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 students. • 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 performance. • 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 success • 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 structure; • 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 district. • 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 methods; • 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 districts; • 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 laws) • 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 notified • 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 survey” 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*: K-3 $5,076 4-6 $5,153 7-8 $5,308 9-12 $6,141 *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 Questions: • 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. Grants • Apply….but: • Be wary of match requirements! • Can create financial burden if not properly understood • 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. Donations • 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 used • Do not use one-time donations to fund ongoing programs • 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 charges 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 ADA • 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 expenditures. •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 presentation 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 Department) • 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 sessions • Revisit priority at budget reporting intervals and as information changes • Budget adoption, interim reports, year-end closing, audit report 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 Compensation 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 sufficient • 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 objectives • 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 problems • 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 entity • 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) trends • 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 budget. • 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 LEAs. • Cash flow will continue to be challenging to manage for LEAs as deferrals are added, increased or lengthened. Deferrals 2003-04 2007-08 2009-10 2010-11 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. 2011-12 Changes made to existing deferrals and new deferrals **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 fund • 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 schools. Apportionment Schedule E.C. 14041(a)(2), (3), and (4) Month Original Schedule 2011-12 Schedule Projected 2012-13 Schedule July 5.0% 0.0% 0.0% August 5.0% 0.0% 0.0% September 9.0% 11.7% 11.7% October 9.0% 0.0% 0.0% November 9.0% 9.0% 9.0% December 9.0% 9.0% 9.0% January 9.0% 25.3% 25.3% February 9.0% 0.5% 1.6% March 9.0% 0.0% 1.2% April 9.0% 4.6% 5.2% May 9.0% 1.5% 2.3% June 9.0% 0.0% 0.0% July 22.6% 20.8% August 15.8% 13.9% 100.0% 100.0% Total Principal Apportionment 100.0% 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) programs. • 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 Expenditures • 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 projection? 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 borrowing 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 schools • 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? • It’s GAME OVER • Charter schools are not eligible for an emergency state loan in California. • Fund balance can be low or negative, but cash cannot Relationships 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 General Purpose Block Grant* Categorical Block Grant Total Funding K-3 $5,117 $410 $5,527 4-6 $5,193 $410 $5,603 7-8 $5,346 $410 $5,756 9-12 $6,188 $410 $6,598 *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 apportionment. 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, cont. 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. CASE STUDY ALBOR CHARTER SCHOOL (((VIDEO))) Fraud There are many words for fraud Fraud, cont. What is your word for fraud? Fraud, cont. Misappropriation Fraud, cont. Theft Fraud, cont. Misappropriation Theft Embezzlement Fraud, cont. Let’s focus on the two terms of – Misappropriation and fraud Fraud, cont. What is MISAPPROPRATION OF FUNDS? 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. WHY ARE CHARTER SCHOOLS A TARGET FOR FRAUD ? 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. THREE INGREDIENTS NEEDED FOR FRAUD Fraud, cont. MOTIVE Fraud, cont. OPPORTUNITY Fraud, cont. ACCESS Fraud, cont. WHAT IS SO IMPORTANT ABOUT motive, opportunity, and access? Fraud, cont. Think about these three things when planning an audit or administering oversight • WHO HAS OPPORTUNITY? • WHO HAS MOTIVE? • WHO HAS ACCESS? Access or No Access? Fraud, cont. OPPORTUNITY and ACCESS IS LIMITED 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 analysis • 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 Procedures 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 47601(f)) • 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 incorporation • 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 Nonsectarian 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 superintendent • 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 schools • 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 functions • 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? Review: • 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...” BUT ONLY IF • “...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 issues. • 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 agencies. • 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 Office 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 (EAAP). 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 Requirements Presented by: Gary Quiring, CSIS Implementation Specialist Fiscal Crisis & Management Assistance Team 159 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 requirements • 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 166 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 Program • 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 required. • 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 47605(d)(1)). • 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 equipment. • 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 funds • 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 $20/person). • 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 allowed • Can’t exceed $200 unless in board policy. • Awards to community members are not considered authorized. • 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 interest • Make exceptional contributions to the efficiency, economy or other improvement in operations of the district 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 allowable/unallowable • 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 Sessions 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 students • Always be prepared — be proactive • Stay involved • Ensure the provided oversight and assistance is adequate Where to Go for Help Fiscal Crisis and Management Assistance Team (FCMAT) 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@example.com Website: www.cde.ca.gov/sp/cs Questions and Answers Thank you for attending!