confluence academy, inc. confluence/gcaa single lea june 2017 · • charter contract renewed in...

Confluence Academy, Inc.Confluence/GCAA Single LEA

June 2017

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Current Organizational Structure:

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* Confluence began as an LEA in 2007 while GCAA became an LEA in 2010


• Confluence Academy, Inc. (CA)– 501(c)(3) non-profit tax-exempt org.

• First LEA – Confluence Academy (Confluence)• Sponsored by University of Missouri – Columbia (UM-C) since 2013• Charter contract with UM-Columbia effective until 2022• The 2014 UM-C contract has a clause which will allow for the sponsoring of GCAA if it is no longer sponsored by Saint

Louis University (SLU)• Can be renewed for 5 more years beginning May 2022• Charter Sponsorship fee is capped at just over $146,960 annually (.030% of revenues)

• Second LEA – Grand Center Arts Academy (GCAA)• Sponsored by SLU since 2010• Charter contract renewed in 2015, effective until June 30, 2020• SLU charter contract has a clause which allows Confluence to terminate the charter contract for any reason by a vote of

the Board. Additionally, if the LEA’s are merged, the contract terminates• Charter Sponsorship fee is 1.5% of revenues or approx. $90,000 annually

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Overview:

Confluence Academy, Inc.’s (“CA”) Confluence Academy LEA and Grand Center Arts Academy LEA charter schools provide students and families alternatives to obtain the highest quality public education within the City of St. Louis by engaging and encouraging their students to excel in reading, math, science, technology, visual arts and performing arts. Those students will be prepared for success in life. These CA educational alternatives help attract and retain City of St. Louis residents, which strengthens our City.

As explained in the following pages, for clear financial reasons, CA should merge its Grand Center Arts Academy LEA into the Confluence LEA. This merger is critical to the existence and long term goals of both the Confluence and Grand Center schools, which, in turn, is essential to the success of the students and families served by those schools. Those schools collectively educate more than 3,300 students daily, including students in the City of St. Louis’ impoverished North City area, which many other charter schools avoid.

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Overview (cont.):

Confluence Academy provides students a neighborhood school option with academic results that are in the upper quartile of performance relative to SLPS neighborhood school options. Grand Center Arts Academy indisputably provides students with an excellent program that is a popular and a vital part of the Grand Center business and arts community. Students and families have chosen to attend these CA schools instead of other alternatives and those choices will be nullified, and those students’ and families’ lives will be severely disrupted, if either Confluence Academy or Grand Center Arts Academy ceases to exist.

Unfortunately, for the reasons explained in the following pages, that is precisely what could happen if the Confluence Academy LEA and the GCAA LEA are not merged into a single LEA. From a governance and operational standpoint merging them is a non-event because that is precisely how they have been governed and operated since Grand Center Arts Academy was granted a charter. Both LEAs are governed by a single non-profit corporation, a single Board of Directors and a single Administration.

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Overview (cont.):

We hope that after your review of the following analysis, you will agree that merging GCAA into Confluence Academy is in the best interest of the students, their families, the SLPS education system, the City of St. Louis and the State of Missouri. CA believes there is no governance, operational or financial downside to such a merger.

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General Summary Information:• The Confluence elementary schools run cash flow positive • GCAA’s LEA currently only includes a middle school and high school• As is the case with almost all “districts” in Missouri, the elementary schools help to subsidize the high schools

operations. This is because staffing needs tend to run higher at high schools• As a sign of relative financial health, the 2016 current assets-liabilities ratio for Confluence is 3.43 while the

ratio for GCAA was only 1.26. Current ratio is calculated by dividing the entity’s short-term assets by its short-term liabilities

• General Fund Reserve Balances over the last three (3) years for each LEA are as follows:Year Confluence GCAAFY15-16 27.19% 3.77%FY14-15 13.70% 6.67%FY13-14 23.86% 3.40%

• GCAA’s Fund Reserve balance is only positive due to the annual loans it receives from Confluence

Note: LEA’s/Districts with fund balance reserves less than 3% are considered financially stressed.

