CBO SB 352 - Fiscal Crisis & Management Assistance Team

Charter School
Fiscal Management
Spring 2012
Presented by:
Fiscal Crisis and Management Assistance Team (FCMAT)
California School Information Services (CSIS)
Schools Legal Services
Michael Ammermon, CPA, CFE
General Information
• Charter school fiscal management binder
• Copies of the presentation
• Additional reference materials
• Explanation of today’s format
• Feel free to ask questions
• Please turn cell phones OFF
Did you Know?
Forty-one states, plus the District of Columbia, allow for charter schools.
• California was 2nd in the nation to authorize charter schools.
More than 4,900 charter schools serving 1.6 million children operate across
the US in January 2010.
• These 4,900 schools are overseen by 872 authorizers, one-third of
which are in California.
Nationwide, California has the largest number of charter schools serving the
largest number of students.
• Charter schools educate approximately six percent of all California
• There are more than 982 charter schools in California, with more than
412,000 students enrolled.
• Charter schools are located throughout 50 of California’s 58 counties.
Did you Know?, cont.
• Many charter schools, though successful in raising student
achievement, are closing their doors due to their lack of
knowledge about managing the business and fiscal
requirements of their schools.
• CDE data shows nearly two-thirds (65%) of all charter schools
that closed since 2004 reported positive trends in API growth
and failed for reasons unrelated to successful academic
• Both the authorizers with oversight responsibility and the
charter schools they serve need to better understand and meet
their respective responsibilities.
What Can We Do?
• Make sure there is an understanding that:
• Effective financial management of charter school resources
is as important to the success of a charter school as the
strength of the curriculum or the dedication of its founders.
• Collaborative efforts between public schools and charter
schools are in the best interest of all of our students; it is
essential to understand each other’s regulatory and
reporting environments.
• The need for effective site-based financial management at
charters has never been greater.
• Sharing best practices to build capacity for effective
financial management is a win-win situation.
What Can We Do?, cont.
• Strong, proactive oversight is critical to everyone’s
• So is open communication
What Is A Charter School?
Presented by:
Bill Hornback, Counsel, Schools Legal Service
Michelle Plumbtree, Chief Management Analyst, FCMAT
What Is A Charter School?
• Publicly funded elementary or secondary schools that:
• may operate independently of an existing school district
• may provide instruction in any grade or grades, K through 12.
• Usually created or organized by a group of teachers, parents,
community leaders, a community-based organization, or the school
• Exempted from significant portions of the California Education Code
in exchange for performance-based accountability.
• Overseen by charter school authorizers, who must ensure that the
school is abiding by their charter and meeting its accountability goals.
What Is A Charter School?, cont.
• Charter schools may be authorized by a district, a
county board of education (CBE), or by the California
State Board of Education (SBE).
• Specific goals and operating procedures for the
charter school are detailed in the "charter."
• Additional details are often set forth in a memorandum
of understanding or “MOU.”
What is the Purpose of Charter Schools?
• Improve student learning;
• Increase learning opportunities for all students, especially
those who are academically low-achieving;
• Encourage the use of different and innovative teaching
• Create new professional opportunities for teachers;
• Provide parents and students with expanded choice within the
public school system;
• Provide competition within the public school system to spur
improvement in all schools;
• Hold schools accountable for meeting
measurable performance outcomes.
What is the Legislative Intent?
• Charter schools are an integral part of the California
educational system;
• The establishment of charter schools should be encouraged;
• Charter schools are part of the public school system, but are
free from most of the state laws that uniquely apply to school
• Charter schools are under the jurisdiction of the public school
system and the exclusive control of the officers of the public
schools, and are entitled to full and fair funding;
• The laws governing charter schools are to be liberally
construed to effectuate their intent.
What Laws Apply to a Charter School?
Constitutions, both state and federal
The California Charter Schools Act
All federal laws (e.g., special education)
Laws generally applicable to governmental entities but not
specifically aimed at school districts (e.g., open meeting
• Provisions of law related to teacher retirement and
employee relations.
• Others listed in the materials.
What is the Difference Between a Dependent and
an Independent Charter School?
• Traditionally, a “dependent” school is treated as another
school of the authorizer, for all purposes.
• Traditionally, an “independent” school may only be a
school of the authorizer for limited purposes, such as
special education.
• There is a growing trend among school districts to mix
things up.
What is a “Conversion” Charter School?
When an existing school site is converted into a
charter school, whether an independent or
dependent charter school, the school is likely to
be considered a “conversion” charter school.
Other Important Considerations
• LEA status
• Classroom- or nonclassroom-based instruction
• Countywide charters – no appeal of a denial,
but there is appeal of a nonrenewal or revocation
• Statewide charters
• Highly qualified teachers
• Core academic subjects
Surrender of Charter
• The voluntary termination of charter school activities
• No process is necessary other than CDE being
• Authorizer should review potential liability for claims
due to:
• final audit
• disposition of assets
• transfer of pupil records
Charter School Finance in California
Presented by:
Michelle Plumbtree, Chief Management Analyst, FCMAT
Funding Mechanism - Direct or Local Funding
Direct funded = from the state to the charter school
Locally funded = from the state to the chartering authority
to the charter school
• Decision is made each May via the CDE “funding
Either way, funding is supposed to be equitable relative
to that received by traditional school districts
Charter School Funding Model
• Three main income sources:
• General Purpose Block Grant per ADA
• State averages per grade level
• Rate does not consider variances in the cost of
living or revenue limit from district to district
• Categorical Block Grant per ADA
• Covers 26 state-funded programs
• Includes additional funds for EIA pupils
• Funding for specific programs for which charter
schools may apply
General Purpose Block Grant
• Largest source of unrestricted charter school revenue
• Funded on enrollment or average daily attendance (ADA)
• No protection for declining enrollment in California
• Based on statewide average revenue limits per ADA by
grade level
• Funded by a combination of:
• State aid
• Local property taxes (“in lieu of property tax”)
General Purpose Block Grant, cont.
Most recent estimates for 2011-12*:
*Will be updated again after second principal apportionment
is certified at the end of June 2012
Categorical Block Grant
• Unrestricted funds
• Consolidated amount based on individual restricted
categorical programs
• i.e. funding in lieu of a long list of categoricals
• Not eligible to apply separately for these programs
• See CDE website for list
• http://www.cde.ca.gov/sp/cs/as/cscatblkgrinfo.asp
Categorical Block Grant, cont.
