Recommendations

October 2017 Charter Schools Some School Districts Improperly Authorized and Inadequately Monitored Out‑of‑District Charter Schools Report 2016‑141 COMMITMENT INTEGRITY LEADERSHIP CALIFORNIA STATE AUDITOR 621 Capitol Mall, Suite 1200 | Sacramento | CA | 95814 916.445.0255 | TTY 916.445.0033 For complaints of state employee misconduct, contact us through the Whistleblower Hotline: 1.800.952.5665 Don’t want to miss any of our reports? Subscribe to our email list at auditor.ca.gov For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255 This report is also available online at www.auditor.ca.gov | Alternate format reports available upon request | Permission is granted to reproduce reports Elaine M. Howle State Auditor Doug Cordiner Chief Deputy October 17, 2017 2016‑141 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As requested by the Joint Legislative Audit Committee, the California State Auditor presents this audit report concerning the oversight and monitoring of charter schools operating outside the geographic boundaries of their authorizing school districts (district). This report concludes that some districts are using exceptions in state law to authorize charter schools that operate outside of their respective boundaries. These authorizations have allowed districts to increase their enrollments and revenue without being democratically accountable to the communities that are hosting the charter schools that they authorize. In addition, the districts we visited could not demonstrate that they limited the fees they charged to their actual costs of providing oversight, as state law requires, and two of the districts charged additional service fees without justifying the costs of providing related services. Further, the districts do not generally have robust processes to ensure that their respective charter schools are financially stable and academically successful. State law requires districts to monitor the fiscal condition of the charter schools they authorize but does not identify specific procedures that authorizers should perform to fulfill this responsibility. Accordingly, the districts we visited provided varying levels of oversight regardless of whether the charter schools operated inside or outside their boundaries. The districts could strengthen their financial oversight of charter schools by incorporating best practices into their processes, such as by obtaining charter school lease agreements and evaluating the reasonableness of the charter schools’ financial projections. None of the districts we visited could demonstrate that they consistently monitored the academic performance of their respective charter schools. However, state law identifies academic performance as the most important factor to consider when deciding to renew or revoke a school’s charter. As a result, districts that fail to document regular academic assessments of their charter schools may not have sufficient evidence to revoke an underperforming school’s charter. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor 621 Capitol Mall, Suite 1200 Sacramento, CA 95814 916.445.0255 916.327.0019 fax www.auditor.ca.gov iv California State Auditor Report 2016-141 October 2017 Selected Abbreviations Used in This Report ASAM Alternative School Accountability Model CMO charter management organization FCMAT Fiscal Crisis Management and Assistance Team LCFF Local Control Funding Formula MOU memorandum of understanding California State Auditor Report 2016-141 v October 2017 Contents Summary 1 Introduction 9 Chapter 1 Some Districts Have Expanded Their Reach and Increased Their Revenue by Authorizing Out‑of‑District Charter Schools 21 Recommendations 36 Chapter 2 The School Districts We Reviewed Need to Provide Stronger Financial Oversight to Their Charter Schools 39 Recommendations 55 Chapter 3 State Law Requires Districts to Provide Only a Minimal Level of Academic Oversight to the Charter Schools They Authorize 57 Recommendations 66 Responses to the Audit Acton‑Agua Dulce Unified School District 69 California State Auditor’s Comments on the Response From Acton‑Agua Dulce Unified School District 75 Antelope Valley Union High School District 77 California State Auditor’s Comments on the Response From Antelope Valley Union High School District 87 New Jerusalem Elementary School District 89 California State Auditor’s Comments on the Response From New Jerusalem Elementary School District 103 vi California State Auditor Report 2016-141 October 2017 Blank page inserted for reproduction purposes only. California State Auditor Report 2016-141 1 October 2017 Summary Results in Brief Audit Highlights . . . Our audit concerning the oversight The Charter Schools Act of 1992 (Charter Schools Act) allows that authorizing districts provided teachers, parents, students, and community members to initiate the three out‑of‑district charter schools establishment of charter schools that operate independently of existing highlighted the following: school district (district) structures. To grant charter schools autonomy and allow them to try innovative teaching methods, state law generally » Requirements related to districts’ exempts charter schools from most requirements governing districts. authorizations of charter schools outside However, charter schools must comply with select statutes and meet their geographical boundaries are vague and ineffective. certain conditions for funding. Further, state law holds each charter school accountable to the authorizing entity (authorizer)—which • Districts we visited authorized charter could be a district, a county office of education, or the State Board of schools outside of their districts that, Education (State Education Board)—that approves its charter petition in effect, expanded the districts’ reach into neighboring communities. (petition). A petition must include a comprehensive description of the proposed charter school’s educational program, measurable student • Districts that authorize out‑of‑district outcomes, governance structure, and manner of conducting annual charter schools are not accountable to financial audits, among other things. To demonstrate community the communities in which the schools support, a petition must also include a minimum number of parent are located (host districts) because residents in host districts cannot vote for or teacher signatures. Once approved, a petition becomes an an authorizing district’s school board. agreement—or charter—between the authorizer and the charter school. Later, if the authorizer’s oversight activities indicate that the • Authorizing districts can significantly established charter school has not fulfilled the charter’s agreements, increase their enrollments and revenue by authorizing the authorizer then has the authority to revoke or deny the renewal out‑of‑district schools. of the school’s charter. » The State is unable to determine how Although state law sets some requirements related to districts’ many out‑of‑district charter school locations exist. We found that over authorizations of charter schools outside their geographical 10 percent of the State’s charter schools boundaries, many of these requirements are vague and ineffective. have at least one school outside of the As a result, two of the three districts we visited—Acton‑Agua Dulce authorizing district’s boundaries. Unified School District (Acton‑Agua Dulce Unified) and New » We identified oversight issues at the Jerusalem Elementary School District (New Jerusalem)—used three districts we visited. exceptions within state law to authorize out‑of‑district charter schools that, in effect, expanded the districts’ reach into neighboring • None had formal procedures for communities. However, our review found that Acton‑Agua Dulce evaluating their charter schools’ Unified and New Jerusalem could not demonstrate that they complied financial information so as to respond to indicators of financial distress. with state law when they authorized Assurance Learning Academy (Assurance Academy) and Acacia Elementary Charter School • The level of financial and academic (Acacia Elementary), respectively. Specifically, state law requires oversight conducted by each charter schools to be located within the geographical boundaries district varied significantly due to vague state laws. of the districts that authorize them unless the schools are unable to locate sites or facilities in the area in which the school chooses to • The three districts could not locate or unless the site is for temporary use during construction. demonstrate that they consistently Nonetheless, neither Acton‑Agua Dulce Unified nor New Jerusalem monitored the academic performance could demonstrate that they or the out‑of‑district charter schools of their charter schools, even though they authorized had attempted to locate suitable facilities within the they performed below the average of districts’ boundaries at the time of authorization. comparable schools. 2 California State Auditor Report 2016-141 October 2017 Furthermore, state law allows districts to expand their reach while limiting their accountability. Specifically, because the residents near the location of an out‑of‑district school cannot vote for an authorizing district’s board members, a district that authorizes an out‑of‑district school is not accountable to the community in which the school is located. In addition, the districts in which the out‑of‑district schools are located (host districts) do not have a means of challenging the schools’ authorizations. In fact, we identified one instance in which Acton‑Agua Dulce Unified authorized an out‑of‑district charter school within a host district even though the host district had previously rejected the same school’s petition. In its lawsuit against Action‑Agua Dulce Unified, the host district noted that it denied the petition because the school failed to identify how it would attract a diverse population, serve English language learners, and address serious financial concerns. Through the authorization of out‑of‑district schools, both Acton‑Agua Dulce Unified and New Jerusalem were able to increase their enrollments and revenue significantly. Charter schools receive state funds based on the average daily attendance of their enrolled students, but the way they receive these funds depends upon whether the schools are directly funded or locally funded. A charter school’s organizational structure and degree of autonomy from its authorizer typically determines its funding method, which affects the way its authorizing district receives revenue. For example, Acton‑Agua Dulce Unified historically has charged all its directly funded charter schools—schools that receive their funding directly from county offices of education, which act as pass‑through agencies for distributing state funding to the charter schools—a 2.5 percent administrative services fee and a 1 percent oversight fee, effectively collecting a total of 3.5 percent of each school’s revenue. The district received $1.9 million total in fees from charter schools in fiscal year 2015–16. Nonetheless, some of Acton‑Agua Dulce Unified’s charter schools appear to have made only sporadic use of the services for which the district charged them. In contrast, New Jerusalem has authorized locally funded out‑of‑district charter schools, which are charter schools that usually have the same governing board as their authorizing districts and that depend heavily on those districts for services, such as those for special education and data reporting. These schools typically receive their funding through their authorizers, so New Jerusalem has been able to manage the charter schools’ funding. In fiscal year 2015–16, New Jerusalem’s four locally funded out‑of‑district charter schools generated more than $5 million in revenue, which the district managed. Because the parents of students in an out‑of‑district school cannot vote for the authorizing district’s board members, New Jerusalem was able expand its reach and increase its revenue without being accountable to the residents of the communities in which the charter schools reside. California State Auditor Report 2016-141 3 October 2017 Moreover, we found that the State is unable to determine how many out‑of‑district charter school locations exist. Because state law does not require charter schools to report all their school locations— including school sites, resource centers, and administrative offices— some charter schools that operate multiple sites report only their in‑district addresses to the California Department of Education (Education). When we analyzed data from multiple sources, we found that 165 of the State’s 1,246 charter schools operated at least one of their school locations outside their respective authorizing districts’ geographic boundaries in fiscal year 2016–17. These 165 charter schools operated in a total of 495 out‑of‑district locations statewide. However, complete data are not available, and additional out‑of‑district charter school locations may exist. Acton‑Agua Dulce Unified’s and New Jerusalem’s decisions to authorize the out‑of‑district charter schools we reviewed may have resulted partly from weaknesses in the districts’ authorization processes. Specifically, neither of the two districts has an adequate process for ensuring that petitions comply with state law. For example, Acton‑Agua Dulce Unified approved a petition that did not have any parent or teacher signatures attached, and the district’s records for evaluating this petition indicate that it did not review this critical element. Petition signatures indicate that individuals are interested meaningfully in either teaching at or having their children attend the proposed school. A lack of signatures may indicate a lack of community support, which could limit the charter school’s ability to obtain adequate funding or to employ qualified teachers. Similarly, New Jerusalem approved a petition that did not have the required number of signatures attached, and it also authorized two petitions that did not contain information about parental involvement, even though state law requires a petition to describe how parents will be involved in the governance of the school. New Jerusalem’s superintendent stated that parents can participate by attending public board meetings; however, we believe this approach may not be adequate to provide parents with the opportunity for active and effective representation. Further, the three districts we visited—Acton‑Agua Dulce Unified, Antelope Valley Union High School District (Antelope Valley Union), and New Jerusalem—did not have written procedures for reviewing their charter schools’ financial information. As a result, Antelope Valley Union and New Jerusalem could not show that they responded promptly to early indicators of financial problems at Los Angeles County Online High School (LA Online) and Acacia Elementary, respectively, which eventually led these two charter schools to close. State law requires districts to monitor the financial conditions of the charter schools they authorize, but it does little to address what effective oversight should entail beyond requiring the districts to perform school site visits and to obtain financial reports. 4 California State Auditor Report 2016-141 October 2017 Consequently, neither Antelope Valley Union nor New Jerusalem could demonstrate that they consistently reviewed and responded promptly to available information about their charter schools’ financial conditions, which showed signs of financial distress. Instead, the districts moved to revoke the two schools’ charters only after the schools reported significant deficits. Regardless of whether charter schools operated inside or outside their authorizing districts’ jurisdictions, the level of financial oversight conducted by the districts we visited varied significantly. These inconsistencies likely occurred because state law is vague; thus, authorizers may have interpreted their responsibilities differently. Although state law directs authorizers to monitor the financial conditions of charter schools under their authority, it does not specify what procedures authorizers should perform to fulfill this oversight responsibility. We believe that school districts could improve their financial oversight by combining best practices, such as those that California’s Fiscal Crisis Management and Assistance Team (FCMAT) recommends, with their current processes. FCMAT’s best practices include obtaining charter school lease agreements and ensuring that charter schools’ financial projections and assumptions are reasonable. If Antelope Valley Union and New Jerusalem had adopted these best practices, they might have noticed sooner that their charter schools’ financial conditions were deteriorating. In addition, if Acton‑Agua Dulce Unified and Antelope Valley Union had used their authority under state law to place representatives on their charter schools’ governing boards, they would have been better positioned to question their charter schools’ other problematic decisions, including a potentially illegal agreement that LA Online had with a sectarian school as well as Assurance Academy’s plan to contribute reserves to a nonprofit corporation. The authorizing districts we visited also provided inconsistent levels of academic oversight to charter schools because state law does not identify specific oversight activities that districts must perform. Although state law requires authorizers to conduct annual site visits at their charter schools, it does not clearly define the minimum level of oversight that authorizer’s must provide with any specificity. In addition, state law only requires authorizers to assess a charter school’s academic performance once every five years, when the school seeks to renew its charter. Although each of the districts we visited established requirements for academic oversight that exceed those in state law, the districts did not always perform the academic monitoring identified in their agreements with their charter schools. As a result, none of the districts held their charter schools accountable for measurable student outcomes outside the process of revoking a school’s charter. For example, the three districts we visited could not demonstrate that they consistently monitored the academic performance of the charter schools we reviewed, even though their respective charter California State Auditor Report 2016-141 5 October 2017 schools performed below the average of comparable schools. State law requires districts to consider increases in academic achievement for all groups of students as the most important factor in deciding whether to revoke a charter, so districts that fail to document their ongoing assessments of academic performance may not have sufficient evidence to revoke failing schools’ charters. Finally, a series of changes in state law has diminished academic accountability for certain charter schools. Specifically, because of recent legislative changes, the only remaining academic performance criterion for renewing a school’s charter is a comparison to other public schools that the charter school’s students would attend if they were not enrolled in the charter school. However, charter schools are exempt from such comparisons if they qualify for an exception within state law. For example, one charter school we reviewed—Assurance Academy—qualified for that exception during our audit period because it serves high‑risk students, such as those who are habitually truant, who are recovered dropouts, or who are parents. As a result, Assurance Academy was allowed to obtain a charter renewal without the district’s assessing the school’s academic performance. The State Education Board recently approved the development of a new program to hold such schools accountable. However, this new program will not be implemented until fall 2018, so gaps within the State’s accountability system will likely exist until that time. Select Recommendations Legislature To ensure that districts obtain community support for charter schools that they authorize, the Legislature should amend state law to do the following: • Further clarify the conditions prospective charter schools must meet to qualify for the geographic exception. For example, the Legislature could clarify whether prospective charter schools qualify for the exception when their petitions indicate that they will serve primarily students residing outside the authorizing district’s jurisdiction. • Require any district that is considering authorizing an out‑of‑district charter school to notify the school’s host district 30 days in advance of the board meeting at which the potential authorizing district is scheduled to make its authorization decision. The Legislature should also require the potential authorizing district to hold the public hearing within the host district’s boundaries, notwithstanding restrictions in the State’s Ralph M. Brown Act that would otherwise require the hearing to be held in the authorizing district. 6 California State Auditor Report 2016-141 October 2017 To ensure charter school accountability, the Legislature should amend state law to require charter schools to annually report all their school locations—including school sites, resource centers, and administrative offices—to their authorizers and Education. To remove the financial incentive for districts to authorize out‑of‑district charter schools, the Legislature should amend state law to prohibit districts from charging fees for additional services above the actual cost of services provided. To ensure that authorizers have adequate tools and guidance for providing effective financial oversight, the Legislature should require the State Education Board and Education to work with representatives from county offices of education, representatives from districts, and subject‑matter experts, such as FCMAT, to either establish a committee or work with an existing committee to report to the Legislature recommendations on the following: • Defining criteria that would allow authorizers to revoke or deny renewal of schools’ charters for financial mismanagement despite increases in academic achievement. • Developing a template that authorizers can use to provide their charter schools with annual feedback on their financial performance. To ensure that districts are aware of significant issues that may impact the out‑of‑district charter schools they authorize, the Legislature should amend state law to require each district to place a district representative as a nonvoting member on each out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. To ensure that charter schools improve the educational outcomes of their students, the Legislature should amend state law to require authorizers to assess annually whether their charter schools are meeting the academic goals established in their charters. California State Auditor Report 2016-141 7 October 2017 Districts To make certain that they authorize only qualified petitions, Acton‑Agua Dulce Unified and New Jerusalem should revise their charter school authorization policies to require the documentation of their evaluations of charter school petitions. The districts should present this documentation to their governing boards for their consideration. To better ensure effective oversight of their charter schools’ finances, the districts we visited should do the following: • Develop written procedures for reviewing charter schools’ financial information and conducting annual oversight visits. These procedures should include relevant requirements from the districts’ agreements with the charter schools as well as best practices. • Develop written procedures for addressing financial concerns. • Place a district representative as a nonvoting member on each charter school’s governing board. To better ensure effective oversight of their charter schools’ finances, Antelope Valley Union and New Jerusalem should provide charter schools with written feedback and recommendations for improving their financial operations after completing their financial review and annual oversight visits. To ensure that charter schools work toward the academic goals established in their charters, the authorizing districts we visited should do the following: • Adopt a policy requiring them to provide their charter schools with timely feedback and recommendations regarding academic performance. • Adopt an academic oversight policy that includes steps for working with charter schools with poor performance results. • Provide their charter schools with annual oversight reports on their academic performance. 8 California State Auditor Report 2016-141 October 2017 Agency Comments Acton‑Agua Dulce Unified and Antelope Valley Unified generally agreed with our findings and conclusions, and indicated they will take actions to implement our recommendations. Although New Jerusalem disagreed with our findings and conclusions, it stated that it plans to implement some of our recommendations. California State Auditor Report 2016-141 9 October 2017 Introduction Background In 1992 the California Legislature enacted the Charter Schools Act of 1992 (Charter Schools Act), which allows teachers, parents, students, and community members to initiate the establishment of charter schools that operate independently of existing school district (district) structures. According to state law, the legislative intent of the Charter Schools Act is for charter schools to improve student learning; to increase learning opportunities for all students, with special emphasis on expanded learning experiences for academically low‑achieving students; to meet measurable student outcomes; to operate under performance‑based accountability systems; and to stimulate continual improvements in all public schools. It also encourages charter schools to develop innovative teaching methods, to create new professional opportunities for teachers, to provide parents and pupils with expanded choices in the types of educational opportunities that are available, and to create vigorous competition in order to improve the State’s public school system. Like districts, charter schools are publicly funded, nondiscriminatory, and tuition‑free. Charter schools are generally exempt from most laws governing districts, but they are required to comply with select statutes, such as those establishing a minimum age for public school attendance. State law also requires charter schools to meet certain conditions for funding, such as participation in the statewide testing of students. In addition to providing classroom‑based instruction at school sites, charter schools can also open resource centers that must be used exclusively for the educational support of students enrolled in nonclassroom‑based study programs, including independent study, home study, work‑study, and distance and computer‑based education. Charter School Authorization Process Charter schools can be authorized by three different types of entities: the governing board of a district, a county board of education, or the State Board of Education (State Education Board). These authorizing entities (authorizers) are responsible for overseeing the charter schools they authorize, as are the charter schools’ own governing boards if nonprofit public‑benefit corporations operate the schools. In fiscal year 2016–17, California had more than 300 charter authorizers and about 1,250 active charter schools that served more than 600,000 students. About 87 percent— or 1,080—of these charter schools obtained their authorizations from districts. 