Review of the Funding Determination Process for Nonclassroom-Based Charter Schools

AN LAO REPORT Review of the Funding Determination Process for Nonclassroom-Based Charter Schools GABRIEL PETEK | LEGISLATIVE ANALYST FEBRUARY 2024 www.lao.ca.gov 1 AN LAO REPORT 2 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Executive Summary Background Nonclassroom-Based Charter Schools Must Submit Funding Determination Requests to the California Department of Education (CDE). State law classifies charter schools as nonclassroom-based if more than 20 percent of instructional time is offered through means that are outside of an in-person classroom setting. To generate funding for its nonclassroom-based attendance, the school must submit a funding determination request to the state using data from the prior year. Nonclassroom-Based Charter Schools Must Meet Three Criteria to Receive “Full” Funding. In order to be eligible to receive full funding for its nonclassroom-based attendance, a nonclassroom-based charter school must meet three criteria: (1) spend 40 percent of annual revenue on certificated staff compensation, (2) spend 80 percent of annual revenue on instruction and related activities, and (3) maintain a student-to-teacher ratio of 25-to-1 in most cases. If a school does not meet these thresholds, they would receive a prorated amount (typically either 85 percent or 70 percent). State Law Requires Evaluation of Process Used to Determine Funding for Nonclassroom-Based Charter Schools. Chapter 48 of 2023 (SB 114, Committee on Budget and Fiscal Review) requires the Legislative Analyst’s Office and the Fiscal Crisis and Management Assistance Team to study the funding determination process for nonclassroom-based charter schools and report their findings by March 1, 2024. The statute specifies that this study shall “identify and make recommendations on potential improvements to the [process], including recommendations for enhancing oversight and reducing fraud, waste, and abuse.” Findings and Assessment “Nonclassroom-Based” Term Is a Misnomer. In 2023-24, 204 nonclassroom-based charter schools reported they offer no virtual instruction or are primarily a classroom-based program. These schools represent half of the statewide attendance at nonclassroom-based charter schools. In our conversations with nonclassroom-based charter schools, many indicated they offer different types of educational programs (primarily in-person, blended, or primarily virtual) that students can choose from. Some indicated they preferred the nonclassroom-based designation because of the flexibility they had in deciding how to serve each student. For these schools, the term nonclassroom-based does not necessarily reflect the experience of students enrolled in their programs. These schools also often have a cost structure that is similar to traditional brick-and-mortar schools. Funding Determination Process Has Gaps. The funding determination process also has several gaps that make it less effective in monitoring school spending. Most notably, nonclassroom-based charter schools usually are only required to submit one out of every four years of expenditure data, which limits the state’s ability to comprehensively assess their spending patterns. Additionally, CDE does not have the capacity to verify the accuracy of the various data submitted that is self-certified. www.lao.ca.gov 3 AN LAO REPORT Current Process Is Not an Effective Way to Address Other Concerns With Nonclassroom-Based Charter Schools. The funding determination process can be a helpful tool to monitor the overall cost structure of a nonclassroom-based charter school and to ensure funding is being spent on staffing and other services that benefit students. The process, however, is not an effective approach for ensuring that charter schools are complying with other state laws. Given the funding determination process is based on the review of audited expenditures and attendance data, it relies on other aspects of the system to be working effectively. These other aspects of oversight—such as annual audit requirements and oversight from authorizers, county superintendents, and the state—are more appropriate ways to monitor these issues. Recommendations Recommend Several Changes to Improve Funding Determination Process. We provide several specific recommendations the Legislature could enact to improve the funding determination process. Our recommendations are intended to narrow the process to a smaller subset of schools, improve the comprehensiveness and quality of data submitted to CDE, and streamline some aspects of the process. Most significantly, we recommend the Legislature: • Narrow the Definition of a Nonclassroom-Based Charter School. We recommend narrowing the definition of a nonclassroom-based charter school so that the designation excludes those schools that provide the majority of their instruction in person. This would exclude charter schools whose programs have cost structures that are similar to traditional classroom-based programs. • Improve Quality of Data Submitted to CDE. To assist CDE in efficiently reviewing and processing funding determination forms, we recommend requiring data submitted by charter schools be consistent with their annual audits. We also recommend several changes that would require information submitted to CDE be subject to annual audits. • Use Multiple Years of Data for Funding Determinations. We recommend the funding determinations take into consideration a school’s aggregate spending for all years since the previous funding determination. This would ensure school expenditures are aligned with the funding determination thresholds consistently over time. Consider Changes to Charter School Oversight. We also provide several recommendations for the Legislature to consider regarding broader oversight of charter schools. These issues generally apply to all charter schools, though in a few cases we highlight specific issues related to nonclassroom-based charter schools and virtual charter schools. Most significantly, we recommend the Legislature consider the following: • Improvements to Oversight by Charter School Authorizers. We recommend the Legislature consider several changes to improve the quality of authorizer oversight. Specifically, we recommend the Legislature set limits on district authorizers by district size and grade, increase minimum requirements for authorizers, and consider an alternative authorizing structure for virtual schools. • Enhancements to Charter School Audits. Current audit requirements often do not address the complexities and unique flexibilities of charter school finances. We recommend the Legislature align the audit process for charter schools to that of school districts and add audit requirements that would address issues specific to charter schools. 4 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT INTRODUCTION State Provides Flexibility Over Instructional staff salaries and benefits and the school’s Approaches. Under current law, charter schools student-to-teacher ratio. The state board adopted and school districts have flexibility to provide thresholds for these criteria, and also required instruction in a variety of settings. Although that funding determinations be based on the school districts are required to operate traditional percentage of total expenditures for instruction in-person instruction, they also have the option and related services. of additionally operating independent study State Law Requires Evaluation of programs which can take on many different forms Processes Used to Determine Funding for that range from fully online virtual academies to Nonclassroom-Based Charter Schools. hybrid programs that combine on-site and off-site Chapter 48 of 2023 (SB 114, Committee on Budget instruction. Charter schools have more flexibility in and Fiscal Review) requires the Legislative Analyst’s structuring their programs as they are not required Office and the Fiscal Crisis and Management to provide in-person instruction. Assistance Team to study the processes used to State Classifies Some Charter Schools determine funding for nonclassroom-based charter as Nonclassroom-Based. State law classifies schools and report their findings by March 1, 2024. charter schools as either classroom-based or The statute specifies that this study shall “identify nonclassroom-based. Specifically, a school is and make recommendations on potential nonclassroom-based if more than 20 percent of improvements to the [funding determination] instructional time is offered through means that processes, including recommendations for are outside of an in-person classroom setting. enhancing oversight and reducing fraud, In 2022-23, 313 schools (25 percent of all charter waste, and abuse.” schools) were nonclassroom-based. These schools Report Has Three Main Sections. This accounted for 38 percent of statewide charter report responds to the statutory requirement. school attendance that year. The first section provides a brief overview of State Law Requires Additional Scrutiny Over charter schools and outlines the main features of Funding for Nonclassroom-Based Charter the funding determination process. The second Schools. Chapter 892 of 2001 (SB 740, O’Connell) section describes our findings, assessment, and required the State Board of Education (SBE) to recommendations specifically related to the funding establish a system for determining the appropriate determination process. The final section describes funding level for nonclassroom-based charter our assessment and recommendations related to schools that, at a minimum, considers the broader issues of oversight for charter schools. percentage of total expenditures for certificated BACKGROUND In this section, we provide a brief overview Charter Schools of charter schools and how they are funded, as California Established Charter Schools well as how charter schools are classified as in 1992. Charter schools are publicly funded nonclassroom-based. We then discuss the funding elementary and secondary schools operating under determination process used to determine the level locally developed agreements (or “charters”) that of funding for these schools. describe their educational programs. The state created charter schools to offer parents or guardians an alternative to traditional public schools www.lao.ca.gov 5 AN LAO REPORT and encourage local leaders to explore innovative to the terms of its charter, performs poorly on state educational programs. All charter schools must measures of academic performance, or violates provide nonsectarian instruction, charge no tuition, the law. (An authorizer can also revoke a charter in and admit all interested California students up to certain circumstances.) school capacity. If the charter school receives more Under Certain Conditions, an Authorizer Can student applications than they have capacity to Reject a Petition. State law specifies that school enroll, the school must implement a lottery system. districts can deny the approval of a new charter Charter Schools Are Held Accountable to petition for one of eight specific circumstances. Their Local Charter. To both be established Most notably, petitions may be denied if the and renewed, a charter school in California proposed educational program is unsound, the must have an approved charter that sets forth a charter school would undermine or be duplicative comprehensive vision for the school, including its of existing programs currently offered by the educational program, student discipline policy, authorizer, or the establishment of the charter employee policies, governance structure, and fiscal would fiscally impact the authorizer to the point they plans. Charter schools are exempt from many state would be unable to meet their financial obligations. laws and regulations that apply to school districts. If a school district denies a charter petition, the For example, they are not required to collectively interested groups can appeal the denial with the bargain with employees or select members of their COE in which the school district operates. In this governing board through local elections. case, a COE will review the charter petition and Interested Groups Initiate Petition Process. the statement from the school district on why they Charter school petitions must set forth a denied the petition. COEs in this case conduct comprehensive vision for the school, including its their own review of the charter petition and may educational program, student discipline policy, authorize the charter if they disagree with the employee policies, governance structure, and fiscal district’s assessment. Appeals may also be filed plans. Petitions must be signed by at least half of with SBE, though their level of review depends on the number of parents or