• Unrestricted funds
• Consolidated amount based on individual restricted
categorical programs
• i.e. funding in lieu of a long list of categoricals
• Current estimate 2011-12, $385 per ADA
• Not eligible to apply separately for these programs
• See CDE website for list
• http://www.cde.ca.gov/sp/cs/as/cscatblkgrinfo.asp
Categorical Block Grant, cont.
To the extent they are eligible:
• Locally-funded charter schools typically apply through
their chartering agencies.
• Direct-funded charter schools apply directly to the
appropriate state or federal agency.
Funding for Selected Programs
• Special education
• Federal
• State (SELPA)
• Others by application, if the charter school complies
with all statutory requirements of the program:
• K-3 CSR
• Quality Education Improvement Act (QEIA)
• Automatically
• Lottery
Funding for Selected Programs, cont.
Federal categorically-funded programs - No Child Left Behind:
Title I, Neglected or Delinquent
Title I, Part A, Basic Grant
Title II, Part A, Teacher & Principal Training & Recruiting
Title III, LEP Students
Title IV, Part A, Safe & Drug-Free Schools & Communities
Title VI, Part B, Rural Education Achievement
Tobacco-Use Prevention Education
Nonclassroom-Based Instruction
Nonclassroom-based instruction occurs when a student is not
scheduled for at least 80% of the instructional time in a
classroom. Funding penalties are invoked if criteria are not
being met. It includes, but is not limited to:
• Independent study
• Home study
• Work study
• Distance and computer-based education
• How do we structure our instructional methodologies?
• Do we align with any state requirements
to maximize funding?
Other Potential Revenue
Charter schools can negotiate with their chartering agency
for some sources of district funding, even though the
district is not required to share, including:
• Share of basic aid excess taxes
• Forest reserve funds
• Federal impact aid
• Parcel tax
Revenue Enhancement
Funding based on student attendance
• Consider student attendance incentives
• Increased attendance rates = increased funding
• Offer awards to students for:
• Best attendance rate
• Most improved attendance rate
• Use donated funds to fund prizes/rewards
• Avoid gift of public funds issue
Revenue Enhancement, cont.
School calendars
• Evaluate daily student attendance patterns
• Identify times when attendance is low
• Adjust school calendar accordingly
• Eliminate days that drag down ADA
Revenue Enhancement, cont.
• Apply….but:
• Be wary of match requirements!
• Can create financial burden if not properly
• Key questions
• What programs can we fund with this grant?
• Can we fund this program once the grant expires?
• Will this grant fund my cost increases over time
and my indirect costs?
Revenue Enhancement, cont.
• Philanthropy/fundraising is an excellent source of
supplementary funding for charter schools
• Make sure it’s a donation, not a fee
• Identify how the donation will be used when collected
• Donors should always know how their donations are
• Do not use one-time donations to fund ongoing
• Allocate as though they are one-time funds
Revenue Enhancement, cont.
Indirect costs
• That portion of costs associated with the overhead of
operating a charter school
• Every resource contributes to the need for indirect costs
• Thus, every resource should be charged
• Each resource has specific limitations on indirect cost
New and Expanding Charter Schools
Special advance apportionments for new charter schools
• Start the flow of funds – new schools
• General purpose funds
• Categorically funded programs – federal and state
• Start the flow of funds – expanding schools
• Significant growth
• Grade level expansion
• Offset opening costs
Declining Enrollment
School districts funded at greater of current or prior year ADA
• Not available to charter schools
• State won’t fund the same ADA for both the district and the
charter school
• The “sending entity” must deduct the ADA from the prior
year ADA count for purposes of calculating fundable
• Can’t fund same ADA twice in the same year
Expenditure Control Strategies for
Charter Schools
Presented by:
Michelle Plumbtree, Chief Management Analyst, FCMAT
Internal Controls
A strong internal control structure is critical to controlling
•This includes:
• Policies and procedures used by staff
• Accounting and information systems
• The work environment
• The tone set by management
• The professionalism of employees
• Covered in more detail in other parts of today’s
Budget Controls
Position control
• System of internal control that ensures all positions funded
by the charter school are properly authorized
• Check and balance between:
• Staff who authorize position changes (Business
• Staff who manage vacancies (hire/adjust/terminate)
(HR Department)
Budget Controls, cont.
Economic uncertainty reserve
• Guidance should be provided in charter document or MOU
with authorizing agency
• Consider building reserves in difficult fiscal times
• Establish a base and add for:
• enrollment fluctuation
• staffing/program fluctuation
• equipment/facility failure
Budget Reductions
Plan for the worst, hope for the best
• Review priorities and commitments
• Update multiyear financial projection
• Make adjustments now; don’t wait
• Savings have a multiplier effect
• Match expenditures to projected funding levels
• Eliminate structural deficit in budget
• Implement new plan ASAP
Budget Reductions, cont.
Develop a list of reductions that exceeds your reduction target …
… and then prioritize
• Board authorization to implement list by priority
• Avoids necessity of constant, never-ending budget cutting
• Revisit priority at budget reporting intervals and as information
• Budget adoption, interim reports, year-end closing, audit
Budget Monitoring
Enrollment and staffing
• Update projections monthly as actual counts are taken
• Budget adjustments should be implemented immediately
if actual data indicates a material difference from the
projected amounts
• Mid-year staffing adjustments may also be necessary to
prevent fiscal distress as a result of overstaffing
• But not recommended, if it can be avoided
• Disrupts instructional program
Budget Monitoring, cont.
Budget overages (actual exceeds budget)
• Preventing overages
• Use position control system
• Use “hard stops” on purchase orders
• Responding to overages
• Present budget modifications monthly
• Resolve overage condition
• Identify condition that led to overage
• Correct the condition
General Ledger Monitoring
Monitoring general ledger accounts is also critical to sound
fiscal monitoring
• Cash reconcile items that are not cleared
• Accounts receivable/payable differences between
accruals and actual receipts/payments
• Inventory that is over/understated
• Payroll clearing accounts that are not reconciled
• Payroll clearing is the most commonly
underscrutinized area
Largest portion of budget
• Components of increased cost
• Compensation increases (nonsalary schedule)
• Salary schedule increases/bonuses
• Step and column salary schedule movement
• Benefit rate increases (statutory)
• Benefit program changes (contracted)
Compensation, cont.
