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Report Number: 2016-141		Abbreviations
Charter Schools Some School Districts Improperly Authorized and Inadequately Monitored Out-of-District Charter Schools

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Chapter 1

SOME DISTRICTS HAVE EXPANDED THEIR REACH AND INCREASED THEIR REVENUE BY AUTHORIZING OUT‑OF‑DISTRICT CHARTER SCHOOLS

Two of the three districts we reviewed—Acton‑Agua Dulce Unified and New Jerusalem—expanded their reach by using exceptions in state law to authorize out‑of‑district charter schools. However, neither district was able to demonstrate that the schools they authorized actually qualified for these exceptions. Further, weaknesses in state law prevent host districts from challenging the authorization of out‑of‑district charter schools, even if the host districts have previously rejected the schools’ petitions. As a result, Acton‑Agua Dulce Unified and New Jerusalem were able to authorize charter schools with little evidence of community support in the host districts. Acton‑Agua Dulce Unified’s and New Jerusalem’s authorizations of out‑of‑district charter schools led to significant increases in the districts’ enrollment numbers and provided a method for the districts to substantially increase their revenue. Further, both Acton‑Agua Dulce Unified and New Jerusalem authorized charter schools despite their petitions missing basic components, such as the minimum number of parent or teacher signatures. Finally, all three districts we visited had outdated charter school policies and did not ensure that their staff thoroughly reviewed petitions for compliance with all legal requirements.

By Authorizing Charter Schools Outside Their Jurisdictions, Two of the Districts We Reviewed Impaired Local Control of Education

Acton‑Agua Dulce Unified and New Jerusalem have used exceptions within the state law on charter school authorization to expand their reach through the establishment of out‑of‑district charter schools. According to Education’s guidance, the State’s educational system relies on local control for the management of districts on the theory that the people closest to the problems and needs of each individual district are best able to make appropriate decisions on its behalf. In addition, state law requires charter schools to operate within the geographic boundaries of their authorizers, with limited exceptions. Specifically, state law allows a charter school to establish one out‑of‑district site within the district’s county if no available site or facility exists to house the entire school program in the area in which the school chooses to locate or if the site is for temporary use during construction. However, neither Acton‑Agua Dulce Unified nor New Jerusalem could provide evidence that their out‑of‑district charter schools had, in fact, qualified for these exceptions during the authorization process. Further, some of the charter schools’ petitions we reviewed indicated their intent to locate outside the district’s jurisdiction by identifying their target student populations as those in another district—a circumstance that appears to conflict with the 2002 amendments to the Charter Schools Act that specify charter schools should be located within their authorizing districts. For example, 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, even though the authorizing district was in Tracy. Likewise, Assurance Academy’s petition proposed to serve students throughout Los Angeles County and adjacent counties.

According to New Jerusalem’s superintendent, his district’s charter schools meet the legal exception for situations in which no available facilities exist within the district. However, given the statutory limitations that require a charter school to be located in the geographic boundaries of the chartering district, New Jerusalem’s reliance on this exception is misplaced because to be consistent with the law, the schools that New Jerusalem has authorized should have petitioned the districts where the students the charter schools chose to target were located. By using this exception in state law, New Jerusalem increased its enrollment with students who would otherwise attend schools in neighboring districts. According to 2010 U.S. Census data, the total population of school‑age residents within New Jerusalem’s geographical boundaries was only about 330 people. However, New Jerusalem increased its enrollment from 686 students in fiscal year 2010–11 to 5,015 students in fiscal year 2015–16 by increasing the number of its out‑of‑district charter schools from zero to 10, as Table 5 shows. For example, in the case of Acacia Elementary, none of its 421 students in fiscal year 2015–16 lived within New Jerusalem’s geographical boundaries. Thus, the decision of New Jerusalem’s board to authorize out‑of‑district charter schools has resulted in the diversion of a significant number of students from other districts to New Jerusalem’s charter schools. According to New Jerusalem’s superintendent, the district is meeting the intent of the Charter Schools Act by providing students and parents in districts within San Joaquin County and contiguous counties with expanded learning opportunities and by providing vigorous competition within the public school system. However, New Jerusalem’s actions do not appear to meet the Legislature’s intent for local districts to authorize the charter schools operating in their districts.

Similarly, Acton‑Agua Dulce Unified has increased its enrollment by authorizing out‑of‑district charter schools. At a time when the number of its students had significantly decreased, Acton‑Agua Dulce Unified’s former superintendent presented a plan to his district’s board to reverse its declining enrollment. In December 2013, the board approved the former superintendent’s plan to take advantage of state law to earn revenue as a charter authorizer. Specifically, the proposal estimated that the district could increase enrollment to more than 30,000 students by the summer of 2016 through the authorization of approximately 24 charter schools. Although these projections were overly optimistic, Acton‑Agua Dulce Unified increased its enrollment from 2,383 students in fiscal year 2013–14 to 7,475 students in fiscal year 2015–16, despite having an in‑district school‑age population of only about 2,500 according to the latest census data. As of May 2017, Acton‑Agua Dulce Unified had authorized 12 charter schools that operated a total of 33 out‑of‑district locations, some of which were more than 50 miles away from the district. According to the district’s director of charter schools, she was unaware of the district’s plan, and no one has referred to it since she took her position in February 2016.

Table 5
By Authorizing Out-of-District Charter Schools, Two of the Three Districts We Reviewed Substantially Increased Their Numbers of Schools and Students

Sources: California State Auditor’s analysis of Education’s school directory, charter school survey, and DataQuest; and the Accrediting Commission for Schools—Western Association of Schools and Colleges’ directory of schools.

* The number of schools includes both in-district and out-of-district charter schools. It does not include the number of resource centers or other facilities that a school may operate.

^† If the majority of a charter school’s locations were outside their authorizing district’s boundaries, we classified the school as an out-of-district charter school.

State law sets some requirements for the authorization of out‑of‑district charter schools, but the requirements that apply to an authorizing district are vague and ineffective. For example, if a charter school is unable to locate within the boundaries of an authorizing district, state law requires that the potential host district receive notice before the petition’s authorization. However, state law does not specify how far in advance the host district needs to receive notice or which party—the authorizing district or proposed charter school—is responsible for providing the notification. As a result, New Jerusalem adhered to the law even though it did not notify Stockton Unified until a few hours before it authorized Acacia Elementary to operate within Stockton Unified’s jurisdiction. In contrast, if an applicant submits a petition to a county office of education, state law requires that any district in which the applicant proposes to operate a charter school location receive at least 30 days’ notice. According to Stockton Unified’s principal auditor, Acacia Elementary provided an incomplete petition to Stockton Unified in December 2012 but then discontinued the process and instead sought authorization through New Jerusalem. Without sufficient notice of the potential authorization, the host district does not have time to respond to the possibility of a new school opening in its community. Further, the authorizing district may not identify issues that previously led the potential host district to reject the petition.

Moreover, even if a host district is aware of the petition, nothing in law establishes an administrative process for the host district to challenge the authorization of the charter school within its jurisdiction. For example, Acton‑Agua Dulce Unified authorized charter schools to operate within the jurisdiction of potential host districts that had previously denied those charter schools’ petitions. A board member from one potential host district attended an Acton‑Agua Dulce Unified board meeting and raised concerns that his district had turned down the proposed charter school several times, but Acton‑Agua Dulce Unified still chose to authorize the charter school. Because state law has not established a procedure for a host district to challenge the authorization of an out‑of‑district charter school within its jurisdiction, litigation is the host district’s only recourse, potentially resulting in costly legal fees for both districts. According to a lawsuit that another host district filed against Acton‑Agua Dulce Unified, the host district had denied a petition because the petition failed to identify how the charter school would attract a diverse population, serve English language learners, and address serious financial concerns.

State law allows a charter applicant to appeal a district’s denial by submitting the petition first to the pertinent county office of education and then to the State Education Board if the county office of education also denies the petition. However, because state law does not prohibit a charter applicant from submitting a denied petition to a neighboring school district, a charter applicant could potentially circumvent this process. If the out‑of‑district charter school then closes, its students are displaced, and this displacement may significantly impact the host district that will need to reenroll the students.

These gaps in state law also allow a district to authorize a charter school without the support of the local community where the charter school plans to operate. Specifically, nothing in state law requires the authorizing district to hold public hearings within the potential host district. For example, when New Jerusalem planned to authorize and operate an out‑of‑district charter within the boundaries of Stockton Unified, it held its public hearing in Tracy, 26 miles from where the district established the charter school. New Jerusalem’s board thus authorized a locally funded charter school to operate in the jurisdiction of another district with minimal opportunity for the local community to provide public feedback. Moreover, because the parents of students in an out‑of‑district school cannot vote for the authorizing district’s board members, the authorizing district is not accountable democratically to the charter school’s community. In this way, state law allows authorizing districts to expand their reach, but it does not hold these districts accountable to the residents of the communities in which the districts’ charter schools operate.

Further, two of the authorizing districts we visited made little effort to prevent charter schools from establishing additional out‑of‑district locations. For example, charter schools in Acton‑Agua Dulce Unified and Antelope Valley Union opened out‑of‑district locations without the prior approval of their authorizing districts. When a charter school proposes to establish operations at one or more additional locations, state law requires it to submit a material revision of its charter to its authorizing district for approval. However, when Assurance Academy opened a resource center in fiscal year 2014–15, it did not notify or seek Acton‑Agua Dulce Unified’s approval. Similarly, LA Online entered into lease agreements for five resource centers in fiscal year 2015–16 without notifying Antelope Valley Union. Moreover, neither district required its charter schools to submit material revisions to their charters even after each district became aware of the location changes. According to Antelope Valley Union’s assistant superintendent of educational services, it was a pervasive practice throughout the State for virtual and independent‑study charter schools to open additional resource centers until a November 2016 appellate court decision in the Anderson Union High School District v. Shasta Secondary Home School case. The decision limited the ability of charter schools to establish out‑of‑district locations because the appellate court held that state law does not distinguish between classroom‑based and nonclassroom‑based charter schools and that geographic restrictions apply to all charter schools. These restrictions state that a charter school may operate a nonclassroom‑based location, such as a resource center, in an adjacent county as long as more than half of the school’s students are residents of the authorizing district’s county. However, with limited exceptions, it does not allow a charter school to operate a nonclassroom‑based location outside the district’s boundaries but within the same county. Districts throughout the State authorized charter schools to operate multiple nonclassroom‑based locations outside the authorizing districts’ boundaries, sometimes in the same county and sometimes in nonadjacent counties.

