Santa Clara County Office of Education – Mexican American Community Services Agency (macsa) Academia Calmecac and El Portal Leadership Academy Charter Schools Report

Extraordinary Audit of the Mexican American Community Services Agency’s (MACSA’s) El Portal Leadership Academy and Academia Calmecac Charter Schools Commissioned by the Santa Clara County Office of Education Administrative Agent Christine Lizardi Frazier August 27, 2009 Office of Kern County Superintendent of Schools Chief Executive Officer Joel D. Montero August 27, 2009 Dr. Charles Weis, Superintendent Santa Clara County Office of Education 1290 Ridder Park Drive San Jose, CA 95131 Dear Superintendent Weis: In April 2009, the Santa Clara County Office of Education and the Fiscal Crisis and Management Assistance Team (FCMAT) entered into an agreement for FCMAT to conduct an AB 139 extraordinary audit of the Mexican American Community Services Agency (MACSA) Academia Calmecac and El Portal Leadership Academy charter schools. The study agreement specifies that FCMAT will complete the following scope of work: 1. The COE requests the Team to conduct a review of the business practices of two direct funded charter schools, the MACSA Academia Calmecac, sponsored by the East Side Union High School District, and the MACSA El Portal Leadership Academy, sponsored by the Gilroy Unified School District. Specifically, the review is requested to determine if there is evidence of illegal fiscal practices or misappropriation of employee CalPERS and CalSTRS payroll deductions. It is alleged that approximately $400,000 in employee deductions ($150,000 for the Gilroy-sponsored charter and $250,000 for the East Side-sponsored charter employees) have not been processed and sent to the retirement agencies for a period in excess of one year; and that the employer portion has also not been processed. It is alleged that MACSA, the Mexican American Community Services Agency, has used the retirement contributions to pay operating costs. The Team’s review will verify whether there is sufficient evidence of illegal fiscal practices or misappropriation in the processing of payrolls and handling of employee deductions and employer contributions for the county superintendent to contact local law enforcement for further investigation. The attached final report contains the study team’s findings and recommendations. We appreciate the opportunity to serve you and we extend our thanks to all the staff and administration of the Santa Clara County Office of Education, MACSA, and the East Side Union High and Gilroy Unified school districts. FCMAT Joel D. Montero, Chief Executive Officer . . 1300 17th Street - CITY CENTRE, Bakersfield, CA 93 . 301-4533 Telephone 661-6 . 36-4611 Fax 661-63 . 6-4647 422 Petaluma Blvd North, Suite. C, Petaluma, CA 94952 Telephone: 707-775-2850 Fax: 707-775-2854 www.fcmat.org Administrative Agent: Christine Lizardi Frazier - Office of Kern County Superintendent of Schools Sincerely, Joel D. Montero Chief Executive Officer c: Cathy Grovenburg, Assistant Superintendent Business Services Fiscal Crisis & Management Assistance Team TABLE OF CONTENTS i Table of Contents Foreword ...........................................................................iii Introduction ...................................................................... 1 Background ..............................................................................................................................................1 Study Guidelines ....................................................................................................................................3 Study Team ..............................................................................................................................................3 Executive Summary ......................................................... 5 Findings and Recommendations ................................... 9 PERS and STRS Contributions .......................................................................................................9 Financial Trends and Analysis ......................................................................................................15 Appendix ..........................................................................25 ii Fiscal Crisis & Management Assistance Team FOREWORD iii Foreword FCMAT Background The Fiscal Crisis and Management Assistance Team (FCMAT) was created by legislation in accordance with Assembly Bill 1200 in 1992 as a service to assist local educational agencies in complying with fiscal accountability standards. AB 1200 was established from a need to ensure that local educational agencies through- out California were adequately prepared to meet and sustain their financial obligations. AB 1200 is also a statewide plan for county offices of education and school districts to work together on a local level to improve fiscal procedures and accountability standards. The legislation expanded the role of the county office in monitoring school districts under certain fiscal constraints to ensure these districts could meet their financial commitments on a multiyear basis. AB 2756 provides specific responsibilities to FCMAT with regard to districts that have received emergency state loans. These include comprehensive assessments in five major operational areas and periodic reports that identify the district’s progress on the improvement plans. Upon request, FCMAT also provides extraordinary audits in accordance with Assembly Bill 139 and Education Code Section 1241.5 (b) and (c), which authorize county super- intendents of schools to conduct or request a review or audit of the expenditures and internal controls of any school district or Total Number of Studies....................743 charter school in their county if there is Total Number of Districts in CA ..........982 reason to believe that fraud, misappropria- tion of funds, or other illegal fiscal practices Management Assistance.............................705 (94.886%) Fiscal Crisis/Emergency ................................38 (5.114%) have occurred. Note: Some districts had multiple studies. Since 1992, FCMAT has been engaged to Districts (7) that have received emergency loans from the state. perform more than 700 reviews for local (Rev. 1/22/09) educational agencies, including school districts, county offices of education, charter schools Study Agreements by Fiscal Year and community 80 colleges. Services 70 range from fiscal 60 crisis intervention to management 50 review and assis- 40 tance. FCMAT 30 also provides 20 professional devel- 10 opment training. The Kern County 0 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 Superintendent of Projected Santa Clara County Office of Education – MACSA Charter Schools