guardians of students that whether or not the charter petition was denied by the charter school estimates will enroll in the school both the school district and COE, or just the school for its first year of operation or by half of the number district. If SBE approves a petition on appeal, they of teachers that the charter school estimates will must designate whether the chartering authority will be employed at the school during its first year be granted to the school district or COE in which of operation. the charter will operate. As described in the nearby box, the state recently enacted various changes Charter Schools Must Be Authorized by a to rules related to authorization and oversight of School District or County Office of Education charter schools. (COE). Every charter school has an authorizer that is responsible for approving the school’s Authorizers Are Responsible for Ongoing charter. In most cases, an interested group looking Oversight. At a minimum, each authorizer must to establish a charter submits its petition to the fulfill five basic responsibilities: (1) identify a local governing board of the school district where contact person at the charter school; (2) visit the the charter school will be located. In 2023-24, charter school at least annually; (3) ensure the districts authorize 83 percent of active charter charter school completes all required reports, schools. Under certain conditions, a group may including the Local Control and Accountability submit a petition to the governing board of the Plan; (4) monitor the charter school’s finances; COE, such as a charter school that is seeking and (5) notify SBE if a charter is renewed, revoked, to serve students from across the county. Initial or the school closes. Authorizers may charge authorization may be for a period of up to five years. a fee of up to 1 percent of a charter school’s The authorizer monitors the charter school and Local Control Funding Formula (LCFF) revenue to may deny a renewal if the school does not adhere cover the actual cost of their oversight activities. 6 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Recent Legislation Impacting Charter School Authorization and Oversight Since 2019, the state has enacted several changes that have impacted the authorization and oversight of charter schools. Below, we describe three bills that made significant changes specifically related to charter schools. Chapter 486 of 2019 (AB 1505, O’Donnell). Assembly Bill 1505 included several changes to laws regarding charter schools. Most notably, the bill made changes in four areas: • Additional Circumstances for Denying a Petition. This legislation added two circumstances under which an authorizer can deny a charter petition for the establishment of a new charter school (providing authorizers with a total of eight circumstances for denying a petition). Specifically, AB 1505 now allows an authorizer to deny a petition if (1) the charter school would undermine or be duplicative of existing programs currently offered by the authorizer, or (2) the establishment of the charter would fiscally impact the authorizer to the point they would be unable to meet their financial obligations. • Delegation of Oversight for Charter Schools Authorized by the State Board of Education (SBE). Assembly Bill 1505 removed SBE’s authority to approve statewide benefit charter schools and required SBE to delegate oversight of charter schools to school districts and county offices of education (COEs). Charter schools previously authorized by SBE are now required to renew their charter with the school district or COE in which they operate. Additionally, when SBE approves a charter on appeal, they must designate, in consultation with the charter school, whether the school district or COE in which the charter operates will provide oversight. • Change to SBE’s Approach to Some Appeals. Prior to AB 1505, SBE reviewed appeals for new charter schools by conducting its own independent review of the charter petition, similar to that of school districts and COEs. Under AB 1505, if the charter petition was denied by a school district and a COE, then SBE only evaluates whether the school district or COE may have abused its discretion—SBE does not conduct an independent review of the charter petition. SBE must conduct their own independent review of appeals for new charter schools in single-district counties. SBE also must conduct their own independent review of appeals for renewal related to schools that were previously authorized by SBE. • Renewals of Existing Charter Schools Tied to Performance. Assembly Bill 1505 required charter authorizers to consider the charter school’s performance on the indicators included in the California School Dashboard when evaluating a petition to renew a charter school. The legislation establishes three tiers of performance based on the School Dashboard indicators. These tiers must be used to determine whether the charter will be renewed and to determine the length of a charter renewal. For schools not in the highest performance tier, the authorizer must consider certain verified data related to year-to-year growth in student academic achievement and postsecondary outcomes (in addition to indicators on the School Dashboard). Chapter 487 of 2019 (AB 1507, O’Donnell). Prior to AB 1507, charter schools could operate facilities outside of their authorizing school district in certain circumstances, as well as operate a resource center in an adjacent county. Assembly Bill 1507 prohibits new charter schools from operating facilities outside of their authorizing school district. As part of their renewal process, charter schools that were already operating outside of their authorizing school district were required to obtain approval from the district where their site or resource center is located. Alternatively, charter schools were also able to renew their charter with the authorizer in which their additional site is operated. Chapter 3 of 2019 (SB 126, Leyva). Senate Bill 126 required charter schools and charter management organizations to comply with the same public record disclosure requirements, open meeting requirements, and conflict of interest laws that apply to school districts and COEs, including the California Public Records Act, The Ralph M. Brown Act, and the Political Reform Act of 1974. www.lao.ca.gov 7 AN LAO REPORT If a charter school utilizes substantially rent-free The exact relationship of a charter network varies. facilities offered by their authorizer, then their For example, a network could have one authorizer can be reimbursed for the actual cost of organization that is involved in operating all providing oversight, up to 3 percent of the charter programs and another network might have schools school’s LCFF revenue. that share their educational model but each school Charter Schools Periodically Up for Renewal. operates independently. In some virtual programs, At the end of a charter’s initial authorization period, the network of schools operates as one school in the authorizer must decide whether to renew the practice where costs are shared across schools charter. Charter schools typically must be renewed and one teacher may have students assigned in every five years. The criteria for the renewal process their caseload from different schools that are part generally are similar to that for approving a new of the same network. Since charter schools can charter, with the exception that charter schools enroll students from within their authorizer’s county seeking renewal must demonstrate a minimum and adjacent counties, a charter network can level of academic performance. When a charter serve large portions of the state by having schools is up for renewal, the authorizer will review the authorized in several key counties across the state. schoolwide and student subgroup performance Charter School Audit Requirements Differ data of the charter school for the two years From School Districts. Every school district, preceding the renewal decision. Under certain charter school, and COE in California must conditions, academic performance can dictate undergo an annual audit to verify the accuracy whether the authorizer must deny or approve the of its financial records and determine if it has charter renewal—unless the authorizer finds that spent funds in accordance with various state the charter school cannot implement its program and federal laws. They must hire an auditor from or is breaking the law. For schools with the lowest a list of firms approved by the State Controller’s academic performance on state indicators, statute Office. The auditor then conducts an independent specifies that authorizers must deny the renewal review following procedures in the audit manual of the charter school. Conversely, for schools with developed by the state known as the Guide for the highest performance levels on state indicators, Annual Audits of K-12 Local Education Agencies statute specifies that the authorizer must renew and State Compliance Reporting (known as the the charter school for a period of between five audit guide). The audit guide includes procedures and seven years. For all other charter schools, for school districts, charter schools, and COEs, they must set growth targets regarding academic such as verification of various compliance tests, performance on state indicators and the authorizer including attendance records. Charter school has the authority to decide to renew the charter for financial reporting requirements differ in some ways a term of up to five years. from that of school districts. For example, charter Charter Schools Have Limits on Where They schools that are organized as a nonprofit public Can Locate and Which Students They Can benefit corporation follow the Financial Accounting Enroll. Charter schools must be located in the Standards Board statements whereas school geographic boundary in which their authorizer districts follow the Governmental Accounting operates. This restriction applies to any school Standards Board statements. Charter school facilities, resource centers, meeting spaces, and auditing requirements are informed by both the satellite facilities. Charter schools are able to enroll audit guide and details specified in their charter students from within the county their authorizer school petition, whereas audits of school districts operates, as well as from all adjacent counties. are informed by the audit guide and statute. Depending on the content of their charter, the Some Charter Schools are Part of Networks. specific elements of a charter school’s audit may Some schools are managed by entities as part of differ from the requirements of school districts. charter school networks. Charter schools that are part of networks are legally separate schools, each with their own authorizer and governing board. 8 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Charter School Funding authorizing district, typically paying either nominal or below-market rent. Most remaining charter As With School Districts, Charter Schools schools occupy privately leased facilities, often Are Mostly Supported by LCFF. School paying market-rate rent. A relatively small share of districts and charter schools receive most of charter schools have constructed or purchased their LCFF apportionment through a per-student their own facilities. formula that provides a base amount of funding by different grade spans. The per-student rates for Some Charter Schools Have Access to school districts and charter schools are applied to Facility Funding. Unlike school districts, charter their average daily attendance (ADA)—the average schools are unable to authorize local bonds for number of students that attend throughout the school facilities. However, the state provides school year. Almost one-fifth of LCFF funding for some funding to help certain charter schools with school districts and charter schools is provided their facility costs. The Charter School Facility through two separate calculations based on Grant Program is available to charter schools that the proportion of their student population that enroll or are located in the attendance area of is an English learner, from a low-income family, an elementary school where at least 70 percent or a foster youth. Charter schools receive about of students are low income. Eligible schools are $8 billion (11 percent) of total school district and reimbursed for up to 75 percent of lease and charter school LCFF funding. other qualifying facility expenditures incurred in the prior year, but are capped at a certain amount Charter Schools Can Be “Directly Funded” ($1,420 per student in 2022-23). Additionally, the or “Locally Funded.” When a charter school is federal Charter School Facilities Program provides authorized, they can