Identify available dollars
• Available new revenue
• COLA, growth
• Less increased fixed costs (previous commitments)
• Step and column salary schedule movement
• Statutory benefit rate increases, utilities, insurance
• Increased staffing needs
• Less discretionary allocations
• New/expanded/restored programs
• Other priorities
• Equals amount available for compensation
Compensation, cont.
Desperate fiscal climate
• Traditional budget reduction approaches may not be
• Creative solutions may be needed to stay fiscally and
cash solvent
• May need to consider:
• Compensation deferrals
• Can’t pay now, but may be able to later
• Compensation rollbacks
• Across-the-board reductions
• Salaries/benefits/both
Compensation - Statutory Benefits
Statutory benefit rates likely to increase
• Retirement systems have suffered substantial losses in
recent years
• Rate adjustments have been implemented
• Benefit reductions are under consideration
• Social Security, Medicare in need of significant fixes
• Proposals are politically risky
• Nothing concrete proposed to date
• Unemployment insurance costs on the rise
• More layoffs = higher rates
Compensation - Contracted Benefits
Health and welfare benefit programs
• Medical, dental, vision, life, etc.
• Health care reform may not provide timely solutions
• May increase costs
• Increase purchasing power
• Join a JPA
• Consider HMOs, health savings accounts (HSAs)
• Review benefit caps on premiums, copays, deductibles
• Validate dependent enrollments
Position Costs
Staff positions to meet charter school’s program needs
• But no more
• Overstaffing - and unfunded compensation agreements are the largest components of financial failures!
• Consider options before creating permanent positions
• Use substitutes/extra duty/overtime
• Contract out (if legal)
• Short-term cost < permanent cost
Contributions to Restricted Programs
Some restricted programs require contributions from
unrestricted funding sources
• Some are mandated by law
• Some are discretionary
Manage contributions
• Limit contributions to the amounts necessary
• If unexpected contribution occurs, investigate
• Educate the organization that the contribution
occurred and why
• Determine the level of commitment
• One-time vs. ongoing
Budget Development Best Practices
for Charter Schools
Presented by:
Michelle Plumbtree, Chief Management Analyst, FCMAT
Budget Development – Governance
Adopt charter school board policies and regulations
regarding budget management
• Guidance to staff regarding expectations for the budget
• Establish:
• Goals and objectives for the charter school
• Instructional/financial/other
• Process by which budgets are aligned with goals and
• Process to identify budget assumptions
• Process to develop budget
Budget Development – Strategies
Develop budgets with a multiyear perspective
• Be thinking in a three- to five-year time frame
• Primary focus on budget year
• Additional focus on subsequent years
• Not as detailed
• Organization needs a compass to see where it’s going
• Action plan
• What we need to do, and when
• To achieve goals and objectives
Budget Development – Strategies, cont.
Use conservative assumptions
• Estimate low on revenues, high on expenditures
• But don’t overdo it!
• Estimating too high or too low can create serious
• Loss of credibility
• Harm to programs
• Negative effect on student performance
Budget Development – Strategies, cont.
Allocate new revenues (if any!) to needs, then wants
• Fund the base and related fixed-cost increases first
• Inflationary effect on supplies, etc.
• Benefit increases
• Statutory and contractual
• Step and column movement across salary
schedules (if any)
• Contractual/debt service obligations
Budget Development – Strategies, cont.
Then, if funds are available, allocate new funds to wants
• Program development, expansion, restoration
• Compensation increases
• Building reserve levels
This process also works when funding decreases.
Multiyear Financial Projections
State law identifies the duties of a charter authorizing
• Charter authorizing entity must monitor the fiscal
condition of charter schools
• But charter schools are NOT subject to AB 1200
county oversight
A budget and a multiyear financial projection (MYFP)
are integral information for the oversight function
• Two to five years after budget year
Multiyear Financial Projections, cont.
MYFP focus
• Meet required reserve for economic uncertainty
• Not required by AB 1200, but could be required as
part of MOU
• Deficit spending trends? Must:
• Increase revenue
• Decrease expenditures
• Or both
Report Format
Budget report format - Narrative
How the budget aligns with the goals of the board
How it supports student learning
Significant assumptions used to develop the budget
Budget reduction detail
• Response to reduced funding, declining enrollment
or other factors
Report Format, cont.
Unaudited actuals report
• Format may be prescribed by the state
• Basis for independent financial audit
• Last chance to affect the charter school’s financial
status before the audit begins
Report Format, cont.
Typical list of supplemental information
• Budget assumptions for revenues and expenditures
• Analysis of enrollment and average daily attendance (ADA)
• An organizational chart
• Statement of cash flow for the current and subsequent
fiscal year
• Profit and loss statement
• Disclosure of all multiyear fiscal obligations, such as loans,
lines of credit, etc., for the next three years
Cash Flow Management
Techniques for Charter Schools
Presented by:
Michelle Plumbtree, Chief Management Analyst, FCMAT
The Importance of Cash Flow
• Cash flow is an important factor in determining the fiscal
health of the charter school.
• Many schools are using their reserves to balance their
• Using reserves affects future cash flow.
• Less reserves means less cash.
• It is possible to maintain economic reserves in the budget,
yet be out of cash.
• Cash shows no mercy – you either have it or you don’t
State Cash Flow Management
As the state continues to experience shortfalls in revenue,
they must have a means to improve their cash flow.
• Deferrals have been the key to improving the state’s
cash situation, but have become detrimental for
• Cash flow will continue to be challenging to manage for
LEAs as deferrals are added, increased or lengthened.
State started deferring the June payment into July
February apportionment deferred into July
State started partially deferring portions of the
April and May apportionment into August
State added multiple deferrals
**July to September
**September to December
**March to April
**Part of April and May to July
**Deferred funds to July and
August delayed to September
Deferrals, cont.
Changes made to existing deferrals and new
**July, August and October 2011 delayed to
January 2012
**Partial deferral of March apportionment to
August 2012
**Additional partial deferral of April
apportionment to August 2012
The Cash Concept
It is often difficult to conceptualize the specific nature of cash
• Assets – liabilities = fund balance
But is the fund balance cash?
• No
• Assets are not all cash
• Liabilities are accrued debts
• Therefore the fund balance is not all cash
Managing Receivables and Payables
Clean up receivables and payables as soon as possible
during the fiscal year
• Best practice indicates that the majority of receivables
and payables should be finalized by October 31
• Any outstanding balances should be investigated:
• Is this still a valid receivable or payable?