seidutS fo rebmuN iv FOREWORD Schools is the administrative agent for FCMAT. The agency is guided under the leader- ship of Joel D. Montero, Chief Executive Officer, with funding derived through appro- priations in the state budget and a modest fee schedule for charges to requesting agencies. Fiscal Crisis & Management Assistance Team INTRODUCTION 1 Introduction Background California Education Code Section 47600, also known as the Charter Schools Act of 1992, was enacted “to provide opportunities for teachers, parents, pupils, and community members to establish and maintain schools that operate independently from the existing school district structure.” Charter schools are a part of the public school system but differ from traditional public schools because they are exempt from many state laws relating to specific educational programs. Specific goals and operating procedures for the charter school are detailed in an agreement, or charter, between the authorizing agency and the charter school organizers. Charter schools may elect to operate as corporations organized under the Nonprofit Public Benefit Corporation Law of the Internal Revenue Code [26 U.S.C. Sec. 501(c)(3)]. Charters offer a more flexible school governance model but are accountable for student achievement and fiscal management. The chartering agency is responsible for adequate and appropriate oversight, including determining if a charter is following prudent busi- ness practices and generally accepted accounting principles (GAAP) in accounting for revenues and expenditures and preparing financial reports. The chartering agency may be a school district, county office of education, or the California State Board of Education. The Mexican American Community Services Agency (MACSA) Academia Calmecac charter school was authorized by the East Side Union High School District and opened in 2001. The MACSA El Portal Leadership Academy charter school was authorized by the Gilroy Unified School District. Its charter petition was approved on February 21, 2000, and the school opened in 2001. Both authorizing districts are in Santa Clara County. Both schools are direct-funded and are operated by MACSA, which is a nonprofit corpo- ration. MACSA provides all of the administrative functions for the two charter schools. Academia Calmecac serves approximately 190 students in grades 9-12, and El Portal serves approximately 158 students in grades 9-12. Both schools offer a site-based instruc- tional program. Based on the provisions of Education Code section 1241.5(c), a county superintendent may review or audit the expenditures and internal controls of any charter school in his or her county if he or she has reason to believe that fraud, misappropriation of funds, or other illegal fiscal practices have occurred that merit examination. The review or audit conducted by the county superintendent shall be focused on the alleged fraud, misap- propriation of funds, or other illegal fiscal practices and shall be conducted in a timely and efficient manner. The basis of the review is to determine if sufficient documentation exists to further investigate the findings. Education Code section 42638(b) states: If the county superintendent determines that there is evidence that fraud or mis- appropriation of funds has occurred, the county superintendent shall notify the Santa Clara County Office of Education – MACSA Charter Schools 2 INTRODUCTION governing board of the school district, the State Controller, the Superintendent of Public Instruction, and the local district attorney. In March 2009, the Fiscal Crisis and Management Assistance Team (FCMAT) received a request from the Santa Clara County Office of Education for an Assembly Bill (AB) 139 extraordinary audit of the two MACSA charter schools. The county office had received information regarding the charter schools’ alleged nonpayment of California State Teachers’ Retirement System (STRS) and California Public Employees’ Retirement System (PERS) contributions. In April 2009, FCMAT and the county office entered into a study agreement which specifies that FCMAT will complete the following: 1. The COE requests the Team to conduct a review of the business practices of two direct funded charter schools, the MACSA Academia Calmecac, sponsored by the East Side Union High School District, and the MACSA El Portal Leadership Academy, sponsored by the Gilroy Unified School District. Specifically, the review is requested to determine if there is evidence of illegal fiscal practices or misappropriation of employee CalPERS and CalSTRS payroll deductions. It is alleged that approximately $400,000 in employee deductions ($150,000 for the Gilroy sponsored charter and $250,000 for the East Side sponsored charter employees) have not been processed and sent to the retirement agencies for a period in excess of one year; and that the employer portion has also not been processed. It is alleged that MACSA, the Mexican American Community Services Agency, has used the retirement contributions to pay operating costs. The Team’s review will verify whether there is sufficient evidence of illegal fiscal practices or misappropriation in the processing of payroll and handling of employee deductions and employer contributions for the county superintendent to contact local law enforcement for further investigation. Fiscal Crisis & Management Assistance Team INTRODUCTION 3 Study Guidelines FCMAT visited the county office, MACSA, the East Side Union High School District and the Gilroy Unified School District on May 12-14, 2009 to conduct interviews, collect data and review documents. This report is the result of those activities and is divided into the following sections: I. Executive Summary II. PERS and STRS Contributions III. Financial Trends and Analysis IV. Appendix Study Team The FCMAT study team was composed of the following members: Diane Branham Deborah Deal FCMAT Fiscal Intervention Specialist FCMAT Fiscal Intervention Specialist Bakersfield, California Bakersfield, California John Lotze FCMAT Public Information Specialist Bakersfield, California Santa Clara County Office of Education – MACSA Charter Schools 4 Fiscal Crisis & Management Assistance Team EXECUTIVE SUMMARY 5 Executive Summary During 2008-09, the Santa Clara County Office of Education received information alleging that, for more than a year, employee deductions and employer contributions to the Public Employees’ Retirement System (PERS) and the State Teachers’ Retirement System (STRS) had not been paid for employees of the Academia Calmecac and the El Portal Leadership Academy charter schools. It was also alleged that these funds had been used by MACSA to pay operating costs. Education Code section 47605 gives charter schools the option to participate in PERS and