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Report Number: 2016-141

Abbreviations

Charter Schools
Some School Districts Improperly Authorized and Inadequately Monitored Out-of-District Charter Schools

Responses to the Audit

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Acton-Agua Dulce Unified School District

September 22, 2017

California State Auditors
621 Capitol Mall Suite 1200
Sacramento, CA 95814

Subject: Charter Schools: Some School Districts Improperly Authorized and Provided Inadequate Oversight to Out-of-District Charter Schools, Audit Number 2016-141, dated October 2017Charter Schools: Some School Districts Improperly Authorized and Provided Inadequate Oversight to Out-of-District Charter Schools, Audit Number 2016-141, dated October 2017

The Acton-Agua Dulce Unified School District (“District”) appreciates the opportunity to respond to the recommendations made to the District in the draft Audit Report No. 2016-141 regarding charter school authorization and oversight. The District’s Administration has reviewed the draft Audit Report and its recommendations, and provides the following responses.

Geographic Restrictions on Charter Schools and Assurance Learning Academy

Acton-Agua Dulce authorized Assurance Learning Academy (“ALA) in May 2012 to operate a nonclassroom-based independent study program. The District and ALA believed that the Charter Schools Act permitted such a program to operate resource centers to support independent study students outside of its authorizer’s boundaries. The District and ALA were not alone in this belief, and like other school districts and charter schools relied on previous guidance from the State Superintendent and the California Department of Education. In October 2016, an appellate court concluded that nonclassroom-based independent study programs were subject to the same geographic restrictions as classroom-based programs (the Anderson v. Shasta decision). The District promptly notified ALA of the decision and required ALA to prepare a plan for complying with the court decision if the ruling became final. ALA did this, and in January 2017, ALA sought and obtained a material revision to its petition to provide student instruction exclusively in partnership with Workforce Innovation Act boards and programs.

Prior to the Anderson v. Shasta decision, the District required charter school petitioners proposing classroom-based programs to comply with Education Code sections 47605(a)(5) and 47605.1(c). These schools had to operate within the District’s boundaries or, prior to approval, demonstrate that they were permitted to operate a single out-of-District site under Sections 47605(a)(5) and 47605.1(c). The District’s Administration and Board would assess whether the petitioners had presented credible evidence that they had recently conducted a diligent search for a single suitable site within the District’s boundaries.

Since the Anderson v. Shasta decision became final in January 2017, the District applies the Education Code’s geographic restrictions in Sections 47605(a)(5) and 47605.1(c) equally to authorized or prospective charter schools, regardless of whether they are classroom or nonclassroom-based programs.

Draft Audit Report Recommendations

The District appreciates the Auditors’ recommendations. The Administration will work to implement any new practices or procedures suggested in the Audit Report and, where necessary or appropriate, present the recommendations to the District’s Board for further consideration. The District responds to specific recommendations below:

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Recommendations at pages 11 and 12 of the Draft Report:

To make certain that they authorize only qualified petitions, Acton-Agua Dulce Unified [redacted] should revise their charter school authorization policies to require the documentation of their evaluations of charter school petitions. The districts should present this documentation to their governing boards for their consideration.

To better ensure effective oversight of their charter schools' finances, the districts we visited should do the following:

To ensure charter schools work toward the academic goals established in their charters the authorizing districts we visited should do the following:

Response:

District Staff review charter petitions submitted for approval, renewal, or material revision with the aid of a “Matrix” which covers the elements of Education Code 47605 and incorporates the State Board of Education’s standards for assessing charter petitions contained at Title 5 of the California Code of Regulations, Section 11967.5.1. The Staff’s recommendation and the completed Matrix are submitted to the Board for its consideration before the Board takes action.

The District is proud of the depth of its oversight work, but the District will begin to formalize in writing the District’s practices and procedures for reviewing charter schools’ financial information, presenting petitioners with any financial concerns, and conducting annual oversight visits.

The District’s CFO provides District-authorized charter schools with written feedback after completing their financial reviews, noting any areas of concern and requesting financial plans that address any projected shortfalls. The District will seriously consider the Auditors’ recommendation to provide charter schools with more detailed recommendations to address any identified financial concerns, but the District’s Staff believes that it is first and foremost an independently operated charter school’s responsibility to develop and present a sound financial plan for addressing any of the District’s financial concerns.

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The District’s Administration will present the District’s Board with the Auditor’s recommendation that the District place a non-voting member on each authorized charter school’s governing board. However, the District’s authorized charter schools operate as, or are operated by, non-profit public benefit corporations. The District believes that California Corporations Code section 5047 prohibits non-voting directors on boards of non-profit public benefit corporations. The District will consider alternatives to non-voting directors.

The District’s existing policy and practice is to provide charter schools with timely feedback and recommendations regarding academic performance. The District’s annual charter school oversight report addresses academic performance. The District will incorporate steps for working with charter schools with poor performance results into the District’s written policies.

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Recommendations at Page 43 of the Draft Report:

To ensure that they have a method to hold charter schools accountable for their educational programs, Acton-Agua Dulce Unified, [redacted] should strengthen their authorization processes by using the State Education Board's criteria for evaluating petitions.

To comply with state law, Acton-Agua Dulce Unified, [redacted] should immediately do the following:

Response:

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The District uses the State Board of Education criteria as addressed above.

4

The District will update its charter school policy to reflect recent changes and clarifications of state law, and going forward will annually review its policy to make any necessary updates. The District does review all charter petitions (approvals, renewals, and material revisions) for compliance with the law, including the geographic restrictions on charter school sites, and through MOU’s the District requires charter schools to obtain pre-approval of a material revision to their petitions before adding new locations. The District will develop and implement a process for tracking actual costs of oversight.

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Recommendations at Page 64 of the Draft Report:

To better ensure effective oversight of their charter schools' finances, the districts we visited should do the following:

Response:

While the District is proud of the extensive fiscal oversight it provides to authorized charter schools, the District will update and expand its formal written policies and procedures related to the review of charter schools’ finances to reflect the District’s practices.

The District’s existing policy and practice is to provide charter schools with timely feedback and recommendations regarding their operations and financial condition. The District will seriously consider the Auditors’ recommendation to provide charter schools with more detailed recommendations to address any identified financial concerns, but the District’s Staff believes that it is first and foremost an independently operated charter school’s responsibility to develop and present a sound financial plan for addressing any of the District’s financial concerns.

The recommendation to place a non-voting member on charter schools’ governing boards was addressed previously.

1

Recommendations at Page 76 of the Draft Report

To ensure charter schools work toward the academic goals established in their charters, the authorizing districts we visited should do the following:

Authorizing districts should maintain active MOUs with their charter schools that describe the district's oversight responsibilities and ensure the schools meet the measurable student outcomes to which they have agreed.

Response:

Most of these recommendations have been addressed above in earlier responses.

The District follows Education Code section 47607 when reviewing renewal petitions from authorized charter schools. To obtain a renewal of its petition, a charter school must demonstrate that it has satisfied one or more of the academic performance criteria in Section 47607(b). However, as the draft Audit Report notes, this has been very difficult to assess in recent years since the Academic Performance Index (“API”) was suspended in the 2013-2014 school year. With the implementation of the new CAASPP system and the California School Dashboard Report, the District will develop procedures for monitoring charter schools’ academic performance throughout the terms of their charter petitions.

Conclusion

The Acton-Agua Dulce Unified School District is firmly committed to thorough charter petition review, approving and denying charter petitions in compliance with law, and rigorous charter school oversight. As part of the District’s continuing efforts to strengthen and improve its policies and processes, the District will take appropriate actions to address issues presented in this Audit Report and implement its various recommendations.

Respectfully,

Lawrence King
Superintendent






Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM ACTON‑AGUA DULCE UNIFIED SCHOOL DISTRICT

To provide clarity and perspective, we are commenting on Acton‑Agua Dulce Unified School District’s (Acton-Agua Dulce Unified) response to our audit. The numbers below correspond with the numbers we have placed in the margin of Acton‑Agua Dulce Unified’s response.

1

While preparing our draft report for publication, some page numbers shifted. Therefore, the page numbers Acton‑Agua Dulce Unified cites in its response do not correspond to the page numbers in our final report.

2
Our report recommends that the Legislature amend state law to grant clear authority for a nonvoting member to be on an out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. We did not disclose this legislative recommendation in the draft report we sent to the district because the recommendation was not directed to the district.
3

Although the district states that it uses the State Board of Education’s (State Education Board) criteria as a guideline for evaluating petitions, we noted that the district’s criteria and its authorization matrix do not include all of the State Education Board’s criteria.

