©1999 Office of the Inspector General, Commonwealth of Massachusetts. All rights reserved.
INTRODUCTION
Legislation authorizing the establishment of public charter schools in Massachusetts was enacted in 1993 as Massachusetts General Laws Chapter 71, Section 89 and subsequently amended in 1995, 1996, 1997, and 1998. Chapter 46 of the Acts of 1997, which amended the charter school law, directed the Office of the Inspector General to conduct a study of operations, practices, and activities at the established charter schools in the Commonwealth. In conducting this review, the Office reviewed records obtained from the Department of Education (DOE) as well as from the 24 charter schools in the scope of this review. The Office also conducted interviews with officials of the DOE's charter school office. The Office appreciates the DOE's assistance and cooperation during the course of this review.
This report focuses on the business operations of the 24 charter schools in this review. The report findings highlight weaknesses that could undermine charter schools' ability to achieve their educational objectives and jeopardize the interests of state taxpayers, whose dollars fund charter schools. The report recommendations are aimed at strengthening the Massachusetts charter school initiative, increasing charter school accountability, and protecting the public's investment in charter schools.
Background on Charter Schools
Charter schools represent one facet of a national reform movement that has promoted and engendered innovative public education approaches and organizational arrangements in many states, including Massachusetts. Charter schools are generally free to establish their own curricula, hire their own staff, and control their own finances. In return, charter schools are expected and obligated to fulfill the objectives of their charters. An underlying premise of the charter school concept is that introducing competition into the public education system will have beneficial effects.
Massachusetts was one of the first five states in the country to undertake a charter school initiative. The charter school law authorizes the creation of two types of charter schools: Commonwealth charter schools and Horace Mann charter schools. When the Office initiated this review in March 1998, no Horace Mann charter schools had been established; accordingly, no Horace Mann charter schools were included in the scope of this review. Thus, the findings contained in this report relate exclusively to Commonwealth charter schools.
Commonwealth charter schools receive state funds under M.G.L. c. 70, which establishes standards for state funding of public schools in Massachusetts. According to the DOE's published statistics, charter schools in Massachusetts received close to $45 million in M.G.L. c. 70 funds in the 1998 fiscal year. In addition, charter schools, like other public schools, may receive federal and state grant funds. Under the charter school law, charter schools may incur temporary debt in anticipation of receiving funds, provided that the terms of repayment may not exceed the duration of the school's charter without the approval of the Board of Education. Charter schools may also receive funds and other donations from private donors.
The charter school initiative, both nationally and in Massachusetts, is designed to require performance-based accountability. In Massachusetts, the determination of whether a charter school should receive public funds is guided by three questions:
A charter school office within the DOE is responsible for overseeing and providing technical assistance to Massachusetts charter schools. The responsibilities of the DOE's charter school office include, but are not limited to, evaluating new charter applicants; assisting newly chartered schools; monitoring the performance of charter schools in improving the academic performance of charter school students; reviewing charter school reports; disbursing state aid to charter schools; and evaluating renewal applications. Since February 1999, these functions have been carried out by two professional staff.
Profiles of Charter Schools in This Review
The 24 schools in this review were granted charters between 1994 and 1996. In 1998, these schools consisted of seven elementary schools, five combined elementary-middle schools, five middle schools, six high schools, and one school serving students in kindergarten through twelfth grade. In the 1998 fiscal year, the 24 schools received state aid under M.G.L. c. 70 totaling $44,302,722 for a combined enrollment of 6,590 students. The expenditures reported by the 24 schools totaled $49,902,034 in the 1998 fiscal year.
Under the charter school law, charter schools are authorized to procure services, equipment, and supplies under contracts and leases with private vendors. The Board of Education is required to approve the terms of any contract with a private entity that will provide "substantially all educational services" to the school. This report refers to the private entities providing these educational and administrative services to charter schools as "management contractors."
The Office's review disclosed that some contracts between charter schools and their management contractors contained provisions that could undermine the schools' ability to achieve their educational objectives. These provisions also jeopardized the interests of state taxpayers whose dollars fund those schools.
Finding 1. Four management contracts for educational services contained no contractor performance requirements measuring students' academic achievement.
