answered. After listening to 25 minutes of pleas from Cato employees and parents, the board took a brief break, then produced a resolution studded with 29 exhibits. Board President William Van Kirk, once Cato’s staunchest enthusiast, gamely took on the chore of reading every word in the three-page resolution, then joined his board colleagues in a unanimous vote to sever ties with Cato.


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