The Charter Gamble: In this series, we examine how Arizona committed 25 years ago to the then-untested concept of charter schools, and what the program has meant for the state. Today, Part 3, the rise of the big charter chains. Read Part 2.

Gov. Doug Ducey had been in office a year when he unveiled an agenda that was truly his own.

During his 2016 State of the State address, a key theme emerged: money for schools.

"In the years ahead, Arizona will be among the states investing the most new dollars in public education, all without raising taxes," Ducey said. "This is a first step. A big first step. But not our only step to improve public education in Arizona."

First Ducey pitched a plan to accelerate withdrawals from the state land trust, one that voters would approve later that year as Proposition 123. It would give an immediate funding increase to all Arizona public schools.

A few minutes later, he unveiled other proposals. But not every school would benefit from them.

One would help the "best public schools" expand by obtaining lower-cost financing with help from the state. Another would financially reward "schools that produce students who successfully complete AP-level, college-prep courses."

Only the most careful listener would have realized at the time that Ducey’s plans were sure to benefit some of his friends in the charter school industry.

Once the money was distributed and the loans secured, that was clear: Basis Charter Schools Inc. and Great Hearts Academies, two booming charter chains, were the clear winners in Ducey's plans.

That wasn't the only disparity in the system. An Arizona Republic analysis found that of the charter schools that received the funds, their total student body is far more white than the state as a whole.

Since the Legislature approved charter schools in 1994, Republicans have enthusiastically supported them. But the winners and losers from the education agenda Ducey unveiled that day highlighted how things had changed since the first small schools opened their doors in 1995.

The mom-and-pop schools that dominated the first wave had given way to big operators with powerful friends at the highest levels of state government.

Basis and Great Hearts, which combined educate about 30,000 of Arizona's 1.1 million students, so far have tapped almost two-thirds of the construction loans given to Arizona's 500-plus charter schools. And the schools' high standardized test scores and focus on Advanced Placement courses have also allowed them to claim an outsize share of Ducey's performance-based funding.

MORE: 'Like the Oklahoma Land Rush,' charter schools take root in Arizona

As Arizona's charter school system ballooned past the expectations of even its most passionate supporters, the state kept making it more difficult to open one.

What was once a simple application grew thick with requests for detailed budgets, lists of potentialfacilities and examples of daily routines.

The state began assessing a $6,500 application fee, designed to weed out all but the most serious applicants. The total cost of pursuing a charter rose to between $10,000 and $20,000, according to the non-profit Arizona Charter Schools Association, which guides people through the process in $155-an-hour consulting sessions. All with no guarantee of success.

Mark Francis, who founded the Arizona School for the Arts, said the application fee has changed the type of applicants seeking to open charter schools. If someone is paying $6,500 just to apply, they better be sure their idea will work, he said, and the people who know their idea will succeed are people who have seen it succeed before.

The result, experts say, is the smaller school operators in the first wave of Arizona charter schools have been eclipsed by the wealthy and well-prepared. Big charters with dozens of campuses dominate now.

Between 2014 to 2017, just 10 charter companies, including Basis and Great Hearts, accounted for 73 percent of the growth in students attending Arizona charter schools, according to research by the nonpartisan Grand Canyon Institute.

"You're starting to see a boil-down," said Damon Norris, who ran procurement for the Legacy Traditional Schools charter chain before joining the Charter Schools Association, where he coaches would-be charter operators on finances and business development.

This shift has brought financial stability and fueled growth. Banks and donors, once reluctant to fund charter school construction, opened their wallets. That stability has allowed charters to expand and claim a larger share of the state's students — and generate massive profits.

Some of the profiteering exposed by a year-long Republic investigation has, however, prompted calls for reform.

For example, Damian Creamer paid himself $10.1 million the past two years running Primavera online charter school, where state records show 49 percent of the kids dropout. State lawmaker Eddie Farnsworth will make $13.9 million selling his Benjamin Franklin charter schools to a non-profit company he created. And American Leadership Academy founder Glenn Way made at least $18.4 million from no-bid contracts to build classrooms for ALA.

"Had you not had those big players come in, maybe you wouldn't have the scale charter schools needed ... to survive politically," said Armando Ruiz, a former state legislatorwho helped organize support for the state's original charter law, then opened three schools in south Phoenix. "Charter schools couldn't survive today without that having happened."