STRS, and the MACSA board of directors approved participation in both retirement systems at its January 10, 2002 meeting. Charter schools that choose to participate must follow the regulations for each program. Payments include a contribution from employ- ees and from employers on all creditable earnings. When charter school employees became aware that the required retirement contributions were not being made to PERS and STRS, a grievance was filed. As a result, MACSA agreed to a schedule for payment of all current and past due contributions. Academia Calmecac owed $249,909.76 for past due payments from April 2007 through January 2009. Payments were also not made for the March and April 2009 payrolls, leav- ing a total unpaid balance of $267,777.91 as of May 12, 2009. El Portal Leadership Academy owed $140,139.85 for past due payments from August 2007 through January 2009. As of May 12, 2009, $103,394.56 had been paid, but no pay- ment was made for the April 2009 payroll, leaving a total unpaid balance of $41,400.01. Failure to report creditable earnings and pay the required contributions to PERS and STRS on time can result in late penalties and interest. Amounts withheld from employ- ees’ salaries are to be treated as a trust fund and not used for other purposes. The credit- able earnings and past due employee deductions and the employer contribution amounts should be reported and paid to PERS and STRS immediately, and all future payments should be reported and paid on time. A review of the financial trends and cost variances for the charter schools indicated that both schools face substantial fiscal challenges that will require making difficult decisions immediately to balance the budgets, pay all of the past due PERS and STRS contribu- tions, and allow them to continue as a going concern. Enrollment at both charter schools has decreased in 2008-09, and the historical average daily attendance (ADA) to enrollment ratios are lower than the statewide average for high schools. Because the majority of the charter schools’ funding is based on ADA, it is imperative that ADA be increased or expenses be reduced. Academia Calmecac’s revenues exceeded expenditures each year after 2004-05, and the school has maintained a positive ending balance since that time. However, it is not clear Santa Clara County Office of Education – MACSA Charter Schools 6 EXECUTIVE SUMMARY whether the entire PERS and STRS liabilities were recorded in the financial statements. If not, the charter school’s fund balance will be reduced. The large increase reported in other local revenue for 2008-09 had not yet been received as of the second interim reporting period. This item should be reviewed to ensure that funds will be received in 2008-09. Increases or decreases in annual revenues appear to have kept pace with annual expenses over time; however, this may be due largely to the increase in other local revenue reported in 2008-09. El Portal Leadership Academy’s revenues have exceeded expenditures in only two years since 2004-05; deficit spending occurred in the other three years. The charter school also reported a negative ending balance each year except 2008-09. As is the case with Academia Calmecac, it is not clear whether the entire PERS and STRS liabilities were recorded in the financial statements. If not, the charter school’s fund balance will be reduced. The charter school has also reported a negative cash balance in each of the prior three years. The charter school included large increases in unrestricted federal revenue and other local revenue in its 2008-09 second interim budget. These should be reviewed to ensure that the funds are unrestricted and that the projected amounts will be received in 2008-09. MACSA provides all administrative services for the charter schools. MACSA staff indi- cated that one bank account is kept for the entire MACSA organization, including the two charter schools. Best practice would be for MACSA to maintain a separate bank account for each charter school to ensure that funds are not commingled. Interviews with staff members at MACSA and the authorizing school districts did not reveal that charter school funds had been used for items unrelated to charter school expenses. However, the failure to make timely retirement system payments appears to be an illegal fiscal practice, and the failure to set the funds aside in a trust and, instead, use the funds to pay for operational costs is an apparent misappropriation of funds. The authorizing school districts and the county office should ensure that MACSA pays all past due PERS and STRS contributions immediately and reports and pays all future monthly contributions on time. In accordance with Education Code section 42638(b), action by the county superintendent shall include the following: If the county superintendent determines that there is evidence that fraud or mis- appropriation of funds has occurred, the county superintendent shall notify the governing board of the school district, the State Controller, the Superintendent of Public Instruction and the local district attorney. Fiscal Crisis & Management Assistance Team EXECUTIVE SUMMARY 7 Subsequent Events Following FCMAT’s field work, the county office and MACSA reported that the El Portal Leadership Academy charter was rescinded by the authorizing school district in June, 2009. A resolution dated June 11, 2009 and adopted by the MACSA board of directors indicates that MACSA relinquished the El Portal Leadership Academy charter school. The county office and MACSA also reported that the Academia Calmecac charter was revoked by the authorizing school district effective June 30, 2009. MACSA staff further indicated that all current and past due PERS and STRS contribu- tions have been paid for employees of the El Portal Leadership Academy. All past due contributions have not been paid for employees of Academia Calmecac. Santa Clara County Office of Education – MACSA Charter Schools 8 Fiscal Crisis & Management Assistance Team pERS AND STRS CONTRIBUTIONS 9 Findings and Recommendations PERS and STRS Contributions The California Public Employees’ Retirement System (PERS) provides retirement benefits to eligible classified employees, and the California State Teachers’ Retirement System (STRS) provides retirement benefits to eligible certificated employees, if their employers participate in these retirement systems. Education Code section 47605 gives charter schools the option to participate in these retirement programs. If a charter school chooses to provide this benefit for its employees, it must follow the regulations for each program in which it participates. The PERS regulations are included in Government Code sections 20000-22970, and the regulations for STRS are included in Education Code sec- tions 