• When will it be received or paid?
Reconciling Cash
• Best practice is to reconcile cash each month for each
• Not reconciling cash can result in significant
surprises once the backlog is caught up
• The charter school will be able to more accurately
anticipate cash borrowing needs
• What needs to be reconciled?
• The county treasurer’s records
• The charter school’s financial system records
• The bank’s records
• Remember to balance clearing accounts
Cash Flow Projection Tools
• Spreadsheets
• Financial management software
• FCMAT’s Budget Explorer software
• Web-based, free of charge
• BECS - Budget Explorer for Charter Schools
• Currently in planning & development phase
• Easy to use, improves planning/decision-making
• Upload data from DAT file, excel or manual input
Apportionment Schedules
For the revenue or receipts section of the cash flow
projection, apportionment schedules are available
• These account for much of charter schools’
incoming cash.
• Education Code Section (E.C.) 14041 in California
details the amount of apportionments for charter
Apportionment Schedule
E.C. 14041(a)(2), (3), and (4)
Original Schedule
2011-12 Schedule
Projected 2012-13 Schedule
Total Principal
In-Lieu Property Taxes
August 6%
September 12%
October 8%
November 8%
December 8%
January 8%
February 8%
March 1/3
April 1/6
May 1/6
June 1/6
Categorical Apportionments
• Federal apportionments are considered Tier I
• No flexibility
• No transfers, except as allowed for No Child Left Behind (NCLB)
• Funds will be apportioned according to established schedules.
• California Tier III categorical programs have experienced a change
in cash flow.
• The 41 programs transferred from restricted to unrestricted will
now follow the regular apportionment schedule (i.e., 5, 5, 9 . . . )
for cash flow purposes
• See the CDE’s worksheet
Local Revenues
Other local revenues
• The charter school is the best estimator of other
local revenues
• Use historical percentages and information on
which to base the school’s current projection
• Update the projections frequently to reflect
actuals to date
• Estimating the timing of expenditures is critical for cash flow purposes
• Dividing the budgeted amount by 12 months is not a good strategy
It most likely will not give you an accurate picture of the LEA’s
cash needs to meet obligations
• As the fiscal year progresses, analyze projected spending amounts
• Use the projected budget as a basis for the cash flow
• Make sure all reductions or increases are accounted for in the
cash projection
• For example, if spending freezes have been enacted, have the
anticipated savings been accounted for in the cash flow
Cash Flow Projections
Critical to staying successful and solvent
Should be updated monthly
Review cash flow projections at board meetings
Project 18 to 24 months in the future
Prepare for all funds
Need to be closely monitored for accuracy
Ensure different scenarios taken into consideration
• “trigger” cuts
• deferrals
Projecting Cash Flow
Now, ask these questions, based on the cash projection:
• Is cash negative at any time?
• What is the negative amount?
• If so, what borrowing options are most appropriate?
• Remember, the cost of borrowing reduces
available resources for students
• Can I pay it back?
Projecting Cash Flow, cont.
If borrowing is necessary at year end, the most frequently
used option is a temporary transfer from another fund
(i.e. internal borrowing)
• Are there sufficient balances in other funds?
• How long will the borrowing be needed?
A midyear RANs may be an option as well
• See following section on cash borrowing options
Cash Borrowing Options
External borrowing – three options:
• Sell revenue notes
• Revenue anticipation notes (RANs)
• Piggyback on district TRANS
• Private financial institutions
• Lines of credit
• Private loan
• Sell accounts receivable
Now, with state deferrals, even more agencies require
Cash Borrowing Options, cont.
Outside experts are needed for legal and financial matters
related to the issuance
• A financial advisor can save you time and money
• Legal counsel can ensure that the transaction complies
with all laws and regulations
Some agencies issue RANs by pooling their needs with
other agencies
• Saves on costs of issuance
• Coordinated through various public
agencies/nonprofit organizations
Cash Borrowing Options, cont.
Borrowing from a financial institution is an option
• Line of credit or private loans
• Secured or unsecured
• Issuance costs and interest rates tend to be higher than
for a RAN
• Private financing tends to be more difficult to acquire
• May find qualification requirements onerous
• Particularly for new or start-up charter schools
Cash Borrowing Options, cont.
Accounts receivable “factoring” (sales) is another option
• Less common
• Involves selling accounts receivable to a financial
institution at a discount
• Need significant receivables for this option to generate
meaningful cash flow
• Relatively expensive
• RAN is likely less expensive
Other Cash Flow Options
The state of California provides cash flow loans to charter
• Used for start-up costs
• Relatively short-term (3-5 years)
• Reasonable interest rates and issuance costs
• Check with CDE; visit the website
Deferral exemptions
• Check with CDE; visit their website
• http://www.cde.ca.gov/fg/fi/ir/mardef112.asp
Other Cash Flow Options, cont.
Current legislation, AB 1576:
• Amends the state’s Education Code to allow a county
board of education or county superintendent to issue,
on behalf of charter schools, treasury revenue
anticipation notes, or TRANs.
• Allows for a county office of education or county
superintendent to make a loan to a charter school not
located within its county, and it protects the county and
the state from any liability should the loan default.
Cash Borrowing Options
Loans require the charter school to repay the lender
• What happens if the charter school can’t?
• Charter schools are not eligible for an emergency
state loan in California.
• Fund balance can be low or negative, but cash cannot
Developing a relationship with your lender and other parties
involved is critical to successful borrowing
• Financial institution
• County office of education
• County treasurer
• Management company (if applicable)
• Sponsoring LEA
• Financial advisor/legal counsel
2012-13 Governor’s Proposal for
Charter Schools
Presented by:
Michelle Plumbtree, Chief Management Analyst, FCMAT
Proposed Increase in Funding, 2012-13
Increase of $50.3 million for the General Purpose Block Grant
and the Categorical Block Grant
Block Grant
*Amount will vary based on statewide average
revenue limits
Proposed Increase in Funding, 2012-13, cont.
Estimated 2012-13 funding rates include:
• 3.17% COLA
• 21.666% deficit
• ADA growth
Final amounts could vary up or down by $20 per ADA.