But experts see some of the drive for innovation that charter schools helped usher in, going away under the corporate charters. And some smaller charter operators believe their voices have been drowned out by the big chains' dominance.

Basis, founded in 1998, has 22 campuses in Arizona, three in Texas and one in Louisiana and Washington, D.C. Great Hearts, which opened in 2004, has 22 schools in the Phoenix metro and seven more in Texas.

MORE: At Basis charter schools, another way to boost teacher pay: Parent donations

Kelly Horn, principal of Create Academy, a small K-6 charter school in central Phoenix, has said the Charter Association, the mouthpiece for charter schools at the state Capitol, loves to promote Basis and Great Hearts. But it does little to help schools like his that are educating minority students and their families, he said.

A majority of students at Basis and Great Hearts are white and come from more-affluent homes, state Department of Education records show. Both ask parents to make sizable donations to subsidize teacher pay, which is below average at both chains. Great Hearts seeks $1,600 per child; Basis asks for $1,500 per student.

"They don't want to talk about schools like us," said Horn, whose school serves a large number of lower-income students and has lower standardized test scores. "It's a different kind of work we are doing."

Basis and Great Hearts don't need an association to ensure they're heard at the Capitol.

That's, in part, a product of their boards and executive ranks, which are filled with individuals whose ties to the Ducey administration and each other form a tight web.

Maricopa County Attorney Bill Montgomery, a key political ally of Ducey's, is on the Great Hearts board. Fellow board member and Arizona Diamondbacks CEO Derrick Hall donated more than $10,000 to Ducey's re-election campaign this year.

Great Hearts' Arizona President Erik Twist is the brother of Ducey policy adviser and campaign manager J.P. Twist. He is also a member of the state Charter Board.

And others at Great Hearts are long-time fixtures in the state's power structure.

Co-founder Jay Heiler was chief of staff to former-Gov. Fife Symington, who signed Arizona's 1994 charter law, and is also chairman of the Charter Association. That group's vice chairman is Glenn Hamer, president and chief executive of the Arizona Chamber of Commerce and Industry, a big financial supporter and public cheerleader for Ducey and expanding school choice.

Erik Twist, meanwhile, once worked for Basis. His father, Steve Twist, is on the Basis Board of Directors as well as the executive committee of the Arizona Chamber of Commerce. Steve Twist is also a founder of the influential Goldwater Institute, and he served on the state Charter Board.

In 2016, Ducey appointed Goldwater Institute litigator Clint Bolick, a former Basis board member, to the Arizona Supreme Court.

Basis' board chairman is Craig Barrett, a former Intel executive who endorsed Ducey's 2012 campaign to defeat a ballot proposition that would have made permanent a 1-cent sales tax for schools. (Erik Twist also publicly opposed the campaign.)

Barrett's fellow Basis board member Don Budinger and Basis founder Michael Block have been generous Ducey campaign donors.

These connections provide Basis and Great Hearts a direct line to the Governor's Office, said Stephanie Parra, a member of the Phoenix Union High School Board.

"It helps them be influential at the Legislature, as well," Parra said. "You would have to think that over the years, through their connections, they have created statutes that have resulted in little-to-no regulation and ultimately benefited the empires that they are trying to build. … It's very curious how the people who are connected to the governor are calling the shots on things that benefit them."

MORE: Charter schools are big business. Who's making money off public education?

Ducey, Basis and Great Hearts officials say their connections have nothing to do with the extra state education dollars and low-interest loans that have flowed to the charter chains.

Basis Executive Director DeAnna Rowe said the organization had nothing to do with Ducey initiating the programs, and it received no benefit because of school officials' relationships with the governor.

Erik Twist said Great Hearts wasn't involved in shaping the funding programs.

When asked about the millions of dollars his programs have sent to Basis and Great Hearts, Ducey said, "We run policy out of the Governor's Office."

Those fulfilled a campaign pledge to "fund the wait lists" at the state’s top schools, Ducey said.

"Until the thousands of kids on public school wait lists have access to our finest teachers and principals, our job isn't done," the governor said during in his 2016 State of the State speech as he unveiled his plans.

Basis, which according to U.S. News & World Report operates the five best high schools in the country, has a waiting list of 5,775 students.