4

Although the district asserts that it reviews all charter petitions for compliance with the law, including the geographic restrictions on charter school sites, we note here that the district could not demonstrate that its out-of-district charter school had, in fact, qualified for the exception in state law during the authorization process.






Antelope Valley Union High School District

September 22, 2017

Elaine M. Howle, CPA
Jim Sandberg-Larsen
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: Charter School Audit Report 2016-141

Dear Ms. Howle and Mr. Larsen,

Please find attached the Antelope Valley Union High School District's response to the Charter Schools Audit Report 2016-141. We appreciate the open and consistent dialogue with the audit team and the multiple opportunities to provide input through the draft and revision process. It is our sincere hope that the ultimate outcome of this report is improved policies, practices, and procedures that work to continually improve the educational experience and progress for all of our students.

Please feel free to contact me with any questions or comments.

Sincerely,

David J. Vierra, Ph.D.
Superintendent

Enclosures:

ANTELOPE VALLEY UNION HIGH SCHOOL DISTRICT'S
RESPONSE TO
CALIFORNIA STATE AUDITOR'S REPORT
(2016-141)

DATED SEPTEMBER 22, 2017

Introduction

The Antelope Valley Union High School District (“District”) appreciates the opportunity to provide the following response to the California State Auditor’s Report entitled Charter Schools: Some School Districts Improperly Authorized and Provided Inadequate Oversight to Out-of-District Charter Schools (“Report”).

At the outset, the District wishes to underscore the importance it places on providing a quality education to all public school students so that they have every opportunity to succeed in their post-secondary endeavors. The District is also committed to ensuring that the charter schools under its authorization are held accountable for improving student academic achievement and performance and implementing sound operational and fiscal practices. The District recognizes there is always room for improvement and continually strives to review, develop, and modify its practices, procedures, and operations to better serve the interests of students, staff, families, and the community.

Practical Considerations

Prior to addressing details of the Report, it is important to highlight several legislative, philosophical, and practical considerations that play a critical part in understanding the evolution of the charter school movement in California and the manner in which school districts, as charter authorizers and oversight agencies, fit within that context. These considerations include the following:

District Response to Key Subject Areas of Audit Report

The Report focuses on several areas related to charter school oversight, including charter school policies and criteria for evaluating charter petitions, and financial and academic oversight. The District does not address, point by point, each of the findings detailed in the Report. Rather, where applicable, the District provides further clarification or explanation for those areas where it believes it is needed to give appropriate context to the particular findings in the Report.

Charter School Policies and Criteria for Evaluating Charter Petitions

The Report indicates that the District may have failed to comply with state law when authorizing and renewing charter petitions because it did not update its charter school policies to reflect changes in state law. Specifically, the Report states that the District last updated its charter school policy in February 2009 and its corresponding administrative regulation in May 2007; thus its policies did not include the “2013 requirements” (i.e., amendments to the CSA that were enacted into law in 2013).

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Although the District’s charter school policy and regulation may not have been updated to include the 2013 requirements, it cannot be inferred that the District failed to comply with the law when it authorized or renewed charter petitions. While the District agrees that periodically updating and modifying school district policies and regulations to ensure consistency with applicable law is a sound practice, the lack of such updates does not mean that the District failed to carefully evaluate and consider the legal sufficiency of the charter petitions it approved. The District thoroughly reviews all charter petitions according to the law before it makes a staff recommendation to the District’s Board of Trustees regarding its findings.

Further, the Report references the regulations promulgated by the State Board of Education (“SBE”), which set forth specific criteria for considering charter petitions. Notably, the Report explains that the Legislature required the SBE to establish this criteria because it recognized that the evaluation of whether petitions contain “reasonably comprehensive” descriptions of the elements required by state law is subjective. The Report then suggests that the District use the SBE’s criteria for evaluating charter petitions.

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The District recognizes that the SBE’s criteria provides helpful guidelines for reviewing charter petitions, but the adoption of this specific criteria was intended for charter petitions that are filed with the SBE and not individual school districts. Therefore, these guidelines are not legally required for school districts. If the Legislature intended to hold school districts to the same standard as the SBE, it would have amended the law or developed regulations to apply this (or similar) criteria to school districts. Evaluating whether a charter petition includes reasonably comprehensive descriptions of the required elements is a subjective analysis and school districts possess the discretion to determine, either through articulated standards in board policies/administrative regulations or otherwise, whether that standard has been met in the petition. In all cases, the District reviews charter petitions in accordance with the law.

Financial Oversight

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The Report discusses the financial issues that Los Angeles County Online High School (“LA Online”), a charter school previously authorized by the District, had encountered. When the District became aware of those problems, it engaged in a series of written and verbal correspondence with LA Online representatives to express concerns regarding its fiscal condition and to ask for corrective action. LA Online continuously provided the District with assurances that it was taking steps to bring it into a positive cash balance and adequately cover its operating expenses, such as potentially securing a loan or line of credit, increasing its student average daily attendance (“ADA”), trimming operating expenses, etc. The District had hoped that its concerns and inquiries would precipitate meaningful action on the part of LA Online, but it did not. Despite the District’s correspondence, requests for information, and request for a strategic plan to correct these fiscal issues, LA Online could not pull itself out of fiscal insolvency. Given the circumstances, the District finds it highly doubtful that further inquiry, requests for information, or recommendations by the District could have reversed or significantly improved LA Online’s financial situation or prevented LA Online’s fiscal insolvency and decision to later file for bankruptcy.

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The Report correctly notes that state law requires charter authorizers to monitor the fiscal condition of their authorized charter schools, but it does not prescribe any specific procedures for authorizers to follow to fulfill this obligation. Again, the District points out that the only legal mechanism or remedy to address a charter school’s fiscal mismanagement or failure to meet generally accepted accounting principles is to initiate revocation proceedings against the charter school, which is precisely what the District did. As the District was preparing its documentation and evidence to initiate this process, LA Online filed for bankruptcy. This complicated and delayed the District’s efforts because the District had to obtain permission from the bankruptcy court before it could continue the revocation process. Once the District secured that approval, it proceeded with the revocation process required by the Education Code.

As the audit team is likely aware, the revocation process is both lengthy and detailed. It was not until after the District had issued a notice of intent to revoke LA Online’s charter based on its determination that significant violations continued to exist, and notified LA Online that it would be holding a public hearing on the matter on February 1, 2017, that LA Online filed an emergency motion with the bankruptcy court requesting permission to cease operations and instructional services to its students. LA Online “voluntarily closed” two weeks prior to the District Board of Trustees taking action to revoke its charter. The District believes that LA Online’s decision to close was precipitated by the District moving forward with the final steps of the revocation process.

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The District also wishes to address statements in the Report that it “could not demonstrate” that it responded to initial indicators of financial difficulties at LA Online and did not always incorporate best practices into its financial oversight processes. It is important to note that a lack of specific documentation reflecting the District’s fiscal oversight of LA Online during certain time periods does not mean that the District did not engage in communications or additional follow up with the charter school to address these matters. Moreover, the failure to implement certain best practices (e.g., use of the Fiscal Crisis and Management Team (“FCMAT”) checklist) does not equate to a lack of fiscal oversight by the District. As with the SBE charter petition review criteria, these types of best practices are certainly worthwhile and helpful, but the law contains no requirement to implement these guidelines.

The District has engaged in several recommended practices and will continue to consider using these types of tools when reviewing the fiscal condition of its authorized charter schools. Nevertheless, while the District is not attempting to diminish in any way its oversight obligation to monitor the fiscal condition of these charter schools, there is a certain level of responsibility and ownership charter schools must assume in managing their budgets.


Academic Oversight

The District wholeheartedly believes that the purpose of a charter school is to provide its students with a sound and quality education that will afford them the opportunity to succeed. Unfortunately, LA Online did not demonstrate adequate student academic achievement and progress. This lack of academic progress was a critical factor in the District’s decision to issue a notice of violation and proceed with the revocation of its charter. Again, the District points out that, short of revocation or non-renewal of a charter, there is no authority for a school district to demand academic achievement other than monitoring progress and providing feedback for improvement.

In addition, while consistent academic monitoring and reporting can be suggested by the charter authorizer or included in a memorandum of understanding between the parties, a charter authorizer cannot be the guarantor of academic success for all of the charter school’s students. A charter school must be accountable to the parents/guardians of its students and its governing board. Further, while the District finds the suggestion of working with its charter schools to improve academic achievement and performance to be noteworthy, charter authorizers must still be mindful that heightened involvement in the educational programming of a charter school could be viewed by members of the charter community as undermining the independent nature of the charter school structure.

