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In a legal dispute between the New York City and state education departments over a charter school rent reimbursement, an Albany Supreme Court judge sided with the city last week.
The fight centered on a state law requiring the city to provide charter schools space or reimburse them for the cost of rent. The city Education Department sued the state over its interpretation of the law after it approved a reimbursement request from Hellenic Classical Charter Schools.
The school rented property on Staten Island then turned over the lease to a group affiliated with the school. That affiliated group then sub-leased the property back to the school at three times its original price, allowing the school to seek more reimbursement from the city. The extra costs were meant to subsidize the construction of a new building for the charter school on the same plot of land, according to court documents.
The city refused to pay the higher rate, which it later called “artificially inflated.” Hellenic appealed to state Education Commissioner Betty Rosa, who ruled in favor of the charter network. Rosa argued that while Hellenic’s arrangement was “concerning,” asking the city to subsidize new construction was “merely an exaggerated example of the goal of the rental assistance program: the public financing of New York City charter schools.”
But in a decision issued last week in a city lawsuit over Rosa’s order, Judge Julian Schreibman disagreed with Rosa’s reading of the law, annulling her decision and directing her to reconsider the case. The law specifies that the city only has to reimburse charters for “the actual rental cost,” which means it can reject requests that don’t go toward that purpose, Schreibman said.
“The reading reached by this Court permits [the New York City Education Department] to be vigilant not merely for expenditures that might benefit the School but are not rent, but for expenditures characterized as ‘rent’ that do not benefit the School at all — something the Commissioner’s decision would not allow,” Schreibman wrote.
A spokesperson for the state Education Department said Rosa would explore options to appeal Schreibman’s ruling. If she is required to reconsider her initial decision, Rosa will “review the entire record before deciding which party is entitled to relief.”
City officials didn’t respond to a request for comment. A lawyer representing Hellenic didn’t respond to questions about the ruling, but previously told Chalkbeat that sub-leasing space from affiliated groups was a common practice for charter schools and the city had no right to second guess charters’ rental costs.
It’s still unclear how Rosa will ultimately rule, or whether the judicial decision will have implications beyond this case, but the ruling could bolster the city’s ability to scrutinize charter reimbursement requests. A Law Department spokesperson previously told Chalkbeat this is the first time the city has sued the state over a charter rental reimbursement dispute.
In an Aug. 2024 document outlining its policy for reviewing rent reimbursement requests, the city Education Department says it won’t reimburse for costs “for buildings not occupied by…students, or other costs that are not directly and necessarily resulting from the rental of space.”
Concerns over rent reimbursement costs
The 2014 rental reimbursement law, which is the only legislation of its kind in the state, was backed by then Gov. Andrew Cuomo to shore up protections for charter schools against former Mayor Bill de Blasio, who was viewed as more hostile to the publicly funded but privately run institutions.
The law caps rental reimbursement at 30% of the base tuition the city pays charters for basic operating expenses. The city paid about $75 million for charter rental reimbursements in fiscal year 2023, after factoring in the state’s portion of the payments, according to the city’s Independent Budget Office.
Some lawmakers have pushed for the law to go even further by extending rental reimbursement to more charters. But advocates and lawmakers critical of charter schools have raised concerns about the costs for the city Education Department.
A 2021 report from the advocacy group Class Size Matters spotlighted several instances of schools renting space in buildings owned by related groups where rent jumped substantially, “raising questions about whether the rents were fairly assessed and whether there may be evidence of self dealing by the charter schools.”
In Hellenic’s case, the school signed a lease to rent a building and adjacent land from a Greek Orthodox Church that would have cost about $660,000 for the 2021-2022 school year. But the school turned over its lease to an entity called “Friends of Hellenic Classical Charter Schools, Inc,” which shares a chairperson with the school, and sub-leased the property back to the school for more than $2 million for the year, according to court records.
The rent increase was meant to account for the added costs of constructing a new building on the same plot of land, according to legal documents.
The New York City Charter School Center, an umbrella organization that lobbies on behalf of charters and filed a legal brief in support of Hellenic, argues that’s an entirely appropriate use of the city funding.
“Just as the public provides funding for constructing public schools, we believe that charter schools should be allowed to use rental assistance for the same purpose,” said Charter Center CEO James Merriman.
But legally, the most important question is whether Hellenic’s expenditures count as “actual rental cost” under state law. Schreibman didn’t explicitly weigh in on that question, but noted there were “multiple red flags” in Hellenic’s request, including “the fact that the ‘rent’ had suddenly increased exponentially following a related party transaction,” and the revelation that “the related-party landlord would be using most of the ‘rent’ to fund other projects on behalf of the School.”
Michael Elsen-Rooney is a reporter for Chalkbeat New York, covering NYC public schools. Contact Michael at melsen-rooney@chalkbeat.org.