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GCAA LEA Historical information and issues:

Note: Due to its deficit spending, it is highly unlikely that GCAA will be able to begin repaying any portion of the Confluence loans in 2020.

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• GCAA incurred significant shortfalls resulting from both operations, as well as facility build-out over the first five (5) years as the school was expanding enrollment

• While a certain level of deficit was anticipated at GCAA, amounts were significantly higher than estimates made by the former management Company (AQS)

• Operating shortfalls were the result of higher than anticipated staffing costs due to operating an Arts school as well as building costs which far exceeded budgets during grade level expansion years

• Additionally, capital improvements (build-out costs) of $1.2mm were incurred to complete the 2nd floor and basement portions of the GCAA building

• Therefore, shortfalls up to June 30, 2016 can be generally categorized as approx. $3.76mm from operations, $1.2mm due to build-out and the remaining $1.34mm due to central office cost allocations

• As of June 30, 2016, GCAA owes $6.3mm to Confluence. Repayment is required beginning July 1, 2020


Benefits of moving to a single LEA:

Provides for a more stable financial picture for GCAA – higher reserve balances – improves odds of securing building loan in 2018 (Beaux Arts) and 2020 (Sun) as well as provides more funds for instruction

Allows GCAA to avoid having to “pay back” Confluence in excess of $6.3mm. Payback begins July 1, 2020 and runs over 60 months with monthly payments of Principal and Interest in excess of $105,000 per month

Eliminates duplicate sponsorship fees (saving approx. $90,000 annually) Allows for a single charter application vs completing two separate applications with the state Provides for a consolidated view of educational achievement for all Confluence managed schools

Note: Starting July 1, 2018, the Beaux Arts building rent increases from $847,100 annually to $1,385,840, an increase of $538,740 per year. Purchasing the GCAA building prior to the increase is critical to ensure more dollars are spent educating children, not on facility costs. We plan to discuss this rent increase with the owner of the Beaux Arts building (Steve Smith) to see what options we may have in regards to lowering the rent escelator in 2018.

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Questions/Concerns over moving to a Single LEA:

1. Why are there two LEA’s and why are we looking at possibly merging them?

In 2008-09, Confluence Academy and Grand Center, Inc. had a vision to open a performing arts school in the Grand Center district. Since Confluence already had an existing charter contract with their sponsor (at the time) UM S&T, there were discussions held to see if UM S&T was interested in sponsoring a fifth school (GCAA). When it was determined that UM S&T wasn’t a fit, Saint Louis University (SLU) was brought in to sponsor the school and a second Local Education Agency (LEA) was created. The University of Missouri – Columbia (MU), Confluence’s current sponsor, as well as SLU have both been adamant that outstanding loans between the two LEA’s be resolved. Additionally, DESE and Confluence’s external auditors (RubinBrown) would also like to see the loan situation rectified as GCAA is unable to pay back amounts currently owed (approx. 6.3mm). Merging the LEA’s will eliminate the existing loan balance, satisfy both sponsors, and DESE as well as our auditors.

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2. Will GCAA have to close and reopen as a new school if the Confluence and GCAA LEA’s were to merge?

DESE, as well as our attorney’s, have been reviewing the necessary steps we would take if the Confluence Board decides to give up the existing GCAA charter with SLU and merge GCAA into a new charter arrangement with MU.

DESE has codes for public school districts and public charter schools (at the LEA level). Each school building within an LEA also has a code. The codes are used by the state to keep track of schools when it comes to funding, annual testing, enrollment and other data used by DESE. If Confluence and GCAA merge, it may be possible to transfer these building codes to roll into the current Confluence charter with MU. Or, there may be a need for some “administrative” closing of the existing GCAA building code with a technically “new” building code to be re-established. Students might have to re-enroll, but since GCAA currently does not have a waitinglist, we believe all existing students would have a spot at the “new” GCAA school.

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3. Will the GCAA Annual Performance Report (APR) scores cease to exist or might they be diluted by the Confluence scores?