Although the appellate court decision provided additional guidance on geographic restrictions, it did little to clarify how those restrictions apply to charter schools that move locations or operate virtually. For example, Antelope Valley Union did not authorize any out‑of‑district charter schools directly, but it allowed one of its charter schools—LA Online—to relocate outside the district’s boundaries without submitting a material revision to the school’s charter. Antelope Valley Union’s former director of categorical and special programs explained that the district did not believe geographical restrictions applied to LA Online because it was a virtual school that only moved its administrative office. State charter school law does not distinguish between virtual and nonvirtual schools, nor does it specifically include guidance about whether changing the location of a facility is a material revision of the charter that would require the charter school to apply to the authorizer for a material revision. Accordingly, Assurance Academy did not obtain a material revision from Acton‑Agua Dulce Unified when it moved a resource center in fiscal year 2015–16. In addition, we noted that Acton‑Agua Dulce Unified authorized a virtual charter school that has its administrative office in San Marcos—roughly 100 miles away from the district’s boundaries. Although the district’s director of charter schools explained that the school closed all its resource centers to comply with the appellate court decision, the remoteness of this site may make it difficult for the district to provide effective oversight.

Moreover, state law provides exceptions that have allowed some charter schools to continue operating nonclassroom‑based locations outside their authorizing districts’ boundaries. The State Education Board can approve waivers to allow noncompliant charter schools to continue to operate during fiscal year 2017–18. These waivers thus give charter schools a grace period to comply with the appellate court ruling, avoiding disruption to educational programs. In May 2017, the State Education Board approved geographic waivers for about 30 charter schools from about 20 districts. Although the State Education Board required the authorizing districts to visit any resource centers that they had not previously visited that are subject to the waiver, it did not prescribe specific procedures for the authorizing districts to follow during those site visits. Alternatively, charter schools that have exclusive partnerships with state or federal workforce programs, such as the California Conservation Corps or the federal Workforce Innovation and Opportunity Act, may avoid the geographic restrictions altogether.

Finally, Education is unable to determine how many charter schools operate remotely because state law does not require charter schools to report all their locations—including school sites, resource centers, and administrative offices. Education conducts an annual survey to update its charter school data, including the locations of all additional sites. However, according to a manager in Education’s technology services division, about 300 charter schools did not submit charter surveys in the 2016–17 year. When we analyzed data from multiple sources, we found that of the State’s 1,246 charter schools in May 2017, 165 district‑authorized charter schools operated at least one of their school locations outside their authorizing districts’ geographic boundaries in fiscal year 2016–17. These 165 charter schools operated in a total of 495 out‑of‑district locations statewide. Further, we determined 52 nonvirtual or primarily classroom‑based schools had at least one location more than 20 miles from their authorizing districts’ boundaries. However, since complete data are not available, there may be more out‑of‑district charter school locations than we identified. For example, as of May 2017, Education’s online directory of charter schools lists only 30 charter school locations for the three districts we visited, but we identified 35 additional out‑of‑district charter school locations, as Figure 1 shows.

Figure 1
Selected School Districts and Charter School Locations

Sources: California State Auditor’s analysis of Education’s school directory, Education’s charter school survey, and the Accrediting Commission for Schools—Western Association of Schools and Colleges’ directory of schools as of May 2017; U.S. Census data; interviews with district administrators; and charter school websites.

* Nine charter schools list their authorizing district’s headquarters as their main address.

Districts Have a Financial Incentive to Authorize Charter Schools Outside Their Jurisdictions and to Charge Extra Fees

Two of the school districts we visited were able to increase their revenue significantly by authorizing out‑of‑district charter schools. As the Introduction discusses, state funding for school districts and charter schools is linked to the average daily attendance of their enrolled students. New Jerusalem was able to increase its revenue by bolstering its enrollment through the authorization of locally funded charter schools located outside its boundaries. Acton‑Agua Dulce Unified, on the other hand, increased its revenue by authorizing directly funded out‑of‑district charter schools that it then charged a flat administrative fee for services. Further, it did not justify the appropriateness of that fee. Finally, although state law limits administrative fees to a district’s actual costs, none of the three school districts we visited tracked their actual costs of providing oversight. This failure to track actual oversight costs could result in the undue diversion of funds from charter schools’ educational programs.

Two Districts We Visited Have Increased Their Revenue by Authorizing Out‑of‑District Charter Schools

New Jerusalem and Acton‑Agua Dulce Unified have significantly increased their enrollments and revenue by authorizing out‑of‑district charter schools. Districts we visited were able to generate revenue from the charter schools they authorized either by operating them as locally funded schools, which resulted in the districts’ receiving and managing the schools’ state funding, or by offering services to their charter schools in exchange for fees. New Jerusalem took the former approach, authorizing mostly locally funded charter schools. Acton‑Agua Dulce Unified, on the other hand, authorized only directly funded charter schools but charged those schools for administrative services. Through these authorizations, New Jerusalem and Acton‑Agua Dulce Unified have received a significant amount of revenue annually, as the text box shows.

New Jerusalem authorized four locally funded out‑of‑district charter schools, allowing it to manage those charter schools’ funding. Because state law does not prevent locally funded charter schools from operating outside their authorizing district’s jurisdiction, New Jerusalem was able to significantly expand its reach and increase its enrollment. New Jerusalem’s superintendent asserts that the district is meeting the intent of the Charter Schools Act; however, we disagree. New Jerusalem’s actions have enabled the district to expand its average daily attendance from outside its boundaries and do not appear to meet the Legislature’s strong preference to limit charter schools to the jurisdiction of their authorizing districts.

In contrast, before this audit, Acton‑Agua Dulce Unified charged all its directly funded charter schools a 2.5 percent administrative services fee and a 1 percent oversight fee, effectively collecting a total of 3.5 percent of each charter school’s revenue. However, some of Acton‑Agua Dulce Unified’s charter schools may have only made sporadic use of the services for which they paid. For example, the district’s memorandum of understanding (MOU) with Assurance Academy describes the administrative services as including the use of a library, reference materials, and equipment, as well as opportunities for training. Assurance Academy’s chief academic officer does not, however, believe the school has received all the services described by the MOU in every fiscal year. In addition, Assurance Academy has a separate agreement for administrative and educational services with its CMO, Lifelong Learning Administration Corporation, for which it pays 14 percent of its revenue. As a result, Assurance Academy paid more than $1.5 million in fees for fiscal year 2015–16. The district’s board voted to reduce the 2.5 percent fee to 2 percent in a May 2017 board meeting. Nevertheless, Assurance Academy has tripled the number of resource centers it plans to operate in fiscal year 2017–18. This change could thus result in the school spending even more state funding on administrative fees for services that it does not consistently use instead of on the school’s educational program.

Two Districts We Visited Charged Oversight Fees That Exceeded the Limits in State Law

In violation of state law, both New Jerusalem and Antelope Valley Union charged their charter schools for oversight fees that exceeded 1 percent of the schools’ revenue. State law allows an authorizer to charge for its actual costs of oversight of a charter school up to 1 percent of the charter school’s local funding plan revenue or up to 3 percent if the authorizer provides facilities that are substantially rent‑free—circumstances that do not apply to either New Jerusalem or Antelope Valley Union. Although Antelope Valley charged LA County Online more than 1 percent in fiscal year 2014–15, it charged less than 1 percent in the other two years we reviewed, reducing its average fee to 0.6 percent across the three years. In contrast, during the three years we tested, New Jerusalem overcharged Acacia Elementary by a total of about $100,000—more than double the legally permitted amount. New Jerusalem’s superintendent asserted that he had a verbal agreement with Tri‑Valley’s former chief executive officer for a higher fee level. He explained that the district’s legal counsel advised the district that it could charge its charter schools an oversight fee greater than 1 percent, and Tri‑Valley agreed to pay a higher oversight fee for Acacia Elementary in return for the district’s advice and other types of administrative services. Although Tri‑Valley’s board meeting minutes from May 2015 showed the board’s approval of New Jerusalem’s proposal for a fee increase to 3 percent, the minutes also indicated that the proposal did not include a breakdown describing what the school would receive in exchange. Similarly, we found that the district’s invoices for these fees were unclear because they did not identify what portion of the invoiced amount was attributable to non‑oversight services. Moreover, the district did not identify these additional services in its MOU with the charter school. In February 2016, New Jerusalem revised its charter school policy to specify that whenever the district agrees to provide administrative or support services, the district and charter school shall develop an MOU that clarifies the financial and operational agreements.

However, New Jerusalem never developed a new MOU to identify these additional services and, in August 2016, the district sent Tri‑Valley an invoice for oversight fees totaling 3 percent of Acacia Elementary’s local funding plan revenue. By overcharging its charter schools, New Jerusalem has directed funds away from the schools’ educational programs without clear justification.

In addition, each of the three districts we visited had agreements with their charter schools that called for no more than a 1 percent oversight fee; however, none of the districts tracked the actual costs of their oversight activities despite the legal limitation that they can only charge their actual costs. Administrators at the three districts offered different justifications for not tracking their actual oversight costs. Acton‑Agua Dulce Unified’s chief financial officer stated that it would be an undue burden on the district to track the costs of its various accounting streams. According to New Jerusalem’s superintendent, district staff have other roles in addition to monitoring charter schools, and the district does not have a written policy or procedure for tracking oversight costs. However, we believe these districts could implement time‑reporting tools that would allow staff to differentiate between their activities. The districts’ failures to track their time and expenses related to oversight are examples of general weaknesses in their documentation of charter school‑related activities, as we describe in later chapters.

The Districts We Visited Authorized Charter School Petitions That Did Not Comply With State and District Requirements

To determine whether the districts we visited complied with state and district requirements when authorizing charter schools, we reviewed the petitions of both in‑district and out‑of‑district schools. We found that the districts we visited did not fully comply with state law when they authorized a number of the charter schools we selected for review. For example, both Acton‑Agua Dulce Unified and New Jerusalem accepted and authorized petitions that were missing standard requirements, such as the minimum number of parent or teacher signatures state law requires. Absent such signatures, the districts had little evidence of community support for the schools. Finally, during our audit period, two of the three districts had not updated their charter school policies to reflect changes in state law.

Two Districts Authorized Charter Schools Without Ensuring the Schools Had Adequate Community Support

Two of the three districts we visited authorized charter schools without ensuring adequate community support, as state law requires. For example, New Jerusalem authorized Acacia Elementary despite its petition having signatures from fewer than half the number of teachers that the school expected to employ in its first year of operation. As we discuss in the Introduction, state law requires charter school applicants to obtain signatures of either half the parents of the number of students the school expects to enroll in the first year or half the teachers it expects to employ in the first year. A lack of signatures may indicate inadequate community support, which could limit the charter school’s ability to enroll students or employ qualified teachers. State law further reinforces the importance of community support by requiring prospective charters to describe in their petitions how they will ensure parental involvement. However, we also noted that New Jerusalem approved two petitions that did not meet this requirement. According to New Jerusalem’s superintendent, parents can participate by attending monthly board meetings at the district. Nevertheless, this approach may not be adequate to ensure that the governance structure of the charter school provides parents with the opportunity for active and effective representation.