elect to receive their state charter schools with funding for constructing, funding in one of two ways: (1) from the county acquiring, or renovating new facilities through treasurer in which their authorizer operates the district in which they operate. The California (directly funded) or (2) from its authorizer School Finance Authority administers both of these (locally funded). The selection may also affect programs. (The Charter School Facilities Program is how a charter school applies for state and jointly administered with the Office of Public School federal grants. In 2022-23, 255 charter schools Construction.) In some cases, school districts (21 percent) were locally funded. Some locally have included charter school facilities in their funded charter schools are operationally local bond program. integrated into their authorizing school district or COE. These schools are sometimes referred to Charter Schools Have Somewhat Different as “dependent” charter schools. A dependent Rules for Independent Study. School districts, charter school also commonly has its expenditure charter schools, and COEs typically receive funding data integrated within the authorizer’s data, not based on student attendance in an in-person reported separately. Conversely, “independent” instructional program, where they receive direct charter schools report their expenditure data supervision from a certificated teacher. In addition, separately from their authorizers and are likely they can receive funding to operate programs with to be directly funded. a more flexible structure through independent study. Although most independent study rules Charter Schools Have Three Options for apply to all entities, charter schools have somewhat Obtaining Facilities. When a charter school is different rules. Most notably, they do not have a projected to have more than 80 students attending minimum amount of instruction or work that must in person in a school year, the authorizer is be completed in one day to generate funding. required to offer reasonably equivalent facilities (See the box on the next page for more detail sufficient to accommodate all of the in-district regarding current independent study rules.) students attending the school. Many charter schools occupy facilities provided by their www.lao.ca.gov 9 AN LAO REPORT Independent Study Independent study programs provide students an alternative to traditional classroom-based instruction. Rather than generating funding solely based on attendance, independent study programs also generate funding based on the work completed by students. Independent study programs range from fully online virtual academies to hybrid programs that combine on-site and off-site instruction. State law allows local education agencies (LEAs)—school districts, charter schools, and county offices of education (COEs)—to decide whether to provide these programs. Basic Requirements of Independent Study Programs. Below are some of the basic requirements for all independent study programs. • Certificated Teachers. Students must work under the general supervision of certificated teachers. State law also specifies that only certificated teachers may evaluate the seat-time equivalent of an independent study student’s work for the purposes of generating average daily attendance (ADA). • Individual Written Agreement. LEAs must maintain a written agreement with each student (and parent or guardian) that specifies the dates of participation, methods of study and evaluation, and other resources to be made available to the student. • Synchronous Instruction. LEAs must offer synchronous instruction—instruction that involves real-time interaction between students and teachers—to independent study students throughout the school year, with frequency varying by grade level. These requirements range from daily instruction for transitional kindergarten through grade three to weekly instruction for high school students. • Student Reengagement Strategies. LEAs must establish procedures for reengaging with independent study students who do not meet certain requirements, such as students who have completed less than 60 percent of their assigned work in one week, participated in less than 60 percent of scheduled synchronous instruction in one month, or violated their independent study agreement. These procedures are to include several elements, such as notification to parents or guardians regarding lack of participation and a standard for when a student’s enrollment in independent study should be reevaluated. • Student-to-Teacher Ratios. Current law limits the average number of students each independent study teacher may supervise, unless an alternative ratio is collectively bargained. These limits vary by LEA. For school districts, the student-to-teacher ratio for independent study programs may not exceed the overall student-to-teacher ratio in the district. For charter schools, the ratio cannot exceed 25 to 1. The limit for COEs is based on the overall student-to-teacher ratio in the high school or unified school district with the largest ADA in the county. • Educational Standards. State law prohibits independent study from using an “alternative curriculum.” This restriction implies that independent study students must be held to the same standards as other district students. Current law, however, does not clarify what an alternative curriculum means or provide a means of enforcing the prohibition. Charter Schools and School Districts Have Different Flexibilities. Unlike school districts, charter schools do not have a daily minimum instructional minute requirement for school days. (The daily minimum instructional minute requirement for school districts varies by grade span, from 180 minutes for kindergarten to 240 minutes for grades 9-12.) Therefore, to claim attendance for funding purposes, charter schools only need to show that a student completed some work during each school day. (However, charter schools must follow the same minimum number of instructional minutes for the school year as school districts.) School districts must show that the work completed by a student satisfies the minimum amount of instruction for the day. However, school districts may have agreements in place where students submit work weekly and the work submitted does not need to be attributed to specific days to generate funding. 10 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Nonclassroom-Based Charter Schools attendance weekly. A charter school is classified as “nonclassroom-based” if more than 20 percent of Senate Bill 740 Established New its total annual ADA is nonclassroom-based. Requirements Governing Funding for Nonclassroom-Based Instruction in Charter Nonclassroom-Based Charter Schools Schools. In the early 2000s, after a few high-profile Not Eligible for Some State Programs. cases, education leaders were concerned that Nonclassroom-based charter schools are ineligible some charter schools offering independent to receive funding from certain grant programs, study were “profiteering.” Specifically, some including the Expanded Learning Opportunities independent study programs spent less than the Program, Charter School Facility Grant Program, amount of funding generated by students and and the California Community Schools Partnership allowed the school operators to keep funding for Program. This is in part due to the assumption personal gain. To address these issues for charter that nonclassroom-based charter schools do schools, the Legislature enacted Chapter 892. not have facilities to provide classroom-based Most notably, SB 740 established a definition for instruction and cannot comply with the what constitutes a nonclassroom-based charter requirements of some programs that provide school and required nonclassroom-based charter services to students in person. schools to request a funding determination from the Nonclassroom-Based Charter School California Department of Education (CDE) to receive Programs Vary. Nonclassroom-based charter their full apportionment. We discuss these in more school programs can range from hybrid programs detail below. with a combination of on-site and off-site Senate Bill 740 Defined Classroom-Based instruction to fully online virtual academies. and Nonclassroom-Based Charter Schools. (The level of in-person and remote instruction For purposes of calculating charter school that hybrid programs offer vary.) Additionally, attendance for classroom-based instruction a nonclassroom-based charter school may apportionments, SB 740 requires that (1) instruction offer multiple types of programs to students. is provided by a certificated teacher, (2) at least In 2022-23, the state had 313 nonclassroom-based 80 percent of instruction is offered at the school charter schools (25 percent of all charter schools) site, (3) the charter school’s schoolsite is a that served a total of roughly 222,000. These facility that is used principally for instruction, and schools accounted for 38 percent of statewide (4) the charter requires its students to attend the charter school attendance and about 4 percent of schoolsite for at least 80 percent of the minimum attendance statewide that year. (Figure 1 on the instructional time required by law. Attendance next page.) From 2018-19 to 2022-23, statewide that does not meet all four of the above criteria nonclassroom-based charter school attendance has is considered nonclassroom-based. Charter increased 5 percent (about 9,500 students), whereas schools must designate each unit of attendance as classroom-based charter school attendance has either classroom-based or nonclassroom-based. decreased 3 percent (about 12,800 students). For example, a student who receives in-person State Commissioned a Study of Funding instruction four days and one day of independent Determination Process Shortly After study would be credited with four days of Establishment. In 2005, RAND evaluated the classroom-based attendance and one day of state’s funding determination process and found nonclassroom-based attendance. However, that the process had reduced misuse of funds by for students who participate in independent nonclassroom-based charter schools and increased study more than 20 percent of their instructional their spending on instruction. RAND found that time, all of their attendance is considered nonclassroom-based charter schools substantially nonclassroom-based. For example, a student who increased both instructional spending and spending receives in-person instruction three days a week on certificated-staff salaries as a proportion of and independent study for two days a week would total revenues in an effort to meet thresholds be credited with five days of nonclassroom-based for full funding. www.lao.ca.gov 11 AN LAO REPORT adopt regulations that govern funding for Figure 1 nonclassroom-based charter schools by Share of Statewide February 1, 2002. SBE was required to appoint an advisory committee consisting of representatives Attendance by School Type of school district superintendents, charter schools, 2022-23 teachers, parents or guardians, members of the governing boards of school districts, county Nonclassroom-Based superintendents of schools, and the State Charter 3.8% Classroom-Based Superintendent of Public Instruction to make Charter 7.2% recommendations to SBE on developing regulations. The legislation specified that the regulations shall include considerations for the amount of the charter school’s total budget expended on certificated employee salaries and benefits and the school’s School District and student-to-teacher ratio. The legislation also COE Schools 89% authorized SBE to include other considerations for making funding determinations, as well as other conditions or limitations on what constitutes nonclassroom-based instruction. Nonclassroom-Based Charter Schools Must A Few High-Profile Cases of Recent Fraudulent Submit Funding Determination Requests to CDE. Activity in Nonclassroom-Based Charter Schools. Nonclassroom-based charter schools are ineligible Over the past decade, there have been a few cases to receive any funding for their nonclassroom-based where fraudulent activity or misuse of public funds ADA without receiving an approved funding were found in nonclassroom-based charter schools. determination from SBE. (Nonclassroom-based One notable recent case is related to the A3 charter charter schools automatically generate full funding for school network, where the schools were found to any classroom-based ADA.) To generate funding for have fabricated attendance data that resulted in its nonclassroom-based ADA, the school must submit generating roughly $400 million in state funding a funding determination request to CDE through through attendance fraud. Several former employees a form on the department’s website