S.C. Tax Money Meant for Kids and Teachers Is Sent to Distant Middleman

By David North, October 26, 2016

Can an out-of-state financial middleman pocket more than a million dollars in South Carolina taxpayers' money meant for kids and teachers at one small school?

Can that private-sector middleman get 7.325 percent interest payments, every year, on $1.5 million lent by other people (namely those applying for EB-5 immigrant visas)?

Can this arrangement go on for a long time?

Is it all a matter of public record?

Does any of this sleight-of-hand help the state's kids, the state's teachers, or even the alien investors whose money is being used? All this relates to a little grade school with 243 students.

The answers to the first four questions are "yes," and the fifth gets a resounding "NO."

How did this unusual diversion of public funds come to pass? It is happening because of the odd convergence of two controversial public programs: the EB-5 (immigrant investor) program at the federal level and the charter school system at the state and local level.

The EB-5 program gives alien investors who pony up $500,000 for a government-approved, but not guaranteed, investment a family-sized set of immigrant visas that they could not get otherwise. The charter school system takes public tax moneys and gives them to private entities that run schools for grades K-12. The two programs interact in a sphere where there are few visible regulations. There are some 24 charter schools that use the EB-5 funds, all in the South and West.

The specifics in this case relate to the Lowcountry Montessori School in Port Royal. The school borrowed $1.5 million from three rich aliens (usually they are from China) through a middleman entity in the EB-5 program. That entity is the Education Fund of America (EFA) of Green Valley, Ariz., which in turn controls a regional center that has been licensed by the U.S. Department of Homeland Security to play the middleman role between the aliens and the users of the funds.

The school also borrowed $3.9 million from other sources, and so it carried a debt of $5.4 million as it opened its doors in the fall of 2014. The one available financial report covers the income and expenditures for the 2014-2015 school year. The school's headcount for 135 days of that school year was 243 students.

During that year, the year the school took in $2,269,004 (95 percent of which consisted of tax dollars) and spent $2,009,922, leaving a surplus of $259,082. If the annual surplus continues at this rate, and if all of it were to be used to pay off the debt of $5.4 million it would take more than 20 years to complete the transaction.

The length of time that it pays off the debt is significant, because for every year that the EB-5 debt is still owed, 7.325 percent of the outstanding sum is to be paid to the middleman entity, EFA. These fees are buried in the school's lease payments, and if it were not for an unnamed auditor working for Elliott Davis Decosimo LLC, a Charleston auditing firm, and that person's insertion of the information in Note 13, on page 24 of the school's financial statement, no one would know of this almost hidden fee.

On this point the auditor's report states:

EFA receives an annual 7.325 percent administrative fee, paid in equal monthly installments, based upon the funds invested in the Partnership [an entity involving the school]. This fee is included in the school's lease payment.

Assuming that the loans were paid off in 20 years, and that the EB-5 and the other loans were all paid off at the same rate of speed, this would mean that over the 20 years the average owed to the three EB-5 aliens (now growing long in tooth) would be $750,000. During each year of the 20, the middlemen would get an average of $54,937.50, or a total of $1,098,750, for arranging a $1.5 million loan. (Regional centers usually charge the alien, in addition, $50,000 to $65,000 upfront for the placement.)

Does that mean that the school will pay only $1,098,750 in interest for the loan? No, because the alien investors, the ones who actually put up the money, also are being paid at 1 percent a year, for a potential total of $150,000 more. So the total would be $1,098,750 + $150,000 + $50,000 = $1,298,750 for the $1.5 million loan. None of the approximately $1.3 million in fees and interest would reduce the $5.4 million principal by a penny.

If the loan could be paid off more quickly, the total spent on interest and fees would decrease, and if the repayment took longer, the reverse would be true.

Were the children involved in a regular public school, these funds would be spent on them, and on their teachers, not primarily on a loan agent in Arizona.

Another comparison: If the county where the school is located, Beaufort, borrowed the money directly, the interest rate would be 4 percent, the coupon rate on other Beaufort bonds, less than half the current combined rate of 8.325 percent. And the fees in connection with selling municipal bonds are minuscule compared to those being charged by EFA.

Perhaps numbers like these are why the EB-5 program, its extension currently before Congress, may be terminated with its currently scheduled December 9 sunset.