Charter school fails and bondholders get bailout

  • Article by: Star Tribune
  • Updated: November 29, 2009 - 10:03 AM

While junk-bond promoters claim taxpayers will never be forced to cover the costs of a failed charter school built with state lease-aid funds, that's exactly what happened in St. Paul.

The deal dates to 2000, when American Express purchased $8.3 million in bonds used to convert the old Science Museum of Minnesota into a charter school called the Minnesota Business Academy. The project also received $1 million in community development funds from the city of St. Paul. Former Lt. Gov. Joanne Benson, who headed the school, helped put the deal together.

In exchange for a hefty 8 percent interest rate, American Express accepted the risk of default and nonpayment.

In less than a year, the school was faltering. There were cost overruns and fundraising shortfalls, and the school was forced to borrow another $1.6 million.

To pay off its debts, the school needed 440 students, with each student representing more than $1,000 in annual lease-aid payments. But the plan backfired, and total enrollment crashed to 292 in 2004.

In 2005, city officials approved another bond offering that allowed the school to reorganize its finances. American Express got $6 million, while the city recovered a total of $451,352. The unsecured creditors were paid 10 cents on the dollar.

"The corporate folks got their dough,'' said St. Paul City Council Member Lee Helgen, who voted against the bond issue.

The restructuring lowered the school's long-term debt from $10.7 million to $6.6 million. But less than 12 months later, the school went broke and closed. The new bondholders had downtown land, an improved building and equipment valued at $7.4 million. The building was sold two years later for $3.5 million to the Church of Scientology.

TONY KENNEDY

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