CDE recalculates the general purpose rates at each
Other Proposals from the Governor for 2012-13
Ways to make things more consistent between traditional and
charter schools, Governor proposes:
“Enhancing Charter School Funding”:
• Authorizing agency could include their charter schools
in TRANS issuances
• Authorizing agency would no longer review charter
school deferral exemptions
Other Proposals from the Governor for 2012-13,
Also proposed:
“Investing in Charter School Facilities”:
• Nonclassroom-based charter schools could participate in the
charter school facility program
• Streamlines application process and eligibility determinations
“Improving Charter School Working Capital”:
• Authorizes the California School Finance Authority to refinance
working capital revenue bonds
• Expands working capital financings to include charter
management organizations (CMOs)
Audits, Fraud, and
Internal Controls
Presented by:
Michael W. Ammermon, CPA, CFE
Audits, Fraud, and Internal Controls
• Do you need internal controls if everyone is
completely honest?
• Can fraud occur if you have great internal controls?
• Could your auditor miss ongoing fraud?
Audits, Fraud, and Internal Controls, cont.
There are many words for fraud
Fraud, cont.
What is your word for fraud?
Fraud, cont.
Fraud, cont.
Fraud, cont.
Fraud, cont.
Let’s focus on the two terms of –
Misappropriation and fraud
Fraud, cont.
Definition of Misappropriation
 “In law, misappropriation is the intentional, illegal
use of the property or funds of another person for
one's own use or other unauthorized purpose,
particularly by a public official, a trustee of a trust, an
executor or administrator of a dead person's estate or
by any person with a responsibility to care for and
protect another's assets (a fiduciary duty).”
Definition of Fraud
 Black’s Law Dictionary defines fraud as:
“all multifarious means which human ingenuity
can devise, and which are resorted to by one
individual to get an advantage over another by
false suggestions or suppression of the truth. It
includes all surprise, trick, cunning or dissembling,
and any unfair way by which another
is cheated.”
Fraud, cont.
Fraud, cont.
What Should We Be Looking For?
Fraud, cont.
What are Some Examples of Fraud?
List A Few…
Fraud, cont.
Falsified or exaggerated attendance
Not recording vacation or sick time off
Paying vendor “buddies” for no work product
Purchasing supply items for personal use
Unsubstantiated travel expenses
Duplicate or fictitious employees
Fraud, cont.
What ingredients are needed for fraud?
How many ingredients?
Fraud, cont.
Fraud, cont.
Fraud, cont.
Fraud, cont.
Fraud, cont.
opportunity, and access?
Fraud, cont.
Think about these three things when planning an audit or
administering oversight
Access or No Access?
Fraud, cont.
with a good system of what?
Internal Controls
We have all heard the words “internal controls” over and
over. Simple internal controls do a lot in helping to
prevent fraud and errors that look like fraud.
Internal Controls, cont.
Simple INTERNAL CONTROLS Help mitigate fraud,
improve protections against motive, opportunity, and
access, as well as shield employees from accusations
of fraud.
What Do Internal Controls Include?
An organizational culture that promotes awareness and
takes fraud seriously at all levels
What Should We Consider?
What are some audit and oversight metrics that should
be considered when evaluating a charter school’s
financial performance?
How do we Evaluate Performance?
How do you evaluate your charter school’s performance
and ability to continue as a going concern?
How do we Evaluate Performance?, cont.
Evaluate the audit report?
Compare the charter’s budget, first interim, second
interim, and unaudited actuals?
Better Charter Oversight and Auditing Metrics
Commonly Evaluated
More Details
• Evaluate audit report
• Compare budget, 1st, 2nd,
and unaudited actuals
• Prepare a comparison of
audit reports and trend
• Compare budget and
unaudited actuals within
the year and against the
prior year
Better Charter Oversight and Auditing Metrics, cont.
• Trend analysis at the object code level.
• Common size analysis with revenue and expenses.
• Examine AGED accounts payable at the individual
vendor level.
• Audit ADA WITHIN the charter’s attendance program.
• Evaluate the charter each year as a boing concern.
Better Charter Oversight and Auditing Metrics, cont.
Attendance Mismatches
Going Concern Checklist
Effective Oversight, including
Monitoring Processes and
Presented by:
Bill Hornback, Counsel, Schools Legal Service
Michelle Plumbtree, Chief Management Analyst, FCMAT
What is Effective Oversight
The Legislature's Intent:
• Charter schools shall be held accountable for
meeting measurable pupil outcomes (E.C. section
• Annual independent audits shall be conducted and
“deficiencies shall be resolved to the satisfaction of
the chartering authority” (E.C. section 47605(b)(5)(l))
What is Effective Oversight, cont.
• Charter can be revoked for:
• “Failure to meet generally accepted accounting
principles, or engaging in fiscal mismanagement”
(E.C. section 47607©(3))
• “Failure to meet or pursue any of the pupil outcomes
identified in the charter” (E.C. section 47607©(2))
• “Committing a material violation of any of the
conditions, standards, or procedures set forth in the
charter” (E.C. section 47607©(1)) or
“violating any provision of the law”
(E.C. section 47607©(4))
What is Effective Oversight, cont.
What’s really happening:
• California Research Bureau study revealed that
between 5 and 20% of all authorizers fail to perform
each of the above duties
• Consistent with state auditor’s 2002 report
What is Effective Oversight, cont.
Educational Program Oversight
• Academic performance criteria. (API growth target)
• Alternative assessment in charter
• Classroom visits
• Teaching methodology
• Standardized test scores (STAR test)
• Parent feedback
What is Effective Oversight, cont.
Personnel/Labor Oversight
• Hiring practices and policies
• Personnel policies
• Employee handbook
• Credentials/highly qualified personnel
• Personnel files
• Complaint procedures
• Discipline, dismissal and release
• Charter provisions
• Payroll/wages
• STRS/PERS/benefits
What is Effective Oversight, cont.
Governance/Legal Oversight
• Governing Board: Brown Act, Political Reform Act,
Conflict of Interest laws
• Public Records Act
• Dispute resolution and complaint procedures
• Nonprofit corporation: Bylaws and articles of
• Nondiscrimination policies and ethnic balance
• Third party and employee complaints
• Instructional minutes
What is Effective Oversight, cont.
Governance/Legal Oversight, cont.
Attendance accounting
Independent study compliance
Tuition free
Insurance coverage and indemnification
Contractual disclaimers
Health and safety policies
Disaster preparedness
What is Effective Oversight, cont.
