Charter school collapse? What Should Be Done?

As many of you know, the League in Florida has been urging improvements in charter school business practices.  In this report by professors Baker, Green, and Oluwole, you will find a list of specific charter management problems and recommendations to remedy them.  We checked with Professor Green to see if the for-profit charter business practices we find in Florida correlate with those in the report.  Based on our study, he replied that it appears they do.  I am so grateful for their work.  It gives us a framework.

I hope every school district digests this list.  They can help communicate the solutions for the pending threat for a financial collapse.

We have extracted the problems and recommendations from: “Are charter schools the second coming of Enron?”.  The wording is essentially theirs (with some minor changes for readability).

Some individuals and corporations in the charter school sector have used Enron-like  related-party transactions to obtain profits at the expense of the very charter schools that they are serving.

The Motivation for Profiteering is Extensive:

• Charter schools attract investors because of the potential for new revenue streams. For instance, the New Market Tax Credits (NMTC) program provides investors the opportunity to make profits from charter-school real estate transactions.
• For-profit entities can double their investment in charter-school real estate projects by taking advantage of the NMTC as well as other federal tax credits.122 For-profit entities can also obtain revenue from charter schools through lease payments for the use of the facilities.
• Investors can also obtain profits through the management fees that EMOs charge for their services.

The Federal Government, Related-Party Transactions, and the Need for Strong  Gatekeeping

• In September 2016, the U.S. Department of Education’s Office of the Inspector General (OIG), the agency’s watchdog, published the findings of an audit, which also suggests that inappropriate related-party transactions are common in the charter school sector.
• The OIG detected 36 instances of internal control weaknesses, which it divided into three categories: (1) conflicts of interest; (2) insufficient segregation of duties; and (3) related-party transactions.

Charter School Gatekeepers

• We found scant evidence of the auditors’ detecting and questioning the related-party transactions that we discussed.
• These auditors might have also performed poorly because they failed to consider the possibility that the charter school officials were deliberately using related-party transactions to defraud their charter schools.
• Consistent with the two main standards used by auditors: generally accepted auditing standards (GAAS), and generally accepted government auditing standards (GAGAS), …Statement on Auditing Standards (SAS) No. 99 requires auditors to conduct “brainstorming” sessions to determine how a client might be vulnerable to fraud. GAGAS standards…requires auditors to design auditing procedures “to obtain reasonable assurance of detecting instances of noncompliance.”
• The pervasiveness of related-party transactions in the charter school sector…and the financial auditors’ lack of training to look for fraud, accounting firms should consider hiring forensic specialists as part of their auditing team.
• Furthermore, states should increase the capacity of state regulatory agencies to conduct regular audits of charter schools because these entities might be better equipped to detect proscribed behavior in the charter school sector than independent auditing firms.
• Regulatory agencies, such as local districts granting charters might also conduct risk assessments of
  charter schools and subject those schools that are vulnerable to fraud to further audits or investigations. Three states impose such a requirement: Louisiana, New York, and Texas.
• Two states – Minnesota and New Mexico – forbid persons from serving on a governing board if
  they or their immediate family members own or have a significant stake in any entity providing
  “professional services, goods, or facilities” to the charter school.
• Nine states specifically require charter schools to be structurally independent from their EMOs. These
  states are Colorado, Connecticut, Illinois, Indiana, Maine, Michigan, Mississippi, Nevada, and Rhode Island.

Further, these states provide indicia for determining whether a charter school governing board is independent from its EMO such as:

1. The EMO must not select the members of the governing board;
2. The governing board must select, retain, and compensate the attorney and auditing firm representing the board.
3. The governing board and the EMO must reach the terms of the service contract through arms-length negotiations.
4. The EMO must not have control over financial decisions;
5. The fees for services must be reasonable;
6. Other agreements between the governing board and the EMO must align with market rates and not change if the contract is terminated.

• Charter boards should receive training and guidance regarding leasing arrangements.
• Charter School Authorizers e.g. local school districts and State Boards of Education should:

1. specifically require authorizers to review the service agreements between EMOs and charter schools: Colorado, Connecticut, Illinois, Michigan, and New Mexico do have this requirement, but they exclude lease agreements and vending contracts.

2. adopt national standards for charter school oversight and evaluation.  Eleven states do so require:  Alabama, Colorado, Illinois, Louisiana, Maine, Mississippi, Nevada, South Carolina, Tennessee, Washington, and Wisconsin.  States need to include authorizer review of vending contracts that do not fall under the category of agreements for comprehensive services or management.

3. improve monitoring of charter school-EMO relationships.  In particular, none of the participating SEAs included procedures for identifying  internal control weaknesses, including related-party transactions.  The audit also found no  legislation that required the participating SEAs to provide oversight over their authorizers.  This lack of oversight might enable illegal related-party transactions to endure without detection.

4. require their SEAs to monitor charter school authorizers. Two states have some requirements:  Alabama and Washington.  Seven states – Hawaii, Illinois, Indiana, Maine, Minnesota, Missouri, and Ohio – go further still by granting SEAs the power to revoke authorizing authority due to poor performance.

The framework for improving charter school self dealing, as Senator Gaetz called it, is here.  We will work on getting support to apply these guidelines to Florida regulatory legislation.  Help us!