22000-28101. Payments for eligible STRS members include an 8% contribution from employees and an 8.25% contribution from employers on all creditable earnings. Payments for eligible PERS members include a 7% contribution from employees and an annual actuarially determined contribution from employers on all creditable earnings. The PERS contribu- tion from employers was 9.306% for 2007-08 and 9.428% for 2008-09. The amounts withheld from employees’ salaries are to be treated as a trust fund and deposited with STRS or PERS. Failure to pay the required contributions to PERS and STRS on time can result in late penalties and interest. At its January 10, 2002 meeting, the MACSA board of directors adopted a resolution approving participation in PERS and STRS for the employees of El Portal Leadership Academy and Academia Calmecac charter schools. The five-year renewal charter petition for the MACSA El Portal Leadership Academy, dated April 18, 2007, states the following on page 72: Staff at MACSA El Portal Leadership Academy will participate in the federal social security system and will have access to other school-sponsored retirement plans according to policies developed by the Board of Directors and adopted as the school’s employee policies. The school retains the option for its Board to elect to participate in the State Teachers Retirement System and/or Public Employees Retirement System and coordinate such participation as appropriate, with the social security system or other reciprocal systems in the future, should it find that participation enables the school to attract and retain a higher quality of staff. MACSA El Portal Leadership Academy will enter into negotiations with the Santa Clara County Office of Education for STRS reporting services for the certificated employees of the school. The charter petition for MACSA Academia Calmecac, dated December 1, 2005 (revised November 20, 2008), states the following on page 34: Santa Clara County Office of Education – MACSA Charter Schools 10 pERS AND STRS CONTRIBUTIONS Staff at MACSA Academia Calmecac will participate in the federal social security system and will have access to other school-sponsored retirement plans according to policies developed by the Board of Directors and adopted as the school’s employee policies. The school retains the option for its Board to elect to participate in the State Teachers Retirement System and/or Public Employees Retirement System and coordinate such participation as appropriate, with the social security system or other reciprocal systems in the future, should it find that participation enables the school to attract and retain a higher quality of staff. MACSA Academia Calmecac will enter into negotiations with the Santa Clara County Office of Education for STRS reporting services for the certificated employees of the school. Education Code section 47611.3 states the following: (a) At the request of a charter school, a school district or county office of education that is the chartering authority of a charter school shall create any reports required by the State Teachers’ Retirement System and the Public Employees’ Retirement System. The county superintendent of schools, employing agency, or school district that reports to those systems pursuant to Section 23004 of this code or Section 20221 of the Government Code shall submit the required reports on behalf of the charter school. The school district or county office of education may charge the charter school for the actual costs of the reporting services. MACSA processes payroll for the employees of Academia Calmecac and El Portal Leadership Academy. MACSA staff members are responsible for submitting the employee earnings and PERS and STRS retirement information to each of the respec- tive authorizing school districts, accompanied by payment for both the employee and employer contributions. The districts’ payroll staff are then responsible for entering the employee earnings and retirement information into the financial accounting software and for ensuring that the information reported is monitored, accurate and on time. The county office audits the retirement information and then submits it to PERS and STRS with pay- ment. The applicable education code and government code sections provide the reporting and payment deadlines that must be followed and the penalties and interest that may be assessed if the deadlines are not followed. These requirements are also outlined in the PERS and STRS procedure manuals available online at http://www.calpers.ca.gov/ and http://www.calstrs.com/, respectively. Staff members from the East Side Union High School and Gilroy Unified school districts reported that retirement information for the charter schools is entered into the financial system and reported to PERS and STRS only when the charter schools submit the payroll report and payment of the contributions. MACSA staff indicated that retirement contributions for the charter school employees were not made for several months because the schools were not meeting their enrollment and ADA projections and an ongoing lack of cash flow necessitated late payments for Fiscal Crisis & Management Assistance Team pERS AND STRS CONTRIBUTIONS 11 items in addition to STRS and PERS. Staff also indicated that cash flow has been an ongoing issue for the entire MACSA organization and that MACSA had planned to sell a piece of property to meet its obligations. However, MACSA has been unable to sell the property because of the severe downturn in the real estate market. When charter school employees became aware that the required retirement contributions were not being made to PERS and STRS, a grievance was filed. As a result of the griev- ance, MACSA agreed to a payment schedule that provides for payment of all current and past due contributions by the dates specified below for each charter school. MACSA Academia Calmecac The MACSA board of directors’ meeting minutes dated March 12, 2009 indicate that the chief financial officer provided an update on STRS and PERS and state, “The payments for STRS and PERS (for AC) had been delayed from April 2007 through January 2009. It is MACSA’s intent to repay all PERS and STRS employee contributions by March 31, 2009; and pay all PERS and STRS employer contributions by the end of September 2009.” East Side Union High School District staff verified that the last payment for STRS and PERS contributions was for March 2007 and was received by the district in February 2008. In response to a grievance filed by an employee on June 27, 2008 regarding the nonpay- ment of retirement contributions and union dues, MACSA developed a payment plan for PERS and STRS. The payment plan indicated that $249,909.76 was owed for contribu- tions through January 2009, that MACSA