One of Idaho's pioneer charter schools faces possible bankruptcy and the Meridian School District is issuing a "defect notice," the first step toward possibly closing the school.
North Star Charter officials told the Meridian School Board this week that they don't have enough money to meet their April expenses and face a $640,000 shortfall by June.
Ten-year-old North Star's options include refinancing its debt; converting to a Meridian district school; or closing, in which case 620 elementary and 300 secondary students would be dispersed to Meridian schools.
The district says it has room in its elementary and high schools, but middle school space is limited. Meridian School District spokesman Eric Exline said it is premature to say which option will prevail.
The Meridian School Board will hold a public meeting within 30 days to determine if North Star's financial situation can be remedied or if the school's charter should be revoked.
In a letter to parents Friday, North Star board Chairman Jim Miller said the school is aware of the defect notice and will "develop a plan to cure the notice in a timely manner."
"Most importantly, not withstanding reports to the contrary, we are confident we will complete another successful school year."
'SEVERE FINANCIAL CONDITION'
The school has 920 students, 60 staff, an annual budget of about $4.5 million - and nearly $12 million in debt load.
That wasn't the original plan.
In 2008, the school broke ground on a new building estimated to cost $7 million to be paid with bonds at 6.75 percent interest. After changes in plans and cost overruns, the school ended up getting $11.75 million in bonds at 9.75 percent and agreed to an "unusually restrictive payment plan," according to one of two independent financial reviews conducted in March.
"While North Star has achieved strong academic performance over its history, its financial outcomes ... have placed it on the road to bankruptcy. It is now about a month from the end of that road," according to a review requested by the bondholders. It identified three factors that have put North Star in "severe financial condition":
Annual debt service consumes 28.5 percent operating revenue. The public school average is a fourth of that.
North Star's state funding has declined 19 percent since 2008.
The school forecasted inaccurately high revenues and low spending.
North Star Vice Chairman Bill Russell told Meridian trustees Tuesday that the school wants to get a short-term loan to cover April expenses and then get an agreement with bondholders to lower the interest rate and use the bond-reserve account money to cover the shortfall.
When asked by the School Board what would happen if the bondholders do not agree to the plan, Russell replied the school would have to close.
But in a March 18 letter, the bond trustee, Wells Fargo, said part of that plan is not possible.
'LAST MINUTE NOTICE'
In late February, North Star officials informed Wells Fargo the school would run out of money in April.
The school told the bank it could use bond assets to cover the deficit, file bankruptcy to restructure the debt or get a loan from the bondholders.
On March 18, Wells Fargo sent a chastising letter to North Star, saying its "inability to manage its cash flow and the 'last minute' notice of this large projected deficiency is of great concern to the bondholders." Wells Fargo said the school is not allowed to use trust assets to cover the shortfall and a short-term loan from bondholders is not possible.
"You have told the bondholders that (state schools chief) Tom Luna has been to North Star twice within the last two years with media coverage and trumpeted North Star as a model academic choice option. Perhaps Mr. Luna or others in the (state school system) could be useful in finding a short-term solution for North Star's projected cash flow problems."
Luna's office said it wasn't able to help following a March 25 meeting.
"They wanted to ... ask if we could advance any payment to their school. We cannot advance any payments to them under Idaho code," said Melissa McGrath, Department of Education spokesperson. "If they think of something else and want to ask us, we are happy to listen to them."
CUTS NOT ENOUGH
The school has lost money for several years, and cutting costs has not balanced the books.
Since 2009, the average teacher salary dropped from $57,000 to $43,000. The school made teachers clean their own rooms, buy their own supplies and ask for parent donations.
"There is not much more, if anything, the school can reasonably do to reduce its operating expenses and remain a viable school," one of the independent reviews reported.
As a charter school, North Star receives no property taxes and cannot float a tax levy. As a public school, it cannot charge tuition or significant fees to generate revenue.
The school receives about 96 percent of its revenue from the state, with small amounts from user fees, fundraising and grants.
North Star is the second Valley charter school to suffer financial woes this year. In February, DaVinci (formerly Garden City Charter School) closed due to financial problems.
Of the 22 charter schools opened in the Treasure Valley since 1998, three others have closed: Owl and Nampa Classical in Nampa; and Hidden Springs, which was transferred to the Boise School District.
Cynthia Sewell: 377-6428, Twitter: @CynthiaSewell