Cato School of Reason (3,500 students)

Cato Caves In: Accused of fraud, mismanagement, maverick school loses charter (LA Weekly, December 3, 1998)

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…"

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Charter School for Scandal: How a controversial academy scored millions in state education funds (LA Weekly, August 20, 1998)

Karen Waters-Titus didn't know what to make of the enrollment form that came home from school with her fourth-grader one day last fall. Her son Cameron's private school in Inglewood was asking parents to join something called Cato, which would provide free books, computers and other school resources. Just sign on the dotted line. Any student returning the form right away would get, as a bonus, a "free-dress Friday," meaning that he or she could skip wearing the school uniform for one day. That was a fine incentive for young Cameron, but Waters-Titus had questions.

What was Cato? And exactly why was Cato providing free services as part of a partnership with the K. Anthony's Schools, a private academy that has long served inner-city, mostly African-American families?

A visit to her son's school only heightened her concerns. A teacher who fielded parents' questions didn't know much about Cato either. When Waters-Titus demanded a phone number for Cato, then dialed it, the line rang in the high-desert town of Victorville, 100 miles and a mountain range away from Inglewood. A Cato staffer invited her to visit, but would offer little explanation other than noting that she didn't have to enroll her son.

That was when she called state regulators.

Waters-Titus had stumbled upon one of the most aggressive, entrepreneurial operations to hit public education in some time. The Cato School of Reason, a public-charter school begun in 1994, has used its Victorville base to make a play for millions in state apportionment money. Begun in part as an academic halfway house for dropouts and expelled students, the school quickly shifted gears to become a clearinghouse for home schooling - for families unable or unwilling to send their children to regular public schools. It then expanded again - almost exponentially - as it formed partnerships with private schools and social-service organizations. A significant boost came from former Lieutenant Governor Mervyn Dymally, who signed on as a member of the board and personally recruited half a dozen private schools to Cato's roster. Every step of the way, the school has emphasized the bottom line, while straddling legal and ethical ones.

A Weekly investigation into the operations of Cato has turned up a series of unorthodox and possibly illegal practices, enabled in large part by the lax state rules governing the operations of charter schools: Most notably, Cato "enrolled" hundreds of students who were actually attending private schools, claimed millions of dollars intended for students in public schools, and split the proceeds with some of these private-school operators.

The story of Cato comes at a key juncture for the state's charter-school movement. In the six years that charter schools have been authorized, restrictions on their creation have limited their growth to 125 schools so far, but last year, proponents led by Silicon Valley businessman Reed Hastings gathered signatures for a ballot initiative that would have removed all the restrictions on the growth of charters. Hastings backed down when state officials and legislators agreed to raise the cap on charter schools to 250 next year and 100 new schools per year after that.

The idea of charter schools is to encourage and unfetter fresh, creative thinking among educators. Conservatives accepted charters as the best-available alternative after their plans to win public funds - in the form of vouchers - for private schools stalled. For liberals and teachers unions, charters were endurable because the plan circumvented new voucher proposals while also keeping the charter schools firmly within the public school system. These quasi-independent schools, sponsored by local school districts, operate under their own governing councils, which have the authority to eliminate red tape, layers of bureaucracy, and even education-code regulations that supposedly have retarded so many past reform efforts.

Enter Cato - the brainchild and alter ego of founding director Thomas A. Cosgrove, a libertarian and small businessman who was in his 60s before he first pursued a teaching credential. When he launched his charter school, his experience in education consisted of nothing more than a stint of student teaching and a little work as a substitute. Now, less than four years later, he's riding the wave of charter-school reform to apparent riches. Last year, Cato's enrollment - estimated as high as 3,500 students - brought in millions of state dollars.

Cosgrove has successfully exploited the flip side to the charter-school mantra of deregulation and local control. Along with the freedom to reform came a distinct lack of oversight. Charter-school legislation never clearly addressed who was responsible when something went wrong. Nor did reformers fully consider that a charter school could exist for reasons other than the best interests of children. They never contemplated that their reforms would unchain dollars as well as ideas. And that state education funds were dangling for the taking by school operators who could obtain a local charter, then devise ways to crunch down costs for financial gain.

"Any liberties that we have taken, and we have taken a few, are because you haven't said what the rules are," observed Cosgrove in an interview. "And until you do, we are going to make them up as we go along."

The results of Cosgrove's capitalist audacity have been astonishing. When his speculative charter school started in late 1994, Cosgrove had little more than ambition, 25 prospective students and the charge limit on his ex-wife's credit card. He and his former spouse were the only paid staff, and they had no assurance they would earn a penny. For the 1996-97 school year, Cato was averaging 934 students. By November 1997, the school was claiming more than 2,600 students.

This growth is reflected in the finances. In the 1996-97 school year, Cato took in $3.9 million in government education funds - based on payments of about $20 a day per student. Just 56 percent of that money went to programs and expenses, giving Cato a whopping $1.7 million surplus for the year, and year-end reserves totaling $2 million. The following year was better still, with the school reaching the $7 million mark in revenues, nearly doubling its take of state education funds…

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