Similarly, Acton‑Agua Dulce Unified approved the petition for a charter school—Albert Einstein Academy for Letters, Arts and Sciences—Agua Dulce Partnership Academy (Albert Einstein Academy)—even though the petition did not include any parent or teacher signatures. The authorization matrix the district used to evaluate the petition indicates that the district did not review this critical element. Although Acton‑Agua Dulce Unified’s director of charter schools provided a list of signatures that she believed might have related to the petition, the list was from the file of a different charter school. In addition, the signatures from that list were dated a month after the district received the Albert Einstein Academy’s petition, even though state law requires prospective charter schools to attach signature pages to their charter petitions. Without the appropriate number of signatures, Acton‑Agua Dulce Unified should not have accepted the petition for consideration.

Further, Acton‑Agua Dulce Unified did not adequately consider Albert Einstein Academy’s failure to obtain community support—an indicator of potential enrollment—when evaluating the charter petition’s proposed financial plan. Specifically, the district’s chief financial officer expressed his concern with the accuracy of the estimated enrollment numbers and projected revenue contained in the petition. However, the former superintendent of Acton‑Agua Dulce Unified recommended the petition for approval. According to the chief financial officer, the former superintendent recommended approving the petition because none of the financial concerns was severe enough to warrant denying the petition. However, we believe the chief financial officer identified valid concerns with the financial plan, such as overstated revenue and understated expenses. Further, before authorizing Albert Einstein Academy, the district operated its own noncharter school at the same location, which it ultimately closed because of low enrollment. Since charter school funding is largely based on enrollment, this experience should have heightened the district’s scrutiny of the number of parent and teacher signatures to ensure that the school had the community support necessary to succeed.

We also identified other potential areas of concern related to Albert Einstein Academy’s financial planning. For example, the school submitted a revised budget for its first year of operation that projected it would end the year with a $30,000 reserve—an amount significantly less than the $600,000 reserve it projected in its petition. Further, the school has consistently failed to meet the district’s minimum reserve requirement, which we identified as an early indicator that preceded the closure of other charter schools we reviewed. Although Albert Einstein Academy is still operating, low enrollment could lead to the school’s bankruptcy and eventual closure, as we discuss in the next chapter.

The Three Districts We Reviewed Lacked Updated Charter School Policies, and Some Had Not Established Criteria for Assessing Petitions

The three districts may have failed to comply with state law when authorizing and renewing petitions because they did not update their charter school policies to reflect changes in state law. For example, New Jerusalem did not update its charter school policy between September 2008 and February 2016, so its authorization process did not address requirements related to educational programs and measurable student outcomes that became effective in 2013. Similarly, Antelope Valley Union last updated its charter school policy in February 2009 and its regulations in May 2007, and thus its policies did not include the 2013 requirements either. Finally, although Acton‑Agua Dulce Unified adopted its charter school policy in December 2013, it also failed to include the requirements that had recently gone into effect.

Because of these outdated policies, New Jerusalem did not assess whether petitions included sufficiently detailed annual goals or measurable student outcomes. Specifically, the petitions we reviewed did not delineate the goals and outcomes meant for all students schoolwide and those meant for each significant subgroup of students the charter schools would serve, as state law requires. By not requiring charter schools to provide this level of detail in their petitions, New Jerusalem may find it more challenging to consider increases in student academic achievement for all subgroups of students when contemplating revocations in the future.

Further, some of the districts we visited did not establish criteria for assessing whether petitions contained reasonably comprehensive descriptions of the elements state law requires, as the Introduction describes. State law allows authorizers to deny petitions if they do not contain reasonably comprehensive descriptions of these elements. Because the Legislature recognized that the term reasonably comprehensive is somewhat subjective, it required the State Education Board to establish criteria for evaluating petitions. The State Education Board issued these criteria as regulations; however, only the State Education Board is required to use those criteria when evaluating charter school petitions. As a result, when we compared the charter school policies of Acton‑Agua Dulce Unified, Antelope Valley Union, and New Jerusalem to those of neighboring host districts—Glendale Unified, Los Angeles Unified, and Stockton Unified—we found that the level of detail the districts require in petitions varies significantly.

Specifically, Antelope Valley Union, Glendale Unified, New Jerusalem, and Stockton Unified use the California School Board Association’s guidance, which closely mirrors state law, for establishing a baseline for their authorization processes; however, Antelope Valley Union and Glendale Unified require prospective charter schools to submit some additional information. For example, Antelope Valley Union and Glendale Unified both require petitions to include information about the proposed charter schools’ bylaws, articles of incorporation, and other management documents, as applicable. In addition, they both require descriptions of the education, experience, credentials, degrees, and certifications of the directors, administrators, and managers of proposed charter schools. In contrast, New Jerusalem and Stockton Unified have made minimal changes to the California School Board Association’s sample policy and thus do not require prospective charter schools to provide additional information with their petitions. However, none of these four districts’ charter school policies incorporates the State Education Board’s criteria or defines what a reasonably comprehensive petition should include. Although New Jerusalem’s policy does not describe its use of the criteria, New Jerusalem’s superintendent asserted that it uses a rubric containing the State Education Board’s criteria for evaluating petitions. Nevertheless, he was able to provide only a copy of the rubric for the petition we reviewed that was two‑thirds completed.

Unlike the districts that rely solely upon the California School Board Association’s guidance, Acton‑Agua Dulce Unified and Los Angeles Unified established their own charter school policies that define criteria for assessing whether a petition is reasonably comprehensive. Los Angeles Unified’s policy, which describes the requirements and timeline for its authorization process, states that it uses the State Education Board’s criteria as a guideline for evaluating petitions. Acton‑Agua Dulce Unified’s policy does not state that it uses the criteria but rather defines its own criteria for a reasonably comprehensive description for each petition requirement.

Although Acton‑Agua Dulce Unified’s policy is expansive and detailed, we found that the district often did not follow the authorization process described in its policy. For example, Acton‑Agua Dulce Unified authorized Assurance Academy’s petition even though it did not present reasonably comprehensive descriptions of proposed measurable student outcomes. Instead, Assurance Academy defined a target for only one measurable student outcome—85 percent attendance. The district’s policy states that a reasonably comprehensive description of measurable student outcomes should include detailed exit outcomes that encompass both academic and non‑academic skills. Similarly, the State Education Board’s criteria require measurable student outcomes, at a minimum, to specify skills, knowledge, and attitudes that reflect schools’ educational objectives and can be frequently assessed by verifiable means to determine whether students are making satisfactory progress. Further, it requires charter schools to describe how they will hold themselves accountable for these outcomes. However, Assurance’s petition did not include the level of detail described in either the district’s policy or the State Education Board’s criteria. When districts authorize petitions that fail to provide comprehensive descriptions of measurable student outcomes, the districts may find it difficult to hold charter schools accountable for poor academic performance and may be unable to revoke the charters of poorly performing schools, as we discuss in Chapter 3.

Recommendations

Legislature

To ensure that districts obtain community support for charter schools that they authorize, the Legislature should amend state law to do the following:

• Further clarify the conditions prospective charter schools must meet to qualify for the geographic exception. For example, the Legislature could clarify whether prospective charter schools qualify for the exception when their petitions indicate that they will serve primarily students residing outside the authorizing district’s jurisdiction.


• Require any district that is considering authorizing an out‑of‑district charter school to notify the school’s host district 30 days in advance of the board meeting at which the potential authorizing district is scheduled to make its authorization decision. The Legislature should also require the potential authorizing district to hold the public hearing within the host district’s boundaries, notwithstanding restrictions in the State’s Ralph M. Brown Act that would otherwise require the hearing to occur in the authorizing district.

To reduce the need for litigation between authorizing districts and host districts, the Legislature should establish an appeals process through which districts can resolve disputes related to establishing out‑of‑district charter schools.

To ensure charter school accountability, the Legislature should amend state law to do the following:

• Require districts to strengthen their authorization processes by using the State Education Board’s criteria for evaluating charter school petitions.


• Require charter schools to report annually all of their school locations—including school sites, resource centers, and administrative offices—to their authorizers and Education.

To remove the financial incentive for districts to authorize out‑of‑district charter schools, the Legislature should amend state law to prohibit districts from charging fees for additional services above the actual cost of services provided.

Districts

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

To ensure that they have a method to hold charter schools accountable for their educational programs, Acton‑Agua Dulce Unified, Antelope Valley Union, and New Jerusalem should, as a best practice, strengthen their authorization processes by using the State Education Board’s criteria for evaluating petitions.

To ensure compliance with state law, Acton‑Agua Dulce Unified, Antelope Valley Union, and New Jerusalem should immediately do the following.

• Establish a procedure to periodically review and update their charter school policies to include all of the requirements in state law.


• Review petitions to ensure they include all of the requirements in state law at the time of their approval.


• Require their charter schools to submit material revisions when they add new locations.


• Track their actual costs for providing oversight and verify that their oversight fees do not exceed legal limits.

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Chapter 2

The School Districts We Reviewed Need to Provide Stronger Financial Oversight to Their Charter Schools

The three districts that we visited—Antelope Valley Union, New Jerusalem, and Acton‑Agua Dulce Unified—could strengthen their financial oversight processes for charter schools they authorize. Although state law requires authorizers to monitor the financial conditions of their authorized charter schools, it does not prescribe specific procedures that authorizers must follow to fulfill this responsibility. However, the three districts we visited did not develop their own written procedures detailing the steps that they expected their staffs to perform to ensure effective financial monitoring of the districts’ charter schools. If Antelope Valley Union and New Jerusalem had established such procedures, they might have responded sooner to initial indicators of financial difficulties at LA Online and Acacia Elementary, respectively. Both of these charter schools filed for bankruptcy and ceased operations in 2017.¹

In addition, the three districts did not always incorporate best practices into their financial oversight processes.  Specifically, we found that the districts inconsistently applied select best practices we identified, such as providing charter schools with annual written reports summarizing the schools’ performances and identifying areas needing improvement.  Similarly, Antelope Valley Union and Acton‑Agua Dulce Unified did not use their authority under state law to place representatives on their charter schools’ governing boards, which contributed to the two districts being unaware of some of LA Online’s and Assurance Academy’s significant financial decisions. By incorporating best practices into their financial oversight processes and by fully using their authority under state law, authorizers could better ensure that they provide effective financial oversight to the charter schools they authorize.

Antelope Valley Union and New Jerusalem Did Not Respond Promptly to Indicators of Financial Difficulties at Their Charter Schools

Two of the three charter schools we visited—LA Online and Acacia Elementary—filed for bankruptcy in 2016 and subsequently closed in 2017, forcing a total of roughly 500 students to change schools. LA Online’s bankruptcy stemmed from a significant decline in enrollment that it experienced in fiscal year 2014–15 and its inability to align its expenses with lower revenue. In Acacia Elementary’s case, the nonprofit corporation that managed it—Tri‑Valley—filed for bankruptcy due to a high level of debt and possible fiscal mismanagement by its management team. Although these schools’ respective authorizing districts—Antelope Valley Union and New Jerusalem—eventually revoked the schools’ charters, as described here and here, they could not demonstrate that they responded promptly to initial indicators of the schools’ financial distress. This may have happened because they lacked robust financial oversight processes.