would make monthly payments beginning in March 2009, and that all past due contributions would be paid by September 2009. However, MACSA and East Side UHSD staff members reported that no payments had been made as of May 12, 2009. MACSA’s accounts payable records indicate that the February 2009 contribution has been paid; however, payments have not yet been made for March and April 2009. This leaves a total balance owed of $267,777.91 through April 2009. A review of the fiscal year 2007-08 Benefits History – PERS Report revealed that an incorrect employer contribution rate was applied each month. Corrections should be made to indicate the rate of 9.306%. The fiscal year 2008-09 Benefits History – PERS Report also indicates that an incorrect rate was used for July 2008. This should be cor- rected to indicate the rate of 9.428%. The annual independent audit for fiscal year 2007-08 did not recognize that the charter school had chosen to participate in the PERS and STRS retirement systems. A revised audit for 2007-08, presented by the audit firm on March 23, 2009, recognizes that the charter school has chosen to participate in PERS but does not recognize participation in STRS. The revised audit states the following: Santa Clara County Office of Education – MACSA Charter Schools 12 pERS AND STRS CONTRIBUTIONS The school contributes to the School Employer Pool under the California Public Employees’ Retirement System (CalPERS); a cost-sharing multiple-employer public employer retirement system defined benefit pension plan administered by CalPERS. The plan provides retirement and disability benefits, annual cost-of- living adjustments, and death benefits to plan members and beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the Public Employees’ Retirement Laws. A payable in the amount of $172,885 was due at June 30, 2008. The audits for fiscal years 2004-05, 2005-06 and 2006-07 recognize that the charter con- tributes to PERS; however, they do not recognize participation in STRS. Based on the charter’s fiscal year 2007-08 unaudited actuals report and annual indepen- dent audit, it is not known if the entire amount of unpaid contributions were included in the financial reports. The 2007-08 employer contribution was recognized as an expense. However, based on the information provided, FCMAT was not able to determine if the amount owed for 2006-07 and the amount withheld from the employees’ pay were recog- nized as liabilities. MACSA El Portal Leadership Academy The MACSA board of directors’ meeting minutes dated March 12, 2009 indicate that the chief financial officer provided an update on STRS and PERS and state, “The payments for PERS (for EPLA) had been delayed from October 2007 through January 2009. The payments for STRS (for EPLA) had been delayed from August 2007 through January 2009. MACSA is committed to paying all outstanding PERS and STRS employer contri- butions by the end of June 2009.” In response to a grievance filed by an employee on June 27, 2008 regarding the non- payment of retirement contributions and union dues, MACSA developed a payment plan for PERS and STRS. The payment plan indicated that $140,139.85 was owed for contributions through January 2009, that MACSA would make monthly payments begin- ning in February 2009, and that all past due contributions would be paid by June 2009. As of May 12, 2009, the accounts payable records provided to FCMAT indicated that $103,394.56 had been paid. MACSA’s accounts payable records indicate that the contributions for February and March 2009 have been paid, but not the contribution for April 2009. This leaves a total balance owed of $41,400.01 through April 2009. A review of the fiscal year 2007-08 Benefits History – PERS Report revealed that an incorrect employer contribution rate was applied each month. Corrections should be made to indicate the rate of 9.306%. The fiscal year 2008-09 Benefits History – PERS Report also indicates that an incorrect rate was used for July 2008. This should be cor- rected to indicate the rate of 9.428%. Fiscal Crisis & Management Assistance Team pERS AND STRS CONTRIBUTIONS 13 The annual independent audit for fiscal year 2007-08 does not recognize that the charter school has chosen to participate in the PERS and STRS retirement systems. The audits for fiscal years 2004-05, 2005-06 and 2006-07 recognize that the charter school contrib- utes to PERS; however, they do not recognize participation in STRS. Based on the charter school’s fiscal year 2007-08 unaudited actuals and annual indepen- dent audit, it is not known if the entire amount of the unpaid contributions was included in the financial reports. The 2007-08 employer contribution was recognized as an expense. However, based on the information provided, FCMAT was not able to determine if the amount withheld from the employees’ pay was recognized as a liability. Recommendations The charter schools should: 1. Report service credit and pay the required employee and employer contributions to PERS and STRS on the required schedule. 2. Immediately pay all past due amounts owed to PERS and STRS. If PERS and STRS will not waive the penalties and interest accrued to date, the payment should include those costs. 3. Ensure that the correct employer contribution percentages for PERS have been applied at each payroll reporting period. 4. Ensure that all applicable financial reports recognize the liability for the unpaid PERS and STRS contributions. 5. Work with the county office and PERS and STRS to determine if a separate account can be established for each charter school so that retirement information can be reported directly to the county office. If a separate account cannot be established, work with the authorizing school district to develop a system to ensure that payroll reports for each pay period are submitted to the district and that the district is monitoring submissions monthly. The districts and county office should: 6. Take all steps necessary to ensure that MACSA pays all past due PERS and STRS contributions immediately and reports and pays all future monthly contributions in accordance with the required time lines. The county superintendent should: 7. Notify the governing board of the charter school, the State Controller, the Superintendent of Public Instruction, and the local district attorney that retirement contributions have not been paid or set aside in a trust. Santa Clara County Office of Education – MACSA Charter Schools 14 Fiscal Crisis & Management Assistance Team FINANCIAL TRENDS AND ANALYSIS 15 Financial Trends and Analysis Financial planning is crucial for every local educational agency, regardless of its size or structure. Long-term financial planning helps a charter school strategically align its budget with its instructional goals