using data of the schools were subsequently convicted of crimes from the prior year. Typically, these forms must be related to these actions. submitted to the department by February 1 in the year when a school’s funding determination is set to State Enacted a Moratorium on New expire. CDE reviews the information submitted on Nonclassroom-Based Charter Schools in 2019, the funding determination form, and can ask charter Set to Expire in 2026. Due, in part, to the concerns schools for clarifying or additional information as well arising from high-profile cases, Chapter 486 of 2019 as use information from the charter school’s audit (AB 1505, O’Donnell) imposed a two-year moratorium to verify information on the form. After reviewing on the establishment of new nonclassroom-based the funding determination form, CDE presents charter schools (from 2019 to 2021). The moratorium its funding determination recommendation to the has since been extended twice—Chapter 44 of Advisory Commission on Charter Schools (ACCS) 2021 (AB 130, Committee on Budget) extended the who then make recommendations to SBE on the moratorium to January 1, 2025, and SB 114 further level of funding based on three thresholds discussed extended the moratorium to expire in January 1, 2026. below. ACCS typically adopts its recommendations Funding Determination Process in April. In turn, SBE typically votes on the funding determinations in May. Statute Directed SBE to Develop Regulations Governing Nonclassroom-Based Charter School Funding. Senate Bill 740 directed SBE to 12 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT Nonclassroom-Based Charter Schools • Certain Student-to-Teacher Ratios. Must Meet Three Criteria to Receive “Full” Charter schools are required to maintain a Funding. In order to be eligible to receive full student-to-teacher ratio of 25-to-1 (or equivalent funding for nonclassroom-based ADA, charter to the largest unified school district in the county schools must meet three criteria: in which the charter school operates). • Spend 40 Percent of Annual Revenue on If a school receives full funding, all of its Certificated Staff Compensation. Charter nonclassroom-based ADA counts towards key schools must show that their total prior-year funding calculations, including the school’s expenditures on certificated staff represent at LCFF allotment and lottery-based apportionment. least 40 percent of total prior-year revenues. SBE may reduce funding determinations to either Certificated staff costs include salaries and 85 percent or 70 percent of full funding—meaning benefits for employees who possess a valid 85 percent or 70 percent of a school’s ADA is counted teaching certificate, permit, or other equivalent in the applicable funding calculations. Figure 2 shows and who work in the charter school in a position the criteria for funding determinations at lower levels required to provide direct instruction or direct than full funding. instructional support to students. A charter Schools Periodically Go Through Funding school’s total revenue includes federal, state, Determination Process. SBE generally has the and local funding. authority to grant funding determinations for up • Spend 80 Percent of Annual Revenue on to five years. The regulations also require funding Instruction and Related Services. Charter determinations of specific lengths in certain cases. schools must show that their prior-year New charter schools, for example, must receive expenditures on instruction and related services their first funding determination for two years. represents at least 80 percent of prior-year total Regulations also require the state to provide revenue. Instruction and related services may schools a five year funding determination if they include, but are not limited to, (1) administrative, meet certain performance standards. However, technical, and logistical support to facilitate the specific measure of performance referenced and enhance instruction; (2) student support in the regulations—the Academic Performance services; (3) school-sponsored extra-curricular Index—is no longer calculated by the state. Thus, no or co-curricular activities; and (4) instructional schools are automatically eligible for five year materials, supplies, and equipment. Additionally, funding determinations. charter schools can elect to have a portion of Schools May Count Facility Costs Towards their spending on facilities be counted towards Spending on Instruction. Charter schools may this requirement. A charter school’s total revenue elect to have some of their facilities costs included includes federal, state, and local funding. towards their spending on instruction and related services. In order to be eligible, charter schools Figure 2 Funding Determination Thresholds Funding Level Requirement 100 percent 85 percent 70 percent Denial Share of revenue spent on At least 40 percent. At least 40 percent. At least 35 percent. Less than 35 percent. certificated staff Share of revenue spent on At least 80 percent. Between 70 percent Between 60 percent Less than 60 percent. instruction and related services and 80 percent. and 70 percent. Student-to-teacher ratio 25 to 1, or highest ratio Not applicable. Not applicable. Not applicable. in the county. www.lao.ca.gov 13 AN LAO REPORT must provide information on: (1) total facility a school’s funding level, nonclassroom-based costs, (2) square footage, (3) classroom-based charter schools also must include additional ADA, and (4) the total number of hours that information in their forms. This information is not nonclassroom-based students spent at school sites. intended to affect a school’s funding determination The formula allows up to $1,000 per classroom-based but serve as a way to screen for any potential issues ADA and a prorated amount for nonclassroom-based that CDE may want to share with charter school ADA based on the amount of time these students authorizers. The additional information includes: physically spend within the charter’s facilities. • Governing Board Composition. Charter State Board Considers Mitigating schools are required to list the members Circumstances When Making Funding of their current governing board. For each Determinations. A nonclassroom-based charter member, the charter must provide name, type school may present additional information of member (for example, parent/guardian to CDE and SBE to request an increase in or teacher), how the member was selected, its funding level if other special or mitigating and their term. Additionally, charter schools circumstances resulted in a smaller proportion of must identify whether any member of the its total revenue being spent on certificated staff board has any affiliations with entities that the compensation or instruction and related services. charter school contracts with above certain For example, SBE considers circumstances such spending thresholds. Charter schools must as a one-time investment in a facility, extraneous also indicate whether or not the governing special education costs, or school bus purchases. board has adopted and implemented conflict If a school can show that these types of expenses of interest policies and procedures. resulted in the school not meeting the expenditure, • Contracts Above Certain Spending SBE typically gives the school a higher funding Thresholds. Charter schools are required determination than would otherwise be assigned, to list any external contracts from the but for a shorter period of time. previous year that were $50,000 or more, Specific Rules for New Charter Schools. or represented at least 10 percent of total New nonclassroom-based charter schools expenditures. For any contract that meets this must submit their funding determination request criterion, charter schools must list the name by December 1 in their first year of operation of the entity, amount provided, details of the using “reasonable” estimates of their expenses. contract, and whether the contract payments The approved funding determination for new are based on specific services rendered or charter schools is effective for two fiscal years. based on an amount per ADA or another Ninety days after the end of the first fiscal year percentage. CDE may request copies of the of operation, the charter school must submit contract agreements. unaudited actual expense reports for the first • Certain Excess Reserves. Charter schools year and a funding determination form based on must classify their reserves in several the school’s second-year budget. This may result categories, including reserves for economic in a revision to the funding determination if the uncertainties, facilities acquisition or capital thresholds were not met in either the first year projects, and reserves required by the charter expenses or in the adopted second-year budget. authorizer. Charter schools are required to The SBE may terminate a determination of funding report the ending fund balance in all these if updated or additional information requested by categories. Charter schools that have ending CDE and/or the ACCS is not made available by a fund balances in either their reserves for charter school within 30 calendar days or if credible economic uncertainties or facilities acquisition information from any source supports termination. exceeding the greater of $50,000 or 5 percent Schools Must Submit Additional Information of total expenditures must justify why their in Funding Determination Forms. In addition to reserves are in excess of these thresholds. the spending and staffing data needed to determine 14 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT ANALYSIS OF FUNDING DETERMINATION PROCESS In this section, we provide our overall Process Is Not an Effective Way to Address findings and assessment regarding the funding Other Concerns With Nonclassroom-Based determination process, specifically as a Charter Schools. The funding determination way to reduce profiteering. We then provide process can be a helpful tool to monitor the overall recommendations to improve the process. cost structure of a nonclassroom-based charter school and to ensure funding is being spent on FINDINGS AND ASSESSMENT staffing and other services that benefit students. The process, however, is not an effective approach Our findings and assessment were developed for ensuring that charter schools are complying based on interviews we conducted with with other state laws and not committing fraud. nonclassroom-based charter school operators and The process may be manipulated and does not other charter school experts, review of existing contain the checks and balances that would data, and a review of various publications related otherwise prevent profiteering. Other aspects to these issues. of oversight, such as annual audit requirements Overall Findings and Assessment and authorizer, county superintendent, and state oversight, are more appropriate ways to monitor Process Likely Affects School Spending. The spending thresholds and staffing ratios these issues. Given the funding determination schools must meet to receive full funding likely process is focused on reviewing periodic audited have some effects on nonclassroom-based charter expenditures and ADA reporting, the process school spending. Likewise, the periodic nature of relies on other aspects of the system to be submitting funding determinations likely affects working effectively. school spending in specific years. Some charter Definition of Nonclassroom-Based schools indicated they took some specific actions Charter Schools to ensure they were meeting these thresholds in years that would apply to the funding determination. California’s Definition of a This is also consistent with findings from the 2005 Nonclassroom-Based School Is Broader RAND report the state commissioned on this issue. Than Other States. In our review of policies Based on our review, we are unable to determine in other states, we found that approximately whether this change in behavior necessarily results 40 out of 50 states allow nonclassroom-based in better student outcomes or limits profiteering. charter schools (although a few of these states currently have none in operation). The remaining Process Is Not Well Targeted, but Also Has ten states have either not adopted a charter school Gaps. Given the state’s broad definition of a law or have adopted a law specifically prohibiting nonclassroom-based charter school, we find that nonclassroom-based charter schools. Most states the funding determination process is applied to with laws pertaining to nonclassroom-based many schools that operate similar to a traditional charter schools focus specifically on schools where brick-and-mortar school and have a cost structure most or all of the instructional program is delivered that make profiteering unlikely. The