State Auditor Recommendations

The Report includes several recommendations developed by the audit team that provide for an increased level of oversight of charter schools. Generally, the District is supportive of those recommendations and believes that the development and implementation of additional internal policies, procedures, checklists, and other tools are beneficial for consistency in performing charter school oversight for all charter authorizers, including the District.

However, there are a few recommendations in the Report that the District believes may not align with the spirit or intent of the law or could result in unintended consequences. These are addressed below.

Oversight Costs

The Report recognizes that during the combined fiscal years that are within the scope of the audit, the District charged less than the maximum one percent (1%) oversight fee allowable by law. The Report includes a recommendation to clearly track actual oversight costs incurred by the District, noting that a failure to track such costs could result in the undue diversion of funds from charter schools’ educational programs. This issue highlights the delicate balance between a school district performing its oversight duties while being fiscally responsible to its own constituency.

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The District is supportive of tracking the actual costs of its charter school oversight to ensure compliance with the law. However, if the District were to perform the heightened level of oversight monitoring suggested in the Report for all aspects of charter school operations (e.g., academic, fiscal, governance, etc.), the amount of staff time and resources the District would be required to dedicate would likely result in costs that exceed the maximum 1% allowed by the law. The District also notes that there is no mechanism for reimbursement of these additional costs by the state. Consequently, the District would be required to absorb those additional costs, which could potentially result in the diversion of funds from the District’s educational programs. For this reason, while the District certainly will not limit its oversight where it believes a heightened degree of monitoring or involvement may be warranted, it must also be mindful of how it dedicates its resources to ensure it is done prudently and in a manner that serves the best interests of its students and the educational community.

District Representative on Charter School Governing Board

The CSA authorizes a school district to place a single representative on the board of the non-profit public benefit corporation that operates the charter school (where applicable). (Educ. Code § 47604(b).) The Report recommends that the District elect to place a representative as a non-voting member on each charter school’s governing board.

9

As part of its findings, the audit team recognized the District had already chosen not to place district representatives on its charter schools’ governing boards due to potential conflicts of interest. It appears that the audit team believes that these concerns would be alleviated if the District were to designate a non-voting member to these boards. However, the District disagrees with this assessment. Even if the District placed a non-voting member on a charter school’s governing board, there is still the potential for conflicts of interest to arise. Charter school governing boards are typically subject to the Ralph M. Brown Act (Government Code sections 54950 et seq.). To illustrate a real conflict of interest issue, if the non-voting member participated in a closed session discussion of the charter school’s board and learned confidential information, the representative would be prohibited under the Brown Act from disclosing that information to the District. (Gov. Code § 54963.) This could be problematic for the District if the information implicated the District in some way or could serve as a potential ground for revocation or non-renewal of the charter school’s charter. Whether the representative voted or did not vote on the matter would not necessarily alleviate this potential conflict.

The District recognizes the value of careful observance of a charter school’s governance practices and operations to verify that it is complying with the law. However, it does not believe that including a non-voting member is critical to this oversight function, especially considering that the law makes the appointment of a school district representative optional. As the audit team appears to suggest, there are other effective means to monitor the governance and operations of a charter school, including attending the charter school’s board meetings; reviewing agendas, meeting materials, and board minutes for compliance with the charter and applicable law; and issuing requests for information to clarify or obtain more information on governance issues.

Proactive Steps for Effective Charter Oversight

The District has thoughtfully considered the proposed recommendations in the Report and has already begun to proactively take measures to improve the consistency and effectiveness of its charter oversight activities. These include the following:

The District is also in the process of reviewing and preparing suggested changes to its board policies and regulations concerning charter schools, and developing written tools and checklists for academic, fiscal, governance, and operational oversight of its charter schools, among other things.

Conclusion

The District takes its charter oversight responsibilities seriously and is supportive of refining and expanding upon its policies, practices, and procedures for holding charter schools under its authorization accountable for their actions, student outcomes, and the law. However, there is an appropriate balance the District must strike between carrying out its oversight obligations while still affording charter schools under its authorization the ability to operate independently from the traditional school district structure, as contemplated by the law.

It is the District’s hope that the Report and the District’s corresponding response will serve to highlight the myriad of issues and complexities charter authorizers face in overseeing charter schools due to the vagueness and lack of specificity in the law. To that end, the District welcomes future legislative amendments to the CSA that will provide much-needed clarity and direction for charter authorizers in carrying out these important duties.






Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM ANTELOPE VALLEY UNION HIGH SCHOOL DISTRICT

To provide clarity and perspective, we are commenting on Antelope Valley Union High School District’s (Antelope Valley Union) response to our audit. The numbers below correspond with the numbers we have placed in the margin of Antelope Valley Union’s response.

1

For clarification, the statement that it was a pervasive practice throughout the State for virtual and independent‑study charter schools to open additional resource centers was presented as an assertion from Antelope Valley Union’s assistant superintendent of educational services, as we note here.

2

Our conclusion that Antelope Valley Union may have failed to comply with state law is based on the fact that it did not ensure that Desert Sands Charter High School’s 2014 renewal petition identified goals and outcomes meant for each significant subgroup of students that the charter school would serve. Desert Sands Charter High School’s 2014 renewal petition only identifies measurable student outcomes for students schoolwide, similar to the way it identified goals and outcomes in the school’s 2010 renewal petition, before state law changed.


3

As we state here, we agree that only the State Education Board is required to use its regulations as criteria for evaluating charter petitions. However, nothing precludes Antelope Valley Union from using the criteria as helpful guidance. Furthermore, because the Legislature recognized that the term reasonably comprehensive is somewhat subjective, we stand by our recommendation that districts should strengthen their authorization processes by using the State Education Board’s criteria for evaluating petitions to ensure that they have a method to hold charter schools accountable for their educational programs.

4

Although our report does not suggest that the District could have prevented LA Online’s fiscal insolvency, we note here and here that the district could not demonstrate that it took prompt and concerted action when LA Online’s financial reports showed that LA Online had not met Antelope Valley Union’s minimum reserve requirement and was experiencing significant financial distress.

5

We acknowledge Antelope Valley Union’s actions in response to LA Online’s deteriorating financial condition here and here; however, we also note here that Antelope Valley Union did not take significant action when LA Online failed to prove that it had obtained a loan to cover its funding shortfall. As a result, the district did not learn that LA Online had not obtained this loan until September 2015—almost nine months after LA Online submitted its first financial report showing indicators of financial difficulties

6

Although state law may not require the district to implement best practices regarding financial oversight, we believe that a robust oversight process would result in documentation that would corroborate the district’s assertions regarding its actions.

7

Our report does not suggest that failure to implement certain best practices equates to a lack of financial oversight. Instead, we state here and here that the districts’ processes for providing financial oversight to charter schools missed opportunities to incorporate best practices for monitoring charter schools’ financial conditions. Similarly, we do not indicate that state law requires districts to implement the best practices for financial oversight that we discuss in the audit report.

8

As we note here, none of the districts tracked the actual costs of their oversight activities as required by law. The district stated in its response that performing a heightened level of oversight monitoring may result in costs that exceed the legal maximum while not having any mechanism for reimbursement of these additional costs. However, if the districts had tracked their time and expenses related to oversight, we could have assessed whether a maximum of one percent is reasonable.

9

As we state here, state law allows an authorizing district to place its representative on a charter school’s governing board. Our recommendation does not suggest that district representatives attend all charter school’s governing board meetings. However, by placing a representative on a charter school’s governing board, the authorizing district would secure access to such meetings. Moreover, we recommended that the Legislature amend state law to grant clear authority for a nonvoting member to be on an out-of-district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board.






New Jerusalem Elementary School District

September 22, 2017

Elaine M. Howle, State Auditor
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: State Auditor's Report on Charter School Oversight, 2016-141

Dear Ms. Howle:

Thank you for the opportunity to review and respond to the State Auditor’s report, no. 2016-141, titled Charter Schools: Some School Districts Improperly Authorized and Provided Inadequate Oversight to Out-of-District Charter Schools (“Oversight Report”).

New Jerusalem Elementary School District (“District”) values charter schools as an alternative educational framework to provide innovative learning opportunities for a student population with a diverse set of needs, based on the unique focus of each charter school. The District has a present and continuing interest in providing effective oversight of its charter schools to ensure high quality academic environments for students, long-term viability of the schools, and compliance with laws and regulations.