10 California State Auditor Report 2016-141 October 2017 The authorization process begins when a group of Elements That State Law Requires in Charter parents, teachers, or community members submits School Petitions: a charter petition (petition) to an authorizer for a prospective charter school. State law requires each • Description of the school’s educational program. petition to contain certain components, including • Measurable student outcomes the school plans to use. either parent or teacher signatures, proposed • Method for measuring student progress in achieving budgets and financial projections, and a reasonably those outcomes. comprehensive description of required elements, • School governance structure, including the process the which we list in the text box. In addition, the school will use to ensure parental involvement. petition must affirm that the school will not charge • Qualifications that individuals the school employs tuition and will not discriminate against any must meet. student based on ethnicity, national origin, religion, • Procedures to ensure the health and safety of students gender, disability, or other protected characteristics. and staff. • Description of how the school will achieve a student Upon receiving a petition, an authorizer has racial and ethnic balance reflective of the general 30 days to hold a public hearing on the provisions population residing in the district. of the charter, at which time the authorizer must • Admission requirements, if applicable. consider the level of support for the petition by • Description of how annual financial audits will be members of the community, such as parents and conducted and how audit exceptions and deficiencies teachers. The authorizer reviews the petition uncovered by the audits will be resolved. and makes a recommendation to the relevant • Procedures for suspending or expelling students. board (the school district board, the county board, or the State Education Board). Within 60 days of • Provisions to cover employees under the California State receiving the petition, the relevant board must Teachers’ Retirement System, the California Public Employees’ Retirement System, or the federal approve or deny the petition. In the case of a Social Security program. petition submitted directly to the county board of education, these deadlines are extended by 30 days. • Public school alternatives for students residing within the district who choose not to attend charter schools. The relevant board cannot deny a petition unless it makes written factual findings that the petition • Description of the rights of any school district employee does one of the following: who leaves the employ of the school district to work in a charter school and of any rights of an employee to return to the school district after employment at a charter school. • Presents an unsound educational program. • Procedures to resolve disputes between the authorizer and the charter school relating to conditions of the charter. • Indicates that the school is demonstrably unlikely to successfully implement the educational • The procedures to be used if the charter school closes. program set forth in the petition. Source: Education Code section 47605(b)(5). • Does not contain the required number of signatures—either half the parents of the number of students the school expects to enroll in the first year or half the teachers it expects to employ in the first year. • Does not contain a declaration that the school will remain nonsectarian, not charge tuition, and not discriminate. • Does not contain a reasonably comprehensive description of all statutorily required elements. California State Auditor Report 2016-141 11 October 2017 • Does not contain a declaration of whether the charter school will be the exclusive public school employer of the charter school employees. Once approved, the petition becomes an agreement—or charter— between the authorizer and the charter school. The authorizer and charter school may also expand upon this agreement by entering memorandums of understanding that further define each party’s legal responsibilities. For example, the authorizer may agree to provide additional services to the charter school for a fee. State law limits the effective term of a charter school to five years, after which an authorizer may renew the charter. The charter‑renewal process is similar to the initial authorization process, but a charter school seeking a renewal must also satisfy academic performance requirements. State law requires an authorizer to consider increases in academic achievement as the most important factor in determining whether to grant a charter renewal. Responsibilities of Charter School Authorizers State law requires that an authorizer perform certain duties, as the text box shows. For Authorizers’ Key Statutory Responsibilities example, an authorizer must provide timely notification to the California Department of State law requires an authorizer to do the following for each Education (Education) if it revokes a school’s charter school under its authority. charter. State law allows an authorizer to take • Visit each charter school at least annually. steps to revoke a school’s charter if the authorizer • Ensure that each charter school prepares and submits finds that the school has committed a material annually the following reports by the following dates: violation of its charter, failed to achieve or pursue ‑ Preliminary budget by July 1. any of its student outcomes, engaged in fiscal mismanagement, or violated any provisions of ‑ Local control and accountability plan by July 1. law. However, as in the charter‑renewal process, ‑ First interim financial report by December 15. state law intends that an authorizer consider ‑ Second interim financial report by March 15. increases in student academic achievement for all ‑ Final unaudited financial report by September 15. groups of students as the most important factor in ‑ Annual independent financial audit report for the determining whether to revoke a charter. preceding year by December 15. If an authorizer believes that it has substantial • Monitor the fiscal condition of each charter school. evidence showing sufficient grounds for revoking • Provide timely notification to Education if the authorizer a charter, it must adhere to the revocation timeline revokes a school’s charter or grants or denies the renewal established in state law. Specifically, state law of a school’s charter. It must also inform Education if a requires the authorizer to first notify the school charter school will cease operations. of its violations and give it a reasonable amount of Source: Education Code sections 47604.32, 47604.33(a), time to correct each violation unless a violation and 47605(m). constitutes a severe and imminent threat to student health and safety. If the school does not take corrective action, the authorizer can then proceed 12 California State Auditor Report 2016-141 October 2017 to revoke the charter by providing the school with a written notice of intent to revoke and a notice of facts in support of revocation. Within 30 days of the authorizer’s sending the revocation notice, the authorizer’s board must hold a public hearing to decide whether enough evidence exists to revoke the school’s charter. The board then has another 30 days to issue its decision on charter revocation. As part of these legal requirements, the Education Code requires an authorizer to fund the cost of performing these duties with supervisorial oversight fees. State law allows an authorizer to charge for the actual costs of supervisorial oversight not to exceed 1 percent of a charter school’s revenue, or 3 percent of its revenue if the authorizer provides substantially rent‑free facilities. Oversight fees are separate from fees associated with any additional services that a charter school may purchase from its authorizer. Charter School Funding Like traditional public schools, California charter schools receive funding based on the State’s local funding plan, which generally considers the grade levels a school serves and the average daily attendance of a school’s enrolled students. Under this plan, charter schools receive funding primarily from three sources: state aid, the Education Protection Account, and local revenue. Proposition 30 created the Education Protection Account, which sets aside additional state aid for public schools. Local revenue, on the other hand, refers to the funding that charter schools receive in lieu of property taxes. In the years since the implementation of the local funding plan, state aid has consistently been the biggest source of revenue for charter schools statewide, followed by local revenue and the Education Protection Account. However, the proportions of the funding that charter schools receive from each of these three sources vary. Charter schools’ organizational structures and degrees of autonomy from their authorizers typically determine how they elect to receive funding. Locally funded charter schools usually have the same governing board as their authorizing districts, and they are highly dependent on those districts for services, such as those for special education and data reporting. These schools typically receive their funding through their authorizers. In contrast, directly funded schools are operated typically by nonprofit public‑benefit corporations. These schools receive their funding from county offices of education, which act as pass‑through agencies for distributing state funding to the charter schools. When nonprofit public‑benefit corporations operate or manage multiple charter schools, the corporations are commonly referred to as charter management organizations (CMOs). CMOs share resources California State Auditor Report 2016-141 13 October 2017 and centralize certain functions among schools—such as hiring, professional development, and advocacy—and they may be involved in submitting petitions for charter schools they propose to operate. In exchange for these services, CMOs typically charge their charter schools management fees or allocate centralized expenses to the schools. The Charter Schools Named in the Audit Request In 2002 the Legislature amended state law to provide additional requirements specific to the locations of charter schools, among other things. An analysis by the Senate Committee on Education quoted the bill’s author to state that amendments were needed to address concerns related to a charter school that accumulated a $1.3 million debt in one year. The amount of this debt raised questions about how the school used state and federal funding. For example, the bill analysis stated that one of the school’s sites may have provided sectarian studies and charged tuition, activities that state law prohibits. According to the bill analysis, the district cited the difficulties of keeping track of remote operations as a reason it did not discover the various anomalies sooner. The site in question was located outside its authorizing district’s geographical boundaries and an Assembly Committee on Education hearing for the same bill cited the Legislative Counsel’s conclusion that charter schools do not have authority to establish locations outside the boundaries of their authorizing school districts. Similarly, the audit request for this report resulted from concerns about management and oversight of out‑of‑district charter schools. Specifically, the request identified as subjects for review Acacia Elementary Charter School (Acacia Elementary), Assurance Learning Academy (Assurance Academy), and Los Angeles County Online High School (LA Online). Each of these three charter schools either operated or currently operates outside its authorizing district’s geographical boundaries. Table 1 on the following page provides background information about these out‑of‑district charter schools. Acacia Elementary was a directly funded charter school authorized by New Jerusalem Elementary School District (New Jerusalem) and managed by Tri‑Valley Learning Corporation (Tri‑Valley). Although New Jerusalem is located in Tracy, Acacia Elementary operated within the boundaries of Stockton Unified School District (Stockton Unified). Tri‑Valley filed for bankruptcy during fiscal year 2016–17, forcing Acacia Elementary to cease operations at the end of fiscal year 2016–17. Chapter 2 discusses the events leading to Acacia Elementary’s closure. 14 California State Auditor Report 2016-141 October 2017 Assurance Academy is a directly funded charter school authorized by Acton‑Agua Dulce Unified School District (Acton‑Agua Dulce Unified) and managed by the Lifelong Learning Administration Corporation. Although Acton‑Agua Dulce Unified is located in Acton, Assurance Academy operates primarily within the boundaries of Los Angeles Unified School District (Los Angeles Unified). LA Online was a directly funded charter school authorized by Antelope Valley Union High School District (Antelope Valley Union). Portable Practical Educational Preparation, Inc.,‑California (PPEP) operated LA Online through the end of fiscal year 2013–14, at which time PPEP changed its name to Olin Virtual Academy. For the purposes of this report, we refer to both entities collectively as LA Online. LA Online’s board of directors resolved to file for bankruptcy during fiscal year 2015–16, and LA Online ceased operations in February 2017. Although Antelope Valley Union is located in Lancaster, LA Online’s administrative office operated within the boundaries of Glendale Unified School District (Glendale Unified). We discuss the events leading to LA Online’s bankruptcy in Chapter 2. Table 1 Profiles of the Three Out-of-District Charter Schools Identified in the Audit Request SCHOOL PROFILE ACACIA ELEMENTARY ASSURANCE ACADEMY LA ONLINE Authorizing district New Jerusalem Acton-Agua Dulce Unified Antelope Valley Union District office city Tracy Acton Lancaster Type of school Classroom-based Nonclassroom-based Nonclassroom-based Status as virtual or Not virtual Not virtual Fully virtual nonvirtual school Charter school city Stockton Los Angeles La Crescenta Charter school county San Joaquin County Los Angeles County Los Angeles County Annual average daily attendance 382 763 255 for fiscal year 2015–16 Grades served K–5 9–12 9–12 Fiscal years of operation 2013–14 through 2016–17 2012–13 to present 2007–08 through 2016–17 State funding allocation for $3.5 million $8.5 million $2.4 million fiscal year 2015–16 Sources: California State Auditor’s analysis of data from Education and from fiscal year 2015–16 audited financial statements for Assurance Academy and LA Online. In addition to reviewing the charter schools and authorizing districts named in the audit request, we also examined the policies and procedures of the districts in which the three charter schools California State Auditor Report 2016-141 15 October 2017 operated (host districts). Table 2 provides background information on the authorizing districts and host districts of the charter schools identified in the audit request. Table 2 Profiles of the Authorizing School Districts and Host School Districts for the Three Out-of-District Charter Schools That We Reviewed ACACIA ELEMENTARY ASSURANCE ACADEMY LA ONLINE AUTHORIZING HOST AUTHORIZING HOST AUTHORIZING HOST SCHOOL DISTRICT SCHOOL DISTRICT SCHOOL DISTRICT SCHOOL DISTRICT SCHOOL DISTRICT SCHOOL DISTRICT NEW STOCKTON ACTON-AGUA LOS ANGELES ANTELOPE VALLEY GLENDALE SCHOOL DISTRICT PROFILE JERUSALEM UNIFIED DULCE UNIFIED UNIFIED UNION UNIFIED School district’s county San Joaquin San Joaquin Los Angeles Los Angeles Los Angeles Los Angeles Fiscal Year 2015–16 Number of students enrolled in district 5,015 40,324 7,475 639,337 24,127 26,117 Percentage of socioeconomically 54% 81% 36% 81% 71% 48% disadvantaged students Number of noncharter schools 1 50 3 732 13 33 Number of charter schools 13 13 14 274 3 0 Number of out-of-district charter schools* 10 0 11 0 2 0 Sources: California State Auditor’s analysis of multiple documents, interviews, and data obtained from Education, and the Accrediting Commission for Schools—Western Association of Schools and Colleges’ directory of schools. * A single charter school may have a number of different locations. We did not include these locations when calculating the number of out-of-district charter schools. Scope and Methodology The Joint Legislative Audit Committee (Audit Committee) directed the California State Auditor to determine the adequacy of the financial and academic oversight that authorizing districts provided to three out‑of‑district charter schools: Acacia Elementary, Assurance Academy, and LA Online. We list the objectives that the Audit Committee approved and the methods used to address them in Table 3 beginning on the following page. 16 California State Auditor Report 2016-141 October 2017 Table 3 Audit Objectives and the Methods Used to Address Them AUDIT OBJECTIVE METHOD 1 Review and evaluate the laws, rules, Reviewed relevant laws, rules, regulations, and other background materials. and regulations significant to the audit objectives. 2 Determine whether the districts that For Acton-Agua Dulce Unified, Antelope Valley Union, and New Jerusalem, we did the following: are authorizing multiple charters • Interviewed district staff and obtained the districts’ policies and procedures for authorizing charter schools. are adhering to the limitations for • Reviewed the districts’ policies and procedures to determine whether they reflect the state law’s authorizing charter schools outside limitations for authorizing charter schools that are located outside of an authorizing district’s their geographical boundaries. geographical boundaries. • Obtained and reviewed evidence to determine whether Acacia Elementary, Assurance Academy, and LA Online—the three out-of-district charter schools named in Objective 6—attempted to locate facilities within the boundaries of their authorizing districts and whether their authorizing districts attempted to locate sites within their geographic boundaries before authorizing the out-of-district locations. • Determined the districts’ total number of out-of-district charter school locations. We also reviewed petitions for Acacia Elementary, Assurance Academy, LA Online and one additional directly funded out-of-district charter school per district to determine whether the petitions complied with state law. Further, we reviewed New Jerusalem’s locally funded out-of-district charter school to determine whether the district followed its authorization process. • In addition, we obtained lists of charter school locations from Education and used them to determine the number of out-of-district charter schools statewide. To make the lists more complete, we included addresses from the directory of schools used by the Accrediting Commission for Schools, Western Association of Schools and Colleges. 3 Determine whether the districts’ For Acton-Agua Dulce Unified, Antelope Valley Union, Glendale Unified, Los Angeles Unified, authorizing processes for charter New Jerusalem, and Stockton Unified, we did the following: schools located outside their • Interviewed district management and staff to identify the process the districts use when authorizing geographic boundaries meet legal charter schools and to identify any differences in the processes depending on the charter schools’ requirements and are rigorous geographic locations. enough to ensure the likely • Obtained and reviewed administrative procedures from each school district related to reviewing success of the charter schools they petitions and identified gaps that may exist between the districts’ processes and state law. authorize. Compare those processes to the authorizing processes of • Determined whether the district’s policies for authorizing petitions aligned with the criteria that the other districts with charter schools State Board of Education uses to evaluate petitions. located within the district and • Compared processes within and among districts. determine the reasons for any For Acton-Agua Dulce Unified, Antelope Valley Union, and New Jerusalem, we determined whether each significant differences. district followed its own authorization process for one locally funded in-district charter school, one directly funded in-district charter school, and the out-of-district charter school named in Objective 6. 4 Assess the districts’ oversight For Acton-Agua Dulce Unified, Antelope Valley Union, and New Jerusalem, we did the following: and monitoring of the financial • Interviewed district staff and obtained the district’s policies and procedures for performing financial information for charter schools they oversight. We determined that the financial oversight policies and procedures the districts provide to authorize that are located outside charter schools do not differ based on the schools’ geographic locations. their respective district’s geographic • Reviewed the districts’ policies and procedures to determine whether they include state law’s boundaries and compare those requirements for the oversight and monitoring of charter schools. Because state law does not processes to the oversight establish a minimum level of oversight that districts must perform, we used best practices from the and monitoring performed by Fiscal Crisis and Management Assistance Team (FCMAT) and the National Association of Charter School the districts when the charter Authorizers to assess the districts’ oversight and monitoring processes. schools are located within the authorizing district. • Obtained and reviewed the financial reports for the last three years for Acacia Elementary, Assurance Academy, and LA Online and determined whether the districts followed their monitoring processes for reviewing the schools’ finances. We also compared each district’s monitoring processes to its process for monitoring directly funded in-district charter schools. • If a district had revoked one of its charter schools, obtained and reviewed documents that supported the district’s decision and determined whether the conditions justifying the revocation exist in any of the other selected charter schools. California State Auditor Report 2016-141 17 October 2017 AUDIT OBJECTIVE METHOD 5 Assess the adequacy of the For Acton-Agua Dulce Unified, Antelope Valley Union, and New Jerusalem, we did the following: academic oversight performed by • Interviewed district staff and obtained the districts’ policies and procedures for performing academic the authorizing districts for the oversight. We determined that the academic oversight that the districts provide to charter schools does charter schools located outside of not differ based on schools’ geographic locations. their geographic boundaries and, • Obtained and reviewed the last three fiscal years’ academic reports that Acacia Elementary, Assurance to the extent possible, compare the Academy, LA Online and a directly funded in-district charter school in each district sent to their academic oversight performed with authorizing districts, as required under their memorandums of understanding with the districts, and that of charter schools operating determined whether the districts followed their monitoring processes for reviewing the charter schools’ within the boundaries of the academic performance. authorizing districts. 6 For Acacia Elementary, Assurance Academy, and LA Online, perform the following: a. Determine whether the selected • Interviewed school staff and obtained policies and procedures about the schools’ accounting and charter schools are financially budgeting processes. stable and are meeting • Determined whether the schools’ financial reporting complied with requirements in state law. accepted financial norms and • Determined whether the schools’ reserves met the minimum levels required by the agreements with state requirements. their authorizing districts. • Reviewed charter schools’ audited financial statements for transactions among charter schools and their related parties during our audit period. We noted that LA Online did not report any related-party transactions, while Assurance’s related-party transactions generally pertained to the shared costs of operating expenses and educational services. We further describe Acacia’s related-party transactions in Chapter 2. b. Assess whether the selected We did not find any applicable requirements. charter schools’ three-year financial projections meet the requirements of their respective county offices of education. c. Determine the academic results • Selected similar noncharter public schools for comparison based on school type, grade levels served, of the selected charter schools number of students, percentage of socioeconomically disadvantaged students, and percentage and compare them to county of English learners. We selected traditional schools in Stockton Unified for comparison to Acacia averages and similar noncharter Elementary, Alternative School Accountability Model schools in Los Angeles Unified for comparison to public schools. Assurance Academy, and primarily or exclusively virtual schools statewide for comparison to LA Online because no comparable schools exist in Los Angeles County. • Obtained the California Assessment of Student Performance and Progress (CAASPP) results for fiscal years 2014–15 through 2015–16 and compared each charter school’s results to results of the schools we selected for comparison. For fiscal year 2013–14, we obtained the Academic Performance Index because the State did not implement CAASPP until fiscal year 2014–15. • Compared the graduation rates and expulsion rates of each charter school and the schools that we selected for comparison. We found that the three charter schools we visited had lower expulsion rates than did similar schools. 7 Determine whether the financial For Acton-Agua Dulce Unified, Antelope Valley Union, and New Jerusalem, we did the following: oversight fees of the chartering • Obtained the past three years of invoices the districts sent to Acacia Elementary, Assurance Academy, districts exceed the limits set by and LA Online, as well as evidence of payment. state law for charter schools located • Determined whether the districts charged the charter schools based on the actual costs of providing outside the authorizing districts’ oversight and services and whether they charged more than the legal maximum. geographic boundaries. • Identified any additional service fees that the districts imposed and determined whether the charter schools benefited from those services. 8 Review and assess any other issues We reviewed the FCMAT audit report of Tri-Valley Learning Corporation. In this report, we identified findings that are significant to the audit. related to Acacia Elementary, and we obtained supporting documentation for such findings, when possible. Sources: California State Auditor’s analysis of Joint Legislative Audit Committee audit request 2016-141 and information obtained from the school districts of Acton-Agua Dulce Unified, Antelope Valley Union, Glendale Unified, Los Angeles Unified, New Jerusalem, and Stockton Unified; Acacia Elementary, Assurance Academy; LA Online, Education; and FCMAT. 