Student Discipline and Special Education Oversight
• Student admissions and enrollment
• Student discipline
• Service delivery - special education
What is Effective Oversight, cont.
The law requires:
• Identify at least one staff member as a contact person.
• Visit each charter school at least annually.
• Ensure that the charter school’s files comply with all
reporting requirements
• Includes providing the annual audit report to the
chartering entity, state controller and county
• Notify the CDE if a renewal is granted or denied, the
charter is revoked, or the school closes.
• Monitor the charter’s fiscal condition.
What is Effective Oversight, cont.
Each charter school annually required to provide:
• A preliminary budget by July 1
• First interim report by December 15
• For changes through October 31
• Second interim report by March 15
• For changes through January 31
• A final unaudited report by September 15
• For previous fiscal year
• Also called “Annual Report of Revenue
and Expenses”
• Annual Audit Report
What is Effective Oversight, cont.
Other Requirements:
• Charter schools shall promptly respond to all reasonable
inquiries from the chartering authority, the county office of
education, the State Superintendent, and shall consult with
these agencies regarding any inquiries (E.C. 47604.3)
• Access not dependent on Public Records Act
• Chartering authority may “inspect or observe any part of the
charter school at any time” (E.C. 47607(a)(1))
• No requirement to schedule the visits
What is Effective Oversight, cont.
• Although charter schools are not subject to AB 1200
requirements, FCMAT recommends that chartering
authorizers establish similar guidelines and standards
found in AB 1200 compliance/oversight to their charter
• Can be done via the charter or the MOU
• Charter authorizers can use any financial information
it obtains from the charter school to assess the fiscal
condition of the charter
What is Effective Oversight, cont.
• Charter authorizers differ significantly on the oversight
activities that they perform
• There is little documented evidence that authorizers
are performing all of the state-mandated oversight
• Most charter authorizers charge charter schools the
maximum allowable amount for oversight activities,
however few authorizers document the time or cost
associated with the activities
What is Effective Oversight, cont.
What are the best practices for financial oversight?
• Multiyear financial plan
• Short or long-term debt
• Potential liability claims
• Bank account balances/cash flow
• Audit information
• Reserves
• Staffing and enrollment projections
• Internal controls
What is Effective Oversight, cont.
What are the best practices for oversight (in general)?
Work as a team
Build trust; foster open communications
Always be aware of what is going on
Be proactive - don’t wait for issues to occur
Be transparent
Verify compliance with the charter, MOU and
the law
What is Effective Oversight, cont.
What are the best practices for oversight (in general)?
• When there are issues, document your
efforts to resolve them.
• Review over time if policies, practices, and
preferences are working.
• Suggest revisions if they are not working.
• What would a jury think I should have done?
Oversight Reimbursement
• Supervisorial oversight fees, maximum charge:
• 1% of charter school revenue*
• 3% if facilities provided substantially rent free
• There appears to be no consistency in authorizer
activities or reported expenses
• Most authorizers report that they spend more than
the cap amount they are able to receive, but they
don’t account for the funds they receive
*Charged on general purpose revenue and
the categorical block grant
Oversight Reimbursement, cont.
• Of the 16 states that base authorizer
reimbursement on a percentage of charter school
funds, most allow authorizers to charge two and
three percent of a school’s general fund budget in
authorizing fees.
• Compared to California’s 1% or 3%
Liability Issues
• “An authority that grants a charter to a charter school to be
operated by, or as, a nonprofit public benefit corporation is not
liable for the debts or obligations of the charter school, or for
claims arising from the performance of such acts, errors, or
omissions by the charter school...”
• “...the authority has complied with all oversight responsibilities
required by law, including, but not limited to those required
by Sections 47604.32 and subdivision(m) of Section 47605
(relating to annual audits)”
Memorandum of Understanding (MOU)
• It’s important to develop a comprehensive MOU as a
framework for the relationship and to supplement the
charter provisions.
• The purpose is to clarify financial and operational
• An MOU is an agreement between the authorizing
agency and the charter school.
• Allows the chartering agency to identify expectations.
• Not required by charter law but highly recommended.
• Is a binding legal agreement once approved.
Memorandum of Understanding (MOU), cont.
• The MOU should define specific expectations
and responsibilities of the two parties, such as:
• student performance
• expectations for educational programs
• special education
• frequency of school site visits
• financial reporting requirements
• services provided by the sponsoring agency
• insurance coverage requirements
Memorandum of Understanding (MOU), cont.
Elements of a comprehensive MOU outline expectations
regarding oversight roles and responsibilities and a well
defined periodic review process through:
• An expanded business plan
• A facilities plan regarding the use and payment for
space that also reflects the terms and conditions for
use of district property.
• An administrative and support services plan
Memorandum of Understanding (MOU), cont.
• It is critical to clearly spell out the relationship
between charter schools and their chartering
• The MOU is traditionally enforced as part of the
charter, and replaces any inconsistent language in
the charter.
• The State Board of Education and Department of
Education have a form of MOU available.
County Office Authority
• To monitor or conduct an investigation into the operations
of the charter school based on written complaints by
parents or other information that justifies such actions.
• To review or audit the expenditures and internal controls
of a charter school at any time during the fiscal year if
there is reason to believe that fraud, misappropriation of
funds, or other illegal fiscal practices have occurred.
• May request the county office or Fiscal Crisis and
Management Assistance Team (FCMAT) to review the
fiscal or administrative condition of a charter school.
Annual Audits
Must contract for an audit by April 1 of each year
• Contract with an auditor from the Certified Public
Accountants Directory published by the State Controller’s
Must submit an annual independent financial audit by
December 15 of each year to the following:
• State Controller’s Office
• CDE’s Charter Schools Division
• CDE Audit Resolution Office
• Authorizing agency
• County office of education where the school is located
Annual Audits, cont.
The audit shall be conducted in accordance with General
Accounting Office (GAO) standards for financial and
compliance audits and in accordance with the audit
guide adopted by the Education Audit Appeals Panel
Delays: There is no provision in the law for an extension
on a charter school audit.
Annual Audits, cont.
Audit findings
• To ensure a favorable recommendation for renewal,
each audit must be free of material findings and
exceptions, or corrective action plans must have
been implemented in a timely manner.