GCAA building would continue to receive an APR score from DESE. The APR results will still be calculated and published for individual schools within an LEA.

If the LEA’s are merged, GCAA will still maintain its own APR score, but GCAA’s APR score would also be included in the overall score for the entire Confluence network. This would not be unique to Confluence. For example, SLPS has high performing schools, such as Metro, McKinley and Carnahan and many other magnet schools, whose APR scores are included in SLPS’s overall LEA score.

It is also important to note that three (3) of our four (4) existing Confluence schools have APR scores that would be considered in the provisionally accredited category in 2016 (based on MSIP5 w/ hold harmless provision).

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4. Why didn’t the CliftonLarsonAllen (CLA) report take into account the potential loss of students that may occur if the LEA’s merge?

This was not included in the scope of CLA’s work. In reality, no one knows what impact merging the LEA’s would have on student enrollment and recruiting. Because we do not expect students, parents teacher and/or staff at GCAA to see a difference at the school if the LEA’s are merged, we do not expect student enrollment to decline. In fact, since GCAA will be stronger financially, student enrollment may in fact increase. Again, the possible merger of the LEA’s will create a stronger financial future for GCAA. The Board of Directors is committed to the long-term viability of GCAA.

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5. Can the Confluence Board of Directors just “forgive” the outstanding loans to GCAA and let GCAA go out on its own?

Some have suggested that if the Board of Directors wanted to forgive the loans between Confluence and GCAA they could do so without any repercussions. CLA read through the bond covenants and thought it was fairly clear that this could not be done. Additionally, our attorney’s have concluded that while it may be technically permissible, it would not be prudent to do so without bondholder consent. Any decision regarding the forgiveness of loans would ultimately be the Board of Directors to make. The Board will make the decision that is in the best interests of the students and families served by Confluence Academy.

Note: GCAA’s loan balance is $6.3MM at June 30, 2016

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6. What steps were taken by CLA to include the GCAA community prior to making their recommendations?

CLA included both the GCAA and Confluence communities in its research. They interviewed GCAA staff, several Board members and Resource Office staff who have direct responsibility for GCAA.

7. Since GCAA has voted in a union, will this have any impact or effect on the possible merger of the two LEA’s?

No. The establishment of a union at GCAA is not a factor in whether or not the two LEA’s merge. The Board will determine what is appropriate and is in the best interest of all children and families served by Confluence Academy.

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8. Will a merger of the two LEA’s take away the uniqueness of GCAA?

No, we do not expect that students, parents, teachers and/or staff will see any changes to the unique character of GCAA. The possible merger of the LEA’s is intended to resolve some complex financial issues. For example, GCAA currently has a 3.77% fund balance, i.e., money in reserves. If merged with the Confluence Charter Schools, GCAA will have a 13% - 15% fund balance – which places GCAA in a much stronger financial position. Schools that have less than a 3.0% fund balance are considered financially “stressed” by DESE. Additionally, if the two LEA’s were merged, GCAA would no longer need loans from Confluence in order to operate. Nor would GCAA have to pay an approximate $90,000 separate sponsorship fee to SLU.

The board has, on multiple occasions and in multiple settings, stressed its desire for GCAA’s culture and art focus to be maintained/protected/continued as part of any merger.

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Five year projection without purchasing Beaux Arts Building:Confluence Academy