18 California State Auditor Report 2016-141 October 2017 Assessment of Data Reliability In performing this audit, we obtained electronic data files extracted from the data sources listed in Table 4. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support findings, conclusions, or recommendations. Table 4 describes the analyses we conducted using data from these sources, our methods for testing, and the results of our assessments. Although these determinations may affect the precision of the numbers we present, there is sufficient evidence in total to support our audit findings, conclusions, and recommendations. Table 4 Methods Used to Assess Data Reliability DATA SOURCE PURPOSE METHOD AND RESULT CONCLUSION Education’s To determine the We did not perform accuracy and completeness testing on Undetermined reliability DataQuest enrollment; percentages these data because it is a paperless system with any records for these audit purposes. of English learners and stored at local educational agencies throughout the state, Although this determination socioeconomically making testing cost-prohibitive. Alternatively, we could have may affect the precision of disadvantaged students; reviewed the adequacy of selected system controls that include the numbers we present, school climate; and cohort general and application controls. However, because it was there is sufficient evidence outcomes for schools and cost-prohibitive, we did not conduct these reviews. in total to support our school districts. audit findings, conclusions, and recommendations. Education’s To determine annual We did not perform accuracy and completeness testing on Undetermined reliability Local Control funding summaries for these data because the system is a paperless system and local for these audit purposes. Funding Formula— individual school districts educational agencies submit data electronically, making testing Although this determination Funding Snapshot and charter schools. cost-prohibitive. Alternatively, we could have reviewed the may affect the precision of adequacy of selected system controls that include general and the numbers we present, application controls. However, because it was cost-prohibitive, there is sufficient evidence we did not conduct these reviews. To gain some assurance in total to support our of the data’s reliability, we reviewed existing information audit findings, conclusions, and found that local educational agencies report data that and recommendations. Education uses to calculate funding exhibits and updates throughout the year. According to Education’s website, county offices of education serve as one mechanism for checking the accuracy of data used in the LCFF Funding Snapshot. Additionally, according to a fiscal consultant with Education, her unit conducts reviews and testing of the data prior to releasing the data on Education’s website. California State Auditor Report 2016-141 19 October 2017 DATA SOURCE PURPOSE METHOD AND RESULT CONCLUSION Education’s To determine all locations We used this system for a purpose for which it was not Not sufficiently reliable for California School of charter schools as originally intended; however, this system was the best source purposes of determining Directory of May 2017, to select of information for our purpose. We performed data-set all locations of charter schools comparable to verification procedures and electronic testing of key data schools, and undetermined the charter schools elements and did not identify significant issues. We did not reliability for the other named in the scope and perform comprehensive accuracy and completeness testing audit purposes. objectives, and to provide because the source documents are stored throughout the Although this determination background information. State, making testing cost prohibitive. To gain some assurance may affect the precision of of the data’s reliability, we reviewed existing information the numbers we present, and determined that according to Education’s website, there is sufficient evidence local educational agencies are responsible for updating and in total to support our maintaining information for charter schools and the charter audit findings, conclusions, schools’ personnel can review their schools’ data. The school and recommendations. directory data contains only two charter school addresses at most—a street address for the charter school’s main location and a mailing address for the charter school. Since some charter schools have more than two locations, these data are incomplete for the purpose of determining all charter school locations. To improve the completeness of the location data we included addresses from Education’s Charter School Division survey database. We performed data-set verification procedures and electronic testing of key data elements and did not identify any significant issues. To test the completeness of the data we compared it to the Accrediting Commission for Schools–Western Association of Schools and Colleges’ public directory. We found that 12 of the 29 records we tested were not in the survey data. To further improve the completeness of the data we included addresses for charter schools that have multiple campuses from the Accrediting Commission for Schools—Western Association of Schools and Colleges’ public directory. We did not assess the reliability of these data because not all charter schools have to pursue accreditation through the Accrediting Commission for Schools, Western Association of Schools and Colleges and we only obtained a list of charter schools with multiple campuses which lead to inherent limitations in the completeness of these data for our audit purpose. Education’s To determine academic We did not perform accuracy and completeness testing on Undetermined reliability California Assessment performance of these data because the system is a primarily paperless system, for these audit purposes. of Student Performance charter schools and making testing cost-prohibitive. Alternatively, we could have Although this determination and Progress System’s comparable entities. reviewed the adequacy of selected system controls that may affect the precision of Smarter Balanced include general and application controls. However, because it the numbers we present, Summative Assessments was cost-prohibitive, we did not conduct these reviews. there is sufficient evidence in total to support our audit findings, conclusions, and recommendations. Sources: California State Auditor’s analysis of multiple documents, interviews, and data from the entities listed in the Table. 20 California State Auditor Report 2016-141 October 2017 Blank page inserted for reproduction purposes only. California State Auditor Report 2016-141 21 October 2017 Chapter 1 SOME DISTRICTS HAVE EXPANDED THEIR REACH AND INCREASED THEIR REVENUE BY AUTHORIZING OUT‑OF‑DISTRICT CHARTER SCHOOLS Two of the three districts we reviewed—Acton‑Agua Dulce Unified and New Jerusalem—expanded their reach by using exceptions in state law to authorize out‑of‑district charter schools. However, neither district was able to demonstrate that the schools they authorized actually qualified for these exceptions. Further, state law does not provide host districts with a process for challenging the authorization of out‑of‑district charter schools, even if the host districts have previously rejected the schools’ petitions. As a result, Acton‑Agua Dulce Unified and New Jerusalem were able to authorize charter schools with little evidence of community support in the host districts. Acton‑Agua Dulce Unified’s and New Jerusalem’s authorizations of out‑of‑district charter schools led to significant increases in the districts’ enrollment numbers and provided a method for the districts to substantially increase their revenue. Further, both Acton‑Agua Dulce Unified and New Jerusalem authorized charter schools despite their petitions missing basic components, such as the minimum number of parent or teacher signatures. Finally, all three districts we visited had outdated charter school policies and did not ensure that their staff thoroughly reviewed petitions for compliance with all legal requirements. By Authorizing Charter Schools Outside Their Jurisdictions, Two of the Districts We Reviewed Impaired Local Control of Education Acton‑Agua Dulce Unified and New Jerusalem have used exceptions within the state law on charter school authorization to expand their reach through the establishment of out‑of‑district charter schools. According to Education’s guidance, the State’s educational system relies on local control for the management of districts on the theory that the people closest to the problems and needs of each individual district are best able to make appropriate decisions on its behalf. In addition, state law requires charter schools to operate within the geographic boundaries of their authorizers, with limited exceptions. Specifically, state law allows a charter school to establish one out‑of‑district site within the district’s county if no available site or facility exists to house the entire school program in the area in which the school chooses to locate or if the site is for temporary use during construction. However, neither Acton‑Agua Dulce Unified nor New Jerusalem could provide evidence that their out‑of‑district charter schools had, in fact, qualified for these exceptions during the authorization process. 22 California State Auditor Report 2016-141 October 2017 Some of the charter schools’ Further, some of the charter schools’ petitions we reviewed petitions we reviewed indicated indicated their intent to locate outside the district’s jurisdiction their intent to locate outside the by identifying their target student populations as those in district’s jurisdiction by identifying another district—a circumstance that appears to conflict with the their target student populations 2002 amendments to the Charter Schools Act that specify charter as those in another district—a schools should be located within their authorizing districts. For circumstance that appears to example, Acacia Elementary’s petition stated that the school’s conflict with the 2002 amendments intention was to serve students within San Joaquin County, with to the Charter Schools Act. particular attention to underserved students in Stockton, even though the authorizing district was in Tracy. Likewise, Assurance Academy’s petition proposed to serve students throughout Los Angeles County and adjacent counties. According to New Jerusalem’s superintendent, his district’s charter schools meet the legal exception for situations in which no available facilities exist within the district. However, given the statutory limitations that require a charter school to be located in the geographic boundaries of the chartering district, New Jerusalem’s reliance on this exception is misplaced because to be consistent with the law, the schools that New Jerusalem has authorized should have petitioned the districts where the students the charter schools chose to target were located. By using this exception in state law, New Jerusalem increased its enrollment with students who would otherwise attend schools in neighboring districts. According to 2010 U.S. Census data, the total population of school‑age residents within New Jerusalem’s geographical boundaries was only about 330 people. However, New Jerusalem increased its enrollment from 686 students in fiscal year 2010–11 to 5,015 students in fiscal year 2015–16 by increasing the number of its out‑of‑district charter schools from zero to 10, as Table 5 shows. For example, in the case of Acacia Elementary, none of its 421 students in fiscal year 2015–16 lived within New Jerusalem’s geographical boundaries. Thus, the decision of New Jerusalem’s board to authorize out‑of‑district charter schools has resulted in the diversion of a significant number of students from other districts to New Jerusalem’s charter schools. According to New Jerusalem’s superintendent, the district is meeting the intent of the Charter Schools Act by providing students and parents in districts within San Joaquin County and contiguous counties with expanded learning opportunities and by providing vigorous competition within the public school system. However, New Jerusalem’s actions do not appear to meet the Legislature’s intent for local districts to authorize the charter schools operating in their districts. Similarly, Acton‑Agua Dulce Unified has increased its enrollment by authorizing out‑of‑district charter schools. At a time when the number of its students had significantly decreased, Acton‑Agua Dulce Unified’s former superintendent presented a plan to his district’s board to reverse its declining enrollment. California State Auditor Report 2016-141 23 October 2017 In December 2013, the board approved the former superintendent’s plan to take advantage of state law to earn revenue as a charter authorizer. Specifically, the proposal estimated that the district could increase enrollment to more than 30,000 students by the summer of 2016 through the authorization of approximately 24 charter schools. Although these projections were overly optimistic, Acton‑Agua Dulce Unified increased its enrollment from 2,383 students in fiscal year 2013–14 to 7,475 students in fiscal year 2015–16, despite having an in‑district school‑age population of only about 2,500 according to the latest census data. As of May 2017, Acton‑Agua Dulce Unified had authorized 12 charter schools that operated a total of 33 out‑of‑district locations, some of which were more than 50 miles away from the district. According to the district’s director of charter schools, she was unaware of the district’s plan, and no one has referred to it since she took her position in February 2016. Table 5 By Authorizing Out-of-District Charter Schools, Two of the Three Districts We Reviewed Substantially Increased Their Numbers of Schools and Students FISCAL YEAR 2010–11 2011–12 2012–13 2013–14 2014–15 2015–16 NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER OF OF OF OF OF OF OF OF OF OF OF OF SCHOOL DISTRICT SCHOOLS* STUDENTS SCHOOLS* STUDENTS SCHOOLS* STUDENTS SCHOOLS* STUDENTS SCHOOLS* STUDENTS SCHOOLS* STUDENTS Acton-Agua Dulce Unified Noncharter 4 1,696 4 1,506 4 1,377 4 1,301 3 1,083 3 1,098 In-district charter 0 0 0 0 0 0 0 0 3 266 3 362 Out-of-district charter† 0 0 0 0 1 165 2 1,082 9 2,694 11 6,015 District total 4 1,696 4 1,506 5 1,542 6 2,383 15 4,043 17 7,475 Antelope Valley Union Noncharter 13 23,183 13 23,350 13 22,933 13 22,220 13 22,071 13 21,616 In-district charter 0 0 0 0 1 257 1 237 1 254 1 331 Out-of-district charter† 2 2,901 2 2,187 2 1,626 2 2,011 2 2,294 2 2,180 District total 15 26,084 15 25,537 16 24,816 16 24,468 16 24,619 16 24,127 New Jerusalem Noncharter 1 27 1 28 1 16 1 23 1 25 1 28 In-district charter 2 659 2 767 2 873 2 970 2 734 3 845 Out-of-district charter† 0 0 1 435 3 2,228 5 2,599 10 3,777 10 4,142 District total 3 686 4 1,230 6 3,117 8 3,592 13 4,536 14 5,015 Sources: California State Auditor’s analysis of Education’s school directory, charter school survey, and DataQuest; and the Accrediting Commission for Schools—Western Association of Schools and Colleges’ directory of schools. * The number of schools includes both in-district and out-of-district charter schools. It does not include the number of resource centers or other facilities that a school may operate. † If the majority of a charter school’s locations were outside their authorizing district’s boundaries, we classified the school as an out-of-district charter school. 24 California State Auditor Report 2016-141 October 2017 State law sets some requirements for the authorization of out‑of‑district charter schools, but the requirements that apply to an authorizing district are vague and ineffective. For example, if a charter school is unable to locate within the boundaries of an authorizing district, state law requires that the potential host district receive notice before the petition’s authorization. However, state law does not specify how far in advance the host district needs to receive notice or which party—the authorizing district or proposed charter school—is responsible for providing the notification. As a result, New Jerusalem adhered to the law even though it did not notify Stockton Unified until a few hours before it authorized Acacia Elementary to operate within Stockton Unified’s jurisdiction. In contrast, if an applicant submits a petition to a county office of education, state law requires that any district in which the applicant proposes to operate a charter school location receive at least 30 days’ notice. According to Stockton Unified’s principal auditor, Acacia Elementary provided an incomplete petition to Stockton Unified in December 2012 but then discontinued the process and instead sought authorization through New Jerusalem. Without sufficient notice of the potential authorization, the host district does not have time to respond to the possibility of a new school opening in its community. Further, the authorizing district may not identify issues that previously led the potential host district to reject the petition. Moreover, even if a host district is aware of the petition, nothing in law establishes an administrative process for the host district to challenge the authorization of the charter school within its jurisdiction. For example, Acton‑Agua Dulce Unified authorized charter schools to operate within the jurisdiction of potential host districts that had previously denied those charter schools’ petitions. A board member from one potential host district attended an Acton‑Agua Dulce Unified board meeting and raised concerns that his district had turned down the proposed charter school several times, but Acton‑Agua Dulce Unified still chose to authorize the Because state law has not charter school. Because state law has not established a procedure established a procedure for a for a host district to challenge the authorization of an out‑of‑district host district to challenge the charter school within its jurisdiction, litigation is the host district’s authorization of an out‑of‑district only recourse, potentially resulting in costly legal fees for both charter school within its jurisdiction, districts. According to a lawsuit that another host district filed litigation is the host district’s against Acton‑Agua Dulce Unified, the host district had denied only recourse. a petition because the petition failed to identify how the charter school would attract a diverse population, serve English language learners, and address serious financial concerns. State law allows a charter applicant to appeal a district’s denial by submitting the petition first to the pertinent county office of education and then to the State Education Board if the county office of education also denies the petition. However, because state law does not prohibit a charter applicant from submitting a denied California State Auditor Report 2016-141 25 October 2017 petition to a neighboring school district, a charter applicant could potentially circumvent this process. If the out‑of‑district charter school then closes, its students are displaced, and this displacement may significantly impact the host district that will need to reenroll the students. These gaps in state law also allow a district to authorize a charter school without the support of the local community where the charter school plans to operate. Specifically, nothing in state law requires the authorizing district to hold public hearings within the potential host district. For example, when New Jerusalem planned to authorize and operate an out‑of‑district charter within the boundaries of Stockton Unified, it held its public hearing in Tracy, 26 miles from where the district established the charter school. New Jerusalem’s board thus authorized a locally funded charter school to operate in the jurisdiction of another district with minimal opportunity for the local community to provide public feedback. Moreover, because the parents of students in an out‑of‑district school cannot vote for the authorizing district’s board members, the authorizing district is not accountable democratically to the charter school’s community. In this way, state law allows authorizing districts to expand their reach, but it does not hold these districts accountable to the residents of the communities in which the districts’ charter schools operate. Further, two of the authorizing districts we visited made little effort Two of the authorizing districts we to prevent charter schools from establishing additional out‑of‑district visited made little effort to prevent locations. For example, charter schools in Acton‑Agua Dulce Unified charter schools from establishing and Antelope Valley Union opened out‑of‑district locations without additional out‑of‑district locations. the prior approval of their authorizing districts. When a charter school proposes to establish operations at one or more additional locations, state law requires it to submit a material revision of its charter to its authorizing district for approval. However, when Assurance Academy opened a resource center in fiscal year 2014–15, it did not notify or seek Acton‑Agua Dulce Unified’s approval. Similarly, LA Online entered into lease agreements for five resource centers in fiscal year 2015–16 without notifying Antelope Valley Union. Moreover, neither district required its charter schools to submit material revisions to their charters even after each district became aware of the location changes. According to Antelope Valley Union’s assistant superintendent of educational services, it was a pervasive practice throughout the State for virtual and independent‑study charter schools to open additional resource centers until a November 2016 appellate court decision in the Anderson Union High School District v. Shasta Secondary Home School case. The decision limited the ability of charter schools to establish out‑of‑district locations because the appellate court held that state law does not distinguish between classroom‑based and nonclassroom‑based charter schools and that geographic 26 California State Auditor Report 2016-141 October 2017 restrictions apply to all charter schools. These restrictions state that a charter school may operate a nonclassroom‑based location, such as a resource center, in an adjacent county as long as more than half of the school’s students are residents of the authorizing district’s county. However, with limited exceptions, it does not allow a charter school to operate a nonclassroom‑based location outside the district’s boundaries but within the same county. Districts throughout the State authorized charter schools to operate multiple nonclassroom‑based locations outside the authorizing districts’ boundaries, sometimes in the same county and sometimes in nonadjacent counties. Although the appellate court decision provided additional guidance on geographic restrictions, it did little to clarify how those restrictions apply to charter schools that move locations or operate virtually. For example, Antelope Valley Union did not authorize any out‑of‑district charter schools directly, but it allowed one of its charter schools—LA Online—to relocate outside the district’s boundaries without submitting a material revision to the school’s charter. Antelope Valley Union’s former director of categorical and special programs explained that the district did not believe geographical restrictions applied to LA Online because it was a virtual school that only moved its administrative office. State charter school law does not distinguish between virtual and nonvirtual schools, nor does it specifically include guidance about whether changing the location of a facility is a material revision of the charter that would require the charter school to apply to the authorizer for a material revision. Accordingly, Assurance Academy did not obtain a material revision from Acton‑Agua Dulce Unified when it moved a resource center in fiscal year 2015–16. In addition, we noted that Acton‑Agua Dulce Unified authorized a virtual charter school that has its administrative office in San Marcos— roughly 100 miles away from the district’s boundaries. Although the district’s director of charter schools explained that the school closed all its resource centers to comply with the appellate court decision, the remoteness of this site may make it difficult for the district to provide effective oversight. State law provides exceptions Moreover, state law provides exceptions that have allowed some that have allowed some charter charter schools to continue operating nonclassroom‑based locations schools to continue operating outside their authorizing districts’ boundaries. The State Education nonclassroom‑based locations Board can approve waivers to allow noncompliant charter schools outside their authorizing to continue to operate during fiscal year 2017–18. These waivers districts’ boundaries. thus give charter schools a grace period to comply with the appellate court ruling, avoiding disruption to educational programs. In May 2017, the State Education Board approved geographic waivers for about 30 charter schools from about 20 districts. Although the State Education Board required the authorizing districts to visit any resource centers that they had not previously visited that are California State Auditor Report 2016-141 27 October 2017 subject to the waiver, it did not prescribe specific procedures for the authorizing districts to follow during those site visits. Alternatively, charter schools that have exclusive partnerships with state or federal workforce programs, such as the California Conservation Corps or the federal Workforce Innovation and Opportunity Act, may avoid the geographic restrictions altogether. Finally, Education is unable to determine how many charter schools operate remotely because state law does not require charter schools to report all their locations—including school sites, resource centers, and administrative offices. Education conducts an annual survey to update its charter school data, including the locations of all additional sites. However, according to a manager in Education’s technology services division, about 300 charter schools did not submit charter surveys in the 2016–17 year. When we analyzed data from multiple sources, we found that of the State’s 1,246 charter schools in May 2017, 165 district‑authorized charter schools operated at least one of their school locations outside their authorizing districts’ geographic boundaries in fiscal year 2016–17. These 165 charter schools operated in a total of 495 out‑of‑district locations statewide. Further, we determined 52 nonvirtual or primarily classroom‑based schools had at least one location more than 20 miles from their authorizing districts’ boundaries. However, since complete data are not available, there may be more As of May 2017, Education’s online out‑of‑district charter school locations than we identified. For directory of charter schools lists example, as of May 2017, Education’s online directory of charter only 30 charter school locations for schools lists only 30 charter school locations for the three districts the three districts we visited, but we we visited, but we identified 35 additional out‑of‑district charter identified 35 additional out‑of‑district school locations, as Figure 1 on the following page shows. charter school locations. Districts Have a Financial Incentive to Authorize Charter Schools Outside Their Jurisdictions and to Charge Extra Fees Two of the school districts we visited were able to increase their revenue significantly by authorizing out‑of‑district charter schools. As the Introduction discusses, state funding for school districts and charter schools is linked to the average daily attendance of their enrolled students. New Jerusalem was able to increase its revenue by bolstering its enrollment through the authorization of locally funded charter schools located outside its boundaries. Acton‑Agua Dulce Unified, on the other hand, increased its revenue by authorizing directly funded out‑of‑district charter schools that it then charged a flat administrative fee for services. Further, it did not justify the appropriateness of that fee. Finally, although state law limits administrative fees to a district’s actual costs, none of the three school districts we visited tracked their actual costs of providing oversight. This failure to track actual oversight costs could result in the undue diversion of funds from charter schools’ educational programs. 