• The auditor is required to review the correction, or
plan of correction, to determine if the exceptions
have been resolved in the subsequent year audit
Charter School Reporting
Presented by:
Gary Quiring, CSIS Implementation Specialist
Fiscal Crisis & Management Assistance Team
Reporting Requirements Topics
• Charter School Reporting Requirements
Ed Code
Data categories
How the certified data is used
Consequences for not certifying
Charter school closure requirements
Charter school reauthorization conversion requirements
Charter school inactive status requirements
Reporting Requirements Topics, cont.
• Authorizing Agency Requirements
• Ed Code
• Charter school closure requirements
• Charter school reauthorization conversion
• Best Practices to Avoid Issues
• Petition process
• Relationship with charter
• Monitoring
• Closure policy
Charter School Reporting Requirements
Ed Code Requirements
Part 28. Chapter 6.1 Public Schools Accountability Act of
1999, Article 2. Public School Performance Accountability
Program, 52051.5 – Inclusion of Charter Schools:
For purposes of this chapter, all references to schools shall
include charter schools.
Part 33, Chapter 10. California Longitudinal Pupil
Achievement Data System, 60900 – Development and
implementation of system; goals; characteristics:
(k) For purposes of this chapter, a local educational agency
shall include a county office of education,
a school district, or charter school.
Charter School Reporting Requirements, cont.
• Data Categories
CALPADS Data Reporting Categories
Fall 1
 Annual
Student Enrollments/Exits
 Student Information
 Student Programs
Fall 2
Spring 1
End of Year 1
End of Year 2
Student Program Participation
End of Year 3
Student Discipline
End of Year 4
Student Waivers (CASHEE)
Certificated Staff Demographics
 Certificated Staff Assignments
 Courses Provided
 Student Course Enrollment
Student Enrollments/Exits
 Student Information
 Student Programs
Student Course Completion and Grades (7-12)
 CTE Participants, Concentrators, and Completers
How Certified CALPADS Data are Used
• Provide the Department of Finance with enrollment counts used
for budget projections.
• Student enrollment counts are the charter’s official enrollment
counts for the year and are used for multiple enrollment-based
funding formulas, including the Public Charter School Grant
Program (PCSGP)
• Data are published on DataQuest to provide the general public
with access to aggregate information on the state’s schools
• Data are used to respond to ad hoc report requests from policy
makers, researchers, and other entities
How Certified CALPADS Data are Used, cont.
• State Reports
California Basic Educational Data System (CBEDS)
Language Census
Governmental Code Sections 13073 and 13073.5
California Code of Regulations, Title V, Section 97
• Federal Reports
State NCLB Consolidated State Performance Report (CSPR)
Student National Origin Report
Carl Perkins
Titles VI and IX of the Civil Rights
Act of 1964
How Certified CALPADS Data are Used, cont.
• Title III eligible immigrant counts
• Funding LEAs for the NCLB Title III Immigrant Program
• Reporting to the United States Department of Education
(ED) on the Consolidated State Performance Report
• The higher of the two counts taken in the Fall 2 and
Spring 1 will be used for funding and reporting purposes
How Certified CALPADS Data are Used, cont.
• English language acquisition status (ELAS) counts
• Counts of eligible limited-English-proficient students for the
purposes of funding LEAs for the NCLB Title III LEP
• LEP counts for the USDOE on the Title III Biennial Report
and other federal reports
• Language Census report of English language acquisition
statuses, services, and strategies
• Direct certification of students who are eligible for free meals
How Certified CALPADS Data
will be used in 2011-12
• Career technical education concentrators and completers
• Preidentification of state assessments and for the reporting
of assessment results in subgroups
Consequences for Not Certifying
Zero enrollment reported if Fall 1 is not certified
Charter marked as failing AYP if Fall 1 is not certified
(charters serving grades 7-12 only)
Charter may be invoiced if Fall 1 enrollment counts are
below the PSCGP estimates
NCLB Title III Immigrant Program funding will be 0 if Fall 2
and Spring 1 are not certified
Authorizing agency has grounds for nonrenewal or
revocation of charter
Common Charter Reporting Problems
• Meeting CALPADS reporting requirements is a low priority for
charter staff or management.
• New charter staff are unaware of state reporting
requirements or do not understand the amount of work
• Charter participation in CALPADS trainings is minimal.
• CALPADS reporting is only addressed during the certification
timeframe, not year round.
• Charter user accounts in CALPADS are
not maintained or misused.
Data Reporting Roadmap Topics
• State reporting changes for 2011-2012
• CALPADS roadmap for 2011-2012 & 2012-2013
• Lessons learned
• Best practices
• Charter school closure requirements
• Data management services provided by FCMAT/CSIS
• Resources
Common Issues
Presented by:
Bill Hornback, Counsel, Schools Legal Service
Michelle Plumbtree, Chief Management Analyst, FCMAT
Governance Issues: What Laws Apply
• There is an unresolved dispute in the state over the
application of Government Code Section 1090
• Govt. Code Section 1099 – Incompatible Offices
• Govt. Code Section 1226 – Incompatible Activities
• Govt. Code Section 53227 – Employees on the Board
• You get to decide the answer, each time you look at a
charter petition, an original petition, or on appeal, or
on renewal
What Laws Apply, cont.
• Some laws are accepted to apply, such as:
• Political Reform Act – Government Code
• Brown Act – Government Code
• Another grey area is the granting agency’s right
to a seat on the board of directors of any not-forprofit corporation operating a charter school.
• The answer is: Whatever you want it to be.
Pupil Fees, Deposits and Other Charges
ACLU Lawsuit
• September 2010 lawsuit being pursued by
the American Civil Liberties Union (ACLU) of
Southern California and two students and their
families, representing students statewide.
• A settlement was reached in 2010 and legislation was
passed through both the state Assembly and Senate
to put such a system in place, but Governor Jerry
Brown vetoed AB 165 in October, saying “this bill
takes the wrong approach.”
Free School System
• California Constitution provides for a free school system
• Applies to charter schools, too
• Since 1874, the California Supreme Court has interpreted
this to mean students are entitled to be educated at the
public’s expense.
• Title 5, California Code of Regulations, Section 350,
specifically states:
“A pupil enrolled in a school shall not be required to pay
any fee, deposit, or other charge not specifically
authorized by law.”
Free School System, cont.
• E.C. 47605(d) specifically prohibits a charter school from
charging tuition.
• But does not mention fees or other charges
• Only some additional Education Code sections specifically
authorizing fees have been explicitly made applicable to
charter schools.