process also virtually. The California definition—encompassing does not account for specific issues many schools all charter schools in which more than 20 percent of face, such as facility costs and use of one-time instruction takes place off-site—is broader than the funding. However, the process also has notable definition in all other states. gaps that make it less effective in monitoring school spending. Most notably, nonclassroom-based “Nonclassroom-Based” Term Is a Misnomer. charter schools are only required to submit one The state does not collect information on the year of expenditure data, which limits the state’s types of instructional models operated by ability to comprehensively assess their spending nonclassroom-based charter schools. It does, patterns. We discuss these concerns in more detail however, collect self-reported data on the degree later in this section. to which the schools offer virtual instruction. www.lao.ca.gov 15 AN LAO REPORT (This data is collected and reported to the The department indicated that data in the vast federal government.) As Figure 3 shows, majority of funding determination requests match 204 nonclassroom-based charter schools up with the expenditure data from their audits. reported they offer no virtual instruction or are As long as these schools meet the spending primarily a classroom-based program. These thresholds and the student-to-teacher ratio schools represent half of the attendance at threshold, they will generally be recommended to nonclassroom-based charter schools. In our receive full funding without having to submit any conversations with nonclassroom-based charter additional information. When discrepancies exist schools, many indicated that their programs were between the information listed on the funding primarily classroom-based, with instruction and determination form and the audit report, CDE student support provided in a brick-and-mortar requests additional information or documentation. school. In other cases, schools offered remote CDE indicated that in many cases, charter schools instruction but had physical locations that students made an error on the funding determination form could use to collaborate with other students or but did actually meet the requirements. CDE also meet with teachers and other support. The cost indicated that in many of these cases, the charter structure of these programs can be similar to schools just needed to update their submission. that of a traditional school. Nonclassroom-based However, in some cases, CDE requests backup charter schools often indicated they offer different documentation to substantiate information listed types of educational programs (primarily in person, on the form. blended, or primarily virtual) that students can In Other Cases, CDE Relies on Self-Certified choose from. Some indicated they preferred Data. Although CDE can use a charter school’s the nonclassroom-based designation because audit to verify certain data (such as some of the flexibility they had in deciding how to expenditure data and ADA), other information serve each student. For these schools, the term reported in the funding determination form cannot “nonclassroom-based” does not necessarily be as easily verified. Based on our review of reflect the experience of students enrolled the forms and conversations we had with CDE, in their programs. we identified three key components that are self-certified and cannot be verified by annual Application Review audits: (1) spending on certificated salaries and CDE Relies on Audit Reports to Verify benefits for positions required to provide direct Some Submitted Expenditure Data. To verify instruction or instructional support to students, the validity of expenditure information included (2) the number of student hours attended by in charter school funding determination forms, nonclassroom-based students at a school site CDE routinely compares the submitted information (used to count facilities costs as instruction related), with information from their prior-year audits. and (3) the student-to-teacher ratio. CDE indicated they do not Figure 3 have the capacity to independently Small Share of Nonclassroom-Based Charter Schools verify the information they Are Fully Virtual receive from charter schools is accurate. Audits and other reports 2023-24 often include total spending on Number of Share of Total Share of certificated staff, as well as the Schools Schools ADA ADA number of full-time equivalent Not virtual 152 49% 91,967 41% certificated staff employed Primarily classroom 52 17 26,078 12 by the charter school. These Primarily virtual 67 22 68,097 31 reports, however do not include Exclusively virtual 40 13 36,088 16 data specifically for certificated Totals 311 100% 222,229 100% staff who work directly with ADA = average daily attendance. students, as is required in the funding determination form. 16 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT CDE indicated that charter schools are not did not meet the spending thresholds but required to submit specific information about each were granted a higher level of funding based employee that would allow the department to on mitigating circumstances described in their verify whether employees are correctly counted. form. CDE indicated they will recommend In cases where CDE has concerns over accuracy 100 percent funding for those that have mitigating of information provided by a charter school, they circumstances as long as the charter school can indicated that they reach out to the charter school’s provide a reasonable justification and previously authorizer. However, charter school authorizers has met the spending thresholds. (CDE can ask are not required to be involved in the funding for additional backup information to substantiate determination process. the charter’s justification.) Despite CDE’s typical Verifying Information From Some Locally approach, several charter schools indicated that Funded Charter Schools Can Be Difficult. CDE they make spending decisions specifically to stated they had difficulty with verifying information comply with the spending requirements and avoid from some locally funded charter schools. having to use mitigating circumstances at all. (These schools are also more likely to be dependent CDE Has Guidelines for Setting Length of charter schools that have their operations Determinations, but They are Not Codified in integrated with that of their authorizer.) This is Statute or Regulations. One common concern because expenditure data from these locally funded we heard from nonclassroom-based charter charter schools was included in the audit of their schools was the lack of clarity regarding the length authorizer, and often spending is not separated out of their funding determination. This was often due to from the authorizer’s spending on its other schools. concerns that they did not receive a determination Both the Standardized Account Code Structure for the maximum of five years. In our conversations and the audit guide provide a mechanism for with CDE, they indicated they have used consistent districts and COEs to separate out their spending guidelines in recent years when deciding on the on charter schools, but if the district has multiple length of a funding determination: two years for new locally funded charter schools they operate, then charter schools (as required by law), two years for the charter school spending numbers often do those with mitigating circumstances, three years not disaggregate by charter school site. CDE for schools on their second funding determination, indicated that they will commonly ask locally funded and four years for all others. They also indicated charter schools to provide additional information to that, given the Academic Performance Index is substantiate the information listed in the form. no longer valid, they do not issue any five year Vast Majority of Schools Receive Full determinations. (Based on our review of statute, Funding. As Figure 4 shows, the vast majority we believe CDE has the authority to provide of active nonclassroom-based charter schools five year determinations if they chose to do so.) receive 100 percent funding. Of the schools that CDE indicates they regularly communicate these received full funding, 12 percent (38 schools) guidelines in presentations to nonclassroom-based charter schools. However, these general guidelines are not reflected Figure 4 in statute or regulations, which can Active Funding Determinations create confusion for schools. 2023-24 Process Can Be Burdensome Initially. In our conversations with 100 85 70 Denial charter schools, we found that Percent Percent Percent (0 Percent Funding Funding Funding Funding) schools going through the process for the first time, particularly Without mitigating circumstances 270 2 3 — With mitigating circumstances 38 — — — smaller charter schools, found Totals 308 2 3 — the process burdensome. Source: California Department of Education. www.lao.ca.gov 17 AN LAO REPORT For larger charter schools and those that have gone two and four years (and never for five years under through the process a few times, the process was current practice). This means that charter schools not as burdensome. As charter schools become often have to go through the charter renewal more familiar with the process, they structure their process and funding determination process program around the specific requirements and at different intervals. Being subjected to these regularly monitor expenses relative to the spending separate processes at different intervals can be thresholds. Moreover, many charter schools that administratively burdensome for schools. contract with vendors for business services were Supplemental Information Provides Helpful able to rely on these vendors to fill out the form and Context. The additional required information monitor any potential issues. on charter board composition, contracts above Only Reviewing Prior-Year Spending Limits certain spending thresholds, and governing board Effectiveness of Oversight. In accordance with members that have dealings with contractors current regulations, CDE generally requires charter provides useful information for the state to identify schools to only submit data for the prior fiscal year. potential issues of fraud. CDE routinely shares this (They may ask for multiyear data in some cases, information with authorizers to make sure they are such as if the charter is seeking a higher funding aware of any possible issues. determination for mitigating circumstances.) For a Instruction and Related Spending school that receives a funding determination of four years, this means that the state would not Schools Cite Three Key Challenges for review spending in the three intervening years. Meeting Instruction and Related Thresholds. Lack of reporting in the years between funding In our conversations with nonclassroom-based determinations limits the state’s ability to ensure charter schools, the 80 percent threshold for schools are consistently meeting the spending instruction and related services was the most criteria in line with their funding determination. difficult requirement to meet. Schools mainly cited three issues that made meeting this requirement Oversight for Charter Networks Is Fragmented. Oversight via the funding more difficult: determination process is more challenging for • Facilities Costs. Schools often cited their networks of schools—particularly for networks of spending on facilities as a key challenge with fully virtual schools—that effectively operate as meeting the 80 percent requirement. Although one school system. Under current law, schools schools can have a portion of the facilities that are part of a network submit separate funding costs included towards the calculation, this determinations for each legally distinct school, even can represent only a share of their actual if the schools operate as one entity. These funding casts. Some schools also had more difficulty determinations can have different time lines, with meeting the 80 percent threshold when they each application representing a fraction of total were setting aside funds over a multiyear spending by the school. This can make it more period to purchase a facility. These issues challenging for CDE to identify whether spending were more common for schools with larger of the network as a whole is in compliance with facility footprints that provided more of their the funding determination levels it has received, instruction and support in person. and provides an opportunity for the charter • One-Time Funding. In recent years, the schools within the network to manipulate data state has provided several one-time grants relevant to the various spending thresholds and the that can be spent over a multiyear period. If