28 California State Auditor Report 2016-141 October 2017 Figure 1 Selected Districts and Charter School Locations MAP KEY DEL NORTE New Jerusalem SISKIYOU MODOC School district headquarters* Charter school—main location (21 total) Additional out-of-district location for Stockton charter school (35 total) # Number of charter school locations sharing the same address* SHASTA LASSEN HUMBOLDT TRINITY Lathrop Lancaster 3 TEHAMA District boundary PLUMAS Tracy BUTTE 4 5 GLENN SIERRA Acton District boundary MENDOCINO 2 NEVADA LAKE COLUSA Simi SUT TE V R al Y le UB y A PLACER Simi Valley 2 5 mi San YOLO EL DORADO Arcadia Bernardino SONOMA NAPA SACRAMENTO AMADOR ALPINE Los Angeles SOLANO CALAVERAS MARIN SAN TUOLUMNE CONTRA MONO JOAQUIN COSTA Santa Ana SAN FRANCISCO ALAMEDA STANISLAUS MARIPOSA SAN MATEO SANTA SANTA CLARA MERCED MADERA CRUZ SAN FRESNO BENITO INYO MONTEREY TULARE San KINGS Acton-Agua Dulce Unified Marcos 10 mi Antelope Valley Union SAN LUIS OBISPO KERN Lancaster SAN BERNARDINO SANTA BARBARA VENTURA LOS ANGELES District boundary San Bernardino ORANGE RIVERSIDE Los Angeles SAN DIEGO IMPERIAL 10 mi Sources: California State Auditor’s analysis of Education’s school directory, Education’s charter school survey, and the Accrediting Commission for Schools—Western Association of Schools and Colleges’ directory of schools as of May 2017; U.S. Census data; interviews with district administrators; and charter school websites. * Nine charter schools list their authorizing district’s headquarters as their main address. California State Auditor Report 2016-141 29 October 2017 Two Districts We Visited Have Increased Their Revenue by Authorizing Out‑of‑District Charter Schools New Jerusalem and Acton‑Agua Dulce Unified have significantly increased their enrollments and Two Districts’ Fees and Funding Plan Revenue From Out-of-District Charter Schools revenue by authorizing out‑of‑district charter for Fiscal Year 2015–16 schools. Districts we visited were able to generate revenue from the charter schools they authorized NEW JERUSALEM either by operating them as locally funded schools, Oversight fees $633,515 which resulted in the districts’ receiving and Local funding plan $5,496,798 managing the schools’ state funding, or by offering Total $6,130,313 services to their charter schools in exchange for fees. New Jerusalem took the former approach, ACTON-AGUA DULCE UNIFIED authorizing mostly locally funded charter schools. Oversight fees $543,153 Acton‑Agua Dulce Unified, on the other hand, Administrative service fees $1,357,882 authorized only directly funded charter schools but Total $1,901,035 charged those schools for administrative services. Through these authorizations, New Jerusalem Sources: California State Auditor’s analysis of financial statements, and Acton‑Agua Dulce Unified have received a district invoices, interviews with district administrators, and Education’s Local Control Funding Formula Funding Snapshots. significant amount of revenue annually, as the text box shows. New Jerusalem authorized four locally funded out‑of‑district charter schools, allowing it to manage those charter schools’ funding. Because state law does not prevent locally funded charter schools from operating outside their authorizing district’s jurisdiction, New Jerusalem was able to significantly expand its reach and increase its enrollment. New Jerusalem’s superintendent asserts that the district is meeting the intent of the Charter Schools Act; however, we disagree. New Jerusalem’s actions have enabled the district to expand its average daily attendance from outside its boundaries and do not appear to meet the Legislature’s strong preference to limit charter schools to the jurisdiction of their authorizing districts. In contrast, before this audit, Acton‑Agua Dulce Unified charged all its directly funded charter schools a 2.5 percent administrative services fee and a 1 percent oversight fee, effectively collecting a total of 3.5 percent of each charter school’s revenue. However, some of Acton‑Agua Dulce Unified’s charter schools may have only made sporadic use of the services for which they paid. For example, the district’s memorandum of understanding (MOU) with Assurance Academy describes the administrative services as including the use of a library, reference materials, and equipment, as well as opportunities for training. Assurance Academy’s chief academic officer does not, however, believe the school has received all the services described by the MOU in every fiscal year. In addition, Assurance Academy has a separate agreement for administrative and educational services with its CMO, Lifelong Learning Administration Corporation, for which it pays 14 percent 30 California State Auditor Report 2016-141 October 2017 Assurance Academy has tripled the of its revenue. As a result, Assurance Academy paid more than number of resource centers it plans $1.5 million in fees for fiscal year 2015–16. The district’s board voted to operate in fiscal year 2017–18. to reduce the 2.5 percent fee to 2 percent in a May 2017 board This could thus result in the school meeting. Nevertheless, Assurance Academy has tripled the number spending even more state funding on of resource centers it plans to operate in fiscal year 2017–18. administrative fees for services that This change could thus result in the school spending even more it does not consistently use instead of state funding on administrative fees for services that it does not on the school’s educational program. consistently use instead of on the school’s educational program. Two Districts We Visited Charged Oversight Fees That Exceeded the Limits in State Law In violation of state law, both New Jerusalem and Antelope Valley Union charged their charter schools for oversight fees that exceeded 1 percent of the schools’ revenue. State law allows an authorizer to charge for its actual costs of oversight of a charter school up to 1 percent of the charter school’s local funding plan revenue or up to 3 percent if the authorizer provides facilities that are substantially rent‑free—circumstances that do not apply to either New Jerusalem or Antelope Valley Union. Although Antelope Valley charged LA County Online more than 1 percent in fiscal year 2014–15, it charged less than 1 percent in the other two years we reviewed, reducing its average fee to 0.6 percent across the three years. In contrast, during the three years we tested, New Jerusalem overcharged Acacia Elementary by a total of about $100,000—more than double the legally permitted amount. New Jerusalem’s superintendent asserted that he had a verbal agreement with Tri‑Valley’s former chief executive officer for a higher fee level. He explained that the district’s legal counsel advised the district that it could charge its charter schools an oversight fee greater than 1 percent, and Tri‑Valley agreed to pay a higher oversight fee for Acacia Elementary in return for the district’s advice and other types of administrative services. Although Tri‑Valley’s board meeting minutes from May 2015 showed the board’s approval of New Jerusalem’s proposal for a fee increase to 3 percent, the minutes also indicated that the proposal did not include a breakdown describing what the school would receive in exchange. Similarly, we found that the district’s invoices for these fees were unclear because they did not identify what portion of the invoiced amount was attributable to non‑oversight services. Moreover, the district did not identify these additional services in its MOU with the charter school. In February 2016, New Jerusalem revised its charter school policy to specify that whenever the district agrees to provide administrative or support services, the district and charter school shall develop an MOU that clarifies the financial and operational agreements. California State Auditor Report 2016-141 31 October 2017 However, New Jerusalem never developed a new MOU to identify these additional services and, in August 2016, the district sent Tri‑Valley an invoice for oversight fees totaling 3 percent of Acacia Elementary’s local funding plan revenue. By overcharging its charter schools, New Jerusalem has directed funds away from the schools’ educational programs without clear justification. In addition, each of the three districts we visited had agreements None of the districts tracked the with their charter schools that called for no more than a 1 percent actual costs of their oversight oversight fee; however, none of the districts tracked the actual activities despite the legal costs of their oversight activities despite the legal limitation that limitation that they can only charge they can only charge their actual costs. Administrators at the their actual costs. three districts offered different justifications for not tracking their actual oversight costs. Acton‑Agua Dulce Unified’s chief financial officer stated that it would be an undue burden on the district to track the costs of its various accounting streams. According to New Jerusalem’s superintendent, district staff have other roles in addition to monitoring charter schools, and the district does not have a written policy or procedure for tracking oversight costs. However, we believe these districts could implement time‑reporting tools that would allow staff to differentiate between their activities. The districts’ failures to track their time and expenses related to oversight are examples of general weaknesses in their documentation of charter school‑related activities, as we describe in later chapters. The Districts We Visited Authorized Charter School Petitions That Did Not Comply With State and District Requirements To determine whether the districts we visited complied with state and district requirements when authorizing charter schools, we reviewed the petitions of both in‑district and out‑of‑district schools. We found that the districts we visited did not fully comply with state law when they authorized a number of the charter schools we selected for review. For example, both Acton‑Agua Dulce Unified and New Jerusalem accepted and authorized petitions that were missing standard requirements, such as the minimum number of parent or teacher signatures state law requires. Absent such signatures, the districts had little evidence of community support for the schools. Finally, during our audit period, two of the three districts had not updated their charter school policies to reflect changes in state law. 32 California State Auditor Report 2016-141 October 2017 Two Districts Authorized Charter Schools Without Ensuring the Schools Had Adequate Community Support Two of the three districts we visited authorized charter schools without ensuring adequate community support, as state law requires. For example, New Jerusalem authorized Acacia Elementary despite its petition having signatures from fewer than half the number of teachers that the school expected to employ in its first year of operation. As we discuss in the Introduction, state law requires charter school applicants to obtain signatures of either half the parents of the number of students the school expects to enroll in the first year or half the teachers it expects to employ in the first year. A lack of signatures may indicate inadequate community support, which could limit the charter school’s ability to enroll students or employ qualified teachers. State law further reinforces the importance of community support by requiring prospective charters to describe in their petitions how they will ensure parental involvement. However, we also noted Attending monthly board meetings that New Jerusalem approved two petitions that did not meet this at the district may not be adequate to requirement. According to New Jerusalem’s superintendent, parents ensure that the governance structure can participate by attending monthly board meetings at the district. of the charter school provides parents Nevertheless, this approach may not be adequate to ensure that the with the opportunity for active and governance structure of the charter school provides parents with effective representation. the opportunity for active and effective representation. Similarly, Acton‑Agua Dulce Unified approved the petition for a charter school—Albert Einstein Academy for Letters, Arts and Sciences—Agua Dulce Partnership Academy (Albert Einstein Academy)—even though the petition did not include any parent or teacher signatures. The authorization matrix the district used to evaluate the petition indicates that the district did not review this critical element. Although Acton‑Agua Dulce Unified’s director of charter schools provided a list of signatures that she believed might have related to the petition, the list was from the file of a different charter school. In addition, the signatures from that list were dated a month after the district received the Albert Einstein Academy’s petition, even though state law requires prospective charter schools to attach signature pages to their charter petitions. Without the appropriate number of signatures, Acton‑Agua Dulce Unified should not have accepted the petition for consideration. Further, Acton‑Agua Dulce Unified did not adequately consider Albert Einstein Academy’s failure to obtain community support— an indicator of potential enrollment—when evaluating the charter petition’s proposed financial plan. Specifically, the district’s chief financial officer expressed his concern with the accuracy of the estimated enrollment numbers and projected revenue contained in the petition. However, the former superintendent of Acton‑Agua Dulce Unified recommended the petition for approval. California State Auditor Report 2016-141 33 October 2017 According to the chief financial officer, the former superintendent recommended approving the petition because none of the financial concerns was severe enough to warrant denying the petition. However, we believe the chief financial officer identified valid concerns with the financial plan, such as overstated revenue and understated expenses. Further, before authorizing Albert Einstein Academy, the district operated its own noncharter school at the same location, which it ultimately closed because of low enrollment. Since charter school funding is largely based on enrollment, this experience should have heightened the district’s scrutiny of the number of parent and teacher signatures to ensure that the school had the community support necessary to succeed. We also identified other potential areas of concern related to Albert Einstein Academy’s financial planning. For example, the school submitted a revised budget for its first year of operation that projected it would end the year with a $30,000 reserve—an amount significantly less than the $600,000 reserve it projected in its petition. Further, the school has consistently failed to meet the district’s minimum reserve requirement, which we identified as an early indicator that preceded the closure of other charter schools we reviewed. Although Albert Einstein Academy is still operating, low enrollment could lead to the school’s bankruptcy and eventual closure, as we discuss in the next chapter. The Three Districts We Reviewed Lacked Updated Charter School Policies, and Some Had Not Established Criteria for Assessing Petitions The three districts may have failed to comply with state law when The three districts may have failed authorizing and renewing petitions because they did not update to comply with state law when their charter school policies to reflect changes in state law. For authorizing and renewing petitions example, New Jerusalem did not update its charter school policy because they did not update their between September 2008 and February 2016, so its authorization charter school policies to reflect process did not address requirements related to educational changes in state law. programs and measurable student outcomes that became effective in 2013. Similarly, Antelope Valley Union last updated its charter school policy in February 2009 and its regulations in May 2007, and thus its policies did not include the 2013 requirements either. Finally, although Acton‑Agua Dulce Unified adopted its charter school policy in December 2013, it also failed to include the requirements that had recently gone into effect. Because of these outdated policies, New Jerusalem did not assess whether petitions included sufficiently detailed annual goals or measurable student outcomes. Specifically, the petitions we reviewed did not delineate the goals and outcomes meant for all students schoolwide and those meant for each significant subgroup of students the charter schools would serve, as state 34 California State Auditor Report 2016-141 October 2017 law requires. By not requiring charter schools to provide this level of detail in their petitions, New Jerusalem may find it more challenging to consider increases in student academic achievement for all subgroups of students when contemplating revocations in the future. Some of the districts we visited did Further, some of the districts we visited did not establish criteria for not establish criteria for assessing assessing whether petitions contained reasonably comprehensive whether petitions contained descriptions of the elements state law requires, as the Introduction reasonably comprehensive describes. State law allows authorizers to deny petitions if they descriptions of the elements state do not contain reasonably comprehensive descriptions of these law requires. elements. Because the Legislature recognized that the term reasonably comprehensive is somewhat subjective, it required the State Education Board to establish criteria for evaluating petitions. The State Education Board issued these criteria as regulations; however, only the State Education Board is required to use those criteria when evaluating charter school petitions. As a result, when we compared the charter school policies of Acton‑Agua Dulce Unified, Antelope Valley Union, and New Jerusalem to those of neighboring host districts—Glendale Unified, Los Angeles Unified, and Stockton Unified—we found that the level of detail the districts require in petitions varies significantly. Specifically, Antelope Valley Union, Glendale Unified, New Jerusalem, and Stockton Unified use the California School Board Association’s guidance, which closely mirrors state law, for establishing a baseline for their authorization processes; however, Antelope Valley Union and Glendale Unified require prospective charter schools to submit some additional information. For example, Antelope Valley Union and Glendale Unified both require petitions to include information about the proposed charter schools’ bylaws, articles of incorporation, and other management documents, as applicable. In addition, they both require descriptions of the education, experience, credentials, degrees, and certifications of the directors, administrators, and managers of proposed charter schools. In contrast, New Jerusalem and Stockton Unified have made minimal changes to the California School Board Association’s sample policy and thus do not require prospective charter schools to provide additional information with their petitions. However, none of these four districts’ charter school policies incorporates the State Education Board’s criteria or defines what a reasonably comprehensive petition should include. Although New Jerusalem’s policy does not describe its use of the criteria, New Jerusalem’s superintendent asserted that it uses a rubric containing the State Education Board’s criteria for evaluating petitions. Nevertheless, he was able to provide only a copy of the rubric for the petition we reviewed that was two‑thirds completed. California State Auditor Report 2016-141 35 October 2017 Unlike the districts that rely solely upon the California School Board Association’s guidance, Acton‑Agua Dulce Unified and Los Angeles Unified established their own charter school policies that define criteria for assessing whether a petition is reasonably comprehensive. Los Angeles Unified’s policy, which describes the requirements and timeline for its authorization process, states that it uses the State Education Board’s criteria as a guideline for evaluating petitions. Acton‑Agua Dulce Unified’s policy does not state that it uses the criteria but rather defines its own criteria for a reasonably comprehensive description for each petition requirement. Although Acton‑Agua Dulce Unified’s policy is expansive and detailed, we found that the district often did not follow the authorization process described in its policy. For example, Acton‑Agua Dulce Unified authorized Assurance Academy’s petition even though it did not present reasonably comprehensive descriptions of proposed measurable student outcomes. Instead, Assurance Academy defined a target for only one measurable student outcome—85 percent attendance. The district’s policy states that a reasonably comprehensive description of measurable student outcomes should include detailed exit outcomes that encompass both academic and non‑academic skills. Similarly, the State Education Board’s criteria require measurable student outcomes, at a minimum, to specify skills, knowledge, and attitudes that reflect schools’ educational objectives and can be frequently assessed by verifiable means to determine whether students are making satisfactory progress. Further, it requires charter schools to describe how they will hold themselves accountable for these outcomes. However, Assurance’s petition did not include the level of detail described in either the district’s policy or the State Education Board’s criteria. When districts authorize petitions that fail to provide comprehensive descriptions of measurable student outcomes, the districts may find it difficult to hold charter schools accountable for poor academic performance and may be unable to revoke the charters of poorly performing schools, as we discuss in Chapter 3. 36 California State Auditor Report 2016-141 October 2017 Recommendations Legislature To ensure that districts obtain community support for charter schools that they authorize, the Legislature should amend state law to do the following: • Further clarify the conditions prospective charter schools must meet to qualify for the geographic exception. For example, the Legislature could clarify whether prospective charter schools qualify for the exception when their petitions indicate that they will serve primarily students residing outside the authorizing district’s jurisdiction. • Require any district that is considering authorizing an out‑of‑district charter school to notify the school’s host district 30 days in advance of the board meeting at which the potential authorizing district is scheduled to make its authorization decision. The Legislature should also require the potential authorizing district to hold the public hearing within the host district’s boundaries, notwithstanding restrictions in the State’s Ralph M. Brown Act that would otherwise require the hearing to occur in the authorizing district. To reduce the need for litigation between authorizing districts and host districts, the Legislature should establish an appeals process through which districts can resolve disputes related to establishing out‑of‑district charter schools. To ensure charter school accountability, the Legislature should amend state law to do the following: • Require districts to strengthen their authorization processes by using the State Education Board’s criteria for evaluating charter school petitions. • Require charter schools to report annually all of their school locations—including school sites, resource centers, and administrative offices—to their authorizers and Education. To remove the financial incentive for districts to authorize out‑of‑district charter schools, the Legislature should amend state law to prohibit districts from charging fees for additional services above the actual cost of services provided. California State Auditor Report 2016-141 37 October 2017 Districts To make certain that they authorize only qualified petitions, Acton‑Agua Dulce Unified and New Jerusalem should revise their charter school authorization policies to require the documentation of their evaluations of charter school petitions. The districts should present this documentation to their governing boards for their consideration. To ensure that they have a method to hold charter schools accountable for their educational programs, Acton‑Agua Dulce Unified, Antelope Valley Union, and New Jerusalem should, as a best practice, strengthen their authorization processes by using the State Education Board’s criteria for evaluating petitions. To ensure compliance with state law, Acton‑Agua Dulce Unified, Antelope Valley Union, and New Jerusalem should immediately do the following: • Establish a procedure to periodically review and update their charter school policies to include all of the requirements in state law. • Review petitions to ensure they include all of the requirements in state law at the time of their approval. • Require their charter schools to submit material revisions when they add new locations. • Track their actual costs for providing oversight and verify that their oversight fees do not exceed legal limits. 