• Fees for field trips
• Fees for food
• Can’t charge other “fees authorized by law” unless
the fees do not relate to an activity that is an
integral component of public education.
More Tuition Rules
• Charter schools shall not charge tuition (E.C. section
• Can’t require a parent to contribute volunteer service
as a form of tuition
• Charter schools can’t receive public funds for a pupil if that
same pupil is also attending a private school that charges
the student’s family for tuition (E.C. section 47602(b)).
• Charter schools cannot “fine” parents when students are
tardy or truant
Nonallowable Fees
• Public schools, including charter schools, cannot levy fees
as a condition for participation in any class, whether
elective or compulsory. This includes:
• Security deposits for locks, lockers, books, class
apparatus, musical instruments, uniforms or other
• Fees for participation in either curricular or extracurricular activities.
• All supplies, both necessary and supplemental, must
be provided free of charge whenever a particular
curricular or extra-curricular program is adopted.
Nonallowable Fees, cont.
• Gym or physical education clothes
• EC Section 49066 states, “No grade of a pupil
participating in a physical education class may be
adversely affected due to the fact that the pupil does
not wear standardized physical education apparel
where the failure to wear such apparel arises from
circumstances beyond the control of the pupil,” such as
lack of sufficient funds.
Nonallowable Fees, cont.
• The CDE has stated the position that schools may
require students to purchase their own gym clothes of
a district specified design and color so long as the
design and color are of a type sold for general wear
outside of school. Once the required gym uniforms
become specialized in terms of logos, school name or
other similar characteristics not found on clothing for
general use outside of school, they are considered
school supplies and the district must provide the
uniforms free of charge.
Additional Information on Fees
• Donations are always allowable
• But they really must be voluntary!
• Child’s ability to participate in a school activity can not
be tied to making a donation
• The availability of a fee waiver does not make an
otherwise unlawful fee permissible.
• CDE has released a new fiscal management advisory,
#11-01, titled “Pupil Fees, Deposits, and Other Charges”.
• We’ve included it in your reference binder
Gift of Public Funds
• California Constitution, Article 16, section 6 addresses
the subject of gift of public funds:
• Prohibits making any gift of public money to any
individual (including public employees),
corporation, or other government agency.
• “ ... the Legislature shall have no ... power to make
any gift, or authorize the making of any gift, of any
public money or thing of value to any individual …
whatever …”
Gift of Public Funds, cont.
• Expenditures of school funds must be for a direct and
primary public purpose to avoid being a gift.
• Expenditures that most directly and tangibly benefit
students’ education are more likely justified.
• Must be within the scope of a school entity’s jurisdiction
and purpose.
• To justify the expenditure of public funds, the governing
board must determine that the expenditure will benefit the
education of students within its schools.
• Expenditures driven by personal motive are not justified
even if they have a long-standing custom or are based on
benevolent feelings.
Gift of Public Funds, cont.
• If the governing board has determined that a particular
type of expenditure serves a public purpose, courts will
almost always defer to that finding.
• Put in board policy
• The following can be considered a gift of public funds
unless in board policy:
• Flowers
• Candy
• Donations to charity
Gift of Public Funds, cont.
• Expenses CANNOT be considered a gift of public
• Must have a direct or substantial purpose.
• Misappropriation of public funds is considered a
criminal act, with no monetary limit specified.
• Better to be safe than sorry.
Are gifts allowable?
• Not allowable, even if small in amount
• Many think that “de minimus” gifts, those of
trivial or little value, would be okay (under
• Most courts would disagree.
Are Awards Allowed?
• Authorized by E.C. 44015
• To employees for exceptional contributions; to students
for excellence.
• The board is required to adopt rules and regulations
about awards.
• If there is no policy or regulations, no awards are
• Can’t exceed $200 unless in board policy.
• Awards to community members are not considered
• Birthdays, weddings, funerals and holidays are not
considered an award.
Are Awards Allowed?, cont.
• Awards to employees are allowed if employees:
• Propose procedures or ideas that are adopted and
result in eliminating or reducing district expenditures
or improving operations
• Perform special acts or special services in the public
• Make exceptional contributions to the efficiency,
economy or other improvement in operations of the
Is Employee Clothing/Attire Allowed?
• No specific statute or case authorizing such expense
• Could definitely be considered a gift of public funds
• Not allowable unless required to perform his or her
duties as a coach, club advisor, etc. or if considered
an “award” under E.C. 44015
Are Employee Appreciation Meals Allowed?
• Appreciation meals do not qualify as awards
• Attorney General says they are not “actual and
necessary” per E.C. 44032
• They don’t provide a direct and/or substantial
purpose, so would be a gift of public funds
Good Business Practices
• Establish board policy and administrative
regulations regarding what is considered
• Establish procedures to follow if questions arise
• Set parameters for determining appropriateness
• Assign a specific employee in the business office to
provide assistance
• Provide annual training
Before we Break for Lunch:
Please choose your Break-Out
 Charter School Reporting Requirements,
including CALPADS and Data Management
 Audits, Fraud and Internal Controls
 Various Legal Topics, including Petitions,
Renewals, and Facilities, as well as time to
ask Miscellaneous Questions
Foretelling The Future
Presented by:
Bill Hornback, Counsel, Schools Legal Service
Michelle Plumbtree, Chief Management Analyst, FCMAT
Foretelling The Future
This Is What’s Happening Already
• Charter schools will continue to increase.
• School districts are converting schools to charters to
get start-up grant money.
• The virtual real-time classroom is already here.
• A movement is under way to relieve virtual classroom
programs from independent study rules/restrictions.
• Statewide/countywide charters dead, or dying?
Foretelling The Future, cont.
What do we need to do?
• Keep communication open
• Conflicts and issues hurt everyone, including
• Always be prepared — be proactive
• Stay involved
• Ensure the provided oversight and assistance is
Where to Go for Help
Fiscal Crisis and Management Assistance Team
Website: www.fcmat.org
Management assistance
On-site technical assistance
AB139 extraordinary audit
Fiscal crisis
Fiscal advisor/fiscal expert
Online help desk
Professional development
Charter School Division Contact Information
Charter Schools Division
California Department of Education,
1430 N Street, Suite 5401, Sacramento, CA 95814
Phone: 916-322-6029 Fax: 916-322-1465
email: [email protected]
Website: www.cde.ca.gov/sp/cs
Questions and Answers
Thank you for attending!

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