a student-to-teacher ratio threshold. nonclassroom-based charter school receives Funding Determination Process Not Aligned these revenues in one year but does not to Charter Renewal Process. Charter schools spend them until subsequent years, this can may be renewed for a period of five to seven reduce their reported spending on instruction years by their authorizer. In contrast, most charter and related services. (This can also make schools receive funding determinations between it more challenging to meet the certificated 18 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT salaries threshold.) Because of the effect could enact to improve the funding determination on the spending threshold, schools have an process (Figure 5). Some changes would incentive to spend the bulk of these funds require modifying state law, while others could in the first year, even if they might be better be implemented by directing SBE to adopt new spent slowly over a multiyear period. regulations. Our recommendations are intended • Reserves. Several charter schools indicated to narrow the process to schools with instructional they planned to increase the amount they hold models more likely to create the opportunity for in reserve to deal with fluctuations in state profiteering, improve the comprehensiveness and funding and student attendance or to save for quality of data submitted to CDE, and streamline major purchases. Setting aside funding for some aspects of the process. These changes reserves, however, reduces their spending on likely will affect CDE’s workload, but the specific instruction and related services. impact will depend on implementation details. In the box on the next page, we also describe Virtual Programs May Have Less Difficulty an alternative approach that would eliminate the Meeting Instruction-Related Requirements. funding determination process. While this approach Given their specific cost model, virtual programs would have negative consequences for some are less likely to have challenges meeting the charter schools, it would be easier for the state 80 percent threshold. Virtual programs typically to administer. have no costs associated with instructional facilities. Compared Figure 5 with brick-and-mortar schools, Recommendations for Improving the Funding they are more likely to spend Determination Process on software and technology— expenses which count towards the Definition of Non-Classroom-Based Charter Schools instruction-related requirements. 9 Narrow the definition of a nonclassroom-based charter school. Student-to-Teacher Ratio 9 Requirements Make the definition of a virtual charter school subject to the annual audit. 9 Highest Staffing Ratio Establish a definition of a virtual charter network in statute. in County Is Not Easily Funding Determination Process Accessible. Although regulations 9 allow nonclassroom-based Require additional review of data submitted to the California Department of charter schools to adhere to a Education. 25-to-1 student-to-teacher ratio 9 Require authorizers to separately track data for their nonclassroom-based or the highest ratio for a district charter schools. in the county, in practice, schools 9 adhered to the 25-to-1 threshold. Use multiple years of data for funding determinations. This is because information on 9 Require networks operating as one school system to apply concurrently. the student-to-teacher ratios of 9 districts in their county was often Align funding determination with charter renewals. not readily available or could 9 not be verified. Use an existing calculation for measuring spending on certificated staff. 9 Build in automatic adjustments for one-time funds and facilities. RECOMMENDATIONS 9 Summary of Modify approach to reserves. Recommendations. In this 9 Require student-to-teacher ratio be included in audits. section, we provide specific recommendations the Legislature www.lao.ca.gov 19 AN LAO REPORT Alternative to the Existing Funding Determination Process This report responds to the Legislature’s request that we make recommendations to improve the funding determination process for nonclassroom-based charter schools. The recommendations we set forth in this report would achieve this purpose. Under these recommendations, the process would continue to require additional workload for the state, nonclassroom-based charter schools, and authorizers. Below, we set forth an alternative that would eliminate most state-level administration. This approach, however would negatively affect nonclassroom-based charter schools with higher cost models, particularly those with higher facility costs. This approach would also eliminate some ways the state currently monitors spending for nonclassroom-based charter schools. Set a Fixed Percentage of Funding for Nonclassroom-Based Charter Schools. As an alternative to the funding determination process, the Legislature could provide a prorated amount of funding to nonclassroom-based charter schools, regardless of their expenditures. This would eliminate the need for the funding determination process entirely. The Legislature could provide the same prorated amount for all nonclassroom-based charter schools (for example, based on 85 percent funded ADA, consistent with the middle category in the current process). Alternatively, the Legislature could create a sliding scale based on the amount of in-person instruction a school provides. This change could be implemented in conjunction with a change in the definition of a nonclassroom-based charter school. (Narrowing the definition would mean that fewer schools would receive a prorated funding amount.) Allow Nonclassroom-Based Charter Schools to Obtain Funding for Instructional Facilities. In our conversations with nonclassroom-based charter schools, many had substantial facility blueprints, which often resulted in relatively higher costs. To provide these schools with access to facility funding, the Legislature could allow them to participate in the Charter School Facility Grant Program. This would allow nonclassroom-based programs where 70 percent or more of their students are low income to be eligible for additional funds. Those with lower proportions of low-income students, however, would be ineligible. Consider Alternative Spending Requirements. If the Legislature were to eliminate the existing funding determination process, nonclassroom-based charter schools would no longer be required to meet the spending thresholds for certificated salaries and instruction and related services. The Legislature could alternatively apply the “current expense of education” calculations to nonclassroom-based charter schools and require that at least 40 percent of their expenditures are spent on salaries and benefits of classroom teachers and instructional aides. (This is similar to recommendation we make in this report for improving the existing funding determination process.) Definition of Non-Classroom-Based them provide a substantial portion of instruction Charter Schools and other support services to students in person. These programs often have cost structures similar Narrow the Definition of a to that of more traditional classroom-based charter Nonclassroom-Based Charter School. schools. Compared to the existing definition, a We recommend narrowing the definition of a narrower definition would allow charter schools nonclassroom-based charter school so that funded primarily on independent study to be the designation excludes those schools that excluded from the funding determination process primarily provide instruction in person. Although all if they can demonstrate they have a significant nonclassroom-based charter schools are mostly portion of their instruction provided in person. funded under independent study rules, many of 20 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT To implement this recommendation, we recommend to students from across the state in virtual the Legislature develop a specific definition courses taught by one instructor, regardless of the based on the proportion of instruction provided student’s location. in person and require a school’s percentage to Funding Determination Process be included in the annual audit process. Although the Legislature could consider a variety or Require Additional Review of Data Submitted definitions, we think a reasonable starting point is to CDE. To assist CDE in efficiently reviewing to designate a school as nonclassroom-based if and processing funding determination forms, we less than half of its instruction occurs in person. recommend requiring additional verification of (Compared with less than 80 percent under information submitted to CDE. Specifically, we current law.) We also recommend that the narrower recommend requiring data submitted by charter threshold of nonclassroom-based be used when schools be consistent with their annual audits. If the determining whether ADA is classroom-based information in the funding determination form is not or nonclassroom-based. The Legislature could consistent with the information reported in their create an even narrower definition if it wanted to annual audit, charter schools would be required focus the funding determination on those that are to provide clarification and backup documents primarily virtual programs. Charter schools no along with their form. We further recommend that longer classified as nonclassroom-based would charter school funding determinations be submitted become eligible for other state programs, such as concurrently to the charter school’s authorizer, the Charter School Facility Grant Program and the and that the authorizer be required to review the Expanded Learning Opportunities Program. request and notify CDE of any concerns, such as discrepancies with data. Make the Definition of a Virtual Charter School Subject to the Annual Audit. We Require Authorizers to Separately Track recommend the Legislature define a virtual charter Data for All Their Nonclassroom-Based Charter school in statute, require each charter school to Schools. Given CDE’s concerns with obtaining report whether or not they meet this definition, and expenditure data for some dependent, locally make the designation subject to the annual audit funded charter schools, we recommend authorizers process. Having a specific definition would help the be required to separately track expenditure and state better track changes in virtual programs over staffing data for each of their nonclassroom-based time and make it easier to set specific requirements charter schools included in their annual audits. for these programs in the future. The state currently This would make it easier for CDE to verify the collects self-reported data related to virtual information submitted in the funding determination programs, but does not verify the results. Existing form for these schools. (Authorizers have state regulations also include a definition of a several options for tracking these expenditures virtual charter school (where at least 80 percent of separately. For example, they can track revenues instruction occurs online), but this definition has no and expenditures using a separate fund for their current practical use and also is not verified by an nonclassroom-based charter school.) external entity. We recommend the Legislature use Use Multiple Years of Data for Funding this latter definition as a starting point, though it Determinations. We recommend the funding could modify the threshold. determination take into consideration a school’s Establish a Definition of a Virtual Charter aggregate spending for all years since the Network in Statute. To better monitor issues previous funding determination. This would related to networks of charter schools operating ensure school expenditures are aligned with the as one school system, we recommend adding funding determination thresholds consistently a specific definition in statute and requiring over time. (Not just in the year prior to the funding the definition be verified in annual audits. determination.) We recommend schools continue to We recommend this definition focus on networks submit forms to CDE in the intervening years. of virtual charter schools that provide instruction www.lao.ca.gov 21 AN LAO REPORT CDE could review them on an interim basis and and instructional aides. (The requirements could notify schools that are at risk of not meeting range from 50 percent for high school districts the spending thresholds. In cases where a school to 60 percent for elementary school districts.) is significantly below the thresholds, CDE could These calculations must be included in a revisit a school’s funding determination in one of the district’s annual audit. Using this approach for intervening years. nonclassroom-based charter schools would Require Networks Operating as One School