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In responding to the concerns raised by the Oversight Report, the District respectfully provides additional context about the District, its infrastructure, and the charter schools it authorizes. Such information is incomplete in the Oversight Report and critical to a full understanding of the District’s oversight practices. Further, significant aspects of the circumstances leading to the bankruptcy of Tri-Valley Learning Corporation (“TVLC”) and closure of its four charter schools, including Acacia Elementary Charter School (“Acacia Elementary”), are not addressed. Instead, the Oversight Report evaluates the Acacia Elementary closure in a vacuum – without analysis of Acacia Middle Charter School (“Acacia Middle,” collectively with Acacia Elementary, the “Acacia Schools”) or Livermore Valley Charter Prep High School and Livermore Valley Charter School (both authorized by Livermore Valley Joint Unified School District (“LVJUSD”), and collectively, the “Livermore Charter Schools”). The root causes of TVLC’s bankruptcy stemmed from aspects of operation of the Livermore Charter Schools. Without the ability to evaluate all aspects of TVLC and its charter schools, the State Auditor has been unfortunately limited in considering and advising on best practices and legislative amendments related to authorization and oversight of charter schools. Such recommendations are needed to ensure accountability in the operations of charter schools for their students and California taxpayers and to provide guidance to all charter authorizers, regardless of agency type or size.

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1

For these reasons, the District respectfully requests that complete information about the District’s infrastructure and oversight practices, as well as a full analysis of TVLC’s operations (including the Livermore Charter Schools and the oversight practices employed by LVJUSD) be included in the final Oversight Report.

The District welcomes the best practice recommendations in the Oversight Report and encourages the Legislature to consider amending the Charter Schools Act (the “Act”) to clarify the legal oversight responsibilities of chartering authorities. Such amendments are necessary so that chartering authorities will have certainty regarding oversight obligations, which are only briefly outlined in the Act without detail to guide implementation. Incorporating the recommendations into law will also provide charter authorizers necessary authority to conduct oversight activities. In the District’s experience, provision of oversight beyond the statutory minimums is often challenged by “independent charter schools” operated as a non-profit corporation or by a non-profit charter management organization (“CMO”) (corporations established for the purpose of operating multiple charter schools, but are separate entities from the charter schools themselves). Changes to the law more clearly defining the authorizer’s role will benefit students and taxpayers by providing a tool for authorizers and charter schools to work together to ensure accountability.

Overview of California Charter School Structure

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The Act permits a variety of organizational and funding structures for charter schools. These structures are only partially described in the Oversight Report. A clear understanding of these structural options will facilitate the discussion about charter school operations and the District’s oversight practices.

1. Independent versus Dependent Charter Schools

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Charter schools may be structured as independent or dependent charter schools. These are terms used in practice to describe particular organizational structures, though the terms are not found in law.Dependent charter schools are charter schools established and operated by the chartering school district.The governing board of the chartering school district also governs the charter school. Charter schools can alternatively elect to be operated as, or by (as with a CMO structure), nonprofit public benefit corporations pursuant to Education Code section 47604(a).The nonprofit structure and such charter schools are commonly referred to as independent charter schools. Independent charter schools are operated as nonprofit corporations with their own governing board, or by a CMO and its governing board.Independent charter schools must still be authorized by a school district, a county board of education, or the State Board of Education.

2. Directly Funded versus Locally Funded Charter Schools

4

The Oversight Report addresses locally funded versus direct funded charter schools, but seems to conflate these funding options with dependent or independent charter school status. The District requests clarity in the Oversight Report around the funding descriptions. Charter schools elect to receive the state aid portion of the charter school’s total local control funding formula allocation either directly to the charter school’s account with the county treasury, or locally, from the county superintendent to the charter authorizer to the charter school. (Ed. Code, § 47651(a)(2).) The funding election is not governed by the charter school’s organizational structure, and does not affect the amount of funding received. Charter schools are not authorized as locally funded or directly funded, because each charter school elects to receive its funding either locally or directly, and may make this election every year by June 1. (Ed. Code, § 47651(b).) In practice, however, independent charter schools typically elect to receive direct funding and dependent charter schools typically elect to receive local funding. Direct funding of independent charter schools, and local funding of dependent charter schools, is generally a matter of convenience.

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The Oversight Report references locally funded versus directly funded charter schools, with an overview of charter school funding on page 18. References locally funded charter schools authorized by the District are found on pages 28, 31, 32, and 34. With respect to the District, the Oversight Report implies the District increased its own revenue by authorizing locally funded charter schools. (Oversight Report, pp. 31–32.) This is not accurate.

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Locally funded monies that pass through the charter authorizer are not owned by the authorizer, nor is the authorizer entitled to keep funds from the charter school for the authorizer’s own purposes aside from fees or costs that may be charged to the charter school pursuant to other provisions such as Education Code section 47613. It is inaccurate to state the District received “revenue” from the charter school local funding, apart from the fees and costs charged for oversight and services. (Oversight Report, 31 – 32.) The District only receives a portion of a locally funded charter school’s revenue when it is in consideration for oversight fees or charges for services.

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Though the District receives and manages the funds of its dependent charter schools (the District would manage the funds even if it is elected direct funding through a county treasury account), it maintains the balances for each school and the school’s reserves. It also budgets for the longer term needs of its dependent charter schools, such as building reserve monies to fund additional facilities for charter school programs. The $5,497,855 amount identified on page 32 as District revenue from local funding plan is not District revenue, but appears to be the total local control funding formula allocation for those charter schools, which is received and managed by the District on behalf of those charter schools.

3. Liability for Independent versus Dependent Charter Schools

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The structure of the charter school dictates an authorizer’s liability for debts and claims against the charter school. A school district operating a dependent charter school is liable for the debts and actions of the charter school, just as it is for the traditional public schools it operates. As its own legal entity, a nonprofit charter school and CMO are liable for operations of an independent charter school. An authorizer is statutorily immune for the operations of independent charter schools: “An authority that grants a charter to a charter school to be operated by, or as, a nonprofit public benefit corporation is not liable for the debts or obligations of the charter school, or for claims arising from the performance of acts, errors, or omissions by the charter school, if the authority has complied with all oversight responsibilities required by law, including, but not limited to, those required by Section 47604.32 and subdivision (m) of Section 47605.” (Ed. Code, § 47604(c), emphasis added.) Thus, the statutory scope of oversight is critically important to an authorizer. To the extent the Oversight Report’s recommendations stray beyond the plain language of the statute, the District requests clarity in the Oversight Report on the scope of opinion and recommended best practices versus application of existing law to the subjects of the audit.

Charter Authorizer Statutory Oversight Obligations

1. Charter School Oversight

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Oversight duties for charter authorizers are specified in Education Code section 47604.32, and listed as “key” duties on page 17 of the Oversight Report. To clarify, the duties listed on page 19 are not just the “key” duties, they are the only statutory prescribed oversight duties specified in the Act, found in Section 47604.32, as follows:

1. Identify at least one staff member as a contact person for the charter school.

2. Visit each charter school at least annually.

3. Ensure that each charter school under its authority complies with all reports required of charter schools by law, including the local control and accountability plan and annual update to the local control and accountability plan required pursuant to Section 47606.5.

4. Monitor the fiscal condition of each charter school under its authority.

Section 47604.32 was added in 2003 as part of AB 1137, legislation following the 2002 State Auditor’s report regarding charter school oversight, which found that oversight of charter schools at all levels could be stronger to ensure charter school accountability. (California State Auditor, California’s Charter Schools: Oversight at All Levels Could Be Stronger to Ensure Charter Schools’ Accountability (November 2002), p. 1.) The intent of AB 1137, and Section 47604.32, was to specify oversight duties of each chartering authority with respect to the charter schools under their authority. (AB 1137, Legislative Counsel’s Digest.) As made clear in the Oversight Report, the specified oversight duties may fall short of the providing the desired clarity, particularly if the State wants authorizers to use the specific best practices recommended by the Oversight Report to comply with the statutory oversight responsibilities. Nothing in current law states how these tasks should be accomplished or what record should be kept of actions. As such, the law is open to wide interpretation of the level of involvement by an authorizer that is required or permitted.

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Greater specificity in the law is also necessary if the Oversight Report’s recommended best practices will become the standard for determining whether a chartering authority has fulfilled its oversight responsibilities. As noted above, the question of liability for an authorizer for the actions of a charter school is directly linked to its oversight. Charter schools, like TVLC, have made it clear to their authorizers they do not have the right to participate in the day-to day control over charter school operations. For example, and relevant to the Oversight Report, TVLC refuted the District’s authority to review for sufficiency the 2016-2019 Local Control and Accountability Plan and Annual Update (“LCAP”), an annual update required by state law. (TVLC November 4, 2016 Response to October 5, 2016 Notice of Violation Regarding Acacia Middle, p. 6.) According to TVLC, the LCAP’s purpose is to “provide the District an opportunity to annually monitor the outcomes of [TVLC’s] internal assessments.” (Id.) “The District has no jurisdiction to determine if our LCAP is deficient or legally compliant.” (Id.) Despite TVLC’s protestations, the District did have authority to review the LCAP for compliance with state law, pursuant to its section 47604.32(a)(3) duty to “ensure that each charter school under its authority complies with all reports required of charter schools by law, including the annual update required pursuant to Section 47606.5” [the annual update to the LCAP].