38 California State Auditor Report 2016-141 October 2017 Blank page inserted for reproduction purposes only. California State Auditor Report 2016-141 39 October 2017 Chapter 2 THE SCHOOL DISTRICTS WE REVIEWED NEED TO PROVIDE STRONGER FINANCIAL OVERSIGHT TO THEIR CHARTER SCHOOLS The three districts that we visited—Antelope Valley Union, New Jerusalem, and Acton‑Agua Dulce Unified—could strengthen their financial oversight processes for charter schools they authorize. Although state law requires authorizers to monitor the financial conditions of their authorized charter schools, it does not prescribe specific procedures that authorizers must follow to fulfill this responsibility. However, the three districts we visited did not develop their own written procedures detailing the steps that they expected their staffs to perform to ensure effective financial monitoring of the districts’ charter schools. If Antelope Valley Union and New Jerusalem had established such procedures, they might have responded sooner to initial indicators of financial difficulties at LA Online and Acacia Elementary, respectively. Both of these charter schools filed for bankruptcy and ceased operations in 2017.1 In addition, the three districts did not always incorporate best practices into their financial oversight processes. Specifically, we found that the districts inconsistently applied select best practices we identified, such as providing charter schools with annual written reports summarizing the schools’ performances and identifying areas needing improvement. Similarly, Antelope Valley Union and Acton‑Agua Dulce Unified did not use their authority under state law to place representatives on their charter schools’ governing boards, which contributed to the two districts being unaware of some of LA Online’s and Assurance Academy’s significant financial decisions. By incorporating best practices into their financial oversight processes and by fully using their authority under state law, authorizers could better ensure that they provide effective financial oversight to the charter schools they authorize. Antelope Valley Union and New Jerusalem Did Not Respond Promptly to Indicators of Financial Difficulties at Their Charter Schools Two of the three charter schools we visited—LA Online and Acacia Elementary—filed for bankruptcy in 2016 and subsequently closed in 2017, forcing a total of roughly 500 students to change schools. LA Online’s bankruptcy stemmed from a significant decline in enrollment that it experienced in fiscal year 2014–15 and its inability 1 Tri-Valley’s bankruptcy petition stated that it did business as Acacia Elementary; thus we note in this report that Acacia Elementary filed for bankruptcy. 40 California State Auditor Report 2016-141 October 2017 to align its expenses with lower revenue. In Acacia Elementary’s case, the nonprofit corporation that managed it—Tri‑Valley— filed for bankruptcy due to a high level of debt and possible fiscal mismanagement by its management team. Although these schools’ respective authorizing districts—Antelope Valley Union and New Jerusalem—eventually revoked the schools’ charters, as described in the next section, they could not demonstrate that they responded promptly to initial indicators of the schools’ financial distress. This may have happened because they lacked robust financial oversight processes. We found that none of the In fact, we found that none of the three districts we reviewed had three districts we reviewed had written procedures for reviewing their charter schools’ financial written procedures for reviewing their conditions. In addition, the three districts did not always incorporate charter schools’ financial conditions. best practices into their financial oversight processes, such as using comprehensive checklists for periodic or annual reviews. As a result, the three districts were unable to ensure that they consistently provided effective financial oversight to the charter schools they authorized and that they responded promptly and appropriately to indicators of charter schools’ financial difficulties. LA Online and Acacia Elementary Filed for Bankruptcy After Extended Periods of Financial Distress LA Online filed for bankruptcy in April 2016 with the intent of reorganizing its finances and continuing operations. However, after the school was unable to recover from its financial problems, its governing board decided to cease operations in 2017. According to the declaration LA Online’s president presented to the bankruptcy court, a significant drop in LA Online’s enrollment, which in turn affected its average daily attendance and revenue, caused its financial problems. As Table 6 shows, LA Online’s average daily attendance fell from 691 students in fiscal year 2013–14 to 255 students in fiscal year 2015–16. Because average daily attendance is a key factor that determines a charter school’s state funding, this significant drop in average daily attendance was a primary factor causing LA Online’s revenue to decrease from $5.4 million in fiscal year 2013–14 to $2.7 million in fiscal year 2015–16. LA Online alleged that its drop in enrollment at the beginning of fiscal year 2014–15 was the result of deliberate efforts by its previous provider of educational and administrative services—K12 Inc.—to recruit LA Online’s students into another K12 Inc. school after LA Online terminated its agreement with K12 Inc. in June 2014. According to LA Online’s notice of intent not to renew its agreement with K12 Inc., LA Online stopped using K12 Inc.’s services after LA Online’s board undertook a review in response to ongoing concerns related to low student retention and graduation rates. California State Auditor Report 2016-141 41 October 2017 In December 2014, after LA Online failed to pay K12 Inc. $2.9 million for services that K12 invoiced for fiscal year 2013–14, K12 Inc. filed a lawsuit against LA Online seeking damages plus interest. In response, LA Online filed a cross‑complaint against K12 Inc., seeking damages for K12 Inc.’s alleged misconduct and breach of contract. Table 6 Two of the Three Out-of-District Charter Schools That We Reviewed Experienced Significant Financial Challenges From Fiscal Years 2013–14 Through 2015–16 FISCAL YEAR OUT-OF-DISTRICT CHARTER SCHOOL 2013–14 2014–15 2015–16* Acacia Elementary Annual average daily attendance 129 269 382 Total revenue $1,614,853 $3,641,932 $5,137,722 Total expenses (1,672,934) (4,005,507) (5,560,515) Excess (deficiency) of (58,081) (363,575) (422,793) revenue over expenses Ending net assets (deficit†) ($58,081) ($421,656) ($844,449) Assurance Academy Annual average daily attendance 622 629 763 Total revenue $5,595,577 $6,288,882 $9,618,877 Total expenses (5,489,240) (6,243,602) (9,477,473) Excess (deficiency) of 106,337 45,280 141,404 revenue over expenses Ending net assets (deficit†) $362,549 $407,829 $549,233 LA Online Annual average daily attendance 691 181 255 Total revenue $5,448,571 $2,147,778 $2,673,812 Total expenses (5,892,973) (4,247,910) (3,379,031) Excess (deficiency) of (444,402) (2,100,132) (705,219) revenue over expenses Ending net assets (deficit†) $551,486 ($1,548,646)‡ ($2,442,704) Sources: Audited financial statements of LA Online and Assurance Academy for fiscal years 2013–14 through 2015–16 and of Acacia Elementary for fiscal years 2013–14 and 2014–15; Education’s Local Control Funding Formula Funding Snapshot database and unaudited financial report of Acacia Elementary for fiscal year 2015–16. * Acacia Elementary never published audited financial statements for fiscal year 2015–16. Acacia Elementary’s financial information for fiscal year 2015–16 presented above is from its unaudited financial report dated September 2016. The financial report that Acacia Elementary submitted to New Jerusalem in March 2017, which presented fiscal year 2016–17 activity, indicated that the school’s ending deficit for fiscal year 2015–16 was ($1,089,776), not ($844,449). † We refer to a charter school’s deficiency of assets over liabilities as a deficit. ‡ In its financial statements for fiscal year 2015–16, LA Online restated its ending deficit for fiscal year 2014–15 from ($1,548,646), as the table shows, to ($1,737,485). 42 California State Auditor Report 2016-141 October 2017 Although LA Online stated in its initial bankruptcy filing that it intended to reorganize its finances and continue operations, its board of directors eventually decided to close the charter school after it received another large claim while struggling to restore its student enrollment. Specifically, in August 2016, LA Online and K12 Inc. reached a settlement agreement to avoid complex and costly litigation. However, shortly before the court hearing to consider this settlement agreement, the State Board of Equalization (Equalization) submitted a claim against LA Online for roughly $478,000 in delinquent sales and use taxes associated with student packages that K12 Inc. had shipped to LA Online students from another state. Because of Equalization’s claim, LA Online could no longer adhere to the payment schedule in its proposed settlement agreement with K12 Inc., and LA Online voluntarily dismissed its request for approval of the settlement agreement. In light of the unresolved litigation with K12 Inc., its continuing low enrollment, and Select Conclusions and Recommendations Antelope Valley Union’s charter revocation From FCMAT’s Audit of Tri-Valley proceedings that we discuss further in the next section, LA Online’s board decided to voluntarily FCMAT’s analysis concluded that Tri‑Valley’s management close the school in February 2017, forcing roughly may have done the following: 200 students to change schools. • Filed incomplete Fair Political Practices Commission Form 700s. Our review of Acacia Elementary showed that its CMO, Tri‑Valley, filed for bankruptcy • Failed to fully disclose affiliated or related parties to because of its inability to make payments on the district and Tri‑Valley’s auditor. a bank note and line of credit, possibly due • Concealed the true nature of related‑party transactions. to fiscal mismanagement by some members • Misled independent auditors. of its management team. According to the bankruptcy declaration of Tri‑Valley’s CEO in • Converted the use of tax‑exempt public bonds November 2016, Tri‑Valley had past due debt of totaling more than $67 million to purchase land and roughly $3.3 million, consisting of trade debt, buildings under the pretext that the acquisition was for a public charter school. loans, and a line of credit. Shortly after Tri‑Valley’s initial bankruptcy filing in November 2016, the • Diverted more than $2.7 million in public funds for Alameda County Office of Education requested off‑book transactions. that California’s Fiscal Crisis and Management • Diverted its charter schools’ funds and commingled Assistance Team (FCMAT) audit Tri‑Valley’s them with those of potentially related entities. Livermore‑based charter schools because of • Contributed to an environment of significantly allegations of fiscal irregularities. In June 2017, deficient internal controls. FCMAT published its audit report. As the text box shows, FCMAT concluded that fraud, FCMAT recommended that the county superintendent misappropriation of assets, or other illegal notify the governing board of Alameda County Office of activities may have occurred at Tri‑Valley. Education, the governing board of Tri‑Valley, the governing board of Livermore Valley Joint Unified School District, the State Controller, the Superintendent of Public Instruction, Although the focus of FCMAT’s audit was and the local district attorney that fraud, misappropriation Tri‑Valley’s charter schools in Livermore, some of assets, or other illegal activities may have occurred. of the issues that FCMAT included in its report also affected Acacia Elementary. For example, Source: FCMAT’s June 8, 2017, audit of Tri-Valley. Tri‑Valley engaged Acacia Elementary in a number of highly questionable transactions California State Auditor Report 2016-141 43 October 2017 with other charter schools it operated and with other entities. Specifically, FCMAT reported that Tri‑Valley pledged its revenue, including that of Acacia Elementary, in a lease agreement for a Tri‑Valley school in Livermore, the proceeds of which covered interest and principal payments related to a 2015 bond issuance for purchasing a facility for one of Tri‑Valley’s Livermore‑based charter schools. Although Tri‑Valley was not able to provide evidence that it actually used Acacia Elementary’s revenue to make payments under this agreement, FCMAT noted that in fiscal year 2015–16, Acacia Elementary transferred $145,000 to a non‑profit corporation that was involved in the 2015 bond issuance. FCMAT also noted that at the end of fiscal year 2015–16, Acacia Elementary owed other Tri‑Valley entities $2.7 million, while other Tri‑Valley entities owed Acacia Elementary $1.6 million. Although these balances suggest that Acacia Elementary needed to transfer $1.1 million to other Tri‑Valley entities, Tri‑Valley could not provide any supporting documentation justifying the nature of these transactions. Similarly, Tri‑Valley was unable to provide documentation or evidence of board approval for an undisclosed loan that New Jerusalem discovered after reviewing Acacia Elementary’s bank statements and that FCMAT described in its report. Specifically, in 2014 Tri‑Valley obtained a loan for $600,000; however, Tri‑Valley never disclosed this loan in its audited financial statements. FCMAT reported that over 18 months Acacia Elementary and other entities paid interest totaling roughly $132,000, or 15 percent per year—a significantly higher interest rate than the rates on Tri‑Valley’s other credit lines, which ranged from 4.75 to 5 percent per year. Although Tri‑Valley planned to reorganize its finances and continue operations at the time it filed for bankruptcy, it subsequently decided to close its schools. The initial bankruptcy declaration of Tri‑Valley’s CEO states that the primary purpose of the bankruptcy filing was to gain the short‑term financial stability needed to preserve its charter schools, including Acacia Elementary. However, Tri‑Valley subsequently decided to cease operations, stating that Tri‑Valley closed all four of its it had insufficient funds to pay administrative expenses and no charter schools at the end of ability or intent to reorganize its operations. As a result, Tri‑Valley fiscal year 2016–17, leaving over closed all four of its charter schools at the end of fiscal year 2016–17, 1,500 students to find new schools, leaving over 1,500 students to find new schools, including about including about 300 attending 300 attending Acacia Elementary at that time. Acacia Elementary. According to our review of financial information, the third charter school that we visited, Assurance Academy, appears to be financially stable. For example, we noted that during fiscal years 2013–14 through 2015–16, Assurance Academy did not experience deficits and had reserves that consistently exceeded the minimum level in its MOU with its authorizing district. 44 California State Auditor Report 2016-141 October 2017 Antelope Valley Union and New Jerusalem Could Not Always Demonstrate Their Use of Financial Reports to Monitor the Financial Conditions of Their Charter Schools State law requires authorizing Although state law requires authorizing districts to monitor the financial districts to monitor the financial conditions of charter schools under their authority using any financial conditions of charter schools under information obtained from the schools, it does not establish a minimum their authority, but does not establish level of financial oversight that districts must perform. The law also a minimum level of financial requires charter schools to submit regular financial reports to their oversight that districts must perform. authorizers, but it does not describe how authorizing districts should use these reports to ensure effective and timely oversight. Accordingly, we noted that Antelope Valley Union and New Jerusalem could not show that they responded to early indicators of their charter schools’ financial distress. These indicators preceded the schools’ eventual failures. In fiscal years 2014–15 and 2015–16, LA Online submitted to Antelope Valley Union financial reports containing indications of the charter school’s financial distress. To show Antelope Valley Union’s responses to LA Online’s financial condition as well as the timing and extent of LA Online’s financial difficulties, Figure 2 juxtaposes information from LA Online’s financial reports, board meeting minutes, and court documents with information from documents Antelope Valley Union provided to us to demonstrate its oversight efforts. Although Antelope Valley Union asserts that it monitored LA Online’s financial condition, it could not demonstrate that it took prompt and concerted action when LA Online’s financial reports showed that LA Online had not met Antelope Valley Union’s minimum reserve requirement and was experiencing significant financial distress. Antelope Valley Union’s MOU with LA Online required LA Online to maintain a reserve equal to the greater of either 4 percent of LA Online’s expenses for the year or $50,000. As Figure 2 shows, LA Online did not meet this reserve requirement for the first time in December 2014, when it submitted its first interim report for fiscal year 2014–15, as state law required. This report showed that LA Online projected that its revenue would be roughly 40 percent lower than it originally budgeted and that it would end the year with a deficit of more than $1.1 million.2 The two subsequent financial reports that LA Online submitted to Antelope Valley Union in February and June 2015 continued to show that LA Online projected it would end fiscal year 2014–15 with a significant deficit. According to Antelope Valley Union’s assistant superintendent of educational services, Antelope Valley Union’s staff had conversations with LA Online about these reports, during which LA Online asserted that it had secured a loan to cover the funding shortfall. However, Antelope Valley Union did not take significant action when LA Online failed to prove that it had, in fact, obtained this loan. As a result, the district did not learn that LA Online had not obtained the loan until September 2015—almost nine months after LA Online submitted its first financial report showing indicators of significant financial difficulties. 2 We refer to a charter school’s deficiency of assets over liabilities as a deficit. California State Auditor Report 2016-141 45 October 2017 Figure 2 Events Leading to LA Online’s Bankruptcy and Antelope Valley Union’s Responses to Those Events LA Online's Actions and Other Events Antelope Valley Union’s Actions 2014 June 2014 September 2014 Ends its agreement with K12 Inc. Sends a letter to LA Online inquiring about the effect of the October 2014 termination of LA Online's agreement with K12 Inc. on LA Online's budget. LA Online responds that it expects to achieve cost savings Enrollment declines to 304 students from 619 students in the prior year. by discontinuing its agreement with K12 Inc. December 2014 December 2014 Incorrectly reports a projected deficit for fiscal year (FY) 2014–15 of Tells its board it is reviewing documents related to substantive changes at LA Online and reports school has enrollment of $1.1 million; a corrected calculation results in a deficit of $595,000. 988 students instead of the 304 students the school reported K12, Inc. files a lawsuit against LA Online for nonpayment of in October 2014. $2.9 million of invoiced services for FY 2013–14. February 2015 Incorrectly reports a projected deficit for FY 2014–15 of $1.4 million; a corrected calculation results in a deficit of $818,000. May 2015 June 2015 Advises its board that LA Online's enrollment for future years and its Reports a projected deficit for FY 2014–15 of $800,000 2015 loan to cover a temporary funding shortfall should be closely monitored. The district also recommends that LA Online provide and a projected deficit for FY 2015–16 of $4,000. updates about the school’s pending lawsuit with K12 Inc. September 2015 September 2015 Reports a projected deficit for FY 2014–15 of $1.7 million. Contacts LA Online and learns that LA Online has not obtained a loan. It then requests additional information to support LA Online's FY 2015–16 budget. December 2015 Reports projected net assets for FY 2015–16 of $87,000. December 2015 Follows up and expands its September request for information. January 2016 Reports a deficit for FY 2014–15 of $1.5 million in its audited financial statements. March 2016 Reports a projected deficit for FY 2015–16 of $1.9 million. April 2016 April 2016 Files for bankruptcy. States in a letter to the county that LA Online did not inform the district of its intent to file for bankruptcy and that it will take additional actions, including revocation, as appropriate. August 2016 2016 August 2016 Reaches a settlement with K12 Inc., agreeing to pay it $1.1 million. Files a motion with the bankruptcy court and receives permission to commence revocation proceedings against LA Online. September 2016 Reports a projected deficit for FY 2015–16 of $2.4 million. October 2016 State Board of Equalization files a claim against LA Online for $478,000. November 2016 Issues a notice of violation to LA Online. November 2016 Voluntarily dismisses its request for court approval of settlement agreement with K12 Inc. January 2017 Issues to LA Online a notice of intent to revoke the school’s charter. February 2017 2017 February 2017 Voluntarily ceases operations. Revokes LA Online’s charter. The charter school discussed this event at one of its board meetings. The charter school presented this information to the district in one of its mandated financial reports. The charter school did not notify the district of this event at the time. The district received notice of this event. Sources: California State Auditor’s analysis of LA Online’s financial reports, court documents, board meeting minutes and resolutions; Antelope Valley Union’s board meeting minutes and correspondence; and data from Education. 46 California State Auditor Report 2016-141 October 2017 Although Antelope Valley Union took additional action starting in September 2015 to monitor LA Online’s financial condition, its oversight efforts were again delayed. In September 2015, three months after LA Online submitted estimated results for fiscal year 2014–15 and a budget for fiscal year 2015–16, Antelope Valley Union asked LA Online to provide information on its enrollment, average daily attendance, and reductions in expenses so that the district could assess the reasonableness of LA Online’s budget. In addition, Antelope Valley Union strongly recommended that LA Online obtain a line of credit to avoid near‑term cash flow shortages. However, Antelope Valley Union waited another three months, until December 2015, before making its first formal request for additional information about the school’s financial situation, at which point it asked for a strategic financial plan to ensure that the school had the ability to cover its operating expenses adequately for fiscal year 2015–16. Antelope Valley Union did not Although this request demonstrates that Antelope Valley Union perform its oversight efforts took action to assess LA Online’s financial condition, the district did promptly enough to aid LA Online not perform its oversight efforts promptly enough to aid LA Online in aligning its expenses with its in aligning its expenses with its significantly reduced revenue. For significantly reduced revenue. example, we noted that LA Online had higher total salary and benefits expenses in fiscal years 2014–15 and 2015–16 than in fiscal year 2013–14, despite losing more than half of its students. According to LA Online’s last board president, the school did not reduce its staffing expenses because it believed it could increase its enrollment and average daily attendance rates and recover from deficit spending. He also said that, notwithstanding the lawsuit with K12 Inc., the board felt it needed to protect its students from severe educational disruption. Nevertheless, this decision not to perform a timely alignment of its staffing expenses with its significantly reduced enrollment may have contributed to LA Online’s bankruptcy. Although Antelope Valley Union could not demonstrate that it promptly raised this particular issue as a concern, it eventually issued a notice of violation to LA Online in November 2016 and a notice of intent to revoke the school’s charter in January 2017. In its notice of intent to revoke, the district scheduled a public hearing in February 2017 to discuss the issue of whether evidence existed to revoke LA Online’s charter. Although LA Online initially stated that it planned to close the school at the end of fiscal year 2016–17, shortly after receiving Antelope Valley Union’s notice of intent to revoke, LA Online filed an emergency motion with the bankruptcy court seeking permission to close the school sooner. In its court documents, LA Online stated that it decided to cease operations earlier to allow students and staff a seamless transition to a new school prior to the start of the new semester. After receiving permission from the bankruptcy court, LA Online’s board decided to voluntarily close the school on February 1, 2017. Antelope Valley Union revoked LA Online’s charter two weeks after the school ceased operations. California State Auditor Report 2016-141 47 October 2017 Antelope Valley Union may not have responded promptly and effectively to indicators of LA Online’s financial difficulties because the district did not have a robust process to review charter schools’ financial reports effectively and to respond appropriately to indicators of financial distress. State law requires authorizers to monitor the financial conditions of charter schools under their authority, but it does not prescribe specific procedures that authorizers should perform or state how quickly authorizers should review and respond to charter schools’ financial reports. However, Antelope Valley Union did not develop its own formal procedures detailing the steps that it expects its staff to perform when reviewing charter schools’ financial information. As a result, Antelope Valley Union’s responses to indicators of LA Online’s financial distress were delayed. Like Antelope Valley Union, New Jerusalem did not have a formal process for reviewing and responding to financial reports. If it had established such a process, it might have responded to Acacia Elementary’s financial condition more quickly than it did. Acacia Elementary started exhibiting signs of financial problems as early as August 2014, when it submitted its unaudited financial report for fiscal year 2013–14, estimating that it ended the year with only about $49,000 in net assets.3 This estimate represented a radical departure from Acacia Elementary’s estimates in previous financial reports, in which it projected that it would end its first year of operations with significantly higher net assets, as we show in Figure 3 on the following page. In addition, New Jerusalem’s MOU with Acacia Elementary required the school to have unexpended funds to pay its creditors in its first year of operations and to maintain a reserve equal to 3 percent of the school’s annual revenue during all subsequent years. As Figure 3 demonstrates, Acacia Elementary failed to meet this requirement for the first time in December 2014, when its audited financial statements showed that Acacia Elementary ended its first year of operations with a deficit of $58,000. According to New Jerusalem’s superintendent, the district did not see the need to take further action in response to Acacia Elementary’s financial condition at the time. He stated that charter schools rarely end their first year of operation with a significant excess of revenue over expenses because of start‑up costs and that the magnitude of In aggregate with other indicators Acacia Elementary’s ending deficit for fiscal year 2013–14 was not present in its financial reports indicative of severe financial issues. However, in aggregate with for fiscal year 2013–14, Acacia other indicators present in Acacia Elementary’s financial reports Elementary’s deficit should have for fiscal year 2013–14, as shown in Figure 3, this deficit should have led New Jerusalem to start taking led New Jerusalem to start taking further action regarding Acacia further action regarding Acacia Elementary’s financial condition. Elementary’s financial condition. 