use an existing calculation that has a clear System to Apply Concurrently. For any networks methodology and is already included in audits for that effectively operate as one school system, school districts. (Given the variety of instructional we recommend requiring they submit their models that nonclassroom-based programs funding determination forms in the same year. use, we recommend keeping the threshold at This would allow for a more comprehensive view of 40 percent, rather than the higher thresholds program expenditures. for school districts.) Align Funding Determination With Charter Build in Automatic Adjustments for One-Time Renewals, Codify Rules in Statute. We Funds and Facilities. We recommend modifying recommend maintaining the current requirement the funding determination form to automatically that new nonclassroom-based charter schools exclude from the instruction and related services receive funding determinations for two fiscal threshold any unspent revenues from one-time years. Moving forward, we recommend the length funds appropriated in that year. (Schools would of funding determinations be aligned with the include these revenues and expenditures in the time line for a charter school’s renewal. Aligning years when funding is spent.) This would ensure the time line to a charter renewal would likely that schools are not penalized for spending result in longer funding determinations, reducing one-time funds over multiple years, consistent with the administrative burden for schools and CDE. typical state requirements. We also recommend (Under our recommended approach, CDE would schools be allowed to count any expenditures for still have the authority to flag schools in the facilities that are primarily used to provide in-person intervening years based on interim reporting.) instruction as instruction related, if they can provide To ensure consistency and transparency, we also backup information that confirms their costs. These recommend codifying in statute the rules regarding changes would minimize the need for mitigating the length of a funding determination. (Even if the circumstances from schools related to these issues. Legislature does not take our approach for setting Modify Approach to Reserves. We recommend the length of determination, we recommend the the Legislature make several changes to the way rules be set in statute.) reserves are currently addressed in the funding Use an Existing Calculation for Measuring determination process. First, we recommend Spending on Certificated Staff. To create schools be required to report their reserves consistency and make it easier for CDE to consistent with state accounting categories verify, we recommend the Legislature take a (assigned, unassigned, restricted, committed, and different approach for measuring spending of nonspendable). Next, for the purposes of funding certificated staff. Specifically, we recommend determination, we recommend schools be allowed nonclassroom-based charter schools be required to exclude from their revenue any net increase to to meet the 40 percent spending threshold using their reserve for economic uncertainties, as long the “current expense of education” calculations as the school has an unassigned fund balance that and to have those calculations included in their represents less than 10 percent of their annual annual audit. Under current law, school districts expenditures. We also recommend modifying must report their current expense of education the threshold at which schools must explain their annually using a methodology specified by CDE, excess reserves. Specifically, we recommend and are expected to spend a certain percentage schools be required to explain their reserves if on salaries and benefits of classroom teachers they have an unassigned fund balance that is 22 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT greater than 10 percent of reserves (as opposed nonclassroom-based charter schools have to a 5 percent threshold under current rules). their student-to-teacher ratios verified through For schools whose unassigned balances the annual audit process. This would make it are less than 5 percent of expenditures, we easier for CDE to confirm whether schools met recommend CDE notify the authorizer to verify this requirement. We also recommend each that the school has sufficient reserves to address COE be required to annually publish the highest economic uncertainties. student-to-teacher ratio of school districts Require Student-to-Teacher Ratio in the county and share this information with Be Included in Audits. We recommend nonclassroom-based charter schools. ANALYSIS OF OTHER CHARTER SCHOOL OVERSIGHT ISSUES As we discussed above, the funding Oversight Fee May Not Be Sufficient for determination process is not an effective approach Quality Oversight. In our conversations with for ensuring that charter schools are complying various individuals with expertise in these issues, with state laws and preventing issues of fraud many indicated the amount that authorizers can and misappropriation of funds. The process relies charge for oversight may not be sufficient for a on other aspects of the system to be working district to develop the capacity to oversee its effectively. In this section, we describe areas charter schools. This is particularly the case when outside of the funding determination process that the district only authorizes one charter school, are key issues for oversight of charter schools, or when the school district is relatively small and then provide several recommendations for the doesn’t already have administrative capacity. Legislature to consider. These issues generally State Has Few Requirements of Authorizers. apply to oversight of all charter schools. In a few Aside from a few narrow activities specified in law cases, however, we highlight specific issues related (such as visiting the school annually and ensuring to nonclassroom-based charter schools and virtual required reports are completed), the state has few charter schools. requirements of authorizers. Furthermore, state law does not require authorizers to have any level of ASSESSMENT expertise or capacity related to a charter school’s instructional model. For example, a school district Authorizer Oversight can authorize a charter school that serves grade Oversight From Authorizers Can Be Lacking. levels that the school district does not serve—such In several high-profile cases where charter schools as an elementary school district authorizing a broke the law, their authorizers missed many key charter school serving students from kindergarten signs of illegal activity that were later identified by to 12th grade. (A charter school would need to other agencies. For example, in the case of the serve students in at least some of the grades A3 charter school network, the authorizer signed served by the district.) Furthermore, there are few off on fraudulent attendance records. In another consequences to authorizers for lack of oversight. case related to a classroom-based program, the However, the consequences to the state and the authorizer did not catch key issues related to rest of the public school system can amount to misappropriation of funds, in part because the hundreds of millions of dollars for inappropriate authorizer did not regularly communicate with the attendance, fraudulent activity, or misappropriation charter school or attend meetings of the charter of public funds. school governing board. These issues were also often missed by COEs that are required to sign off on attendance reporting. www.lao.ca.gov 23 AN LAO REPORT Many Nonclassroom-Based Charter Schools State’s Approach to Authorization Makes Are Authorized by Relatively Small School Overseeing Charter School Networks More Districts. Issues of authorizer oversight may be Challenging. With limited exceptions, charter especially challenging for nonclassroom-based schools cannot serve students on a statewide basis charter schools, as they are more commonly with one authorized charter school. Instead, they authorized by small school districts. Based on must establish legally separate schools in counties 2022-23 data, we identified 14 small school districts across the state, with separate authorizers for each that were authorizing about one-third of the state’s school. In practice, however, these schools can nonclassroom-based attendance. Specifically, functionally operate as one school system. (This is each of these 14 school districts authorized more likely with fully virtual schools.) Families may nonclassroom-based charter school attendance enroll through the same online portal. Teachers that was more than ten times the size of the may regularly teach virtual courses that include district’s attendance. (See Figure 6.) These school students from all over the state, and the experience districts all had attendance of less than 1,000. for students can be consistent, regardless of their Overall, school district authorizers whose county of residence. Under the state’s approach, nonclassroom-based charter school attendance each authorizer is technically only responsible for exceeds the district’s attendance oversee roughly the students enrolled in their geographic area, even half of the nonclassroom-based charter school though this distinction does not necessarily occur attendance statewide. (With one exception, all of in practice. This creates a fragmented authorizing these school districts have attendance of less than approach that does not assign responsibility for the 2,500.) Given small school districts generally have entire network’s expenditures and practices to any less administrative staffing, these authorizers may one specific authorizer. not have the capacity or expertise to provide quality Relationship Between Authorizing School oversight. The amount of funding they receive in Districts and Charter Schools Can Be oversight fees can also represent a substantial Contentious. In addition to issues of capacity, increase in funding, which may reduce the incentive oversight can also be affected by the relationship to carefully monitor a charter school’s attendance between charter schools and their authorizing or other financial reporting. Our understanding school district. For example, a school district may is that some small school districts often rely be concerned that the charter school will enroll on support from their COE to oversee their some of the district’s existing students. School charter schools. This support, however, is not districts and charter schools also commonly have required by law. specific disagreements around a variety of issues, such as the use of district facilities and how certain special education Figure 6 students should be served. These Several Small School Districts Authorize Large Share conflicts can affect the quality of NCB Charter School ADA of oversight and may mean that the district is not interested in 2023-24 helping the charter school be Combined NCB ADA Relative Number of Total Share of more successful. to Authorizing District Districts NCB ADA NCB ADA Relationship With COEs Can More than ten times the district’s ADA 14 70,038 37% Be More Collaborative. Several Between one and ten times the district’s ADA 24 33,913 18 charter school administrators with Less than the district’s ADA 113 83,990 45 experience working with COEs Totals 151 187,941 100% and district authorizers indicated Note: Excludes NCB charter schools authorized by the State Board of Education and county offices of education. to us that COEs can often be NCB = nonclassroom-based and ADA = average daily attendance. more supportive authorizers than school districts. COEs typically do 24 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT not operate programs that compete for the same of education agencies. In particular, this training is students as the charter school. In addition, COEs unlikely to address issues related to charter schools have more familiarity with serving in an oversight that generate attendance through independent role given their role in monitoring school district study and have hybrid classroom-based and fiscal issues and providing support to school nonclassroom-based instruction. districts with low-performing student groups. Audit Guide Does Not Establish Materiality School districts, on the other hand, usually do not Levels for Charter Schools. Materiality levels set serve in this same type of oversight role. thresholds that auditors use to determine whether any inconsistencies in records should constitute Audit Requirements an audit finding and lack of compliance with the Audits Did Not Follow Standard Audit law. The existing audit guide establishes materiality Sampling Procedures. The audit guide includes levels for reviewing the ADA of school district standards