In fact, we found that none of the three districts we reviewed had written procedures for reviewing their charter schools’ financial conditions. In addition, the three districts did not always incorporate best practices into their financial oversight processes, such as using comprehensive checklists for periodic or annual reviews. As a result, the three districts were unable to ensure that they consistently provided effective financial oversight to the charter schools they authorized and that they responded promptly and appropriately to indicators of charter schools’ financial difficulties.

LA Online and Acacia Elementary Filed for Bankruptcy After Extended Periods of Financial Distress

LA Online filed for bankruptcy in April 2016 with the intent of reorganizing its finances and continuing operations. However, after the school was unable to recover from its financial problems, its governing board decided to cease operations in 2017. According to the declaration LA Online’s president presented to the bankruptcy court, a significant drop in LA Online’s enrollment, which in turn affected its average daily attendance and revenue, caused its financial problems. As Table 6 shows, LA Online’s average daily attendance fell from 691 students in fiscal year  2013–14 to 255 students in fiscal year 2015–16. Because average daily attendance is a key factor that determines a charter school’s state funding, this significant drop in average daily attendance was a primary factor causing LA Online’s revenue to decrease from $5.4 million in fiscal year 2013–14 to $2.7 million in fiscal year 2015–16.

Table 6
Two of the Three Out-of-District Charter Schools That We Reviewed Experienced Significant Financial Challenges From Fiscal Years 2013–14 Through 2015–16

OUT‑OF‑DISTRICT CHARTER SCHOOL	FISCAL YEAR
	2013–14	2014–15	2015–16
Acacia Elementary
Annual average daily attendance	129	269	382
Total revenue	$1,614,853	$3,641,932	$5,137,722
Total expenses	(1,672,934)	(4,005,507)	(5,560,515)
Excess (deficiency) of revenue over expenses	(58,081)	(363,575)	(422,793)
Ending net assets (deficit†)	($58,081)	($421,656)	($844,449)
Assurance Academy
Annual average daily attendance	622	629	763
Total revenue	$5,595,577	$6,288,882	$9,618,877
Total expenses	(5,489,240)	(6,243,602)	(9,477,473)
Excess (deficiency) of revenue over expenses	106,337	45,280	141,404
Ending net assets (deficit†)	$362,549	$407,829	$549,233
LA Online
Annual average daily attendance	691	181	255
Total revenue	$5,448,571	$2,147,778	$2,673,812
Total expenses	(5,892,973)	(4,247,910)	(3,379,031)
Excess (deficiency) of revenue over expenses	(444,402)	(2,100,132)	(705,219)
Ending net assets (deficit†)	$551,486	($1,548,646)	($2,442,704)

Sources: Audited financial statements of LA Online and Assurance Academy for fiscal years 2013–14 through 2015–16 and of Acacia Elementary for fiscal years 2013–14 and 2014–15; Education’s Local Control Funding Formula Funding Snapshot database and unaudited financial report of Acacia Elementary for fiscal year 2015–16.

* Acacia Elementary never published audited financial statements for fiscal year 2015–16. Acacia Elementary’s financial information for fiscal year 2015–16 presented above is from its unaudited financial report dated September 2016. The financial report that Acacia Elementary submitted to New Jerusalem in March 2017, which presented fiscal year 2016–17 activity, indicated that the school’s ending deficit for fiscal year 2015–16 was ($1,089,776), not ($844,449).

^† We refer to a charter school’s deficiency of assets over liabilities as a deficit.

^‡ In its financial statements for fiscal year 2015–16, LA Online restated its ending deficit for fiscal year 2014–15 from ($1,548,646), as the table shows, to ($1,737,485).

LA Online alleged that its drop in enrollment at the beginning of fiscal year 2014–15 was the result of deliberate efforts by its previous provider of educational and administrative services—K12 Inc.—to recruit LA Online’s students into another K12 Inc. school after LA Online terminated its agreement with K12 Inc. in June 2014. According to LA Online’s notice of intent not to renew its agreement with K12 Inc., LA Online stopped using K12 Inc.’s services after LA Online’s board undertook a review in response to ongoing concerns related to low student retention and graduation rates. In December 2014, after LA Online failed to pay K12 Inc. $2.9 million for services that K12 invoiced for fiscal year 2013–14, K12 Inc. filed a lawsuit against LA Online seeking damages plus interest. In response, LA Online filed a cross‑complaint against K12 Inc., seeking damages for K12 Inc.’s alleged misconduct and breach of contract.

Although LA Online stated in its initial bankruptcy filing that it intended to reorganize its finances and continue operations, its board of directors eventually decided to close the charter school after it received another large claim while struggling to restore its student enrollment. Specifically, in August 2016, LA Online and K12 Inc. reached a settlement agreement to avoid complex and costly litigation. However, shortly before the court hearing to consider this settlement agreement, the State Board of Equalization (Equalization) submitted a claim against LA Online for roughly $478,000 in delinquent sales and use taxes associated with student packages that K12 Inc. had shipped to LA Online students from another state. Because of Equalization’s claim, LA Online could no longer adhere to the payment schedule in its proposed settlement agreement with K12 Inc., and LA Online voluntarily dismissed its request for approval of the settlement agreement. In light of the unresolved litigation with K12 Inc., its continuing low enrollment, and Antelope Valley Union’s charter revocation proceedings that we discuss further in the next section, LA Online’s board decided to voluntarily close the school in February 2017, forcing roughly 200 students to change schools.

Our review of Acacia Elementary showed that its CMO, Tri‑Valley, filed for bankruptcy because of its inability to make payments on a bank note and line of credit, possibly due to fiscal mismanagement by some members of its management team. According to the bankruptcy declaration of Tri‑Valley’s CEO in November 2016, Tri‑Valley had past due debt of roughly $3.3 million, consisting of trade debt, loans, and a line of credit. Shortly after Tri‑Valley’s initial bankruptcy filing in November 2016, the Alameda County Office of Education requested that California’s Fiscal Crisis and Management Assistance Team (FCMAT) audit Tri‑Valley’s Livermore‑based charter schools because of allegations of fiscal irregularities. In June 2017, FCMAT published its audit report. As the text box shows, FCMAT concluded that fraud, misappropriation of assets, or other illegal activities may have occurred at Tri-Valley.

Although the focus of FCMAT’s audit was Tri‑Valley’s charter schools in Livermore, some of the issues that FCMAT included in its report also affected Acacia Elementary. For example, Tri‑Valley engaged Acacia Elementary in a number of highly questionable transactions with other charter schools it operated and with other entities. Specifically, FCMAT reported that Tri‑Valley pledged its revenue, including that of Acacia Elementary, in a lease agreement for a Tri‑Valley school in Livermore, the proceeds of which covered interest and principal payments related to a 2015 bond issuance for purchasing a facility for one of Tri‑Valley’s Livermore‑based charter schools. Although Tri‑Valley was not able to provide evidence that it actually used Acacia Elementary’s revenue to make payments under this agreement, FCMAT noted that in fiscal year 2015–16, Acacia Elementary transferred $145,000 to a non‑profit corporation that was involved in the 2015 bond issuance. FCMAT also noted that at the end of fiscal year 2015–16, Acacia Elementary owed other Tri‑Valley entities $2.7 million, while other Tri‑Valley entities owed Acacia Elementary $1.6 million. Although these balances suggest that Acacia Elementary needed to transfer $1.1 million to other Tri‑Valley entities, Tri‑Valley could not provide any supporting documentation justifying the nature of these transactions. Similarly, Tri‑Valley was unable to provide documentation or evidence of board approval for an undisclosed loan that New Jerusalem discovered after reviewing Acacia Elementary’s bank statements and that FCMAT described in its report. Specifically, in 2014 Tri‑Valley obtained a loan for $600,000; however, Tri‑Valley never disclosed this loan in its audited financial statements. FCMAT reported that over 18 months Acacia Elementary and other entities paid interest totaling roughly $132,000, or 15 percent per year—a significantly higher interest rate than the rates on Tri‑Valley’s other credit lines, which ranged from 4.75 to 5 percent per year.

Although Tri‑Valley planned to reorganize its finances and continue operations at the time it filed for bankruptcy, it subsequently decided to close its schools. The initial bankruptcy declaration of Tri‑Valley’s CEO states that the primary purpose of the bankruptcy filing was to gain the short‑term financial stability needed to preserve its charter schools, including Acacia Elementary. However, Tri‑Valley subsequently decided to cease operations, stating that it had insufficient funds to pay administrative expenses and no ability or intent to reorganize its operations. As a result, Tri‑Valley closed all four of its charter schools at the end of fiscal year 2016–17, leaving over 1,500 students to find new schools, including about 300 attending Acacia Elementary at that time.

According to our review of financial information, the third charter school that we visited, Assurance Academy, appears to be financially stable. For example, we noted that during fiscal years 2013–14 through 2015–16, Assurance Academy did not experience deficits and had reserves that consistently exceeded the minimum level in its MOU with its authorizing district.

Antelope Valley Union and New Jerusalem Could Not Always Demonstrate Their Use of Financial Reports to Monitor the Financial Conditions of Their Charter Schools

Although state law requires authorizing districts to monitor the financial conditions of charter schools under their authority using any financial information obtained from the schools, it does not establish a minimum level of financial oversight that districts must perform. The law also requires charter schools to submit regular financial reports to their authorizers, but it does not describe how authorizing districts should use these reports to ensure effective and timely oversight. Accordingly, we noted that Antelope Valley Union and New Jerusalem could not show that they responded to early indicators of their charter schools’ financial distress. These indicators preceded the schools’ eventual failures.

In fiscal years 2014–15 and 2015–16, LA Online submitted to Antelope Valley Union financial reports containing indications of the charter school’s financial distress. To show Antelope Valley Union’s responses to LA Online’s financial condition as well as the timing and extent of LA Online’s financial difficulties, Figure 2 juxtaposes information from LA Online’s financial reports, board meeting minutes, and court documents with information from documents Antelope Valley Union provided to us to demonstrate its oversight efforts.