3 For a nonprofit entity, net assets are the excess of assets over liabilities. 48 California State Auditor Report 2016-141 October 2017 Figure 3 Events Leading to Acacia Elementary’s Bankruptcy and New Jerusalem’s Responses to Those Events Acacia Elementary's Actions and Other Events New Jerusalem’s Actions February 2014 June 2014 Requests information on Acacia Elementary's accounts payable, Reports projected net assets of $272,000 for fiscal year (FY) 2013–14 in response to calls from one of Acacia Elementary's vendors and $849,000 for FY 2014–15. regarding unpaid invoices. August 2014 Reports projected net assets of $49,000 and August 2014 projected expenses of $1,326,838 for FY 2013–14. Asks to include its representative on Tri-Valley's governing board. 2014 Enters into a lease agreement for new facilities for roughly $85,000 per month, but does not notify the district until November 2014. December 2014 Reports projected net assets of $748,000 for FY 2014–15. December 2014 Reports a deficit of $58,000 and expenses of $1,672,934 Asks again to include its representative on Tri-Valley's governing board. in its audited financial statements for FY 2013–14. March 2015 Incorrectly reports projected net assets of $319,000 for FY 2014–15; corrected net assets would have equaled roughly $90,000. May 2015 Tri-Valley pledges Acacia Elementary's revenue in a lease agreement, the proceeds of which cover the 2015 bond payments for another school. Tri-Valley's board appoints New Jerusalem's representative 2015 to Tri-Valley's governing board. September 2015 June 2015 Issues a notice of concern regarding Acacia Elementary's unaudited Reports projected net assets of $66,000 for FY 2014–15 financial results for FY 2014–15. and $341,000 for FY 2015–16. September 2015 October–December 2015 Reports projected net assets of $18,000 for FY 2014–15. Requests supporting documentation to assess the reasonableness of Acacia Elementary's financial reports and Tri-Valley’s Form 700s. December 2015 Reports projected net assets of $174,000 for FY 2015–16. January 2016 Requests bank statements from Tri-Valley. February 2016 February 2016 Reports a deficit of $422,000 in its Its representative resigns from Tri-Valley's governing board. audited financial statements for FY 2014–15. Follows up on its request for bank statements and requests additional information from Tri-Valley. March 2016 March 2016 Incorrectly reports projected net assets of $167,000 for FY 2015–16; Questions the reasonableness of Acacia Elementary's second interim corrected amount would have equaled a deficit of roughly $271,000. 2016 report, follows up on its request for bank statements, and inquires about some issues subsequently addressed in FCMAT's report. August 2016 April 2016 The court issues a temporary restraining order, which halts Issues a notice of violation to Acacia Elementary. New Jerusalem’s revocation of Acacia Elementary's charter. May 2016 September 2016 Issues a supplemental notice of violation to Acacia Elementary. Reports a projected deficit of $844,000 for FY 2015–16. June 2016 November 2016 Issues to Acacia Elementary a notice of intent to revoke its charter. Tri-Valley files for bankruptcy. July 2016 Revokes Acacia Elementary’s charter. 2017 June 2017 Voluntarily ceases operations. The charter school presented this information to the district in one of its mandated financial reports. The charter school did not notify the district of this event at the time. The district received notice of this event. The charter school discussed this event at one of its board meetings. Sources: Acacia Elementary’s and Tri-Valley’s financial reports, board meeting minutes and resolutions, court documents, and lease agreements, as well as New Jerusalem’s correspondence. California State Auditor Report 2016-141 49 October 2017 However, unlike Antelope Valley Union, New Jerusalem revoked Acacia Elementary’s charter before Acacia Elementary filed for bankruptcy. Acacia Elementary fell below the minimum reserve requirement in June 2015, when its estimated results for fiscal year 2014–15 showed that it was ending the year with $66,494 in net assets, a reserve of only about 2 percent of its revenue. In September 2015, after Acacia Elementary’s unaudited financial report for fiscal year 2014–15 showed a further reduction in its ending net assets to $17,656, New Jerusalem issued a formal notice of concern to Tri‑Valley stating that Acacia Elementary did not meet the minimum reserve requirement and requesting additional information about the school’s financial condition. After working with Tri‑Valley to determine whether Acacia Elementary’s unaudited financial report for fiscal year 2014–15 and budget for fiscal year 2015–16 were reasonable and after reviewing Tri‑Valley’s Form 700s, Statements of Economic Interests, New Jerusalem requested Tri‑Valley’s bank statements in January 2016. By reviewing Tri‑Valley’s bank statements and other financial information, New Jerusalem identified some of the issues that FCMAT subsequently investigated in more detail during the audit that we discuss on page 42. In response, New Jerusalem promptly commenced revocation proceedings against Acacia Elementary and eventually revoked its charter in July 2016. However, the San Joaquin Superior Court then halted New Jerusalem’s charter revocation based on the district’s insufficient consideration of the school’s increases in academic achievement. We discuss this issue further in Chapter 3. As a result, Acacia Elementary did not cease operations until Tri‑Valley’s board of directors voted to close it voluntarily at the end of fiscal year 2016–17. The third district that we visited—Acton‑Agua Dulce Unified— demonstrated that it generally reviewed Assurance Academy’s financial reports and assessed Assurance Academy’s financial condition. However, because Assurance Academy’s financial reports did not show problems during our audit period, we could not evaluate the timeliness or the quality of its responses to indicators of financial distress. Nevertheless, like Antelope Valley Union and New Jerusalem, Acton‑Agua Dulce Unified does not have written procedures for reviewing charter schools’ financial reports. Without Without written procedures, robust oversight processes, districts cannot ensure the consistent district staff may not always take quality of their reviews of charter schools’ financial reports. In appropriate or prompt action if addition, without written procedures, district staff may not always charter schools’ financial reports take appropriate or prompt action if charter schools’ financial start exhibiting indicators of reports start exhibiting indicators of financial distress. financial distress. 50 California State Auditor Report 2016-141 October 2017 Districts Could Strengthen Their Financial Oversight of Charter Schools by Incorporating Best Practices Into Their Processes Due to the vagueness of state law, authorizers may interpret their responsibilities differently and provide varying levels of financial oversight to charter schools. Although state law requires authorizers to monitor the financial conditions of charter schools under their authority, it does not identify specific procedures that authorizers should perform to fulfill this oversight responsibility. Therefore, it is incumbent on authorizers to identify and establish We noted that the three districts’ appropriate monitoring processes. We noted, however, that the processes for providing financial three districts’ processes for providing financial oversight to oversight to charter schools missed charter schools missed opportunities to incorporate best practices opportunities to incorporate best for monitoring charter schools’ financial conditions. Further, practices for monitoring charter we observed that the three districts’ charter school policies did schools’ financial conditions. not vary based on the location of the charter school; thus the districts provided a similar level of oversight to the in‑district and out‑of‑district charter schools we reviewed. We identified two sources that suggest procedures or best practices that we believe authorizers should follow to ensure their financial oversight of charter schools is effective. Specifically, FCMAT publishes a detailed Charter School Annual Oversight Checklist (oversight checklist) that authorizers could use as a guide to conducting annual visits and providing ongoing financial oversight. FCMAT developed the oversight checklist to aid authorizers in addressing their annual oversight responsibilities. Similarly, the National Association of Charter School Authorizers (NACSA) publishes 12 Essential Practices, which contains recommendations for conducting effective financial oversight. Nonetheless, we found that the three districts we reviewed did not always incorporate the best practices from these two sources into their financial oversight processes, as Table 7 shows. For example, NACSA recommends that districts review charter schools’ performance and provide annual written reports to charter schools that summarize the schools’ performance and identify areas needing improvement. However, Antelope Valley Union and New Jerusalem did not always provide such reports to LA Online and Acacia Elementary, respectively. For instance, although Antelope Valley Union prepared annual reports on LA Online for fiscal years 2014–15 and 2015–16, these reports did not always contain meaningful recommendations related to improving LA Online’s financial operations and did not point out the need for LA Online to align expenses with its significantly reduced revenue in fiscal years 2014–15 and 2015–16, when the school was experiencing financial difficulties. Similarly, after completing site visits of Acacia Elementary and reviewing its financial reports, New Jerusalem did not provide annual reports to Acacia Elementary California State Auditor Report 2016-141 51 October 2017 identifying areas needing improvement. If districts do not provide feedback to the charter schools they oversee, the schools may not remedy weaknesses in a timely manner, which could eventually lead to the deterioration of the schools’ financial conditions. Table 7 The Three Districts We Reviewed Missed Opportunities to Incorporate Many Best Practices Into Their Financial Oversight Processes During Fiscal Years 2013–14 Through 2015–16 AUTHORIZING SCHOOL DISTRICT BEST PRACTICE ACTON-AGUA DULCE UNIFIED ANTELOPE VALLEY UNION NEW JERUSALEM NACSA Require and review annual, independent financial audits  t t and regular financial reports of its charter schools. Provide an annual written report to each charter school  t 5 on its performance. FCMAT Use a comprehensive checklist for periodic or 5 5 t annual reviews. Obtain lease agreements when charter schools plan to 5 t t operate in new facilities. Ensure that charter schools’ financial projections and t t t assumptions are reasonable. Have a current memorandum of understanding with  t  each charter school. Ensure that each charter school maintains a prudent level  t t of reserves for economic uncertainties. Sources: California State Auditor’s analysis of NACSA’s 12 Essential Practices, FCMAT’s Charter School Annual Oversight Checklist, interviews with the districts’ key staff, the districts’ policies and procedures, and other documentation related to the districts’ financial oversight processes.  = The district applied this practice consistently during fiscal years 2013–14 through 2015–16. t = The district could not demonstrate that it applied this practice consistently during fiscal years 2013–14 through 2015–16. 5 = The district could not demonstrate that it applied this practice at all during fiscal years 2013–14 through 2015–16. Neither Acton‑Agua Dulce Unified nor Antelope Valley Union could demonstrate that they used an oversight checklist when conducting their legally required annual site visits or as part of their ongoing financial oversight of Assurance Academy and LA Online, respectively. Further, although New Jerusalem developed an oversight matrix based on FCMAT’s oversight checklist, New Jerusalem could not show that it used the matrix effectively. According to New Jerusalem’s superintendent, before its site visits in fiscal years 2014–15 and 2015–16, New Jerusalem asked Acacia Elementary’s management to complete the oversight matrix and submit it, along with key supporting documents, to the district for review. Although New Jerusalem kept copies of Acacia Elementary’s completed oversight matrices, it could not demonstrate that it consistently reviewed these matrices and provided feedback to Acacia Elementary on its findings. Specifically, New Jerusalem left 52 California State Auditor Report 2016-141 October 2017 blank the portions of the fiscal year 2014–15 matrix designated for a reviewer’s signature and did not include recommendations to Acacia Elementary on improving its fiscal operations in this matrix. As a result, although New Jerusalem developed a tool to aid its staff in conducting site visits and ongoing oversight of charter schools, it could not show that it used this tool in a meaningful way or that it provided feedback to Acacia Elementary. Although FCMAT recommends In the oversight checklist, FCMAT also recommends authorizers authorizers obtain lease agreements obtain lease agreements when charter schools plan to operate when charter schools plan to operate in new facilities. However, the three districts did not always in new facilities, the three districts did obtain lease agreements from the charter schools we reviewed. not always obtain lease agreements For example, although New Jerusalem was aware that Acacia from the charter schools we reviewed. Elementary relocated to a new facility in September 2014, New Jerusalem could not provide evidence that it had reviewed promptly the lease agreement for this facility. In August 2014, Acacia Elementary entered into a lease agreement to rent facilities in Stockton at rates that were significantly higher than those for its previous location. Specifically, for its previous location Acacia Elementary paid roughly $9,000 per month during fiscal year 2013–14, whereas for its new location it agreed to pay more than $85,000 per month during fiscal year 2014–15, with rates increasing even further in subsequent years. Although Acacia Elementary did not make payments for the full amounts due under this lease agreement, its actual rent payments were substantial, exceeding $700,000 in fiscal year 2015–16 alone. New Jerusalem’s superintendent asserted that he first started questioning this lease agreement in October 2015; however, he could not demonstrate that the district acted in response to the high rates until April 2016, when the district issued its notice of violation to Acacia Elementary. We also found that the three districts did not always incorporate into their processes FCMAT’s suggestions pertaining to authorizers’ reviews of charter schools’ budgets. In the oversight checklist, FCMAT directs authorizers to ensure that charter schools’ financial projections and their underlying assumptions are reasonable. However, the three districts did not always obtain supporting documentation for the key assumptions that the three charter schools used to develop their budgets. For example, none of the three districts required charter schools to submit waiting lists or other forms indicating parents’ intent to enroll their students— evidence supporting the schools’ enrollments and revenue projections. As a result, we noted that for at least one of the years in our audit period, the three charter schools’ actual revenue was more than 10 percent below their projected revenue. When they do not require that charter schools have robust support for their budgets, the districts miss an opportunity to better ensure the schools’ financial stability. California State Auditor Report 2016-141 53 October 2017 Finally, FCMAT suggests that authorizers ensure that charter schools’ governing boards function effectively and appropriately. FCMAT does not explicitly recommend authorizers to attend charter schools’ board meetings or direct authorizers to assign their representatives to charter schools’ governing boards, as state law allows. Nevertheless, as we discuss in the following section, we believe that this practice could improve authorizing districts’ financial oversight. Two Districts Did Not Use Their Authority Under State Law to Place a Representative on Their Respective Charter School’s Governing Board Although state law allows authorizers to place their representatives on charter schools’ boards of directors, two of the three districts that we visited have chosen not to do so. Specifically, Acton‑Agua Dulce Unified and Antelope Valley Union did not appoint representatives to Assurance Academy’s and LA Online’s boards of directors, even though doing so could have increased their awareness of their charter schools’ financial conditions and decisions. For example, although LA Online’s governing board consistently discussed LA Online’s large decline in enrollment starting in July 2014, Antelope Valley Union appears to have been unaware of this decline until December 2014. In a report that Antelope Valley Union presented to its board of trustees in December 2014, it stated that LA Online’s enrollment was 988 students, when in fact it was only about 300 students at that time. Had Antelope Valley Union attended LA Online’s board meetings or even just reviewed the meeting minutes, it would have been aware of this development sooner and could have promptly advised LA Online on revising its budget to account for its decreased enrollment. In addition, because it did not attend LA Online’s governing board meetings, Antelope Valley Union was unaware of LA Online’s potentially illegal arrangement to include students who were enrolled concurrently in a sectarian school in its average daily attendance and consequently in its state funding claims. Specifically, after experiencing a significant decline in enrollment, LA Online and a sectarian school entered into an MOU in which the sectarian school agreed to provide LA Online with 25 students during the spring 2015 semester. The MOU required both parties to provide State law prohibits the appropriation financial, material, and labor resources in order to create blended of state funding for the support of learning opportunities for the students of the sectarian school. any sectarian school and specifically However, state law prohibits the appropriation of state funding for requires that a charter school the support of any sectarian school and specifically requires that a be nonsectarian in its programs, charter school be nonsectarian in its programs, admissions policies, admissions policies, employment employment practices, and other operations. practices, and other operations. 54 California State Auditor Report 2016-141 October 2017 When we asked Antelope Valley Union about this agreement, its assistant superintendent of educational services stated that the district had been unaware of it. However, an LA Online governing board meeting discussed LA Online’s decision to enter into the agreement. According to LA Online’s board meeting minutes, the partnership would increase average daily attendance, expand LA Online’s name, and lead to partnerships with other private schools. In addition, the minutes state that students would be enrolled full‑time with LA Online while continuing their full‑time enrollment at the sectarian school. Had Antelope Valley Union regularly attended LA Online’s governing board meetings or assigned a representative to the school’s governing board, it would have been better able to provide oversight and ensure that LA Online’s practices were legal. According to Antelope Valley Union’s superintendent, his district has chosen not to place district representatives on its charter schools’ governing boards because it could potentially create conflicts of interest between the schools and the district. He explained that a district representative on a charter school’s governing board might have to make a decision that would negatively impact either the school or the district, and that this lack of separation could cause the district to accept liability for the charter school’s actions. He also noted that such an arrangement might prevent charter schools from pursuing innovative Designating their representatives as educational processes. Nevertheless, authorizers could maintain a nonvoting members would ensure presence on charter schools’ governing boards without exposure to that authorizers are aware of perceived conflicts of interest by designating their representatives as significant issues that might impact nonvoting members. This would ensure that authorizers are aware their charter schools. of significant issues that might impact their charter schools. Similarly, Acton‑Agua Dulce Unified was unaware of certain financial decisions Assurance Academy’s governing board made. For example, Acton‑Agua Dulce Unified was unaware that in June 2014 Assurance Academy’s governing board approved a resolution for annually transferring up to 45 percent of its reserves to Choices in Learning National Foundation, a nonprofit corporation located in the same office park. According to Assurance Academy’s board meeting minutes, the purpose of this resolution was to support and promote charitable work consistent with the mission and purpose of Assurance Academy. Although Assurance Academy’s executive vice president of finance stated that Assurance Academy did not make any transfers under this plan, the approval of such a process appears questionable. As a charter school, Assurance Academy receives state school funds that are exclusively available for the purpose of educating enrolled students, not for supporting another organization. In September 2017, after we discussed this issue with Assurance Academy, its board rescinded the resolution. California State Auditor Report 2016-141 55 October 2017 When asked about the appropriateness of Assurance Academy’s board resolution, Acton‑Agua Dulce Unified’s chief financial officer stated that he was not aware of Assurance Academy’s decision to transfer 45 percent of its reserves annually to another organization and that he could not comment upon the appropriateness of the resolution without having all the facts. He also explained that he was not aware of any district employees attending the board meeting at which Assurance Academy’s board passed that resolution. Because the district did not attend Assurance Academy’s board meeting or review the minutes, this board resolution has been in effect and unmonitored by the district for more than three years. The chief financial officer stated that the district has considered putting a representative on its charter schools’ board of directors, but he opined that the district has not needed to do so because Assurance Academy’s financial reports have not indicated financial difficulties. Nevertheless, we believe that attending charter school board meetings is a critical component of administering effective financial oversight. Recommendations Legislature To ensure that authorizers have adequate tools and guidance for providing effective financial oversight, the Legislature should require the State Education Board and Education to work with representatives from county offices of education, representatives from districts, and subject‑matter experts such as FCMAT, to either establish a committee or work with an existing committee to report to the Legislature recommendations on the following: • Establishing a minimum reserve requirement for charter schools. • Defining criteria that would allow authorizers to revoke or deny renewal of schools’ charters for financial mismanagement despite increases in academic achievement. • Developing a template that authorizers can use to provide their charter schools with annual feedback on their financial condition. To ensure that districts are aware of significant issues that may impact the out‑of‑district charter schools they authorize, the Legislature should amend state law to require each district to place a district representative as a nonvoting member on each out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. 