Great Hearts, which has roughly 12,000 students waiting for a spot, offers a classical education featuring Latin, Shakespeare and a heavy dose of the arts.

But critics say it's hard to see the policies as anything but intentionally drawn to favor the governor’s friends in the charter business.

One gave more cash to schools with students who passed Advanced Placement and International Baccalaureate exams — the primary focus of a Basis high school education.

A second gave extra money to schools with high standardized test scores, measures at which Basis and Great Hearts excel.

A third program provided low-interest construction loans to public schools as Basis and Great Hearts were adding campuses.

"It was a choice to create this program to look this way," said Anabel Aportela, a budget and research expert with the Arizona School Boards Association.

MORE: Gov. Doug Ducey releases plan to shrink wait lists at high-performing schools

From the moment students walk through the doors at a Basis high school, they begin preparing to perform well on standardized tests and AP exams.

At most U.S. high schools, students can start taking AP courses their sophomore year. Basis requires all freshmen to take them, and some start in middle school. An average Basis graduate takes a dozen AP exams, and passes nearly 11.

Teachers' compensation is determined, in part, by how well students do on the tests: $200 for each student who earns the highest score – a 5 – on an AP exam, and $100 for each student who scores a 4.

When the state started rewarding schools for high AP-course enrollment, Basis received the most money, including 90 percent of the funds given to charter schools overall.

State Department of Education records show nine Basis schools received $703,200 of the $3.8 million available through Ducey's "college credit by examination incentive program," which was distributed for the first time this fall.

Chandler Unified was tops among districts, receiving $561,900 at six schools.

Ducey's program to financially reward schools with high AzMerit test scores gives $400 per student to high-performing schools in the state's poorest areas and $250 per student to high-performing schools in middle- and higher-income areas. Ducey and the Legislature allocated $38.3 million for the current school year, and $39.1 million last year.

Basis and Great Hearts claimed a disproportionate share of this money, nearly 13 percent of the funds distributed during the two years it has operated. Their combined enrollment is less than 3 percent of the state's 1.1 million public school students.

This year, 285 schools received money. Eighteen Basis schools collectively received $2.95 million, the most in the state. Thirteen Great Hearts schools received about $1.85 million, the fifth largest payout in the state, this year. Last year, Great Hearts received $2.4 million, third among schools statewide.

MORE: Did your kids pass an AP exam? Their teacher got a bonus

A Republic analysis found racial and financial disparities in who benefits most from Ducey's performance funding.

Fifty-three percent of students at charters that received performance funding were white, while white students make up 38 percent of enrollment in the state.

Latino students account for 45 percent of students in the state. But they accounted for just 25 percent of the students at charters that received performance pay.

The gap narrows at district schools that got the funding. There 41 percent of students were white while 45 percent were Latino, in line with statewide enrollment figures.

Aportela, the budget and research expert with the Arizona School Boards Association, said it would have been fairer to reward schools for academic progress from year to year, or to ensure a larger share of the money went to lower-income schools that show improvement.

Meanwhile, Ducey's low-interest construction loan program has so far only benefited charter operators, who unlike school districts can't access voter-approved building bonds.

The program reduces borrowing costs for schools by making bonds less risky for investors because they will be repaid from an insurance fund if schools default.

Great Hearts was the top recipient of the state-backed loans, with $53.7 million. Basis was second, with $35.5 million in loans. Together they account for almost two-thirds of nearly $143 million in classroom construction loans for Arizona's 500-plus charter schools.

Ruiz, the former state legislator who opened his south Phoenix charter school immediately after the charter law passed, said no one at the time imagined that charters would eventually become the dominant chains of today.

"It was never for making money," he said. "It's not to say those who have gotten into it for that reason, that it's bad. It's just how society is."

But Curt Cardine, a fellow at the Grand Canyon Institute, which describes itself as a centrist think tank, said the big charters have formed an elite group that has pushed out the smaller schools.

In the process they have effectively eliminated the competition policymakers sought when they passed Arizona's charter school law, he said.

"The charter model is just like Walmart, but do we want our schools to be run like that?" asked Cardine, a former charter school executive. "That's the big picture, and that's what is wrong with charter schools."

NEXT IN THE SERIES: Charter schools spend more on administration, less in classrooms

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