Although Antelope Valley Union asserts that it monitored LA Online’s financial condition, it could not demonstrate that it took prompt and concerted action when LA Online’s financial reports showed that LA Online had not met Antelope Valley Union’s minimum reserve requirement and was experiencing significant financial distress. Antelope Valley Union’s MOU with LA Online required LA Online to maintain a reserve equal to the greater of either 4 percent of LA Online’s expenses for the year or $50,000. As Figure 2 shows, LA Online did not meet this reserve requirement for the first time in December 2014, when it submitted its first interim report for fiscal year 2014–15, as state law required. This report showed that LA Online projected that its revenue would be roughly 40 percent lower than it originally budgeted and that it would end the year with a deficit of more than $1.1 million.² The two subsequent financial reports that LA Online submitted to Antelope Valley Union in February and June 2015 continued to show that LA Online projected it would end fiscal year 2014–15 with a significant deficit. According to Antelope Valley Union’s assistant superintendent of educational services, Antelope Valley Union’s staff had conversations with LA Online about these reports, during which LA Online asserted that it had secured a loan to cover the funding shortfall. However, Antelope Valley Union did not take significant action when LA Online failed to prove that it had, in fact, obtained this loan. As a result, the district did not learn that LA Online had not obtained the loan until September 2015—almost nine months after LA Online submitted its first financial report showing indicators of significant financial difficulties.

Figure 2
Events Leading to LA Online’s Bankruptcy and Antelope Valley Union’s Responses to Those Events

Sources: California State Auditor’s analysis of LA Online’s financial reports, court documents, board meeting minutes and resolutions; Antelope Valley Union’s board meeting minutes and correspondence; and data from Education.

Although Antelope Valley Union took additional action starting in September 2015 to monitor LA Online’s financial condition, its oversight efforts were again delayed. In September 2015, three months after LA Online submitted estimated results for fiscal year 2014–15 and a budget for fiscal year 2015–16, Antelope Valley Union asked LA Online to provide information on its enrollment, average daily attendance, and reductions in expenses so that the district could assess the reasonableness of LA Online’s budget. In addition, Antelope Valley Union strongly recommended that LA Online obtain a line of credit to avoid near‑term cash flow shortages. However, Antelope Valley Union waited another three months, until December 2015, before making its first formal request for additional information about the school’s financial situation, at which point it asked for a strategic financial plan to ensure that the school had the ability to cover its operating expenses adequately for fiscal year 2015–16.

Although this request demonstrates that Antelope Valley Union took action to assess LA Online’s financial condition, the district did not perform its oversight efforts promptly enough to aid LA Online in aligning its expenses with its significantly reduced revenue. For example, we noted that LA Online had higher total salary and benefits expenses in fiscal years 2014–15 and 2015–16 than in fiscal year 2013–14, despite losing more than half of its students. According to LA Online’s last board president, the school did not reduce its staffing expenses because it believed it could increase its enrollment and average daily attendance rates and recover from deficit spending. He also said that, notwithstanding the lawsuit with K12 Inc., the board felt it needed to protect its students from severe educational disruption. Nevertheless, this decision not to perform a timely alignment of its staffing expenses with its significantly reduced enrollment may have contributed to LA Online’s bankruptcy. Although Antelope Valley Union could not demonstrate that it promptly raised this particular issue as a concern, it eventually issued a notice of violation to LA Online in November 2016 and a notice of intent to revoke the school’s charter in January 2017. In its notice of intent to revoke, the district scheduled a public hearing in February 2017 to discuss the issue of whether evidence existed to revoke LA Online’s charter. Although LA Online initially stated that it planned to close the school at the end of fiscal year 2016–17, shortly after receiving Antelope Valley Union’s notice of intent to revoke, LA Online filed an emergency motion with the bankruptcy court seeking permission to close the school sooner. In its court documents, LA Online stated that it decided to cease operations earlier to allow students and staff a seamless transition to a new school prior to the start of the new semester. After receiving permission from the bankruptcy court, LA Online’s board decided to voluntarily close the school on February 1, 2017. Antelope Valley Union revoked LA Online’s charter two weeks after the school ceased operations.

Antelope Valley Union may not have responded promptly and effectively to indicators of LA Online’s financial difficulties because the district did not have a robust process to review charter schools’ financial reports effectively and to respond appropriately to indicators of financial distress. State law requires authorizers to monitor the financial conditions of charter schools under their authority, but it does not prescribe specific procedures that authorizers should perform or state how quickly authorizers should review and respond to charter schools’ financial reports. However, Antelope Valley Union did not develop its own formal procedures detailing the steps that it expects its staff to perform when reviewing charter schools’ financial information. As a result, Antelope Valley Union’s responses to indicators of LA Online’s financial distress were delayed.

Like Antelope Valley Union, New Jerusalem did not have a formal process for reviewing and responding to financial reports. If it had established such a process, it might have responded to Acacia Elementary’s financial condition more quickly than it did. Acacia Elementary started exhibiting signs of financial problems as early as August 2014, when it submitted its unaudited financial report for fiscal year 2013–14, estimating that it ended the year with only about $49,000 in net assets.³ This estimate represented a radical departure from Acacia Elementary’s estimates in previous financial reports, in which it projected that it would end its first year of operations with significantly higher net assets, as we show in Figure 3. In addition, New Jerusalem’s MOU with Acacia Elementary required the school to have unexpended funds to pay its creditors in its first year of operations and to maintain a reserve equal to 3 percent of the school’s annual revenue during all subsequent years. As Figure 3 demonstrates, Acacia Elementary failed to meet this requirement for the first time in December 2014, when its audited financial statements showed that Acacia Elementary ended its first year of operations with a deficit of $58,000.

According to New Jerusalem’s superintendent, the district did not see the need to take further action in response to Acacia Elementary’s financial condition at the time. He stated that charter schools rarely end their first year of operation with a significant excess of revenue over expenses because of start‑up costs and that the magnitude of Acacia Elementary’s ending deficit for fiscal year 2013–14 was not indicative of severe financial issues. However, in aggregate with other indicators present in Acacia Elementary’s financial reports for fiscal year 2013–14, as shown in Figure 3, this deficit should have led New Jerusalem to start taking further action regarding Acacia Elementary’s financial condition.

Figure 3
Events Leading to Acacia Elementary’s Bankruptcy and New Jerusalem’s Responses to Those Events

Sources: Acacia Elementary’s and Tri‑Valley’s financial reports, board meeting minutes and resolutions, court documents, and lease agreements, as well as New Jerusalem’s correspondence.

However, unlike Antelope Valley Union, New Jerusalem revoked Acacia Elementary’s charter before Acacia Elementary filed for bankruptcy. Acacia Elementary fell below the minimum reserve requirement in June 2015, when its estimated results for fiscal year 2014–15 showed that it was ending the year with $66,494 in net assets, a reserve of only about 2 percent of its revenue. In September 2015, after Acacia Elementary’s unaudited financial report for fiscal year 2014–15 showed a further reduction in its ending net assets to $17,656, New Jerusalem issued a formal notice of concern to Tri‑Valley stating that Acacia Elementary did not meet the minimum reserve requirement and requesting additional information about the school’s financial condition. After working with Tri‑Valley to determine whether Acacia Elementary’s unaudited financial report for fiscal year 2014–15 and budget for fiscal year 2015–16 were reasonable and after reviewing Tri‑Valley’s Form 700s, Statements of Economic Interests, New Jerusalem requested Tri‑Valley’s bank statements in January 2016. By reviewing Tri‑Valley’s bank statements and other financial information, New Jerusalem identified some of the issues that FCMAT subsequently investigated in more detail during the audit that we discuss here. In response, New Jerusalem promptly commenced revocation proceedings against Acacia Elementary and eventually revoked its charter in July 2016. However, the San Joaquin Superior Court then halted New Jerusalem’s charter revocation based on the district’s insufficient consideration of the school’s increases in academic achievement. We discuss this issue further in Chapter 3. As a result, Acacia Elementary did not cease operations until Tri‑Valley’s board of directors voted to close it voluntarily at the end of fiscal year 2016–17.

The third district that we visited—Acton‑Agua Dulce Unified—demonstrated that it generally reviewed Assurance Academy’s financial reports and assessed Assurance Academy’s financial condition. However, because Assurance Academy’s financial reports did not show problems during our audit period, we could not evaluate the timeliness or the quality of its responses to indicators of financial distress. Nevertheless, like Antelope Valley Union and New Jerusalem, Acton‑Agua Dulce Unified does not have written procedures for reviewing charter schools’ financial reports. Without robust oversight processes, districts cannot ensure the consistent quality of their reviews of charter schools’ financial reports. In addition, without written procedures, district staff may not always take appropriate or prompt action if charter schools’ financial reports start exhibiting indicators of financial distress.

Districts Could Strengthen Their Financial Oversight of Charter Schools by Incorporating Best Practices Into Their Processes

Due to the vagueness of state law, authorizers may interpret their responsibilities differently and provide varying levels of financial oversight to charter schools. Although state law requires authorizers to monitor the financial conditions of charter schools under their authority, it does not identify specific procedures that authorizers should perform to fulfill this oversight responsibility. Therefore, it is incumbent on authorizers to identify and establish appropriate monitoring processes. We noted, however, that the three districts’ processes for providing financial oversight to charter schools missed opportunities to incorporate best practices for monitoring charter schools’ financial conditions. Further, we observed that the three districts’ charter school policies did not vary based on the location of the charter school; thus the districts provided a similar level of oversight to the in‑district and out‑of‑district charter schools we reviewed.

We identified two sources that suggest procedures or best practices that we believe authorizers should follow to ensure their financial oversight of charter schools is effective. Specifically, FCMAT publishes a detailed Charter School Annual Oversight Checklist (oversight checklist) that authorizers could use as a guide to conducting annual visits and providing ongoing financial oversight. FCMAT developed the oversight checklist to aid authorizers in addressing their annual oversight responsibilities. Similarly, the National Association of Charter School Authorizers (NACSA) publishes 12 Essential Practices, which contains recommendations for conducting effective financial oversight. Nonetheless, we found that the three districts we reviewed did not always incorporate the best practices from these two sources into their financial oversight processes, as Table 7 shows.

Table 7
The Three Districts We Reviewed Missed Opportunities to Incorporate Many Best Practices Into Their Financial Oversight Processes During Fiscal Years 2013–14 Through 2015–16

BEST PRACTICE	AUTHORIZING SCHOOL DISTRICT
	ACTON-AGUA DULCE UNIFIED	ANTELOPE VALLEY UNION	NEW JERUSALEM
NACSA
Require and review annual, independent financial audits and regular financial reports of its charter schools.	✔	♦	♦
Provide an annual written report to each charter school on its performance.	✔	♦	✖
FCMAT
Use a comprehensive checklist for periodic or annual reviews.	✖	✖	♦
Obtain lease agreements when charter schools plan to operate in new facilities.	✖	♦	♦
Ensure that charter schools’ financial projections and assumptions are reasonable.	♦	♦	♦
Have a current memorandum of understanding with each charter school.	✔	♦	✔
Ensure that each charter school maintains a prudent level of reserves for economic uncertainties.	✔	♦	♦

Sources: California State Auditor’s analysis of NACSA’s 12 Essential Practices, FCMAT’s Charter School Annual Oversight Checklist, interviews with the districts’ key staff, the districts’ policies and procedures, and other documentation related to the districts’ financial oversight processes.