56 California State Auditor Report 2016-141 October 2017 Districts To better ensure effective oversight of their charter schools’ finances, the districts we visited should do the following: • Develop written procedures for reviewing charter schools’ financial information and conducting annual oversight visits. These procedures should include relevant requirements from memorandums of understanding with the charter schools and best practices. • Develop written procedures for addressing financial concerns, such as a charter school’s failure to meet the minimum reserve requirement established in the district’s memorandum of understanding with the charter school. • Place a district representative as a nonvoting member on each charter school’s governing board. To better ensure effective oversight of their charter schools’ finances, Antelope Valley Union and New Jerusalem should provide charter schools with written feedback and recommendations for improving their financial operations after completing their financial reviews and annual oversight visits. California State Auditor Report 2016-141 57 October 2017 Chapter 3 STATE LAW REQUIRES DISTRICTS TO PROVIDE ONLY A MINIMAL LEVEL OF ACADEMIC OVERSIGHT TO THE CHARTER SCHOOLS THEY AUTHORIZE State law requires authorizing districts to conduct annual site visits at their charter schools, but it does not identify specific oversight activities that the districts must provide. For example, although state law requires charter schools to establish measurable student outcomes within their petitions, it does not require authorizing districts to assess annually whether charter schools are meeting those outcomes. Rather, it requires only that authorizers monitor the academic performance of their charter schools once every five years, when the schools seek to renew their charters. Thus, we were not surprised to find that the districts we visited provide varying levels of academic oversight. In general, these districts lack procedures for providing charter schools with timely feedback on specific areas in which a charter school is either succeeding or failing academically. Further, none of the districts regularly raised concerns about academic performance, even though the charter schools we reviewed consistently scored lower on statewide tests than comparable schools on average. According to the districts we visited, changes in state law—such as the elimination of the academic performance index—have also made it more difficult for them to conduct effective academic oversight and to hold charter schools accountable for poor academic performance. In addition, one of the districts we visited noted that one of its charter schools qualifies for an exception within state law, which limits the criteria against which the district could hold the school accountable for academic performance. The Districts We Reviewed Had Different Processes for Holding Their Charter Schools Accountable for Academic Performance While state law generally describes certain duties that an authorizer must undertake with respect to its charter school, the law does not clearly define the minimum level of oversight that authorizers must provide with any specificity. Consequently, the districts we visited provide varying levels of academic oversight of their charter schools. For example, according to state law, an authorizing district must visit its charter schools’ sites annually; however, state law does not describe the specific oversight activities that the district must perform. Nevertheless, without periodically monitoring their schools for compliance with academic goals, authorizers cannot ensure that schools are making progress in improving student learning, nor are they in a position to identify the need for corrective actions or possibly the revocation of the schools’ 58 California State Auditor Report 2016-141 October 2017 charters. For example, New Jerusalem provided evidence that it had visited Acacia Elementary annually throughout our audit period; however, for one of the years, it was unable to demonstrate that it had conducted any substantive assessment of the school’s academic performance. Nevertheless, state law does not require districts to do more than visit school sites annually. Moreover, Acton‑Agua Dulce Unified and Antelope Valley Union could not demonstrate that they had performed these site visits for all the years in our audit period. Similarly, although state law requires charter schools to establish measurable student outcomes within their petitions, it does not require authorizing districts to assess annually whether charter schools are meeting those outcomes. Accordingly, the districts we visited could not demonstrate that they had evaluated whether their charter schools had met their measurable student outcomes each year. For example, New Jerusalem’s superintendent stated that the district has required its charter schools to report certain financial and educational information since fiscal year 2014–15, and he further asserted that the district has reviewed this information during annual site visits. However, New Jerusalem was unable to provide evidence that it verified the accuracy of any of Acacia Elementary’s self‑reported information. New Jerusalem’s superintendent explained that he does not have any documentation related to Acacia Elementary’s academic performance because he periodically reviewed the school’s test scores online and would have only documented his review if he identified an issue. However, we do not believe this process would have allowed the district to obtain enough information to assess whether Acacia Elementary was meeting the measurable student outcomes in its charter. The districts we reviewed did In fact, we found that the districts we reviewed did not consistently not consistently perform the perform the academic monitoring included in their agreements academic monitoring included with their charter schools. Although state law requires authorizers in their agreements with their to monitor the academic performance of their charter schools only charter schools. when the schools seek to renew their charters every five years, authorizers may choose to implement more stringent requirements as part of their MOUs or policies. All the authorizing districts we reviewed have established requirements for academic oversight that exceed those in state law. For example, New Jerusalem established an MOU with Acacia Elementary requiring the school to self‑report whether it was meeting the goals and outcomes in its charter. However, New Jerusalem’s superintendent stated that the district never received these reports or followed up with Acacia Elementary about them before beginning the revocation process. Similarly, Acton‑Agua Dulce Unified’s policy requires its charter schools to hire an outside auditor to conduct periodic audits of their academic and financial performances; however, the district has not enforced this requirement. The district’s director of charters, who started her role in 2016, believes district staff already perform California State Auditor Report 2016-141 59 October 2017 these duties annually, as part of the district’s annual oversight process. Nevertheless, Acton‑Agua Dulce Unified was not able to demonstrate that it regularly assessed whether its charter schools were achieving the measurable student outcomes identified in their charters and thus were on track for renewal. Antelope Valley Union also failed to provide effective monitoring of LA Online’s academic performance, even when the school provided it with information that would have allowed it to identify that the school was struggling. Although Antelope Valley Union’s assistant superintendent of educational services stated that the district did not have an active agreement requiring LA Online to self‑report measurable student outcomes as part of a programmatic audit, LA Online still provided these programmatic reports to the district for two of the three years we audited. LA Online’s reports for fiscal years 2013–14 and 2014–15 revealed that it had not met many of its academic goals, such as those related to English language arts and math. Further, LA Online failed to meet those measurable student outcomes throughout our audit period. Nonetheless, Antelope Valley Union could not demonstrate that it identified the severity of LA Online’s academic performance problems until it filed a notice of violation in November 2016. In fact, although Antelope Valley Union’s annual review report for fiscal year 2015–16 included a section on Assessment and Accountability, the district did not describe within it LA Online’s history of failing to meet measurable student outcomes. Antelope Valley Union’s assistant superintendent asserted that the district assessed LA Online’s academic performance by reviewing test results online, but it did not retain evidence of these assessments. Similarly, New Jerusalem did not report any issues with Acacia Elementary’s academic performance until it began the process to revoke the school’s charter. Specifically, we determined that Acacia Elementary did not meet some of its measurable student outcomes in fiscal years 2014–15 and 2015–16, such as having its students meet or exceed the average achievement of schools located in Stockton. New Jerusalem’s superintendent explained that academic performance data for fiscal year 2014–15 was not available until fall 2015, around the same time it became aware of Tri‑Valley’s potential financial mismanagement. He also explained that the district neither compared Acacia Elementary’s academic performance to similar schools in its host district nor evaluated whether the school achieved its charter’s goals because the district was concerned that the school’s financial issues would have immediate consequences. Although the district asserted that it would have reported any academic performance issues, it did not formally report concerns about Acacia Elementary’s academic performance until it filed a notice of intent to revoke in June 2016. As we discuss in Chapter 2, the San Joaquin Superior 60 California State Auditor Report 2016-141 October 2017 Court reviewed New Jerusalem’s support for revoking Acacia Elementary’s charter and determined that New Jerusalem had not adequately considered increases in academic achievement as part of its revocation decision. Because state law requires authorizers to consider increases in student academic achievement for all groups of students as the most important factor in revocations, districts that do not document their ongoing assessments of academic performance may not have sufficient evidence to revoke the charters of failing charter schools. All three districts lack procedures In general, all three districts lack procedures for providing charter for providing charter schools schools with timely feedback on specific academic areas in which with timely feedback on specific the schools are either succeeding or failing. For example, during our academic areas in which the schools audit period, Antelope Valley Union reviewed its charter schools’ are either succeeding or failing. curriculum, professional development, and education technology, among other things; however, it did not determine whether the schools complied with academic requirements established in the district’s policies, MOUs between the district and the charter schools, and charters. New Jerusalem’s superintendent stated the district relied on its charter schools’ self‑assessments of their educational programs; however, it was unable to demonstrate that it verified the schools’ responses or evaluated whether they had met measurable student outcomes. Moreover, we noted that Antelope Valley Union provided less academic oversight to LA Online than it did to the in‑district charter school we reviewed—Desert Sands Charter High School (Desert Sands). Although the district asserted that it uses the same academic oversight process regardless of a charter school’s location, the district did not visit LA Online in fiscal year 2013–14, while it visited Desert Sands every year of our audit period. In addition, the district did not prepare an annual review report for LA Online for fiscal year 2013–14, even though it prepared Desert Sands’ annual review reports for all three years of our audit period. Antelope Valley Union’s assistant superintendent stated it did not visit LA Online during fiscal year 2013–14 because during that fiscal year it met with representatives from LA Online at the district’s offices. Nevertheless, state law requires authorizing districts to conduct site visits. Moreover, because the district did not retain evidence that it had performed any reviews during fiscal year 2013–14, Antelope Valley Union cannot demonstrate that it held all its charter schools equally accountable. Finally, Acton‑Agua Dulce Unified could not demonstrate that it assessed Assurance Academy’s academic performance for one of the years in our audit period because Assurance Academy was an Alternative School Accountability Model (ASAM) school. The California Public Schools Accountability Act of 1999 established ASAM to provide school‑level accountability for alternative schools California State Auditor Report 2016-141 61 October 2017 serving high‑risk students, such as those who are habitually truant, who are recovered dropouts, or who are parenting. ASAM was an alternative accountability system in effect during our audit period, which we discuss further in a following section. The Academic Performance of the Out-of-District Charter Schools We Visited Was Below the Average Performance of Comparable Schools According to analyses we conducted, the standardized test scores for English language arts and math at the three charter schools we visited were below the combined average scores of comparable schools for fiscal years 2014–15 and 2015–16. State law requires both charter and noncharter schools to participate in standardized statewide testing. Education publishes each school’s test results on its website, and these results can aid authorizers in gauging the academic achievement of their charter schools. For example, test scores help authorizers determine whether their charter schools are meeting the academic goals in their charters and if their schools’ performances are above or below the average of comparable schools. State law includes five academic criteria for charter renewal and requires that charter schools need only meet one of the five criteria to have their charters renewed. However, three of the five criteria are no longer applicable because they refer to an accountability system that the State suspended in fiscal year 2013–14 and subsequently replaced in March 2017. The two remaining criteria are that a charter school’s academic performance must be equal to or better than that of the noncharter schools its students would have otherwise attended or that the charter school qualifies for an alternative accountability system. Because the authorizers we visited could not demonstrate or The authorizers we visited could provide documentation that they consistently monitored the not demonstrate or provide academic performance of their charter schools, we conducted our documentation that they own evaluation. Specifically, we used the State’s new accountability consistently monitored the academic system to compare the fiscal year 2014–15 and 2015–16 English performance of their charter schools. language arts and math scores for the three out‑of‑district schools we visited to the scores of comparable noncharter schools. Because Education was field testing the new accountability system during fiscal year 2013–14, no data was available until the system was fully implemented in fiscal year 2014–15. We identified comparable schools based on school type, location, size, percentage of socioeconomically disadvantaged students, and percentage of English learners. Because Acacia Elementary operated in Stockton Unified’s jurisdiction, we selected schools from Stockton Unified serving kindergarten through grade 5 that had similar enrollment sizes and percentages of socioeconomically disadvantaged students and English learners. 62 California State Auditor Report 2016-141 October 2017 We chose LA Online’s comparable schools based on whether the schools were primarily or exclusively virtual, had similar enrollment sizes, and served similar percentages of socioeconomically disadvantaged students and English learners in grades 9 to 12. Because there are so few noncharter virtual schools, we broadened our search to the entire State. As we mention previously, during our audit period, Assurance Academy was an ASAM school that served students in grades 9 to 12 who mostly lived in LA Unified’s jurisdiction. Because ASAM schools use varying methods to serve unique populations, the effectiveness of comparing academic performance among ASAM schools may be limited. Accordingly, state law makes certain exceptions for ASAM schools, as we describe below. We therefore compared Assurance Academy to other ASAM schools in LA Unified, such as continuation schools with similar enrollment sizes and percentages of socioeconomically disadvantaged students and English learners. According to its ASAM application, 95 percent of Assurance Academy’s students qualified as high‑risk students. All our selected charter schools’ As Tables 8 and 9 on pages 63 and 64 show, all our selected math scores were below the charter schools’ math scores were below the combined averages combined averages of comparable of comparable schools for both years. Similarly, the schools’ schools for both years. English language arts scores were below the combined average of comparable schools for both years, except in one instance, when the scores were the same. As shown in Table 8, Acacia Elementary English language arts results significantly improved from fiscal year 2014–15 to fiscal year 2015–16. However, with one exception, its scores were still below the combined average of comparable schools. In addition, Acacia Elementary’s improvement might have been overstated because it did not report scores for its fourth graders for fiscal year 2014–15 as they were deemed invalid. Tri‑Valley’s chief executive officer could not provide an explanation why Acacia Elementary did not report the test scores. According to one of Education’s administrators, invalid test scores may be the result of cheating, testing of students at the wrong grade level, students’ failing to complete enough questions, or parents requesting exemptions from testing. All the authorizing districts we visited stated that they were aware of their charter schools’ academic performance because they reviewed the testing data online; however, they asserted that they did not follow up with the charter schools to create corrective action plans either because the schools qualified for an alternative accountability system or because the State had implemented changes to its accountability system. For example, the assistant superintendent of Antelope Valley Union indicated that the district monitors whether its charter school students are meeting measurable outcomes; thus, his district should have been California State Auditor Report 2016-141 63 October 2017 aware of LA Online’s poor test scores. However, the assistant superintendent stated that the district did not follow up with the school in fiscal year 2014–15 because LA Online had just adopted a new curriculum. He explained that properly evaluating a new curriculum takes time; however, LA Online also had poor academic results in fiscal year 2013–14 under its old curriculum, and the district could not demonstrate that it had followed up then either. Antelope Valley Union’s assistant superintendent also pointed to the State’s transition to a new accountability system as a hindrance to the district’s ability to provide consistent academic oversight. He stated that the district relied heavily on the old accountability system to determine a school’s academic achievement and that the discontinuance of academic performance reports the State issued under the previous system limited the district’s ability to assess academic performance. Table 8 Acacia Elementary’s Academic Performance Fell Below the Averages for Comparable Elementary Schools During Fiscal Years 2014–15 and 2015–16 OTHER STUDENT OUTCOMES* CALIFORNIA ASSESSMENT OF STUDENT PERFORMANCE AND PROGRESS (CAASPP)— PERCENTAGE OF STUDENTS MEETING OR EXCEEDING STATE STANDARDS PERCENTAGE PERCENTAGE OF STUDENTS OF STUDENTS ENGLISH LANGUAGE ARTS MATHEMATICS SUSPENDED EXPELLED SCHOOL GRADE 3 GRADE 4 GRADE 5 GRADE 3 GRADE 4 GRADE 5 SCHOOLWIDE SCHOOLWIDE Fiscal Year 2014–15 Acacia Elementary 0% 0%† 12% 0% 9% 3% 0% 0% Averages for Comparable Schools 21 22 27 26 25 16 10 0 El Dorado Elementary 17 18 19 11 11 10 12 0 Kennedy Elementary 14 21 27 30 33 18 11 0 Rio Calaveras Elementary 33 33 49 36 41 34 8 0 George W. Bush Elementary 21 18 20 27 25 11 7 0 Victory Elementary 21 22 19 25 16 7 10 0 San Joaquin County 27 30 34 31 26 21 8 0 Fiscal Year 2015–16 Acacia Elementary 17% 14% 29% 11% 7% 12% Averages for Comparable Schools 29 23 29 36 30 21 El Dorado Elementary 23 21 24 25 20 8 Kennedy Elementary 30 17 34 39 31 23 Rio Calaveras Elementary 47 43 48 58 46 49 George W. Bush Elementary 20 19 26 27 28 19 Victory Elementary 25 14 15 29 27 5 San Joaquin County 32 32 38 36 29 24 Sources: California State Auditor’s analysis of fiscal years 2014–15 and 2015–16 CAASPP data and fiscal year 2014–15 suspension and expulsion data from Education. * Suspension and expulsion data from Education are not yet available for fiscal year 2015–16. † None of Acacia Elementary’s fourth graders had valid test scores for English language arts in fiscal year 2014–15. 64 California State Auditor Report 2016-141 October 2017 Table 9 Assurance Academy’s and LA Online’s Academic Performance Fell Below the Averages for Comparable High Schools During Fiscal Years 2014–15 and 2015–16 OTHER STUDENT OUTCOMES* CAASPP—PERCENTAGE OF STUDENTS MEETING OR EXCEEDING STATE STANDARDS PERCENTAGE PERCENTAGE PERCENTAGE OF STUDENTS OF STUDENTS OF STUDENTS ENGLISH LANGUAGE ARTS MATHEMATICS GRADUATED SUSPENDED EXPELLED SCHOOL GRADE 11 GRADE 11 GRADE 12 SCHOOLWIDE SCHOOLWIDE Fiscal Year 2014–15 Assurance Academy 17% 1% 5% 0.0% 0.0% Averages for Comparable Schools 23 2 9 0.0 0.0 Cal Burke High 32 6 13 0.0 0.0 Central High 24 0 4 0.7 0.0 Metropolitan Continuation High 30 0 1 0.0 0.0 Will Rogers Continuation High 8 0 14 0.0 0.0 Frida Kahlo High 23 2 10 0.0 0.0 Los Angeles County 54 28 79 2.2 0.0 LA Online 50% 10% 27% 0.0% 0.0% Averages for Comparable Schools 61 16 91 0.0 0.0 Redlands eAcademy † † 100 0.0 0.0 Rivercrest Preparatory 35 13 100 0.0 0.0 Riverside Virtual 87 18 73 0.0 0.0 Los Angeles County 54 28 79 2.2 0.0 Fiscal Year 2015–16 Assurance Academy 19% 1% 6% Averages for Comparable Schools 22 3 17 Cal Burke High 30 0 34 Central High 10 5 11 Metropolitan Continuation High 37 3 3 Will Rogers Continuation High 10 0 21 Frida Kahlo High 24 6 18 Los Angeles County 58 30 81 LA Online 47% 7% 18% Averages for Comparable Schools 68 27 82 Redlands eAcademy † † 83 Rivercrest Preparatory 51 6 87 Riverside Virtual 84 48 75 Los Angeles County 58 30 81 Sources: California State Auditor’s analysis of fiscal years 2014–15 and 2015–16 CAASPP data from Education , fiscal year 2014–15 suspension and expulsion data from Education, and fiscal years 2014–15 and 2015–16 graduation data from Education. * Suspension and expulsion data from Education are not yet available for fiscal year 2015–16. † Education does not publish the data if fewer than ten students were tested. California State Auditor Report 2016-141 65 October 2017 State law describes that the intent of the Legislature is to hold charter schools accountable for meeting measurable student outcomes. Further, state law establishes that districts must consider increases in student academic achievement as the most important factor in determining whether to renew or revoke schools’ charters. If authorizers do not consistently monitor the academic performance of charter schools and hold the schools accountable, they cannot ensure that charter school students are academically prepared to advance or graduate. Changes in State Law Have Diminished Certain Charter Schools’ Academic Accountability Although state law requires authorizers to assess the academic performance of schools petitioning for charter renewal, schools that qualify for an alternative accountability system, such as ASAM, do not need to demonstrate academic achievement as a condition for their charter renewal. Accordingly, Acton‑Agua Dulce Unified ASAM’s 15 Indicators of Academic Performance recently renewed Assurance Academy’s charter From fiscal years 2001–02 through 2009–10, ASAM schools without assessing Assurance Academy’s academic were required to choose three of the following 15 indicators performance. According to Acton‑Agua Dulce’s to measure their academic performance. director of charter schools, the board did not evaluate the charter school’s academic performance Readiness indicators: as a criterion for renewal because of Assurance • Improved student behavior Academy’s ASAM status. She stated that due to • Suspensions the lack of criteria for holding ASAM schools • Student punctuality accountable the district instead considered other • Sustained daily attendance factors, such as enrollment, retention and graduation • Student persistence rates, and the number of students reclassified as fluent in English. Contextual indicators: • Attendance Before fiscal year 2009–10, state law held ASAM • California English Language Development Test schools accountable based on their choice of Academic and completion indicators: readiness indicators, contextual indicators, and academic completion indicators, as the text box • Writing achievement shows. However, due to budget constraints, ASAM • Reading achievement schools became accountable under the State’s general • Math achievement accountability model beginning in fiscal year 2009–10. • Promotion to next grade This model measured schools’ academic growth • Course completion or average course completion based on their academic performance index and • Credit completion or average credit completion adequate yearly progress. However, the academic performance index was suspended at the end of • High school graduation fiscal year 2013–14 and adequate yearly progress was • General Educational Development (GED) completion, discontinued the following year. In September 2016, California High School Proficiency Examination, or the State Education Board approved key elements of GED section completion a new accountability system, the California School Source: Education’s website. Dashboard (Dashboard), but it did not determine how the Dashboard’s indicators should be measured 66 California State Auditor Report 2016-141 October 2017 for alternative accountability model schools. As a result, state law does not establish academic metrics against which it will hold those alternative schools accountable. On July 12, 2017, the State Education Board approved the development of the Dashboard Alternative School Status program to replace ASAM. According to Education’s director of the Analysis, Measurement & Accountability Reporting Division, the new program will hold alternative schools accountable to the same indicators as traditional schools, but it may measure those indicators differently. For example, the program may track indicators related to graduation rates by one‑year graduation rates for alternative schools instead of the four‑year cohort graduation rates applicable to traditional schools. According to its website, the State Education Board expects to incorporate this new program into the Dashboard in fall 2018. However, the director stated that, pursuant to state law, the Dashboard may still be used to identify schools, including charter schools, in need of technical assistance or charter schools subject to revocation. Nevertheless, while this gap exists in the State’s accountability system, authorizers must continue renewing the charters of schools that qualify for alternative accountability systems without the schools having to demonstrate that they are expanding learning experiences effectively for high‑risk students, as the Legislature requires. Recommendations Legislature To ensure that charter schools improve the educational outcomes of their students, the Legislature should amend state law to require authorizers to annually assess whether their charter schools are meeting the academic goals established in their charters. Districts To ensure that charter schools work toward the academic goals established in their charters, the authorizing districts we visited should do the following: • Adopt a policy requiring them to provide their charter schools with timely feedback and recommendations regarding academic performance. • Adopt an academic oversight policy that includes steps for working with charter schools with poor performance results. California State Auditor Report 2016-141 67 October 2017 • Provide their charter schools with annual oversight reports on their academic performance. Authorizing districts should maintain active memorandums of understanding with their charter schools that describe the district’s oversight responsibilities and ensure the schools meet the measurable student outcomes to which they have agreed. We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Respectfully submitted, ELAINE M. HOWLE, CPA State Auditor Date: October 17, 2017 Staff: Jim Sandberg‑Larsen, CPA, CPFO, Audit Principal Andrew Jun Lee Louis Calderon Aren Knighton, MPA Natalja Zvereva Legal Counsel: Richard B. Weisberg, Sr. Staff Counsel For questions regarding the contents of this report, please contact Margarita Fernández, Chief of Public Affairs, at 916.445.0255. 