Five-Year Budget Projections

Financial Summary FY16-17 FY17-18 FY18-19 FY19-20 FY20-21

Enrollment

Average Enrollment Target - Students 3,705 3,355 3,255 3,255 3,255

Revenues

State

Base Revenue 26,336,275 25,113,149 26,368,806 26,632,494 26,898,819

Summer School - June '17 1,362,250 956,897 875,000 925,000 950,000

Summer School - July '17 507,688 - - - -

At-Risk 3,527,008 3,986,864 3,950,000 3,989,500 4,029,395

Remedial Revenue 2,308,911 2,139,852 1,950,000 1,969,500 1,989,195

ELL 1,531,706 1,131,878 1,143,197 1,154,629 1,166,175

Prop C. 4,221,828 4,321,783 4,300,000 4,050,000 4,000,000

Transportation 537,420 444,000 385,000 355,000 325,000

Local

Donations 10,000 20,000 20,000 20,000 20,000

Theater Rental Income 20,000 25,000 25,000 25,000 25,000

Federal

Title IA 2,637,976 2,429,748 2,454,045 2,478,586 2,503,372

Title IA - Carryover 60,000 60,000 60,600 61,206 61,818

School Improvement (FOCUS) 60,000 110,000 111,100 112,211 113,333

Perkins Grant 93,812 90,000 90,900 91,809 92,727

Title IIA 427,171 279,369 282,163 284,984 287,834

Title III 35,258 35,000 35,350 35,704 36,061

IDEA Part B (Sped) + High Needs Revenues 531,679 531,679 536,996 542,366 547,789

National School Lunch 2,288,000 1,975,000 1,994,750 2,014,698 2,034,844

Medicare Reimbursemetns 205,000 205,000 207,050 209,121 211,212

Total Revenue 46,701,982 43,855,218 44,789,957 44,951,807 45,292,575

Charter Board & Facility/Debt Expenses

Facility Rent/Lease Costs 2,128,894 2,207,355 2,790,355 2,790,355 2,790,355

RO Allocation (GCAA) - -

Sponsorship Fee 240,761 240,761 250,000 265,000 275,000

Debt Service 2,424,413 1,845,654 1,845,654 1,845,654 1,845,654

Cash Surplus/Deficit Retained by Board (139,309) (82,083) (136,017) (389,568) (463,204)

Total Charter Board, Facilitiy/Debt Expenses 4,654,759 4,211,686 4,749,992 4,511,441 4,447,805

Net Revenue 42,047,224 39,643,531 40,039,966 40,440,366 40,844,770

Total Direct Site Expenses

Personnel (to add summer pay, OT, subs, stipends)29,917,574 27,705,720 27,982,777 28,262,605 28,545,231

Non-Personnel (see tab for details) 12,129,651 11,937,811 12,057,189 12,177,761 12,299,539

Total Direct Site Expenses 42,047,225 39,643,531 40,039,966 40,440,366 40,844,770

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Ramifications of NOT purchasing the Beaux Arts building in 2018

We believe it will be very difficult to obtain financing to purchase the Beaux Arts building with the existing dual LEA structure and the financial picture of GCAA on a stand-alone basis is not sustainable long-term

Without buying the Beaux Arts building, budget projections (on preceding page) show deficits for the FY18-19, FY19-20 and FY20-21, even after factoring in a large increase in state funding due to Prop 1 revenues (beginning in FY18-19)

The budget projections show funds would not be available for the payback of Confluence loans By incurring the substantial increase in rent, it puts the organization at risk of not meeting bond covenants in FY19-20 and

FY20-21 (budgeted Debt Service Coverage Ratio may be less than 1.0x) Lower levels of funding would be available for student instruction as more would go towards building costs GCAA’s potential “default” on Confluence loans could negatively impact bond covenants, financials and/or bondholders

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Summary & Next Steps

• It is clear from this analysis that the existence of two separate charters with two separate LEA’s is unsustainable. It is our belief that merging or consolidating the two LEA’s is necessary and that this should be done no later than July 1, 2018. We believe there is “wiggle-room” in the statutes to accomplish this. In fact, several sections within the Missouri state statutes lean in favor of consolidating or merging the two LEA’s. They are as follows:

1. RSMo 160.400.10 permits charters to transfer to a university, therefore legislation anticipated changes.2. RSMo 160.405.6 refers to amending a charter with mutual consent.

As for next steps, we ask the Confluence Board of Directors vote in favor to merge the two LEA’s. We will then begin working with attorney Charles Elbert to establish a plan for merging the LEA’s with a July 1, 2018 deadline.

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confluence academy, inc. confluence/gcaa single lea june 2017 · • charter contract renewed in...

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