Similarly, there are different interpretations of the duty to monitor the fiscal condition of each charter school. As identified in Chapter 2 of the Oversight Report, section 47604.32(a)(4) does not establish a minimum level of financial oversight that districts must perform. In practice, there are even different interpretations of the meaning to “monitor” the fiscal condition of the charter school, and the extent of a charter authorizer’s ability to exercise authority over proposed charter school transactions and financial decisions.

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Though opinions regarding best practices for authorizers oversight duties vary, the District complied with its statutory duties in providing oversight to Acacia Elementary, including: 1) identifying a contact for Acacia Elementary, 2) visiting the school at least once each year, 3) ensuring compliance with reports, and 4) monitoring Acacia Elementary’s fiscal condition. The District respectfully requests the Oversight Report clarify the District fulfilled its statutory obligations even if its practices could be improved.

2. CMO Operations

Though the Act anticipates the operation of charter schools by CMOs, the Act’s oversight obligations relate to charter schools and not CMOs. This limited scope means authorizers may not always have access to all information or ability to fully evaluate CMO operations. This includes lack of access to reports, records, and facilities that provide a comprehensive picture of the CMO, its management, and financial viability. The complexity of CMOs can also be used to obfuscate potential issues.

With respect to TVLC, this limitation meant that the District’s oversight did not extend to the Livermore Charter Schools chartered by LVJUSD. The District thus did not receive records of the Livermore Charter Schools and did not evaluate transactions related to the Livermore Charter Schools that may have raised red flags at an earlier point. Similarly, LVJUSD likely did not have access to information about the Acacia Schools. The District had no involvement in the transactions related to the Livermore Charter Schools described in the AB 139 Extraordinary Audit prepared by the Fiscal Crisis Management Assistance Team (“FCMAT”) regarding the Tri-Valley Learning Corporation, dated June 8, 2017 (“FCMAT Extraordinary Audit”), and the Oversight Report, including school bonds (totaling more than $67 million) which financed the Livermore Charter Schools’ facilities, the related lease that pledged Acacia Elementary revenues for the lease payments that were assigned to the bond trustee, and undisclosed transactions of self-dealing. (FCMAT Extraordinary Audit, p. 10, 63; Oversight Report, p. 48.) Much of the financial pressure that led to TVLC’s bankruptcy was due to financial issues created by the Livermore Charter Schools transactions, including various loans, and loss of enrollment of the Livermore Charter Schools attributable to upheaval around the bonds and the private school involved in the facilities transactions. (FCMAT Extraordinary Audit, p. 59.)

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As a result, TVLC was able to obfuscate its financial problems as a CMO. Funds were moved between its four charter schools as needed, and without proper documentation. (FCMAT Extraordinary Audit, p. 56 – 58; Oversight Report, p. 48 – 49.) TVLC funds were moved to private entities, and commingled. (FCMAT Extraordinary Audit, p. 40 – 46.) A loan to Acacia Elementary was undocumented and not disclosed in the annual audit report or TVLC’s accounting records. (FCMAT Extraordinary Audit, p. 57 – 58.) The Act does not require specificity in its required financial records, and the Acacia Elementary financial records did not provide the detail regarding TVLC’s finances that would have raised additional red flags, other than the negative ending balance and lack of reserves.

When the District began investigating the status of TVLC’s finances in Fall 2015, it had limited records related to the Acacia Schools. This led to a series of requests by the District for TVLC records, as the District tried to understand the limited information in financial records and audit reports, and then bank statements. Ultimately, the District had to rely on publicly available records such as the bond statements and records that TVLC only disclosed in response to the Acacia Schools revocation proceedings. The District learned additional information, which had been withheld from it, only when the FCMAT report was released.

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Based on this experience, the District believes it would be valuable for the State Auditor’s report to include additional analysis of TVLC’s status as a CMO and its relationship to TVLC’s financial dealings and liabilities.

The District and Its Charter Schools

1. District Schools

During the 2016-17 school year, the District authorized 13 charter schools (seven dependent charter schools and six independent charter schools) that varied by location and program type:

Dependent Charter Schools

Independent Charter Schools

Of the six independent charter schools, two were operated as nonprofit corporations, and four were operated by a CMO (including the two Acacia Schools operated by TVLC).

Of the six site-based charter schools, two of the schools are located within the District’s boundaries.

Seven of these charter schools provided virtual independent study programming, accounting for approximately 56% of the charter school students that attended District-authorized charter schools. These independent study charter schools either located within the District’s boundaries, outside the District’s boundaries pursuant to a relevant exception under Education Code section 47605.1, or do not have educational programming facilities.

2. Charter School Compliance and Oversight Infrastructure

Unlike many small school districts, the District infrastructure is built to provide proper oversight of, and ensure charter school’s compliance with, the Act. From its staffing to authorizing procedures, the District has prudently managed its resources to ensure the successful operation of its dependent charter schools and proper oversight of all its charter schools.

Under the umbrella of the District and its Superintendent, the District’s charter team is led by a Deputy Superintendent of Educational Services who manages the charter school oversight and compliance activities, and is supported by other District administrators with expertise in budget/finance and special education. The Deputy Superintendent serves as the contact to each charter school, and supervises the teams conducting annual visits. District staff members working with charter school matters routinely attend charter school conferences and other professional development opportunities to stay current with charter school development. The District also works with legal counsel experienced with the oversight of charter schools.

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The District has developed policies regarding charter school authorization, oversight, renewal, revocation, and facilities. As noted on page 39 of the Oversight Report, these policies are based on guidance from the California School Board Association (“CSBA”), which closely mirrors state law. The CSBA model policies are the industry standard in California adopted by the majority of school districts throughout the State. The policies are current and the District is committed to updating them to stay on pace with changes in the law and best practices.

Further, the District routinely requires charter petitioners to submit documentation necessary to supplement or clarify aspects of each charter petition to ensure compliance with the Act. The District’s new charter petition application guide requires the following information be submitted with each petition: a letter of intent, teacher resumes and credentials, information regarding the governing board, a three-year budget, enrollment forms, due diligence questionnaire, and administrator and governing board member questionnaires. Legislative or regulatory changes mandating that petitioners submit such information as part of a petition would assist authorizers in addressing resistance from petitioners to submitting documentation in support of each petition outside of the elements of the Act.

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The District created a rubric to analyze petitions that will be submitted to the District’s Board this year for review. The rubric relies in part on the State Board of Education (“SBE”) criteria for charter school approval. This effort is consistent with the recommendations set forth in the Oversight Report, but are not required by law. The District also utilizes the support of legal counsel, as appropriate, during the petition review process. Altogether, the District’s detail in petition review has generally resulted in authorization of well qualified charter schools. Not all charter petitions meet the legal requirements of the Act and, in those instances, such petitions have not been approved (including three petitions in the past two years). With respect to Acacia Elementary, when TVLC submitted is petition to the District, it was regionally recognized as a successful CMO with two charter schools authorized first by the SBE, and renewed by LVJUSD. At the time, closer scrutiny of the petition is unlikely to have revealed the egregious financial mismanagement that followed.

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Other infrastructure assists the District’s oversight following charter petition approval. The District created a semi-annual oversight matrix for the charter schools to complete. The matrix asks for evidence of support for indicators in the areas of student attendance, cash receipts, disbursements, records retention, payroll, budget/accounting/financial reporting, audit, financial condition, equipment condition, educational program, services to special populations, curricular materials, professional development and teacher qualifications, ongoing assessment, facilities, organizational management, capacity/composition, structure, clarity, meetings, parent and staff involvement, employees, admissions, discipline, health and safety, and parent notifications.

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The District also has a rubric to evaluate the statutorily required annual LCAP. District staff use the rubric to evaluate the annual LCAP update prepared by the charter schools. Notably, TVLC challenged the District’s ability to evaluate the sufficiency of the LCAP report, stating that the law only provided the District the authority to ensure that the report was submitted.(TVLC November 4, 2016 Response to October 5, 2016 Notice of Violation Regarding Acacia Middle, p. 6.)