68 California State Auditor Report 2016-141 October 2017 Blank page inserted for reproduction purposes only. California State Auditor Report 2016-141 69 October 2017 * * California State Auditor’s comments appear on page 75. 70 California State Auditor Report 2016-141 October 2017 1 California State Auditor Report 2016-141 71 October 2017 2 72 California State Auditor Report 2016-141 October 2017 1 3 4 1 California State Auditor Report 2016-141 73 October 2017 1 74 California State Auditor Report 2016-141 October 2017 California State Auditor Report 2016-141 75 October 2017 Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM ACTON‑AGUA DULCE UNIFIED SCHOOL DISTRICT To provide clarity and perspective, we are commenting on Acton‑Agua Dulce Unified School District’s (Acton‑Agua Dulce Unified) response to our audit. The numbers below correspond with the numbers we have placed in the margin of Acton‑Agua Dulce Unified’s response. While preparing our draft report for publication, some page 1 numbers shifted. Therefore, the page numbers Acton‑Agua Dulce Unified cites in its response do not correspond to the page numbers in our final report. Our report recommends that the Legislature amend state law 2 to grant clear authority for a nonvoting member to be on an out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. We did not disclose this legislative recommendation in the draft report we sent to the district because the recommendation was not directed to the district. Although the district states that it uses the State Board of Education’s 3 (State Education Board) criteria as a guideline for evaluating petitions, we noted that the district’s criteria and its authorization matrix do not include all of the State Education Board’s criteria. Although the district asserts that it reviews all charter petitions 4 for compliance with the law, including the geographic restrictions on charter school sites, we note on page 21 that the district could not demonstrate that its out‑of‑district charter school had, in fact, qualified for the exception in state law during the authorization process. 76 California State Auditor Report 2016-141 October 2017 Blank page inserted for reproduction purposes only. California State Auditor Report 2016-141 77 October 2017 * * California State Auditor’s comments begin on page 87. 78 California State Auditor Report 2016-141 October 2017 California State Auditor Report 2016-141 79 October 2017 80 California State Auditor Report 2016-141 October 2017 1 California State Auditor Report 2016-141 81 October 2017 2 82 California State Auditor Report 2016-141 October 2017 3 4 5 California State Auditor Report 2016-141 83 October 2017 6 7 84 California State Auditor Report 2016-141 October 2017 8 California State Auditor Report 2016-141 85 October 2017 9 86 California State Auditor Report 2016-141 October 2017 California State Auditor Report 2016-141 87 October 2017 Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM ANTELOPE VALLEY UNION HIGH SCHOOL DISTRICT To provide clarity and perspective, we are commenting on Antelope Valley Union High School District’s (Antelope Valley Union) response to our audit. The numbers below correspond with the numbers we have placed in the margin of Antelope Valley Union’s response. For clarification, the statement that it was a pervasive practice 1 throughout the State for virtual and independent‑study charter schools to open additional resource centers was presented as an assertion from Antelope Valley Union’s assistant superintendent of educational services, as we note on page 25. Our conclusion that Antelope Valley Union may have failed to 2 comply with state law is based on the fact that it did not ensure that Desert Sands Charter High School’s 2014 renewal petition identified goals and outcomes meant for each significant subgroup of students that the charter school would serve. Desert Sands Charter High School’s 2014 renewal petition only identifies measurable student outcomes for students schoolwide, similar to the way it identified goals and outcomes in the school’s 2010 renewal petition, before state law changed. As we state on page 34, we agree that only the State Education 3 Board is required to use its regulations as criteria for evaluating charter petitions. However, nothing precludes Antelope Valley Union from using the criteria as helpful guidance. Furthermore, because the Legislature recognized that the term reasonably comprehensive is somewhat subjective, we stand by our recommendation that districts should strengthen their authorization processes by using the State Education Board’s criteria for evaluating petitions to ensure that they have a method to hold charter schools accountable for their educational programs. Although our report does not suggest that the District could have 4 prevented LA Online’s fiscal insolvency, we note on pages 44 and 46 that the district could not demonstrate that it took prompt and concerted action when LA Online’s financial reports showed that LA Online had not met Antelope Valley Union’s minimum reserve requirement and was experiencing significant financial distress. We acknowledge Antelope Valley Union’s actions in response to 5 LA Online’s deteriorating financial condition on pages 44 through 46; however, we also note on page 44 that Antelope Valley Union 88 California State Auditor Report 2016-141 October 2017 did not take significant action when LA Online failed to prove that it had obtained a loan to cover its funding shortfall. As a result, the district did not learn that LA Online had not obtained this loan until September 2015—almost nine months after LA Online submitted its first financial report showing indicators of financial difficulties. 6 Although state law may not require the district to implement best practices regarding financial oversight, we believe that a robust oversight process would result in documentation that would corroborate the district’s assertions regarding its actions. 7 Our report does not suggest that failure to implement certain best practices equates to a lack of financial oversight. Instead on pages 50 and 51, we state that the districts’ processes for providing financial oversight to charter schools missed opportunities to incorporate best practices for monitoring charter schools’ financial conditions. Similarly, we do not indicate that state law requires districts to implement the best practices for financial oversight that we discuss in the audit report. 8 As we note on page 31, none of the districts tracked the actual costs of their oversight activities as required by law. The district stated in its response that performing a heightened level of oversight monitoring may result in costs that exceed the legal maximum while not having any mechanism for reimbursement of these additional costs. However, if the districts had tracked their time and expenses related to oversight, we could have assessed whether a maximum of one percent is reasonable. 9 As we state on page 53, state law allows an authorizing district to place its representative on a charter school’s governing board. Our recommendation does not suggest that district representatives attend all charter school’s governing board meetings. However, by placing a representative on a charter school’s governing board, the authorizing district would secure access to such meetings. Moreover, we recommended that the Legislature amend state law to grant clear authority for a nonvoting member to be on an out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. California State Auditor Report 2016-141 89 October 2017 * 1 2 3 * California State Auditor’s comments begin on page 103. 90 California State Auditor Report 2016-141 October 2017 1 2 4 4 4 California State Auditor Report 2016-141 91 October 2017 5 6 6 5 6 7 92 California State Auditor Report 2016-141 October 2017 7 5 8 9 California State Auditor Report 2016-141 93 October 2017 10 94 California State Auditor Report 2016-141 October 2017 5 11 2 California State Auditor Report 2016-141 95 October 2017 5 12 96 California State Auditor Report 2016-141 October 2017 13 14 9 5 California State Auditor Report 2016-141 97 October 2017 15 15 16 17 5 5 18 98 California State Auditor Report 2016-141 October 2017 5 19 20 5 21 5 22 23 5 California State Auditor Report 2016-141 99 October 2017 24 5 25 26 5 27 28 100 California State Auditor Report 2016-141 October 2017 29 30 31 5 32 5 32 California State Auditor Report 2016-141 101 October 2017 33 34 5 5 35 34 102 California State Auditor Report 2016-141 October 2017 4 12 13 14 1 2 1–35 7 3 35 California State Auditor Report 2016-141 103 October 2017 Comments CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM NEW JERUSALEM ELEMENTARY SCHOOL DISTRICT To provide clarity and perspective, we are commenting on New Jerusalem Elementary School District’s (New Jerusalem) response to our audit. The numbers below correspond to the numbers we have placed in the margin of New Jerusalem’s response. We disagree that information on the district is incomplete. We present 1 detail on the district as necessary throughout our report. In addition, we provide background information about the district in Table 2 on page 15 and changes to the district’s number of charter schools and enrollment in Table 5 on page 23. Contrary to New Jerusalem’s assertion, our report includes significant information regarding the circumstances leading to the bankruptcy of Tri‑Valley Learning Corporation (Tri‑Valley) and the closure of Acacia Elementary. As we state on page 15, our audit focused on charter schools 2 specifically identified in the audit request and on these charter schools’ authorizing school districts. Because the audit request named Acacia Elementary Charter School (Acacia Elementary) but did not name other Tri‑Valley charter schools, we provided information on other Tri‑Valley schools to the extent that such information was relevant to Acacia Elementary. In addition, California’s Fiscal Crisis and Management Assistance Team (FCMAT) performed an audit of Tri‑Valley’s Livermore schools and published the results of its audit in June 2017. We summarize FCMAT’s key findings and recommendations in the text box on page 42. We disagree. The scope of our audit as approved by the Joint 3 Legislative Audit Committee has resulted in our report citing relevant best practices and making numerous legislative recommendations related to the authorization and oversight of charter schools. As we note on page 12, our report makes clear that we are discussing 4 the common practice of locally funded and directly funded charter schools. We do not use the terms dependent and independent, which are sometimes used within the education community to describe a charter school’s structure, because they are not found in state law. On page 12, we note that locally funded charter schools usually have the same governing board as their authorizing districts while directly funded charter schools are typically operated by nonprofit public‑benefit corporations. The district’s response acknowledges that this practice is typical of how charter schools elect to receive their funding. Thus, we believe we have sufficiently covered the structures of charter schools for the purposes of our audit report. 104 California State Auditor Report 2016-141 October 2017 5 While preparing our draft report for publication, some page numbers shifted. Therefore, the page numbers New Jerusalem cites in its response do not correspond to the page numbers in our final report. 6 We disagree with the district’s statement that it did not increase its revenue as a result of authorizing locally funded charter schools outside the district’s geographic boundaries. As shown in the text box on page 29, the district’s out‑of‑district locally funded charter schools generated nearly $5.5 million in local control funding formula revenue, which we refer to as the local funding plan, described on page 12. Although we do not discuss this in the report, the revenue of locally funded charter schools that New Jerusalem authorized is included in the district’s audited financial statements. Moreover, the charter petitions of New Jerusalem’s locally funded charter schools state that the district provides all support services to these charter schools, including personnel, financial, legal, purchasing, and facility services. The petitions further state that New Jerusalem’s superintendent determines the charter schools’ costs for these services, subject to the district’s governing board ratification. Given that the district receives its locally funded charter schools’ funding and makes spending decisions in relation to this funding, we stand by our conclusion that New Jerusalem increased its revenue by authorizing locally funded charter schools outside its geographic boundaries. 7 We disagree that our recommendations are not clear. The report clearly distinguishes between the law and best practices in its discussion of the authorization and monitoring of charter schools. Our recommendation specific to ensuring compliance with state law on page 37 clearly states this focus. 8 In the text box on page 11, we describe key statutory responsibilities of charter authorizers. An example of a responsibility that we did not include in the text box is state law’s requirement that charter authorizers consider increases in student academic achievement for all groups of students served by a charter school as the most important factor in determining whether to grant a charter renewal or revoke a charter. Thus, we stand by our description of the items as key statutory responsibilities. 9 The example that New Jerusalem provides in its response is not relevant to Acacia Elementary, as New Jerusalem refers to a document that pertains to Acacia Middle Charter School (Acacia Middle)— another Tri‑Valley charter school. As we describe in Comment 2, the audit request named Acacia Elementary but did not name other Tri‑Valley charter schools as being within this audit’s scope. 10 As we state on page 15, the Joint Legislative Audit Committee directed us to determine the adequacy of the financial oversight provided by the authorizing districts for the charter schools located California State Auditor Report 2016-141 105 October 2017 outside of their geographic boundaries. State law does not prescribe specific procedures that authorizers must follow to fulfill their oversight responsibilities, which we acknowledge several times throughout the report—including on pages 4, 39, 44, and 50—so we relied upon best practices to assess their financial oversight. New Jerusalem’s statement minimizes the significance of Acacia 11 Elementary’s low level of reserves and the charter school’s deficit for its first year of operations as indicators of the charter school’s financial condition. New Jerusalem’s statement is inconsistent with the district’s requirements. Specifically, as we state on page 47, the district’s memorandum of understanding with Acacia Elementary required the charter school to maintain a minimum level of reserves. Thus, we disagree with New Jerusalem’s justification for its lack of action in response to Acacia Elementary’s initial indicators of financial difficulties and we stand by our conclusion that the district should have taken action sooner in response to these indicators. As we describe on page 33, the district did not update its charter 12 school policy between September 2008 and February 2016, despite amendments to state charter school law in 2013. We look forward to the district’s 60‑day response to clarify the specific procedure it has established to ensure that its policies are updated periodically to reflect changes in state law. Contrary to New Jerusalem’s statement, our report does not suggest 13 that New Jerusalem’s review of Acacia Elementary’s petition would have revealed Tri‑Valley’s financial mismanagement. Although we acknowledge on pages 51 and 52 that New Jerusalem 14 uses oversight matrices, our concern is that New Jerusalem could not demonstrate that it always reviewed these matrices or provided feedback to Acacia Elementary on identified issues. As such, the district is not using this tool in the most meaningful way, as we state on page 52. We disagree with the district’s claim that Acacia Elementary 15 qualified for an exception to being located within the district’s geographic boundaries. State law requires a charter petition to identify a single school to operate within the geographic boundaries of the authorizer, with limited exceptions. As the district noted in its response, the plain language of the law provides an exception if the charter school has attempted to locate a single site or facility to house the entire program, but such a facility or site is unavailable in the area in which the charter school chooses to locate. As we point out on page 22, Acacia Elementary’s petition stated that the school’s intention was to serve students within San Joaquin County, with particular attention to underserved students in Stockton. 106 California State Auditor Report 2016-141 October 2017 Further, on that same page, we note that in fiscal year 2015–16 none of Acacia Elementary’s students lived within New Jerusalem’s boundaries. Therefore, we stand by our conclusion that it did not qualify for the legal exception and should have petitioned the district where the students it intended to serve were located. 16 As we point out on page 24, state law does not specify how far in advance the host district needs to be notified. However, because the district did not notify Stockton Unified until a few hours before it authorized Acacia Elementary’s petition, it is unclear how this constituted sufficient notice that would have allowed Stockton Unified an opportunity to object. 17 State law requires petitions to include all of the required signatures prior to being submitted to the district’s governing board for review. However, Acacia Elementary’s petition included only nine of the 10 teacher signatures it needed at the time it was authorized. Districts should strictly adhere to legal requirements related to charter school authorization. 18 We address specifics of the district’s comments related to financial oversight in Comments 19 through 25 below. 19 New Jerusalem misstates that Acacia Elementary’s reported ending balance amounted to $58,000 for fiscal year 2013–14, when, in fact, Acacia Elementary actually reported a deficit of $58,000, an amount $116,000 lower than New Jerusalem cited in its response. We stand by our conclusion on page 47 that, in aggregate with other indicators present in Acacia Elementary’s financial reports, this deficit should have led New Jerusalem to start taking further action regarding Acacia Elementary’s financial condition. 20 We disagree with New Jerusalem’s argument that its reliance on Tri‑Valley’s reputation as a successful CMO justified New Jerusalem’s lack of action in response to initial indicators of Acacia Elementary’s financial difficulties. As an authorizing district, New Jerusalem had a responsibility to monitor the fiscal condition of Acacia Elementary. As we show in Figure 3 on page 48, Acacia Elementary’s financial reports indicated that its financial condition was deteriorating. Hence, we believe that New Jerusalem should have taken action based on Acacia Elementary’s financial information, regardless of its perception of Tri‑Valley’s reputation. 21 Our report does not suggest that New Jerusalem should have approved Acacia Elementary’s financial decisions and transactions, including its lease agreement. Instead, on page 52, we state that New Jerusalem could not demonstrate that it acted in response to the high rates in this lease agreement until April 2016, even though the district was aware that Acacia Elementary had relocated California State Auditor Report 2016-141 107 October 2017 to a new facility in September 2014. Had the district evaluated the related lease agreement in the fall of 2014, when Acacia Elementary notified the district of its relocation to a new facility, we believe New Jerusalem could have earlier recognized the impact of the lease agreement’s higher rates on Acacia Elementary’s financial condition. On page 49 and in Figure 3 on page 48, we acknowledge that the 22 district issued a formal notice of concern after receiving Acacia Elementary’s unaudited financial report for fiscal year 2014–15, requested additional information from the school to assess its financial condition, and promptly commenced revocation proceedings against Acacia Elementary after identifying additional issues with Acacia Elementary’s finances. Therefore, it is unclear with which aspect of our analysis New Jerusalem disagrees. Contrary to New Jerusalem’s statement, our report does not suggest 23 that New Jerusalem should have known about the financial issues pertaining to Tri‑Valley’s Livermore schools. As we show in Figure 3 on page 48, we recognize New Jerusalem’s 24 attempts to place a district representative on Tri‑Valley’s governing board. Our report does not suggest that placing a district representative on Tri‑Valley’s governing board sooner would have allowed New Jerusalem to identify Acacia Elementary’s undisclosed loan or the fact that Tri‑Valley pledged Acacia Elementary’s revenue in a lease agreement for its Livermore schools. We disagree with New Jerusalem’s assessment of its oversight 25 of Acacia Elementary’s financial condition. In its response, New Jerusalem asserted that it identified early indicators of Acacia Elementary’s financial distress and responded quickly after reviewing the unaudited financial report for Acacia Elementary’s second year of operations. However, as we state on page 47 and highlight in Figure 3 on page 48, prior to receiving Acacia Elementary’s unaudited financial report for its second year of operations, New Jerusalem had received financial reports indicating that Acacia Elementary was experiencing financial difficulties. The district could not demonstrate that it responded to those initial indicators of Acacia Elementary’s financial distress. As a result, we stand by our conclusion that New Jerusalem could have responded sooner to initial indicators of Acacia Elementary’s financial difficulties. Contrary to New Jerusalem’s statement, our report does not state that 26 charter schools are required to assess measurable student outcomes each year. On page 58, we note that although state law requires charter schools to establish measurable student outcomes within their petitions, it does not require authorizing districts to assess annually whether charter schools are meeting those outcomes. 108 California State Auditor Report 2016-141 October 2017 27 New Jerusalem is mischaracterizing a statement we made on page 57, which notes that state law requires authorizing districts to conduct annual site visits at their charter schools, but does not identify specific oversight activities that the districts must perform. 28 We address specifics of the district’s comments related to academic oversight in Comments 29 through 31 below. 29 We note on page 59 that Acacia Elementary failed to meet some of its measurable student outcomes in fiscal year 2014–15 and 2015–16, such as having its students meet or exceed the average achievement of schools located in Stockton. We also include on page 59 the district’s explanation that academic performance data for fiscal year 2014–15 was not available until fall 2015. Although the district states that it did not have two years of data to compare prior to revocation, the fall 2015 data would have been sufficient for the district to assess whether Acacia Elementary met its measurable student outcomes for fiscal year 2014–15. However, as we also note on that same page, the district did not report concerns about Acacia Elementary’s academic performance until June 2016. 30 Contrary to New Jerusalem’s statement, our report accurately cites excerpts from the court’s decision to issue the preliminary injunction. The court’s decision states that “the resolutions and Finding of Facts #8 of each resolution do not constitute substantial evidence that the District considered increases in the students’ academic achievement as the most important factor in the revocation decision. This court would expect that increases would be laid out and identified as to each group and sub‑group with a statement about the impact of the increases for the students and the values of such increases for the students and the community.” 31 As we state on page 17 for Objective 6c in Table 3, we were asked to perform this analysis over this time frame by the Joint Legislative Audit Committee. Although the district notes that a measurement over four years provides a more accurate picture of academic performance, only two years of academic performance data was available. 32 As we state on page 30, the board meeting minutes from May 2015 showed that Tri‑Valley’s board approved New Jerusalem’s proposal for a fee increase to 3 percent; however, the minutes also indicate that the proposal did not include a breakdown describing what the school would receive in exchange. As we note on page 12, state law allows charter schools to purchase additional services from their authorizers; however, state law specifies that authorizers can only charge for the actual costs of supervisorial oversight not to exceed 1 percent of a charter school’s revenue, or 3 percent of its California State Auditor Report 2016-141 109 October 2017 revenue if the authorizer provides substantially rent‑free facilities. Although Tri‑Valley agreed to pay New Jerusalem oversight fees that exceeded the statutory cap, the agreement violated state law. Although New Jerusalem notes that it is common practice for 33 authorizers and charter schools to agree on a flat rate percentage for oversight fees, state law establishes a legal limitation that districts can only charge their actual costs up to 1 percent of charter school revenue. We believe that the implementation of time‑reporting tools would allow staff to identify the cost of district activities related to oversight of each charter school. The example that New Jerusalem provides in its response is not 34 relevant to Acacia Elementary, which is the focus of our audit. New Jerusalem’s response refers to another charter school that the district authorized. We have made a legislative recommendation to amend state law to 35 grant clear authority for a nonvoting member from an authorizing district to be on an out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. We did not share this recommendation with the districts we audited because it was not made to them.