✔ = The district applied this practice consistently during fiscal years 2013–14 through 2015–16.

♦ = The district could not demonstrate that it applied this practice consistently during fiscal years 2013–14 through 2015–16.

✖ = The district could not demonstrate that it applied this practice at all during fiscal years 2013–14 through 2015–16.

For example, NACSA recommends that districts review charter schools’ performance and provide annual written reports to charter schools that summarize the schools’ performance and identify areas needing improvement. However, Antelope Valley Union and New Jerusalem did not always provide such reports to LA Online and Acacia Elementary, respectively. For instance, although Antelope Valley Union prepared annual reports on LA Online for fiscal years 2014–15 and 2015–16, these reports did not always contain meaningful recommendations related to improving LA Online’s financial operations and did not point out the need for LA Online to align expenses with its significantly reduced revenue in fiscal years 2014–15 and 2015–16, when the school was experiencing financial difficulties. Similarly, after completing site visits of Acacia Elementary and reviewing its financial reports, New Jerusalem did not provide annual reports to Acacia Elementary identifying areas needing improvement. If districts do not provide feedback to the charter schools they oversee, the schools may not remedy weaknesses in a timely manner, which could eventually lead to the deterioration of the schools’ financial conditions.

Neither Acton‑Agua Dulce Unified nor Antelope Valley Union could demonstrate that they used an oversight checklist when conducting their legally required annual site visits or as part of their ongoing financial oversight of Assurance Academy and LA Online, respectively. Further, although New Jerusalem developed an oversight matrix based on FCMAT’s oversight checklist, New Jerusalem could not show that it used the matrix effectively. According to New Jerusalem’s superintendent, before its site visits in fiscal years 2014–15 and 2015–16, New Jerusalem asked Acacia Elementary’s management to complete the oversight matrix and submit it, along with key supporting documents, to the district for review. Although New Jerusalem kept copies of Acacia Elementary’s completed oversight matrices, it could not demonstrate that it consistently reviewed these matrices and provided feedback to Acacia Elementary on its findings. Specifically, New Jerusalem left blank the portions of the fiscal year 2014–15 matrix designated for a reviewer’s signature and did not include recommendations to Acacia Elementary on improving its fiscal operations in this matrix. As a result, although New Jerusalem developed a tool to aid its staff in conducting site visits and ongoing oversight of charter schools, it could not show that it used this tool in a meaningful way or that it provided feedback to Acacia Elementary.

In the oversight checklist, FCMAT also recommends authorizers obtain lease agreements when charter schools plan to operate in new facilities. However, the three districts did not always obtain lease agreements from the charter schools we reviewed. For example, although New Jerusalem was aware that Acacia Elementary relocated to a new facility in September 2014, New Jerusalem could not provide evidence that it had reviewed promptly the lease agreement for this facility. In August 2014, Acacia Elementary entered into a lease agreement to rent facilities in Stockton at rates that were significantly higher than those for its previous location. Specifically, for its previous location Acacia Elementary paid roughly $9,000 per month during fiscal year 2013–14, whereas for its new location it agreed to pay more than $85,000 per month during fiscal year 2014–15, with rates increasing even further in subsequent years. Although Acacia Elementary did not make payments for the full amounts due under this lease agreement, its actual rent payments were substantial, exceeding $700,000 in fiscal year 2015–16 alone. New Jerusalem’s superintendent asserted that he first started questioning this lease agreement in October 2015; however, he could not demonstrate that the district acted in response to the high rates until April 2016, when the district issued its notice of violation to Acacia Elementary.

We also found that the three districts did not always incorporate into their processes FCMAT’s suggestions pertaining to authorizers’ reviews of charter schools’ budgets. In the oversight checklist, FCMAT directs authorizers to ensure that charter schools’ financial projections and their underlying assumptions are reasonable. However, the three districts did not always obtain supporting documentation for the key assumptions that the three charter schools used to develop their budgets. For example, none of the three districts required charter schools to submit waiting lists or other forms indicating parents’ intent to enroll their students—evidence supporting the schools’ enrollments and revenue projections. As a result, we noted that for at least one of the years in our audit period, the three charter schools’ actual revenue was more than 10 percent below their projected revenue. When they do not require that charter schools have robust support for their budgets, the districts miss an opportunity to better ensure the schools’ financial stability.

Finally, FCMAT suggests that authorizers ensure that charter schools’ governing boards function effectively and appropriately. FCMAT does not explicitly recommend authorizers to attend charter schools’ board meetings or direct authorizers to assign their representatives to charter schools’ governing boards, as state law allows. Nevertheless, as we discuss here and here, we believe that this practice could improve authorizing districts’ financial oversight.

Two Districts Did Not Use Their Authority Under State Law to Place a Representative on Their Respective Charter School’s Governing Board

Although state law allows authorizers to place their representatives on charter schools’ boards of directors, two of the three districts that we visited have chosen not to do so. Specifically, Acton‑Agua Dulce Unified and Antelope Valley Union did not appoint representatives to Assurance Academy’s and LA Online’s boards of directors, even though doing so could have increased their awareness of their charter schools’ financial conditions and decisions. For example, although LA Online’s governing board consistently discussed LA Online’s large decline in enrollment starting in July 2014, Antelope Valley Union appears to have been unaware of this decline until December 2014. In a report that Antelope Valley Union presented to its board of trustees in December 2014, it stated that LA Online’s enrollment was 988 students, when in fact it was only about 300 students at that time. Had Antelope Valley Union attended LA Online’s board meetings or even just reviewed the meeting minutes, it would have been aware of this development sooner and could have promptly advised LA Online on revising its budget to account for its decreased enrollment.

In addition, because it did not attend LA Online’s governing board meetings, Antelope Valley Union was unaware of LA Online’s potentially illegal arrangement to include students who were enrolled concurrently in a sectarian school in its average daily attendance and consequently in its state funding claims. Specifically, after experiencing a significant decline in enrollment, LA Online and a sectarian school entered into an MOU in which the sectarian school agreed to provide LA Online with 25 students during the spring 2015 semester. The MOU required both parties to provide financial, material, and labor resources in order to create blended learning opportunities for the students of the sectarian school. However, state law prohibits the appropriation of state funding for the support of any sectarian school and specifically requires that a charter school be nonsectarian in its programs, admissions policies, employment practices, and other operations.

When we asked Antelope Valley Union about this agreement, its assistant superintendent of educational services stated that the district had been unaware of it. However, an LA Online governing board meeting discussed LA Online’s decision to enter into the agreement. According to LA Online’s board meeting minutes, the partnership would increase average daily attendance, expand LA Online’s name, and lead to partnerships with other private schools. In addition, the minutes state that students would be enrolled full‑time with LA Online while continuing their full‑time enrollment at the sectarian school. Had Antelope Valley Union regularly attended LA Online’s governing board meetings or assigned a representative to the school’s governing board, it would have been better able to provide oversight and ensure that LA Online’s practices were legal.

According to Antelope Valley Union’s superintendent, his district has chosen not to place district representatives on its charter schools’ governing boards because it could potentially create conflicts of interest between the schools and the district. He explained that a district representative on a charter school’s governing board might have to make a decision that would negatively impact either the school or the district, and that this lack of separation could cause the district to accept liability for the charter school’s actions. He also noted that such an arrangement might prevent charter schools from pursuing innovative educational processes. Nevertheless, authorizers could maintain a presence on charter schools’ governing boards without exposure to perceived conflicts of interest by designating their representatives as nonvoting members. This would ensure that authorizers are aware of significant issues that might impact their charter schools.

Similarly, Acton‑Agua Dulce Unified was unaware of certain financial decisions Assurance Academy’s governing board made. For example, Acton‑Agua Dulce Unified was unaware that in June 2014 Assurance Academy’s governing board approved a resolution for annually transferring up to 45 percent of its reserves to Choices in Learning National Foundation, a nonprofit corporation located in the same office park. According to Assurance Academy’s board meeting minutes, the purpose of this resolution was to support and promote charitable work consistent with the mission and purpose of Assurance Academy. Although Assurance Academy’s executive vice president of finance stated that Assurance Academy did not make any transfers under this plan, the approval of such a process appears questionable. As a charter school, Assurance Academy receives state school funds that are exclusively available for the purpose of educating enrolled students, not for supporting another organization. In September 2017, after we discussed this issue with Assurance Academy, its board rescinded the resolution.

When asked about the appropriateness of Assurance Academy’s board resolution, Acton‑Agua Dulce Unified’s chief financial officer stated that he was not aware of Assurance Academy’s decision to transfer 45 percent of its reserves annually to another organization and that he could not comment upon the appropriateness of the resolution without having all the facts. He also explained that he was not aware of any district employees attending the board meeting at which Assurance Academy’s board passed that resolution. Because the district did not attend Assurance Academy’s board meeting or review the minutes, this board resolution has been in effect and unmonitored by the district for more than three years. The chief financial officer stated that the district has considered putting a representative on its charter schools’ board of directors, but he opined that the district has not needed to do so because Assurance Academy’s financial reports have not indicated financial difficulties. Nevertheless, we believe that attending charter school board meetings is a critical component of administering effective financial oversight.

Recommendations

Legislature

To ensure that authorizers have adequate tools and guidance for providing effective financial oversight, the Legislature should require the State Education Board and Education to work with representatives from county offices of education, representatives from districts, and subject‑matter experts such as FCMAT, to either establish a committee or work with an existing committee to report to the Legislature recommendations on the following:

• Establishing a minimum reserve requirement for charter schools.


• Defining criteria that would allow authorizers to revoke or deny renewal of schools’ charters for financial mismanagement despite increases in academic achievement.


• Developing a template that authorizers can use to provide their charter schools with annual feedback on their financial condition.

To ensure that districts are aware of significant issues that may impact the out‑of‑district charter schools they authorize, the Legislature should amend state law to require each district to place a district representative as a nonvoting member on each out‑of‑district charter school’s governing board and allow such a representative to attend all meetings of the charter school’s governing board.

Districts

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

• Develop written procedures for reviewing charter schools’ financial information and conducting annual oversight visits. These procedures should include relevant requirements from memorandums of understanding with the charter schools and best practices.


• Develop written procedures for addressing financial concerns, such as a charter school’s failure to meet the minimum reserve requirement established in the district’s memorandum of understanding with the charter school.


• Place a district representative as a nonvoting member on each charter school’s governing board.

To better ensure effective oversight of their charter schools’ finances, Antelope Valley Union and New Jerusalem should provide charter schools with written feedback and recommendations for improving their financial operations after completing their financial reviews and annual oversight visits.