By pressing TVLC on this and other issues through the District’s robust oversight process the District flagged discrepancies in TVLC’s mismanagement of the Acacia Schools. In fact, the District was the first agency to identify and attempt to correct these issues with TVLC – steps not taken by LVJUSD until over a year later after FCMAT, at the request of the Alameda County Office of Education, confirmed the factual findings that were the basis for District’s revocation of the Acacia Schools charters.

Other Issues Raised in Oversight Report

1. Location

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The Oversight Report raises questions about the location of Acacia Elementary and whether it qualified for an exception to locate outside of the District’s boundaries pursuant to Education Code section 47605.1.(Oversight Report, pp. 23 – 28.) The District followed the plain language of the law, which states:

[A] charter school that is unable to locate within the geographic boundaries of the chartering school district may establish one site outside the boundaries of the school district, but within the county within which that school district is located, if the school district in which the charter school proposes to operate is notified in advance of the charter petition approval, the county superintendent of schools is notified of the location of the charter school before it commences operations, and either of the following circumstances exist:

1) The charter school has attempted to locate a single site or facility to house the entire program, but such a facility or site is unavailable in the area in which the charter school chooses to locate.

2) The site is needed for temporary use during a construction or expansion project.

(Education Code section 47605.1(d).)

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Acacia Elementary qualified for this exception as it was unable to locate within the District. When the petition was presented to the District, its staff and Board knew with certainty that no facilities were available within the District adequate to house Acacia Elementary. The District is a rural school district outside of the City of Tracy. The only community within its boundaries is the unincorporated community of New Jerusalem, consisting of the District’s school facilities, a fire station, residential buildings, and a small airport. The rest of the District is agricultural land, with agricultural and residential buildings. With the exception of the District’s buildings, the facilities within the District are unsuitable for school facilities, and the District was aware that its own buildings could not house a classroom-based elementary school program with over 200 students.

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In reviewing the petition, the Board considered Petitioner’s intent to serve students in San Joaquin County, which includes the District and its constituents. As a school of choice, the charter school may enroll students throughout the county regardless of location. Since Acacia Elementary was unable to locate within the District’s boundaries, the Board approved the Stockton location consistent with Section 47605.1(d). Proper notice was provided to Stockton Unified School District without objection.

2. Review of Charter School Petitions

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Petitions to establish charter schools must contain signatures by parents or teachers, with the number of signatures meeting certain requirements. (Ed. Code, § 47605(a)(1).) The Oversight Report identifies an irregularity with the Acacia Elementary charter petition, that the petition did not have the required number of signatures. (Oversight Report, pp. 23 & 36.) The Acacia Elementary charter petition was one signature short, and that one signature was crossed out. The District’s count of the total number of signatures was off by one. This error was an oversight, and not indicative of the District’s practices.

3. Review of Acacia Elementary Finances

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The Oversight Report makes several comments to the effect the District was not timely in identifying Acacia Elementary’s financial problems. (Oversight Report, pp. 45, 50, 53.) The District strongly disagrees with this assessment and respectfully requests that these statements be corrected in the final Oversight Report. Each item is addressed below:

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Financial issues that later surfaced could not have been known by the District at the time they occurred. As discussed in this response, the District did not authorize and was not responsible for providing oversight to the Livermore Charter Schools. TVLC did not disclose to the District that it pledged Acacia Elementary’s revenues to make lease payments for Livermore Charter School facilities that were assigned to the trustee for the bonds. In addition, TVLC hid its financial problems, moving monies between its charter schools, entering into an undocumented loan, and failing to disclose that loan in the annual audit. (FCMAT Extraordinary Audit, pp. 56 – 58; Oversight Report, pp. 48 - 49.) The lack of detail required of charter school financial reports and the annual audit also made it difficult for the District to ascertain financial status and the nature of some of the transactions.

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The timeline in Figure 3 also identifies the District’s requests to include its representative on the TVLC Board, as is its legal right pursuant to Education Code section 47604(b). These requests were made at the beginning of Acacia Elementary’s second year of operation, and then several months later. By the time TVLC added the District representative to its board, TVLC had already entered into many of the transactions that contributed to its financial problems, including the Acacia Elementary lease (August 2014), the undisclosed $600,000 loan (2014), and the lease that pledged the Acacia Elementary revenues as security (May 2015). (Oversight Report, Figure 3, p. 49.) Since TVLC’s bylaws restricted charter authorizer representatives participation to voting on open session matters related to the charter school it authorized, District representative on the TVLC Board still did not have access to information related to the rest of TVLC’s finances and operations.

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Thus, through its oversight practices, the District did identify the early indicators that were available to the District related to Acacia Elementary’s financial distress. The District responded responsibly and quickly after reviewing the unaudited actuals financial report detailing Acacia Elementary’s finances in its second year of operation.

The questions asked by the District following receipt of the unaudited actuals report, and its own research, led to the discovery of information about TVLC’s financial transactions, including the Livermore Charter Schools’ bonds and TVLC’s debts, that eventually led to revocation of the Acacia Elementary charter on the bases of failure to comply with material terms of the charter (particularly terms related to Acacia Elementary’s finances) and fiscal mismanagement. The issues identified by the District during the revocation process led to increased scrutiny of the Livermore Charter Schools by LVJUSD, and eventually Alameda County Office of Education, which requested the FCMAT extraordinary audit. FCMAT was given access to TVLC documents and information to which the District did not have access, and FCMAT’s extraordinary audit confirmed many of the District’s allegations.

4. Academic Performance

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As described in the Oversight Report, there are limited statutory requirements related to the authorizer’s role in reviewing a charter school’s academic performance. Authorizers are only required to assess academic performance when a charter petition is renewed (Ed. Code, § 47607(a) & (b)) and when a charter is revoked. (Ed. Code, § 47607(c)(2).) (Oversight Report, p. 65.) On the other hand, charter schools are required to assess stated measurable student outcomes each year. (Oversight Report, pp. 65 - 66.) There is no clear authority for the District to intervene in the assessment or review process outside the renewal or revocation processes. State law does not require, direct, or arguably even permit, academic performance to be evaluated at the annual site visits. (Oversight Report, p. 65.) With this context in mind, the District respectfully requests the State Auditor to reconsider aspects of the Oversight Report related to the District’s evaluation of Acacia Elementary’s academic performance, and to make certain factual corrections to the Oversight Report related to this issue.

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Acacia Elementary’s charter petition indicated that student performance would be evaluated based upon statewide testing. (Acacia Elementary Charter, Element C.) In 2013-14, its first year of operation, no data was available for the District to review because Acacia Elementary did not utilize the California Assessment of Student Performance and Progress (“CAASPP”) because statewide testing was transitioning to this new tool for scoring academic performance. Acacia Elementary’s 2014-2015 CAASPP scores were available in Fall 2015. The charter was revoked in July 2016. The 2015-2016 scores were released in the Fall of 2016, after revocation (a very limited snapshot of 2015-2016 data was provided by TVLC to the District prior to revocation, but did not contain the detail necessary for a complete evaluation). Since the District did not have two years of data to compare prior to revocation, the District could not determine, much less put the charter school on notice regarding academic progress concerns, prior to initiating and approving revocation. In light of the egregious financial mismanagement triggering the revocation process, which was subsequently confirmed by the FCMAT Audit some 10 months following revocation, the District felt compelled to proceed with revocation notwithstanding the limited data available related to student achievement.

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Related, the District requests the State Auditor to correct the statement in the Oversight Report that the San Joaquin Superior Court determined the District had not adequately considered increases in academic achievement as part of its revocation decision. (Oversight Report, pg. 69.) The Superior Court’s determination was made for the limited purpose of a preliminary injunction and the issue has not been finally adjudicated. (TVLC v. NJESD, et al. (Super. Ct. San Joaquin County, 2016, NO, STK-CV-UWM-2016-0007774.)

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Finally, the Oversight Report’s Table 8 comparing Acacia Elementary’s 2014-2015 and 2015-2016 CAASPP scores is also misleading because it compares the Acacia Elementary scores to the scores of other local schools similar to Acacia Elementary. This comparison would be made after four years of operation when the charter school is requesting renewal of its petition not in the revocation context. (Ed. Code, § 47607(b)(4).) A measurement over four years provides a more accurate picture of whether a charter school’s teaching methods are resulting in improved pupil performance.

5. Oversight Fees

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The Oversight Report raises concerns regarding the oversight fees charged by the District to charter schools. (Oversight Report, pp. 31, 34 – 36.) The supervisorial oversight fee specifically funds the oversight activities listed in sections 47604.32 and 47607.3. (Ed. Code, §§ 47604.32(b), 47613(g.).) Charter schools may also separately purchase administrative or other services from the charter authority. (Ed. Code, § 47613(d).)