and programs, and should be part of annual budget development. In addition, recognizing financial trends is essential to maintaining a charter school’s fiscal health. Reviewing and analyzing year-over-year trends in key budget areas is helpful in evaluating the charter’s budget direction and in highlighting possible areas of concern. Fiscal year 2008-2009 has been an unprecedented budget year for California’s local edu- cational agencies. In November, the governor called for a special session when it became clear that financial projections showed a growing multibillion-dollar deficit. During the emergency session, the governor released the 2009-2010 proposed budget in December, a month earlier than normal. On February 20, 2009, after months of delays, the governor signed a 17-month budget, Senate Sill (SB) 1, Chapter 1, Statutes of 2009, which runs through June 2010 and included revisions to the 2008-09 budget and approval of the 2009-10 state budget. The enacted budget is devastating to K-12 education, reducing education spending by $8.6 billion over the next 17 months. The enacted budget depended on the passage of several ballot measures that went before the voters on May 19, 2009. All failed with the exception of Proposition 1F. Therefore, the governor’s May revise included further cuts to education funding. In July, the gover- nor called for another special session to address the additional $26 billion deficit in the state’s budget. Given these enacted and proposed cuts to education funding, it is critical that local educa- tion agencies monitor their spending and cash flow and make reductions as needed to maintain reserves and weather the state’s fiscal crisis. Because of the charter schools’ outstanding PERS and STRS contributions, the county office of education requested that FCMAT review financial trends and cost variances for each of the charter schools. FCMAT reviewed Academia Calmecac’s and El Portal Leadership Academy’s unaudited actuals and annual independent audits for fiscal years 2004-05 through 2007-08 and the 2008-09 second interim reports. The review compared year-over-year trends in general fund revenues, expenditures, deficit spending, ending fund balance and ending cash balance. Because the charter schools’ primary funding is based on the total number of student attendance days, monitoring and projecting student enrollment and analyzing average daily attendance (ADA) are essential to budget planning. When enrollment and related ADA decline, the charter school must consider the effect on the budget and teacher-to- student ratios and plan accordingly. FCMAT reviewed the charters schools’ enrollment and ADA for 2003-04 through 2008-09 and compared the October California Basic Santa Clara County Office of Education – MACSA Charter Schools 16 FINANCIAL TRENDS AND ANALYSIS Educational Data System (CBEDS) enrollment counts to the second period (P-2) princi- pal apportionment as presented in the annual independent audit. The tables below compare this data. MACSA Academia Calmecac Table 1: Enrollment/ADA for Academia Calmecac 2004-05 2005-06 2006-07 2007-08 2008-09 CBEDS Enrollment* 142 191 205 207 190 p-2 ADA** 153 167 180 275 171.25 Gain/Loss - # of Students 16 49 14 2 -17 Gain/Loss - % of Students 12.70% 34.51% 7.33% 0.98% -8.21% Enrollment/ADA Ratio 107.75% 87.43% 87.80% 132.85% 90.13% *Source: CDE Dataquest Web site **Source: Annual Independent Audit; 2008-09 CDE The Academia Calmecac’s enrollment increased in the previous four years but declined by 8% in 2008-09. Because it is highly unusual for the P-2 ADA to be higher than the October CBEDS enrollment count, it appears that the audit report does not contain the correct ADA for 2004-05 and 2007-08. Excluding these two years, the school’s average historical ADA is 88.45% of total enrollment. As reported by School Services of California (SSC), the 2006-07 statewide average ratio of ADA-to-enrollment for grades 9-12 was 91.56%. Thus the ratio for Academia Calmecac is less than the statewide average. Because the majority of the school’s funding is based on ADA, it is essential to investigate all means of increasing ADA. Table 2: Academia Calmecac General Fund 2004-05 2005-06 2006-07 2007-08 2008-09* Revenues $921,326 $1,364,301 $1,406,063 $1,635,935 $1,530,077 Expenditures $947,752 $1,232,421 $1,402,723 $1,612,279 $1,510,289 Excess/(Deficiency) ($26,426) $131,880 $3,340 $23,656 $19,788 Fund Balance ($31,465) $100,415 $103,755 $127,411 $129,923 Cash** $36,874 $49,845 $136,730 $441,005 unknown Fiscal Crisis & Management Assistance Team FINANCIAL TRENDS AND ANALYSIS 17 Academia Calmecac General Fund $2,000,000 $1,750,000 $1,500,000 $1,250,000 $1,000,000 $750,000 $500,000 $250,000 $0 ($250,000) 2004-05 2005-06 2006-07 2007-08 2008-09 Revenues Expenditures Excess/(Deficiency) Fund Balance Cash** Source: Annual Independent Audit *Source: Second Interim Report; report includes beginning balance that doesn’t match prior year ending balance **Source: Unaudited Actuals Report A review of the charter school’s revenues, expenditures, deficit spending, fund balance and cash balances from 2004-05 through the 2008-09 second interim reporting period indicates that revenues have exceeded expenditures in each year following 2004-05 and the school has maintained a positive ending balance since that time. However, based on the documentation received, it is not clear whether the entire liabilities for PERS and STRS have been recorded in the charter school’s financial statements. The charter school’s unaudited actuals reports indicate that the cash balance at the end of each fiscal year has been positive. However, this could not be verified by the annual independent audit reports because cash was reported at zero for each fiscal year except 2007-08. Santa Clara County Office of Education – MACSA Charter Schools 18 FINANCIAL TRENDS AND ANALYSIS Fiscal Crisis & Management Assistance Team sisylanA ecnairaV – dnuF lareneG cacemlaC aimedacA :3 elbaT *90-8002 80-7002 70-6002 60-5002 50-4002 noitpircseD seuneveR 00.861,455 %78 00.266,736 %131 52.407,784 %78 64.389,165 %541 00.395,783 diA etatS 00.147,725 %87 00.275,776 %09 12.372,947 %411 00.404,656 %431 00.969,884 sexaT ytreporp fo ueiL nI 00.000,89 %101 00.163,79 %78 00.105,111 %601 00.677,401 %3201 00.042,01 euneveR laredeF 00.861,001 %64 72.052,612 %973 05.440,75 %881 41.704,03 %921 09.316,32 euneveR etatS rehtO 00.000,052 %6253 14.980,7 %2131 33.045 %5 41.037,01 %89 50.019,01 euneveR lacoL rehtO 00.770,035,1 %49 86.439,536,1 %611 92.360,604,1 %301 47.003,463,1 %841 59.523,129 SEUNEVER LATOT serutidnepxE 00.680,095 %17 95.587,538 %041 30.131,595 %301 58.662,675 %411 59.642,405 seiralaS detacfiitreC 00.818,322 %342 58.731,29 %63 99.109,752 %351 45.417,861 %821 45.884,131 seiralaS detacfiitreC-noN 