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Chapter 3

STATE LAW REQUIRES DISTRICTS TO PROVIDE ONLY A MINIMAL LEVEL OF ACADEMIC OVERSIGHT TO THE CHARTER SCHOOLS THEY AUTHORIZE

State law requires authorizing districts to conduct annual site visits at their charter schools, but it does not identify specific oversight activities that the districts must provide. For example, although state law requires charter schools to establish measurable student outcomes within their petitions, it does not require authorizing districts to assess annually whether charter schools are meeting those outcomes. Rather, it requires only that authorizers monitor the academic performance of their charter schools once every five years, when the schools seek to renew their charters. Thus, we were not surprised to find that the districts we visited provide varying levels of academic oversight. In general, these districts lack procedures for providing charter schools with timely feedback on specific areas in which a charter school is either succeeding or failing academically. Further, none of the districts regularly raised concerns about academic performance, even though the charter schools we reviewed consistently scored lower on statewide tests than comparable schools on average. According to the districts we visited, changes in state law—such as the elimination of the academic performance index—have also made it more difficult for them to conduct effective academic oversight and to hold charter schools accountable for poor academic performance. In addition, one of the districts we visited noted that one of its charter schools qualifies for an exception within state law, which limits the criteria against which the district could hold the school accountable for academic performance.

The Districts We Reviewed Had Different Processes for Holding Their Charter Schools Accountable for Academic Performance

While state law generally describes certain duties that an authorizer must undertake with respect to its charter school, the law does not clearly define the minimum level of oversight that authorizers must provide with any specificity. Consequently, the districts we visited provide varying levels of academic oversight of their charter schools. For example, according to state law, an authorizing district must visit its charter schools’ sites annually; however, state law does not describe the specific oversight activities that the district must perform. Nevertheless, without periodically monitoring their schools for compliance with academic goals, authorizers cannot ensure that schools are making progress in improving student learning, nor are they in a position to identify the need for corrective actions or possibly the revocation of the schools’ charters. For example, New Jerusalem provided evidence that it had visited Acacia Elementary annually throughout our audit period; however, for one of the years, it was unable to demonstrate that it had conducted any substantive assessment of the school’s academic performance. Nevertheless, state law does not require districts to do more than visit school sites annually. Moreover, Acton‑Agua Dulce Unified and Antelope Valley Union could not demonstrate that they had performed these site visits for all the years in our audit period.

Similarly, although state law requires charter schools to establish measurable student outcomes within their petitions, it does not require authorizing districts to assess annually whether charter schools are meeting those outcomes. Accordingly, the districts we visited could not demonstrate that they had evaluated whether their charter schools had met their measurable student outcomes each year. For example, New Jerusalem’s superintendent stated that the district has required its charter schools to report certain financial and educational information since fiscal year 2014–15, and he further asserted that the district has reviewed this information during annual site visits. However, New Jerusalem was unable to provide evidence that it verified the accuracy of any of Acacia Elementary’s self‑reported information. New Jerusalem’s superintendent explained that he does not have any documentation related to Acacia Elementary’s academic performance because he periodically reviewed the school’s test scores online and would have only documented his review if he identified an issue. However, we do not believe this process would have allowed the district to obtain enough information to assess whether Acacia Elementary was meeting the measurable student outcomes in its charter.

In fact, we found that the districts we reviewed did not consistently perform the academic monitoring included in their agreements with their charter schools. Although state law requires authorizers to monitor the academic performance of their charter schools only when the schools seek to renew their charters every five years, authorizers may choose to implement more stringent requirements as part of their MOUs or policies. All the authorizing districts we reviewed have established requirements for academic oversight that exceed those in state law. For example, New Jerusalem established an MOU with Acacia Elementary requiring the school to self‑report whether it was meeting the goals and outcomes in its charter. However, New Jerusalem’s superintendent stated that the district never received these reports or followed up with Acacia Elementary about them before beginning the revocation process. Similarly, Acton‑Agua Dulce Unified’s policy requires its charter schools to hire an outside auditor to conduct periodic audits of their academic and financial performances; however, the district has not enforced this requirement. The district’s director of charters, who started her role in 2016, believes district staff already perform these duties annually, as part of the district’s annual oversight process. Nevertheless, Acton‑Agua Dulce Unified was not able to demonstrate that it regularly assessed whether its charter schools were achieving the measurable student outcomes identified in their charters and thus were on track for renewal.

Antelope Valley Union also failed to provide effective monitoring of LA Online’s academic performance, even when the school provided it with information that would have allowed it to identify that the school was struggling. Although Antelope Valley Union’s assistant superintendent of educational services stated that the district did not have an active agreement requiring LA Online to self‑report measurable student outcomes as part of a programmatic audit, LA Online still provided these programmatic reports to the district for two of the three years we audited. LA Online’s reports for fiscal years 2013–14 and 2014–15 revealed that it had not met many of its academic goals, such as those related to English language arts and math. Further, LA Online failed to meet those measurable student outcomes throughout our audit period. Nonetheless, Antelope Valley Union could not demonstrate that it identified the severity of LA Online’s academic performance problems until it filed a notice of violation in November 2016. In fact, although Antelope Valley Union’s annual review report for fiscal year 2015–16 included a section on Assessment and Accountability, the district did not describe within it LA Online’s history of failing to meet measurable student outcomes. Antelope Valley Union’s assistant superintendent asserted that the district assessed LA Online’s academic performance by reviewing test results online, but it did not retain evidence of these assessments.

Similarly, New Jerusalem did not report any issues with Acacia Elementary’s academic performance until it began the process to revoke the school’s charter. Specifically, we determined that Acacia Elementary did not meet some of its measurable student outcomes in fiscal years 2014–15 and 2015–16, such as having its students meet or exceed the average achievement of schools located in Stockton. New Jerusalem’s superintendent explained that academic performance data for fiscal year 2014–15 was not available until fall 2015, around the same time it became aware of Tri‑Valley’s potential financial mismanagement. He also explained that the district neither compared Acacia Elementary’s academic performance to similar schools in its host district nor evaluated whether the school achieved its charter’s goals because the district was concerned that the school’s financial issues would have immediate consequences. Although the district asserted that it would have reported any academic performance issues, it did not formally report concerns about Acacia Elementary’s academic performance until it filed a notice of intent to revoke in June 2016. As we discuss in Chapter 2, the San Joaquin Superior Court reviewed New Jerusalem’s support for revoking Acacia Elementary’s charter and determined that New Jerusalem had not adequately considered increases in academic achievement as part of its revocation decision. Because state law requires authorizers to consider increases in student academic achievement for all groups of students as the most important factor in revocations, districts that do not document their ongoing assessments of academic performance may not have sufficient evidence to revoke the charters of failing charter schools.

In general, all three districts lack procedures for providing charter schools with timely feedback on specific academic areas in which the schools are either succeeding or failing. For example, during our audit period, Antelope Valley Union reviewed its charter schools’ curriculum, professional development, and education technology, among other things; however, it did not determine whether the schools complied with academic requirements established in the district’s policies, MOUs between the district and the charter schools, and charters. New Jerusalem’s superintendent stated the district relied on its charter schools’ self‑assessments of their educational programs; however, it was unable to demonstrate that it verified the schools’ responses or evaluated whether they had met measurable student outcomes.

Moreover, we noted that Antelope Valley Union provided less academic oversight to LA Online than it did to the in‑district charter school we reviewed—Desert Sands Charter High School (Desert Sands). Although the district asserted that it uses the same academic oversight process regardless of a charter school’s location, the district did not visit LA Online in fiscal year 2013–14, while it visited Desert Sands every year of our audit period. In addition, the district did not prepare an annual review report for LA Online for fiscal year 2013–14, even though it prepared Desert Sands’ annual review reports for all three years of our audit period. Antelope Valley Union’s assistant superintendent stated it did not visit LA Online during fiscal year 2013–14 because during that fiscal year it met with representatives from LA Online at the district’s offices. Nevertheless, state law requires authorizing districts to conduct site visits. Moreover, because the district did not retain evidence that it had performed any reviews during fiscal year 2013–14, Antelope Valley Union cannot demonstrate that it held all its charter schools equally accountable.

Finally, Acton‑Agua Dulce Unified could not demonstrate that it assessed Assurance Academy’s academic performance for one of the years in our audit period because Assurance Academy was an Alternative School Accountability Model (ASAM) school. The California Public Schools Accountability Act of 1999 established ASAM to provide school‑level accountability for alternative schools serving high‑risk students, such as those who are habitually truant, who are recovered dropouts, or who are parenting. ASAM was an alternative accountability system in effect during our audit period, which we discuss further in a following section.

The Academic Performance of the Out‑of‑District Charter Schools We Visited Was Below the Average Performance of Comparable Schools

According to analyses we conducted, the standardized test scores for English language arts and math at the three charter schools we visited were below the combined average scores of comparable schools for fiscal years 2014–15 and 2015–16. State law requires both charter and noncharter schools to participate in standardized statewide testing. Education publishes each school’s test results on its website, and these results can aid authorizers in gauging the academic achievement of their charter schools. For example, test scores help authorizers determine whether their charter schools are meeting the academic goals in their charters and if their schools’ performances are above or below the average of comparable schools.

State law includes five academic criteria for charter renewal and requires that charter schools need only meet one of the five criteria to have their charters renewed. However, three of the five criteria are no longer applicable because they refer to an accountability system that the State suspended in fiscal year 2013–14 and subsequently replaced in March 2017. The two remaining criteria are that a charter school’s academic performance must be equal to or better than that of the noncharter schools its students would have otherwise attended or that the charter school qualifies for an alternative accountability system.

Because the authorizers we visited could not demonstrate or provide documentation that they consistently monitored the academic performance of their charter schools, we conducted our own evaluation. Specifically, we used the State’s new accountability system to compare the fiscal year 2014–15 and 2015–16 English language arts and math scores for the three out‑of‑district schools we visited to the scores of comparable noncharter schools. Because Education was field testing the new accountability system during fiscal year 2013–14, no data was available until the system was fully implemented in fiscal year 2014–15. We identified comparable schools based on school type, location, size, percentage of socioeconomically disadvantaged students, and percentage of English learners. Because Acacia Elementary operated in Stockton Unified’s jurisdiction, we selected schools from Stockton Unified serving kindergarten through grade 5 that had similar enrollment sizes and percentages of socioeconomically disadvantaged students and English learners. We chose LA Online’s comparable schools based on whether the schools were primarily or exclusively virtual, had similar enrollment sizes, and served similar percentages of socioeconomically disadvantaged students and English learners in grades 9 to 12. Because there are so few noncharter virtual schools, we broadened our search to the entire State.