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The District and Acacia Elementary verbally agreed to a 3 percent oversight fee even though Acacia Elementary did not receive rent-free facilities. TVLC Board minutes reflected the TVLC Board’s approval of the higher rate. (Oversight Report, p. 34.) This verbal agreement should have been in writing so that the terms were memorialized.

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Despite the statutory cap, oversight fees in excess of the statutory cap are analogous to developer fees or other circumstances where parties willingly contract at rates that exceed the statutory rate.

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It is common practice for authorizers and charter schools to agree on a flat rate percentage to the extent that tracking District staff time and costs related to supervisorial oversight can be burdensome since it is part of the day to day work conducted by District employees. Given the significant staff time and costs related to supervisorial oversight the statutory oversight fee is not likely to cover the direct costs. Thus, the conclusions in the Oversight Report that collection of the fee results in funds being improperly directed away from charter schools’ educational programs is not accurate. In fact, in a matter unrelated to TVLC, the District legally challenged the practice of another CMO that retained in excess of $1 million in reserves for two charter schools whose operation was moved from the CMO to the District.1 This demonstrates the District’s strong commitment to keeping dollars meant for education with students.

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Finally, the District wishes to clarify it did not develop a new agreement with TVLC and Acacia Elementary following its amended policy specifying the District’s agreement to provide administrative or support services should be memorialized in a memorandum of understanding. (Oversight Report, p. 34 – 35.) At the time the policy was updated in February 2016, the District was preparing to file a Notice of Violation with TVLC regarding Acacia Elementary and TVLC. The priority at that time was addressing the various deficiencies in TVLC’s operations, which ultimately resulted in revocation and closure.

6. Board Membership

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The Oversight Report recommends that charter authorizers place a district representative as a nonvoting member on each charter school’s governing board. (Oversight Report, p. 12.) The Charter Schools Act expressly allows this, as “[the] governing board of a school district that grants a charter for the establishment of a charter school formed and organized pursuant to this section shall be entitled to a single representative on the board of directors of the nonprofit public benefit corporation.” (Ed. Code, § 47604(b).) As used in the Corporations Code, however, directors of nonprofit corporations have voting rights; a person who does not have the authority to vote as a member of the governing body of the corporation is not a director. (Corp. Code, § 5047.) The District requests clarity on this recommendation.

In practice, charter authorizers in California typically do not appoint a member to the charter school’s governing board. There are concerns regarding the potential for conflicts given the issues that may arise between the charter authorizer and the charter school.

Conclusion

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Consistent with the foregoing, the District respectfully requests the final Oversight Report be revised as follows:

  1. Clarify the types of charter school structures;

  2. Include relevant information regarding the District and its current infrastructure related to charter school authorization and oversight;

  3. Include and evaluate relevant information related to TVLC and the Livermore Schools;

  4. Correct factual errors in the Oversight Report as identified in this response;

  5. Clarify current law related to oversight practices and distinguish those requirements from best practice recommendations as applied to the subjects of the audit; and

  6. Make recommendations regarding Legislation to address authorization and oversight of charter schools operated by CMOs, operation of such charter schools by CMO, including required transparency by CMO to authorizers regarding CMO operation.
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Thank you for the opportunity to respond to the Oversight Report. If you have any questions regarding these responses, please contact Superintendent, David Thoming at (209) 830-6363.

Sincerely,

David Thoming
Superintendent

Footnote

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1 The District initiated litigation against a CMO that retained the unspent funds of two charter schools following transfer of management of the charter schools to the District. The District took the position that state funds allocated to the charter schools were for the benefit of the charter schools, and did not belong to the CMO. (NJESD vs. Academy of Arts and Sciences Charter School, et al., (Super. Ct. San Joaquin County, 2016, No. STK-CV-UWM-2016-0007774.) Go back to text






Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM NEW JERUSALEM ELEMENTARY SCHOOL DISTRICT

To provide clarity and perspective, we are commenting on New Jerusalem Elementary School District’s (New Jerusalem) response to our audit. The numbers below correspond to the numbers we have placed in the margin of New Jerusalem’s response.

1

We disagree that information on the district is incomplete. We present detail on the district as necessary throughout our report. In addition, we provide background information about the district in Table 2 and changes to the district’s number of charter schools and enrollment in Table 5. Contrary to New Jerusalem’s assertion, our report includes significant information regarding the circumstances leading to the bankruptcy of Tri‑Valley Learning Corporation (Tri‑Valley) and the closure of Acacia Elementary.

2

As we state here, our audit focused on charter schools specifically identified in the audit request and on these charter schools’ authorizing school districts. Because the audit request named Acacia Elementary Charter School (Acacia Elementary) but did not name other Tri‑Valley charter schools, we provided information on other Tri‑Valley schools to the extent that such information was relevant to Acacia Elementary. In addition, California’s Fiscal Crisis and Management Assistance Team (FCMAT) performed an audit of Tri‑Valley’s Livermore schools and published the results of its audit in June 2017. We summarize FCMAT’s key findings and recommendations in this text box.

3

We disagree. The scope of our audit as approved by the Joint Legislative Audit Committee has resulted in our report citing relevant best practices and making numerous legislative recommendations related to the authorization and oversight of charter schools.

4

As we note here, our report makes clear that we are discussing the common practice of locally funded and directly funded charter schools. We do not use the terms dependent and independent, which are sometimes used within the education community to describe a charter school’s structure, because they are not found in state law. We note here that locally funded charter schools usually have the same governing board as their authorizing districts while directly funded charter schools are typically operated by nonprofit public‑benefit corporations. The district’s response acknowledges that this practice is typical of how charter schools elect to receive their funding. Thus, we believe we have sufficiently covered the structures of charter schools for the purposes of our audit report.

5

While preparing our draft report for publication, some page numbers shifted. Therefore, the page numbers New Jerusalem cites in its response do not correspond to the page numbers in our final report.

6

We disagree with the district’s statement that it did not increase its revenue as a result of authorizing locally funded charter schools outside the district’s geographic boundaries. As shown in this text box, the district’s out-of-district locally funded charter schools generated nearly $5.5 million in local control funding formula revenue, which we refer to as the local funding plan, described here. Although we do not discuss this in the report, the revenue of locally funded charter schools that New Jerusalem authorized is included in the district’s audited financial statements. Moreover, the charter petitions of New Jerusalem’s locally funded charter schools state that the district provides all support services to these charter schools, including personnel, financial, legal, purchasing, and facility services. The petitions further state that New Jerusalem’s superintendent determines the charter schools’ costs for these services, subject to the district’s governing board ratification. Given that the district receives its locally funded charter schools’ funding and makes spending decisions in relation to this funding, we stand by our conclusion that New Jerusalem increased its revenue by authorizing locally funded charter schools outside its geographic boundaries.

7

We disagree that our recommendations are not clear. The report clearly distinguishes between the law and best practices in its discussion of the authorization and monitoring of charter schools. Our recommendation specific to ensuring compliance with state law clearly states this focus.

8

In this text box, we describe key statutory responsibilities of charter authorizers. An example of a responsibility that we did not include in the text box is state law’s requirement that charter authorizers consider increases in student academic achievement for all groups of students served by a charter school as the most important factor in determining whether to grant a charter renewal or revoke a charter. Thus, we stand by our description of the items as key statutory responsibilities.

9

The example that New Jerusalem provides in its response is not relevant to Acacia Elementary, as New Jerusalem refers to a document that pertains to Acacia Middle Charter School (Acacia Middle)—another Tri‑Valley charter school. As we describe in Comment 2, the audit request named Acacia Elementary but did not name other Tri‑Valley charter schools as being within this audit’s scope.

10

As we state here, the Joint Legislative Audit Committee directed us to determine the adequacy of the financial oversight provided by the authorizing districts for the charter schools located outside of their geographic boundaries. State law does not prescribe specific procedures that authorizers must follow to fulfill their oversight responsibilities, which we acknowledge several times throughout the report—including here, here, here, and here—so we relied upon best practices to assess their financial oversight.

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New Jerusalem’s statement minimizes the significance of Acacia Elementary’s low level of reserves and the charter school’s deficit for its first year of operations as indicators of the charter school’s financial condition. New Jerusalem’s statement is inconsistent with the district’s requirements. Specifically, as we state here, the district’s memorandum of understanding with Acacia Elementary required the charter school to maintain a minimum level of reserves. Thus, we disagree with New Jerusalem’s justification for its lack of action in response to Acacia Elementary’s initial indicators of financial difficulties and we stand by our conclusion that the district should have taken action sooner in response to these indicators.