00.439,472 %89 05.666,082 %901 19.989,652 %321 83.142,802 %221 46.987,071 stfieneB eeyolpmE 00.403,34 %911 14.523,63 %28 08.751,44 %211 43.092,93 %45 20.540,37 seilppuS dna skooB gnitarepO rehtO dna secivreS 00.741,873 %301 31.363,763 %941 98.802,742 %401 88.450,732 %134 81.700,55 serutidnepxE 00.0 %0 00.0 %0 00.0 %0 00.0 %0 00.0 yaltuO latipaC 00.0 %0 00.0 %0 33.333,1 %74 06.258,2 %22 17.471,31 ogtuO rehtO 00.982,015,1 %49 84.872,216,1 %511 59.227,204,1 %411 95.024,232,1 %031 40.257,749 SERUTIDNEpXE LATOT sesU/secruoS gnicnaniF rehtO 00.0 00.0 00.0 00.0 00.0 nI srefsnarT 00.0 00.0 00.0 00.0 00.0 tuO srefsnarT 00.0 00.0 00.0 00.0 00.0 snoitubirtnoC LAICNANIF REHTO ,LATOT 00.0 00.0 00.0 00.0 00.0 SESU/SECRUOS ni )esaerceD(/esaercnI teN 00.887,91 02.656,32 43.043,3 51.088,131 )90.624,62( ecnalaB dnuF ecnalaB dnuF 10.531,011 04.557,301 60.514,001 )90.564,13( 00.169,47 ecnalaB dnuF gninnigeB 00.0 00.0 00.0 00.0 )00.000,08( stnemetatseR/stnemtsujdA 10.329,921 06.114,721 04.557,301 60.514,001 )90.564,13( ecnalaB dnuF gnidnE latoT ecnalab gnidne raey roirp eht hctam t’nseod taht ecnalab gninnigeb a sedulcni troper ;tropeR miretnI dnoceS :ecruoS* • slautcA detiduanU :ecruoS FINANCIAL TRENDS AND ANALYSIS 19 A review of the above variance analysis indicates that the charter school reported a substantial increase in other state revenue in 2007-08. This appears to have been caused by a change in the reporting of revenue for the charter school’s categorical block grant; in 2006-07 this revenue was included in state aid rather than in other state revenue. A large increase is also reported in other local revenue in 2008-09. Because these funds had not yet been received at the second interim reporting period, this item should be reviewed to ensure that funds will be received in 2008-09. Expenses for the charter school include salaries and benefits for a school principal, nine teachers and five support staff members. Ten percent of the MACSA chief executive offi- cer’s salary and benefits and 7.4% of ADA funding are paid to MACSA for administrative services. Also, 1% of the general purpose and charter school block grant funding is paid to East Side UHSD for its oversight; this is in addition to a monthly lease payment for the use of school facilities. The increase and/or decrease in annual revenues appears to have kept pace with the increase/decrease in annual expenses over time; however, this may be due in large part to the increase in other local revenue reported in 2008-09. MACSA El Portal Leadership Academy Table 4: Enrollment/ADA for El Portal Leadership Academy 2004-05 2005-06 2006-07 2007-08 2008-09 CBEDS Enrollment* 168 140 181 164 158 p-2 ADA** 131 129 157 137.44 142.51 Gain/Loss - # of Students 35 -28 41 -17 -6 Gain/Loss - % of Students 26.32% -16.67% 29.29% -9.39% -3.66% Enrollment/ADA Ratio 77.98% 92.14% 86.74% 83.80% 90.20% *Source: CDE Dataquest Web site **Source: Annual Independent Audit; 2008-09 CDE The El Portal Leadership Academy has experienced declining enrollment in three of the last five years, and an overall enrollment decline of 6% since 2004-05. The charter school’s five-year historical ADA average is 86.17% of total enrollment. As reported by School Services of California (SSC), the 2006-07 statewide average ratio of ADA-to- enrollment for grades 9-12 was 91.56%. Thus the ratio for El Portal is significantly less than the statewide average. Because the majority of the school’s funding is based on ADA, it is essential to investigate all means of increasing ADA. Santa Clara County Office of Education – MACSA Charter Schools 20 FINANCIAL TRENDS AND ANALYSIS Table 5: El Portal Leadership Academy General Fund 2004-05 2005-06 2006-07 2007-08 2008-09* Revenues $934,331 $990,081 $1,373,952 $1,176,559 $1,848,230 Expenditures $1,020,665 $1,060,663 $1,278,041 $1,215,086 $1,699,147 Excess/(Deficiency) ($86,334) ($70,582) $95,911 ($38,527) $149,083 Fund Balance ($90,085) ($160,667) ($64,756) ($103,283) $45,800 Cash** $2,866 ($137,067) ($13,803) ($16,732) unknown El Portal Leadership Academy General Fund $2,000,000 $1,750,000 $1,500,000 $1,250,000 $1,000,000 $750,000 $500,000 $250,000 $0 ($250,000) 2004-05 2005-06 2006-07 2007-08 2008-09 Revenues Expenditures Excess/(Deficiency) Fund Balance Cash** Source: Annual Independent Audit *Source: Second Interim Report **Source: Unaudited Actuals Report A review of the charter school’s revenues, expenditures, deficit spending, fund balance and cash balances from fiscal year 2004-05 through the 2008-09 second interim reporting period indicates that revenues exceeded expenditures in only two years. Deficit spending is shown in each of the other three years. The charter school has also reported a negative ending fund balance each fiscal year except 2008-09. In addition, based on the documen- tation received, it is not clear whether the entire liabilities for PERS and STRS have been recorded in the charter school’s financial statements. The school’s unaudited actuals reports indicated that the cash balance has been negative at the end of three of the prior four fiscal years. However, this could not be verified by the annual independent audit reports because the cash balance was not reported in the audit prior to 2007-08. Fiscal Crisis & Management Assistance Team FINANCIAL TRENDS AND ANALYSIS 21 Santa Clara County Office of Education – MACSA Charter Schools sisylanA ecnairaV – dnuF lareneG ymedacA pihsredaeL latroP lE :6 elbaT *90-8002 80-7002 70-6002 60-5002 50-4002 noitpircseD seuneveR 00.340,963 %701 01.350,543 %66 00.970,025 %491 80.676,762 %68 00.928,903 diA etatS 00.380,595 %201 52.448,485 %19 28.333,146 %111 43.097,675 %501 69.936,155 sexaT ytreporp fo ueiL nI 00.000,843 %643 00.066,001 %18 00.518,421 %601 00.212,711 %942 00.289,64 euneveR laredeF 00.401,68 %06 55.741,341 %271 37.250,38 %743 69.429,32 %202 26.538,11 euneveR etatS rehtO 00.000,054 %66751 23.458,2 %16 96.176,4 %401 66.674,4 %23 32.440,41 euneveR lacoL rehtO 00.032,848,1 %751 22.955,671,1 %68 42.259,373,1 %931 40.080,099 %601 18.033,439 SEUNEVER LATOT serutidnepxE 00.831,015 %18 61.136,826 %011 05.890,175 %421 90.224,954 %19 60.145,405 seiralaS detacfiitreC 00.370,292 %834 95.057,66 %04 73.336,861 %821 91.684,131 %201 14.351,921 seiralaS detacfiitreC-noN 00.974,952 %811 31.938,912 %79 97.802,622 %421 53.876,281 %99 25.857,481 stfieneB eeyolpmE 00.284,211 %423 78.486,43 %06 43.836,75 %841 52.878,83 %29 93.622,24 seilppuS dna skooB gnitarepO rehtO dna secivreS 00.579,425 %891 01.081,562 %501 41.597,252 %301 60.236,442 %362 72.368,29 serutidnepxE 00.0 %0 00.0 %0 00.0 %0 00.0 %0 00.0 yaltuO latipaC 00.0 %0 00.0 %0 76.666,1 %74 67.565,3 %5 64.221,76 ogtuO rehtO 00.741,996,1 %041 58.580,512,1 %59 18.040,872,1 %021 07.266,060,1 %401 11.566,020,1 SERUTIDNEPXE LATOT sesU/secruoS gnicnaniF rehtO 00.0 