As we mention previously, during our audit period, Assurance Academy was an ASAM school that served students in grades 9 to 12 who mostly lived in LA Unified’s jurisdiction. Because ASAM schools use varying methods to serve unique populations, the effectiveness of comparing academic performance among ASAM schools may be limited. Accordingly, state law makes certain exceptions for ASAM schools, as we describe below. We therefore compared Assurance Academy to other ASAM schools in LA Unified, such as continuation schools with similar enrollment sizes and percentages of socioeconomically disadvantaged students and English learners. According to its ASAM application, 95 percent of Assurance Academy’s students qualified as high‑risk students.

As Table 8 and Table 9 show, all our selected charter schools’ math scores were below the combined averages of comparable schools for both years. Similarly, the schools’ English language arts scores were below the combined average of comparable schools for both years, except in one instance, when the scores were the same. As shown in Table 8, Acacia Elementary English language arts results significantly improved from fiscal year 2014–15 to fiscal year 2015–16. However, with one exception, its scores were still below the combined average of comparable schools. In addition, Acacia Elementary’s improvement might have been overstated because it did not report scores for its fourth graders for fiscal year 2014–15 as they were deemed invalid. Tri‑Valley’s chief executive officer could not provide an explanation why Acacia Elementary did not report the test scores. According to one of Education’s administrators, invalid test scores may be the result of cheating, testing of students at the wrong grade level, students’ failing to complete enough questions, or parents requesting exemptions from testing.

Table 8
Acacia Elementary's Academic Performance Fell Below the Averages for Comparable Elementary Schools
During Fiscal Years 2014–15 and 2015–16

SCHOOL	CALIFORNIA ASSESSMENT OF STUDENT PERFORMANCE AND PROGRESS (CAASPP)— PERCENTAGE OF STUDENTS MEETING OR EXCEEDING STATE STANDARDS								OTHER STUDENT OUTCOMES*
	ENGLISH LANGUAGE ARTS				MATHEMATICS				PERCENTAGE OF STUDENTS SUSPENDED	PERCENTAGE OF STUDENTS EXPELLED
	GRADE 3	GRADE 4	GRADE 5		GRADE 3	GRADE 4	GRADE 5		SCHOOLWIDE	SCHOOLWIDE
Fiscal Year 2014–15
Acacia Elementary	0%	0%†	12%		0%	9%	3%		0%	0%
Averages for Comparable Schools	21	22	27		26	25	16		10	0
El Dorado Elementary	17	18	19		11	11	10		12	0
Kennedy Elementary	14	21	27		30	33	18		11	0
Rio Calaveras Elementary	33	33	49		36	41	34		8	0
George W. Bush Elementary	21	18	20		27	25	11		7	0
Victory Elementary	21	22	19		25	16	7		10	0
San Joaquin County	27	30	34		31	26	21		8	0
Fiscal Year 2015–16
Acacia Elementary	17%	14%	29%		11%	7%	12%
Averages for Comparable Schools	29	23	29		36	30	21
El Dorado Elementary	23	21	24		25	20	8
Kennedy Elementary	30	17	34		39	31	23
Rio Calaveras Elementary	47	43	48		58	46	49
George W. Bush Elementary	20	19	26		27	28	19
Victory Elementary	25	14	15		29	27	5
San Joaquin County	32	32	38		36	29	24

Sources: California State Auditor’s analysis of fiscal years 2014–15 and 2015–16 CAASPP data and fiscal year 2014–15 suspension and expulsion data from Education.

* Suspension and expulsion data from Education are not yet available for fiscal year 2015–16.

^† None of Acacia Elementary’s fourth graders had valid test scores for English language arts in fiscal year 2014–15.

Table 9
Assurance Academy’s and LA Online’s Academic Performance Fell Below the Averages for Comparable High Schools During Fiscal Years 2014–15 and 2015–16

SCHOOL	CAASPP— PERCENTAGE OF STUDENTS MEETING OR EXCEEDING STATE STANDARDS			OTHER STUDENT OUTCOMES*
	ENGLISH AND LANGUAGE ARTS	MATHEMATICS		PERCENTAGE OF STUDENTS GRADUATED	PERCENTAGE OF STUDENTS SUSPENDED	PERCENTAGE OF STUDENTS EXPELLED
	GRADE 11	GRADE 11		GRADE 12	SCHOOLWIDE	SCHOOLWIDE
Fiscal Year 2014–15
Assurance Academy	17%	1%		5%	0.0%	0.0%
Averages for Comparable Schools	23	2		9	0.0	0.0
Cal Burke High	32	6		13	0.0	0.0
Central High	24	0		4	0.7	0.0
Metropolitan Continuation High	30	0		1	0.0	0.0
Will Rogers Continuation High	8	0		14	0.0	0.0
Frida Kahlo High	23	2		10	0.0	0.0
Los Angeles County	54	28		79	2.2	0.0
LA Online	50%	10%		27%	0.0%	0.0%
Averages for Comparable Schools	61	16		91	0.0	0.0
Redlands eAcademy	†	†		100	0.0	0.0
Rivercrest Preparatory	35	13		100	0.0	0.0
Riverside Virtual	87	18		73	0.0	0.0
Los Angeles County	54	28		79	2.2	0.0
Fiscal Year 2015–16
Assurance Academy	19%	1%		6%
Averages for Comparable Schools	22	3		17
Cal Burke High	30	0		34
Central High	10	5		11
Metropolitan Continuation High	37	3		3
Will Rogers Continuation High	10	0		21
Frida Kahlo High	24	6		18
Los Angeles County	58	30		81
LA Online	47%	7%		18%
Averages for Comparable Schools	68	27		82
Redlands eAcademy	†	†		83
Rivercrest Preparatory	51	6		87
Riverside Virtual	84	48		75
Los Angeles County	58	30		81

Sources: California State Auditor’s analysis of fiscal years 2014–15 and 2015–16 CAASPP data from Education , fiscal year 2014–15 suspension and expulsion data from Education, and fiscal years 2014–15 and 2015–16 graduation data from Education.

* Suspension and expulsion data from Education are not yet available for fiscal year 2015–16.

^† Education does not publish the data if fewer than ten students were tested.

All the authorizing districts we visited stated that they were aware of their charter schools’ academic performance because they reviewed the testing data online; however, they asserted that they did not follow up with the charter schools to create corrective action plans either because the schools qualified for an alternative accountability system or because the State had implemented changes to its accountability system. For example, the assistant superintendent of Antelope Valley Union indicated that the district monitors whether its charter school students are meeting measurable outcomes; thus, his district should have been aware of LA Online’s poor test scores. However, the assistant superintendent stated that the district did not follow up with the school in fiscal year 2014–15 because LA Online had just adopted a new curriculum. He explained that properly evaluating a new curriculum takes time; however, LA Online also had poor academic results in fiscal year 2013–14 under its old curriculum, and the district could not demonstrate that it had followed up then either. Antelope Valley Union’s assistant superintendent also pointed to the State’s transition to a new accountability system as a hindrance to the district’s ability to provide consistent academic oversight. He stated that the district relied heavily on the old accountability system to determine a school’s academic achievement and that the discontinuance of academic performance reports the State issued under the previous system limited the district’s ability to assess academic performance.

State law describes that the intent of the Legislature is to hold charter schools accountable for meeting measurable student outcomes. Further, state law establishes that districts must consider increases in student academic achievement as the most important factor in determining whether to renew or revoke schools’ charters. If authorizers do not consistently monitor the academic performance of charter schools and hold the schools accountable, they cannot ensure that charter school students are academically prepared to advance or graduate.

Changes in State Law Have Diminished Certain Charter Schools’ Academic Accountability

Although state law requires authorizers to assess the academic performance of schools petitioning for charter renewal, schools that qualify for an alternative accountability system, such as ASAM, do not need to demonstrate academic achievement as a condition for their charter renewal. Accordingly, Acton‑Agua Dulce Unified recently renewed Assurance Academy’s charter without assessing Assurance Academy’s academic performance. According to Acton‑Agua Dulce’s director of charter schools, the board did not evaluate the charter school’s academic performance as a criterion for renewal because of Assurance Academy’s ASAM status. She stated that due to the lack of criteria for holding ASAM schools accountable the district instead considered other factors, such as enrollment, retention and graduation rates, and the number of students reclassified as fluent in English.

Before fiscal year 2009–10, state law held ASAM schools accountable based on their choice of readiness indicators, contextual indicators, and academic completion indicators, as the text box shows. However, due to budget constraints, ASAM schools became accountable under the State’s general accountability model beginning in fiscal year 2009–10. This model measured schools’ academic growth based on their academic performance index and adequate yearly progress. However, the academic performance index was suspended at the end of fiscal year 2013–14 and adequate yearly progress was discontinued the following year. In September 2016, the State Education Board approved key elements of a new accountability system, the California School Dashboard (Dashboard), but it did not determine how the Dashboard’s indicators should be measured for alternative accountability model schools. As a result, state law does not establish academic metrics against which it will hold those alternative schools accountable.

On July 12, 2017, the State Education Board approved the development of the Dashboard Alternative School Status program to replace ASAM. According to Education’s director of the Analysis, Measurement & Accountability Reporting Division, the new program will hold alternative schools accountable to the same indicators as traditional schools, but it may measure those indicators differently. For example, the program may track indicators related to graduation rates by one‑year graduation rates for alternative schools instead of the four‑year cohort graduation rates applicable to traditional schools. According to its website, the State Education Board expects to incorporate this new program into the Dashboard in fall 2018. However, the director stated that, pursuant to state law, the Dashboard may still be used to identify schools, including charter schools, in need of technical assistance or charter schools subject to revocation. Nevertheless, while this gap exists in the State’s accountability system, authorizers must continue renewing the charters of schools that qualify for alternative accountability systems without the schools having to demonstrate that they are expanding learning experiences effectively for high‑risk students, as the Legislature requires.

Recommendations

Legislature

To ensure that charter schools improve the educational outcomes of their students, the Legislature should amend state law to require authorizers to annually assess whether their charter schools are meeting the academic goals established in their charters.

Districts

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

• Adopt a policy requiring them to provide their charter schools with timely feedback and recommendations regarding academic performance.


• Adopt an academic oversight policy that includes steps for working with charter schools with poor performance results.


• Provide their charter schools with annual oversight reports on their academic performance.

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

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

ELAINE M. HOWLE, CPA
State Auditor

Date:
October 17, 2017

Staff:
Jim Sandberg-Larsen, CPA, CPFO, Audit Principal
Andrew Jun Lee
Louis Calderon
Aren Knighton, MPA
Natalja Zvereva

Legal Counsel:
Richard B. Weisberg, Sr. Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.

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Footnotes

¹ Tri-Valley’s bankruptcy petition stated that it did business as Acacia Elementary; thus we note in this report that Acacia Elementary filed for bankruptcy. Go back to text

² We refer to a charter school’s deficiency of assets over liabilities as a deficit. Go back to text

³ For a nonprofit entity, net assets are the excess of assets over liabilities. Go back to text

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