12

As we describe here, the district did not update its charter school policy between September 2008 and February 2016, despite amendments to state charter school law in 2013. We look forward to the district’s 60‑day response to clarify the specific procedure it has established to ensure that its policies are updated periodically to reflect changes in state law.

13
Contrary to New Jerusalem’s statement, our report does not suggest that New Jerusalem’s review of Acacia Elementary’s petition would have revealed Tri‑Valley’s financial mismanagement.
14

Although we acknowledge that New Jerusalem has oversight matrices, our concern is that New Jerusalem could not demonstrate that it always reviewed these matrices or provided feedback to Acacia Elementary on identified issues. As such, the district is not using this tool in the most meaningful way, as we state here.

15

We disagree with the district’s claim that Acacia Elementary qualified for an exception to being located within the district’s geographic boundaries. State law requires a charter petition to identify a single school to operate within the geographic boundaries of the authorizer, with limited exceptions. As the district noted in its response, the plain language of the law provides an exception if the charter school has attempted to locate a single site or facility to house the entire program, but such a facility or site is unavailable in the area in which the charter school chooses to locate. As we point out here, Acacia Elementary’s petition stated that the school’s intention was to serve students within San Joaquin County, with particular attention to underserved students in Stockton. Further, we note that in fiscal year 2015–16 none of Acacia Elementary’s students lived within New Jerusalem’s boundaries. Therefore, we stand by our conclusion that it did not qualify for the legal exception and should have petitioned the district where the students it intended to serve were located.

16

As we point out here, state law does not specify how far in advance the host district needs to be notified. However, because the district did not notify Stockton Unified until a few hours before it authorized Acacia Elementary’s petition, it is unclear how this constituted sufficient notice that would have allowed Stockton Unified an opportunity to object.

17

State law requires petitions to include all of the required signatures prior to being submitted to the district’s governing board for review. However, Acacia Elementary’s petition included only nine of the 10 teacher signatures it needed at the time it was authorized. Districts should strictly adhere to legal requirements related to charter school authorization.

18

We address specifics of the district’s comments related to financial oversight in Comments 19 through 25 below.

19

New Jerusalem misstates that Acacia Elementary’s reported ending balance amounted to $58,000 for fiscal year 2013–14, when, in fact, Acacia Elementary actually reported a deficit of $58,000, an amount $116,000 lower than New Jerusalem cited in its response. We stand by our conclusion that, in aggregate with other indicators present in Acacia Elementary’s financial reports, this deficit should have led New Jerusalem to start taking further action regarding Acacia Elementary’s financial condition.

20

We disagree with New Jerusalem’s argument that its reliance on Tri‑Valley’s reputation as a successful CMO justified New Jerusalem’s lack of action in response to initial indicators of Acacia Elementary’s financial difficulties. As an authorizing district, New Jerusalem had a responsibility to monitor the fiscal condition of Acacia Elementary. As we show in Figure 3, Acacia Elementary’s financial reports indicated that its financial condition was deteriorating. Hence, we believe that New Jerusalem should have taken action based on Acacia Elementary’s financial information, regardless of its perception of Tri‑Valley’s reputation.

21

Our report does not suggest that New Jerusalem should have approved Acacia Elementary’s financial decisions and transactions, including its lease agreement. Instead, here we state that New Jerusalem could not demonstrate that it acted in response to the high rates in this lease agreement until April 2016, even though the district was aware that Acacia Elementary had relocated to a new facility in September 2014. Had the district evaluated the related lease agreement in the fall of 2014, when Acacia Elementary notified the district of its relocation to a new facility, we believe New Jerusalem could have earlier recognized the impact of the lease agreement’s higher rates on Acacia Elementary’s financial condition.

22

In Chapter 2 and in Figure 3, we acknowledge that the district issued a formal notice of concern after receiving Acacia Elementary’s unaudited financial report for fiscal year 2014–15, requested additional information from the school to assess its financial condition, and promptly commenced revocation proceedings against Acacia Elementary after identifying additional issues with Acacia Elementary’s finances. Therefore, it is unclear with which aspect of our analysis New Jerusalem disagrees.

23
Contrary to New Jerusalem’s statement, our report does not suggest that New Jerusalem should have known about the financial issues pertaining to Tri‑Valley’s Livermore schools.
24

As we show in Figure 3, we recognize New Jerusalem’s attempts to place a district representative on Tri‑Valley’s governing board. Our report does not suggest that placing a district representative on Tri‑Valley’s governing board sooner would have allowed New Jerusalem to identify Acacia Elementary’s undisclosed loan or the fact that Tri‑Valley pledged Acacia Elementary’s revenue in a lease agreement for its Livermore schools.

25

We disagree with New Jerusalem’s assessment of its oversight of Acacia Elementary’s financial condition. In its response, New Jerusalem asserted that it identified early indicators of Acacia Elementary’s financial distress and responded quickly after reviewing the unaudited financial report for Acacia Elementary’s second year of operations. However, as we state here and in Figure 3, prior to receiving Acacia Elementary’s unaudited financial report for its second year of operations, New Jerusalem had received financial reports indicating that Acacia Elementary was experiencing financial difficulties. The district could not demonstrate that it responded to those initial indicators of Acacia Elementary’s financial distress. As a result, we stand by our conclusion that New Jerusalem could have responded sooner to initial indicators of Acacia Elementary’s financial difficulties.

26

Contrary to New Jerusalem’s statement, our report does not state that charter schools are required to assess measurable student outcomes each year. We note here that although state law requires charter schools to establish measurable student outcomes within their petitions, it does not require authorizing districts to assess annually whether charter schools are meeting those outcomes.

27

New Jerusalem is mischaracterizing a statement we made here, which notes that state law requires authorizing districts to conduct annual site visits at their charter schools, but does not identify specific oversight activities that the districts must perform.

28

We address specifics of the district’s comments related to academic oversight in Comments 29 through 31 below.

29

We note here that Acacia Elementary failed to meet some of its measurable student outcomes in fiscal year 2014–15 and 2015–16, such as having its students meet or exceed the average achievement of schools located in Stockton. We also include the district’s explanation that academic performance data for fiscal year 2014–15 was not available until fall 2015. Although the district states that it did not have two years of data to compare prior to revocation, the fall 2015 data would have been sufficient for the district to assess whether Acacia Elementary met its measurable student outcomes for fiscal year 2014–15. However, as we also note, the district did not report concerns about Acacia Elementary’s academic performance until June 2016.

30

Contrary to New Jerusalem’s statement, our report accurately cites excerpts from the court’s decision to issue the preliminary injunction. The court’s decision states that “the resolutions and Finding of Facts #8 of each resolution do not constitute substantial evidence that the District considered increases in the students’ academic achievement as the most important factor in the revocation decision. This court would expect that increases would be laid out and identified as to each group and sub‑group with a statement about the impact of the increases for the students and the values of such increases for the students and the community."

31

As we state for Objective 6c in Table 3, we were asked to perform this analysis over this time frame by the Joint Legislative Audit Committee. Although the district notes that a measurement over four years provides a more accurate picture of academic performance, only two years of academic performance data was available.

32

As we state here, the board meeting minutes from May 2015 showed that Tri‑Valley’s board approved New Jerusalem’s proposal for a fee increase to 3 percent; however, the minutes also indicate that the proposal did not include a breakdown describing what the school would receive in exchange. As we note here, state law allows charter schools to purchase additional services from their authorizers; however, state law specifies that authorizers can only charge for the actual costs of supervisorial oversight not to exceed 1 percent of a charter school’s revenue, or 3 percent of its revenue if the authorizer provides substantially rent‑free facilities. Although Tri‑Valley agreed to pay New Jerusalem oversight fees that exceeded the statutory cap, the agreement violated state law.

33
Although New Jerusalem notes that it is common practice for authorizers and charter schools to agree on a flat rate percentage for oversight fees, state law establishes a legal limitation that districts can only charge their actual costs up to 1 percent of charter school revenue. We believe that the implementation of time‑reporting tools would allow staff to identify the cost of district activities related to oversight of each charter school.
34

The example that New Jerusalem provides in its response is not relevant to Acacia Elementary, which is the focus of our audit. New Jerusalem’s response refers to another charter school that the district authorized.

35
We have made a legislative recommendation to amend state law to grant clear authority for a nonvoting member from an authorizing district to be on an out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board. We did not share this recommendation with the districts we audited because it was not made to them.






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