The cash-strapped Philadelphia School District is giving Universal Cos. a free pass for the current school year, eating $1.8 million in costs for the charter operator to use two district buildings at no charge.
Thomas Knudsen, the district's chief recovery officer, defended the decision Tuesday, saying his hands were tied by a deal cut by the prior administration and the financial realities Universal faces in attempting to overhaul two tough, under-enrolled schools.
Universal, the nonprofit founded by music impresario Kenny Gamble, began running former district schools Audenried High School and Vare Middle School in September under the district's Renaissance charter program, which hands the toughest schools over to charters to attempt turnarounds.
But unlike other Renaissance providers, Universal hasn't paid a penny for $1.8 million in utilities, custodial staff, supplies, and trash pickup for the two Southwest Philadelphia schools, one of which - Audenried - is a $60 million building built with taxpayer money in 2008.
The prior administration had an oral "understanding" with Universal to waive the fees, officials have said, but there had been no written agreement.
"We inherited that situation," Knudsen said in an Inquirer interview Tuesday.
"What are we going to do, take the schools back midyear? The answer is no," Knudsen said. "We have to run this operation. You can't be constantly visiting and revisiting programs and problems. And that's what I attempted to do here. We didn't want to take the schools back. We didn't want to get into litigation."
A Universal spokesman declined to comment until the agreement is finalized.
The issue centered on what a district source described as an oral agreement among Universal, former Superintendent Arlene C. Ackerman, and former School Reform Commission Chairman Robert L. Archie Jr. The source said they told Universal the district would waive license fees amounting to $1.8 million for the schools.
Ackerman, in an e-mailed statement, said, "I am not aware of such an agreement. I was not involved in the contract negotiations nor did I know the details of the finalized agreement since I left in August before it was approved by the SRC."
Archie could be reached for comment.
Universal has operated the schools - and operated them well, early indicators show - all year and paid no fees, but there was no contract to spell out the understanding.
City Controller and frequent district critic Alan Butkovitz blasted the no-rent deal, which he said "should not have been made. There should not be side oral deals. All charter organizations must be treated the same."
But he agreed with Knudsen that the best course of action in this situation was cutting losses for the district, which over the last year had to slash $700 million in spending and will have to borrow at least $218 million to make ends meet in 2012-13.
"Knudsen and the rest of them are up to their ears in alligators," he said. "They are trying to avoid collapse. They don't have the ability to deal with this problem now, while they're fighting for their existence."
View it like you would a settlement in a legal case, Butkovitz said: "Admit a wrong was done by the School District, limit your liability, and get out of it."
Parent Gerald Wright isn't buying that argument, given that district officials are saying they need $94 million in new city money to operate next year.
"It doesn't wash to me, that you can simply decide that any amount of money is insignificant and we can move on," said Wright, a founder of Parents United for Public Education and father of two children in the district. "That money would be a large step toward restoring nurses in schools. It would be a large step toward restoring police officers that were taken out, noontime aides."
For the 2012-13 school year, Universal will pay a portion of the full cost of running the buildings - a total of $500,000, with $300,000 allocated for Audenried and $200,000 for Vare. The district will continue to subsidize the rest of the company's costs for the buildings.
Last summer, a prior SRC adopted resolutions spelling out the building fees that all Renaissance charter operators might pay. The resolutions called for Universal to pay a maximum fee of up to $1.5 million a year for Audenried and $858,360 for Vare.
Knudsen said that typical charter operators pay between 9 and 13 percent of their costs in facilities expenses. In the case of Vare and Audenried, "it was north of 23, 24 percent," he said.
Size is a major factor. Both Vare and Audenried are considerably under-enrolled, in part because under the district's watch, the reputations of both tumbled and parents in the neighborhood have been reluctant to send their children there.
Charters are funded on a per-student basis, so fewer students means less money to operate. And the Renaissance providers can't skimp too much - they are required by their contracts to turn around failing schools and must provide things like a longer school year.
Other charter companies operating small Renaissance schools have had similar financial issues, Knudsen said.
"Given what we know about what it costs to operate schools with excess capacity, I'm sympathetic to them," he said.
None of the other providers has gotten a pass on licensing fees, Knudsen confirmed.
Thomas Darden, the district official who oversees charters, said that going forward, the district will run small schools that need overhauling as Promise Academies, or in-house turnarounds. Only the larger schools will be turned over to charters.
Knudsen said that early indicators on Universal's performance at Audenried and Vare have been positive - "the climate is very different. It's much safer, and the attendance is up."
Officials have stressed that the $500,000 agreement is for one year only, and that that figure is based on Universal's need to be able to pay for an effective turnaround.
And going forward, "we will be getting financials - audited costs. If they've not been fair with us, and haven't been truthful, we will have a very different negotiating position going forward, and we will be difficult," Knudsen said.
Requests to speak with SRC leadership were referred back to Knudsen.
"This was a business decision that has nothing to do with the SRC, or any policy considerations with Universal," Knudsen said.