regarding sample sizes when testing for independent study and continuing education, but compliance. In some recent cases of fraud, it was not for compliance testing of charter schools. discovered that the licensed auditors approved by the State Controller’s Office did not follow standard Transparency and Conflict of Interest auditing procedures common in the profession Concerns About Transparency in Charter around sampling of transactions and records. In the School Operations. In our conversations with known cases, the auditor had the charter school’s various individuals involved in state education personnel make the selection of records for review. issues, many expressed concerns with a lack Existing Audits Do Not Review or Report of transparency about some charter school Enrollment and Attendance Records in Depth. operations. This lack of transparency fosters This lack of depth is particularly challenging distrust and contributes to the tension between for auditing charter schools funded based on school districts and charter schools. In particular, independent study rules. In these cases, charter individuals often expressed concerns about schools have flexibility in how they generate third-party organizations that can have significant attendance funding, which can make auditing these control over the charter school’s operations and records complex. This lack of depth also makes could stand to benefit financially. Charter schools it more challenging to review records for charter rely on a variety of third-party entities for a variety of schools that operate multitrack calendars. (Under a activities, such as financial and accounting support, multitrack calendar, students are split into “tracks” learning management software, and enrichment and schedules are staggered so students are out of activities for students. In some cases, such as with session at different times.) some virtual schools, a significant portion of the Auditors Generally Lack school’s revenues go directly to cover contracts for Authoritative Training and Knowledge one third-party vendor. Individuals associated with of Nonclassroom-Based Charter School these third parties could also be members of the Operations. Under current law, school districts, charter school’s governing board. We also heard COEs, and charter schools may select a certified concerns about charter school administrators and public accountant or a public accountant founders benefiting financially through third-party licensed by the state from a directory of auditors entities. For example, the charter school could be deemed by the State Controller to be qualified contracting for services from a company owned to conduct their audits. To be included in the by an administrator or founder of the charter directory, an auditor simply needs to be currently school. Although these types of contracts are not licensed and make a request to be added. necessarily illegal or a poor use of funding, the There is no vetting as to the qualifications of conflicts of interest prevalent in these situations can auditors specific to school finances. While raise questions about whether funds are being used licensure requires certain levels of continuing properly for the benefit of students. education, such training is not specific to audits www.lao.ca.gov 25 AN LAO REPORT RECOMMENDATIONS a charter school, however, should result in the authorizer remitting the oversight fee collected to In this section, we describe changes the the COE or state. Legislature could consider to address broader oversight issues for charter schools. Consider Alternative Authorizing Structure for Virtual Schools. Given recent issues that have Authorizer Oversight arisen with virtual charter schools, the Legislature Increase Minimum Requirements for could consider establishing a specific authorizing Authorizers. We recommend the Legislature structure for these programs. For example, the require authorizers to conduct certain activities Legislature could establish a separate authorizing to review and monitor their charter schools. agency for all virtual charter schools. Assigning For example, the Legislature could require oversight responsibilities to one agency would authorizers to conduct regular reviews throughout improve the expertise and quality of oversight the school year of expenditures, enrollment, and provided to virtual charter schools and virtual attendance data. It could also require that the charter school networks. This approach, however, authorizer investigate and notify its COE of any is at odds with recent state changes to eliminate significant changes in enrollment or attendance, or statewide benefit charter schools. Another discrepancies between enrollment and attendance. option would be to continue to have school We also recommend authorizers be required to districts authorize these schools, but require attend regular trainings on these topics. Authorizers that they conduct their oversight with a newly could confirm their compliance using regular established agency that has expertise related to reports they file as part of the typical budget virtual programs. adoption and interim reporting. If authorizers Audit Requirements do not comply with the requirements, the state could require that authorization be shifted to the Enhance the Audit Process for Charter COE (or, if the COE is the current authorizer, a Schools. We recommend the Legislature make neighboring COE). several changes to improve the audit process for charter schools. These changes would reduce the Set Limits on District Authorizers Based on likelihood that issues of fraud or misappropriation District Size and Grade. We recommend setting of funds would occur and would bring issues to the a cap on the nonclassroom-based charter school attention of other agencies more quickly. attendance that a school district can authorize by using the ratio of total nonclassroom-based • Ensure Conformity of Audit Process to charter school attendance to the authorizing That of School Districts. Explicitly require district’s attendance. For example, the Legislature all charter schools to be subject to the same could specify that the total nonclassroom-based audit process as school districts. This should charter school attendance of a district authorizer include the timing of auditor selection, cannot exceed the school district’s attendance. disclosure of an auditor’s termination or (The Legislature could choose to set a different replacement, the granting of extensions for threshold. The Legislature may also need to charter school audits, and other matters of make exceptions for rural counties that have few, parity to school districts. if any, large school districts.) In cases where a • Ensure the Audit Guide Addresses school district exceeds its cap, authorization and Compliance Sampling. Direct that the audit oversight could be transferred to the COE or a guide be specific as to sampling techniques neighboring COE. and that the selection of samples be Allow Higher Spending for Authorizing. performed personally by the auditor. We recommend allowing authorizers to charge • Develop Materiality Levels for Charter actual costs up to 3 percent for authorizing and Schools. Explicitly require that the audit guide oversight activities, as long as they are meeting include ADA materiality levels for compliance new requirements. Failure to adequately oversee testing at charter schools. 26 LEGISLATIVE ANALYST’S OFFICE AN LAO REPORT • Require Supplemental Schedules of • A schedule of payments or transfers of Enrollment and ADA by Track. Direct (1) the largest 25 payments or transfers of that the audit guide require supplemental assets to organizations, determined by value information and schedules be included in an accumulated over the fiscal year, including audit of a charter school, such as a schedule to individuals, corporations, partnerships, of student enrollment and attendance nonprofit organizations, and other that includes student enrollment and organizations, but excluding governmental attendance by month and track (if applicable). entities; and (2) all payments and transfers of This should include reconciliation of assets of $50,000 or more to organizations, enrollment/attendance changes from the determined by value accumulated over beginning of the year to the end of the year, the fiscal year, including to individuals, including detail on additions, subtractions, and corporations, partnerships, nonprofit transfers. In addition, this information should organizations, and other organizations, but be separated by category of attendance excluding governmental entities. (classroom-based, nonclassroom-based, • For nonclassroom-based charter schools, summer schedule, enrichment, and other). include a schedule denoting the computation • Require Disclosure of Changes Related to of the 40 percent threshold for certificated Enrollment and ADA. Direct that the audit staff, 80 percent threshold for instruction guide require auditors specifically disclose in and related services, and student-to-teacher the audit of a charter school, and separately ratio as required in the funding determination. to CDE, any instance where either or both (These components would need to be enrollment and attendance increases or modified if the Legislature enacted changes to decreases by more than 5 percent during any the funding determination process.) month as compared to the prior month. • Composition of the charter school’s governing board. Improve the Quality of Audits Through Specific Auditor Training. To improve auditors’ Require Disclosure of Related Organizations. knowledge of issues related to K-12 education, We recommend the audit guide include a procedure we recommend the Legislature require certified to determine if the charter school has a relationship public accountants or public accountants licensed with a related entity, such as an entity managing in California to complete additional training to a charter school or a similar third party with remain on the State Controller’s directory of financial, economic, or controlling membership qualified auditors. The Legislature could consider interest. If such a relationship exists, the auditor requiring an additional 24 hours of training every should evaluate the level of the relationship to two years in topics specific to financial reporting determine if it is material. For material relationships, and compliance testing related to schools, charter the audit guide should ensure compliance of the schools, and nonclassroom-based charter schools. related party to disclosure rules of the Financial Accounting Standards Board Accounting Standards Transparency and Conflict of Interest Codification and other generally accepted Require Charter School Audits to Publicly accounting principles. The audit guide should also Disclose Similar Information Collected ensure the charter school complies with constraints on Funding Determination Form. Including regarding when financial statement consolidation is this information in the audit would provide required, permitted, and prohibited. greater awareness to authorizers and the public. Specifically, we recommend requiring charter school audits include the following supplemental information: www.lao.ca.gov 27 AN LAO REPORT CONCLUSION Issues related to nonclassroom-based charter determination process, however, likely will not schools will be increasingly important over the next address broader charter school oversight issues few years, particularly as the state approaches the that have resulted in cases of fraud and misuse of end of the current moratorium on new schools. public funds. To address these broader issues, the This report provides several recommendations Legislature will want to consider changes related to the Legislature can adopt to improve the funding the state’s system of oversight for charter schools. determination process for nonclassroom-based We intend for the recommendations related to charter schools. These changes would improve authorizer oversight, audit requirements, and the quality of data submitted to CDE, streamline transparency and conflict of interest to assist the a few aspects of the process, and narrow the Legislature in identifying key issues that should be process to schools with cost structures that make addressed prior to the end of the moratorium on profiteering more likely. Changes to the funding nonclassroom-based charter schools. PUBLICATIONS This report was a joint project of the Legislative Analyst’s Office (LAO) and the Fiscal Crisis and Management Assistance Team (FCMAT). The report was prepared by Michael Alferes (LAO) and reviewed by Edgar Cabral (LAO), Michael H. Fine (FCMAT), and Michelle Giacomini (FCMAT). To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 28 LEGISLATIVE ANALYST’S OFFICE