00.0 00.0 00.0 00.0 nI srefsnarT 00.0 00.0 00.0 00.0 00.0 tuO srefsnarT 00.0 00.0 00.0 00.0 00.0 snoitubirtnoC /SECRUOS LAICNANIF REHTO ,LATOT 00.0 00.0 00.0 00.0 00.0 SESU ni )esaerceD(/esaercnI teN 00.380,941 )36.625,83( 34.119,59 )66.285,07( )03.433,68( ecnalaB dnuF ecnalaB dnuF )09.282,301( )72.657,46( )07.766,061( )40.580,09( 62.942,69 ecnalaB dnuF gninnigeB 00.0 00.0 00.0 00.0 )00.000,001( stnemetatseR/stnemtsujdA 01.008,54 )09.282,301( )72.657,46( )07.766,061( )40.580,09( ecnalaB dnuF gnidnE latoT tropeR miretnI dnoceS :ecruoS* • slautcA detiduanU :ecruoS 22 FINANCIAL TRENDS AND ANALYSIS The above variance analysis indicates that the El Portal Leadership Academy charter school reported a substantial increase in other state revenue in 2007-08. This appears to have been caused by a change in the reporting of revenue for the charter school’s categorical block grant; in 2006-07 this revenue was included in state aid rather than in other state revenue. Large increases are also reported in federal revenue and other local revenue in 2008-09. The 2008-09 second interim report indicates that 70% of these funds had been received as of January 31, 2009, and that these increased funds are unrestricted. This information should be reviewed to ensure that these additional funds are unrestricted and that the projected amounts will be received in 2008-09. The charter school’s expenses include salaries and benefits for a school principal, eight teachers and one support staff member. As with the Academia Calmecac, 10% of the MACSA chief executive officer’s salary and benefits and 7.4% of ADA funding are paid to MACSA for administrative services. In addition, 3% of the general purpose and charter school block grant funding is paid to the Gilroy Unified School District for its oversight and the use of its school facilities. The charter school’s 2008-09 second interim report indicates large increases in classified salaries, books and supplies, and services and other operating expenditures. While these increases appear to be driven by the increase in federal and local revenues, the expen- ditures should be reviewed to ensure that they are consistent with the provisions of the additional funding. Going Concern The term “going concern,” means that an agency, business or organization is fiscally healthy and able to meet its financial obligations. When its fiscal health is suspect or it is deemed to have risk of insolvency, an organization is referred to as “not a going concern” or “lack of a going concern.” Education Code section 42127.6, often referred to as the “going concern” section, was amended to include the provisions of AB 2756. A review of the two charter school’s financial trends indicates that MACSA will need to make difficult choices about which expenditures and programs to continue funding and which to scale back, reconfigure or eliminate so that it can balance the schools’ budgets, pay all of the past due PERS and STRS contributions, and continue as a going concern. The charter schools face substantial fiscal challenges that will require them to make and implement difficult decisions immediately. Financial Reporting Education Code section 47604.33 states, in part, the following: (a) Each charter school shall annually prepare and submit the following reports to its chartering authority and the county superintendent of schools: (1) On or before July 1, a preliminary budget. Fiscal Crisis & Management Assistance Team FINANCIAL TRENDS AND ANALYSIS 23 (2) On or before December 15, an interim financial report. This report shall reflect changes through October 31. (3) On or before March 15, a second interim financial report. This report shall reflect changes through January 31. (4) On or before September 15, a final unaudited report for the full prior year. Although MACSA is completing these reports, a review of the 2007-08 and 2008-09 charter school board of directors’ meeting minutes did not indicate that the reports were provided to the board for review and approval, nor did they indicate that the annual inde- pendent audits for the charter schools were presented to the board. MACSA provides all administrative services for the charter schools. MACSA staff members indicated that one bank account is kept for the entire MACSA organization, including the two charter schools, and that funds are coded into the accounting system by division and program. Funds are then distributed throughout the entire organization as needed. Page 67 of the charter petition for El Portal Academy charter school, dated April 18, 2007, states the following: MACSA shall keep separate accounts for those funds received by the state and from other sources, which relate to the Academy. Any budget deficit will be covered by MACSA and all surpluses generated by the Academy will return directly to the Academy’s account. El Portal Leadership Academy shall provide GUSD with quarterly reports, which will include MACSA El Portal Leadership Academy’s financial information. Page 31 of the charter petition for Academia Calmecac charter school, dated December 1, 2005, states the following: MACSA shall keep separate accounts for those funds received by the state and from other sources, which relate to the Academy. Any budget deficit may be covered by MACSA and all surpluses generated by the Academy will return directly to the Academy’s account. Academia Calmecac shall provide the District with monthly financial reports of the Academy. Best practices would be for MACSA to maintain a separate bank account for each charter school to ensure that funds provided for these public schools are not commingled with funds for the parent organization’s other programs. Santa Clara County Office of Education – MACSA Charter Schools 24 FINANCIAL TRENDS AND ANALYSIS Recommendations The charter schools should: 1. Review budget variances on an on-going basis, and make budget adjustments as necessary. 2. Investigate methods to improve the ratio of ADA to enrollment. 3. Review the projected increases in federal and other local revenue for fiscal year 2008-09 to ensure that they are accurate and that the funds are unrestricted. 4. Ensure that the cash balance for each charter school is included in that school’s annual independent audit. 5. Make and implement the decisions necessary to ensure that each charter school is able to continue as a going concern. 6. Present all required state budget reports and the annual independent audit to the board of directors for approval within the required time lines. 7. Consider keeping a separate bank account for each charter school. Fiscal Crisis & Management Assistance Team AppENDIX 25 Appendix A Study Agreement Santa Clara County Office of Education – MACSA Charter Schools 26 AppENDIX Fiscal Crisis & Management Assistance Team