Finding 2. Management contracts executed by some charter schools contained compensation provisions that posed unwarranted risks to the charter schools and taxpayers.
Finding 3. Management contracts executed by five charter schools contained provisions that could restrict public use of educational curricula and other intellectual property developed with public funds.
Finding 4. The DOE's management contract approval process has been unsystematic and inconsistently implemented.
Conflict of Interest Issues
Charter schools are subject to the Massachusetts conflict of interest law, M.G.L. c. 268A, which regulates the conduct of public officials and employees at all levels of government in Massachusetts. The purpose of the conflict of interest law is to ensure that public officials' financial interests and personal relationships do not conflict with their public obligations. Under the charter school law, charter schools are deemed state agencies for the purposes of M.G.L. c. 268A. Any individual who holds an office, position, or employment with a charter school, whether paid, unpaid, full-time, or part-time, is considered a state employee under the conflict of interest law. Individuals serving as consultants to charter schools are also covered by the law in most cases.
Elected and certain appointed state officials are required under M.G.L. c. 268B, the financial disclosure law, to file annual statements of financial interest reporting their financial activities of the previous year, including their income, business ownership and equity, real property owned in Massachusetts, securities and investments, and certain information pertaining to their family members, with the State Ethics Commission. Until 1998, the charter school law required members of the boards of trustees of all charter schools to file statements of financial interest pursuant to M.G.L. c. 268B, §5. However, in April 1998 the charter school law was amended to require a more abbreviated annual financial disclosure requirement for charter school trustees.
Under the charter school law, the members of a charter school's board of trustees are "public agents authorized by the commonwealth to supervise and control the charter school." As board members, charter school trustees are required to fulfill certain fiduciary obligations or duties that apply to members of all boards of directors, whether their organizations are private or public. These duties are generally referred to as the "duty of care" (sometimes called the duty to be informed) and the "duty of loyalty."
DOE records showed that as of May 1999, 308 trustees -- virtually all trustees of the 24 charter schools in this review -- had complied with the annual financial disclosure requirement contained in the charter school law. Of these, approximately three-quarters disclosed no financial interests in any charter schools.
M.G.L. c. 268A, §6 prohibits a state employee from participating in an official capacity in any particular matter that would affect the financial interest of a business organization in which the employee is serving as officer, director, trustee, partner, or employee unless the employee receives permission from the public official who appointed the employee to his or her job. The information reported on the disclosure forms showed that some charter school trustees had financial interests that required them to restrict their actions as trustees in order to comply with the conflict of interest law and their duty of loyalty to their charter schools. For example, 29 trustees reported that they were also employed by their schools as teachers or administrators. Under the charter school law, the Commissioner of Education is the appointing official of members of charter school boards of trustees for purposes of M.G.L. c. 268A, the conflict of interest law. As of May 1999, DOE records contained no disclosures from charter school trustees pursuant to M.G.L. c. 268A, §6, or written determinations by the DOE in response to such disclosures. In interviews, DOE officials confirmed that the DOE had not granted written permission to any charter school trustees to participate in particular matters in which they held financial interests.
Finding 5. The composition of some charter school boards of trustees could undermine the boards' ability to fulfill their fiduciary duties to the schools they serve.
Finding 6. The DOE has provided no guidance to charter schools concerning the requirements of the conflict of interest law.
Loans
Most public schools in Massachusetts are subject to stringent borrowing rules. Charter schools are not subject to these borrowing restrictions. Under the charter school law, charter schools may incur temporary debt in anticipation of receiving funds, provided that the terms of repayment may not exceed the duration of the charter without the approval of the Board of Education. There are no restrictions on the purposes for which charter schools may borrow funds or the amount of funds charter schools may borrow, nor are the terms of charter school loans subject to any specific approval or disclosure requirements.
According to the charter schools' audited financial statements, a total of 10 of the 24 schools had outstanding loans and other financial obligations -- such as overdue fees and interest charges owed to management contractors -- at the close of the 1998 fiscal year. The total outstanding balances included approximately $12.3 million owed by Boston Renaissance Charter School, approximately $6 million owed by Seven Hills Charter School, and smaller amounts owed by Boston University Residential Charter School, Cape Cod Charter School, Hilltown Cooperative Charter School, Lynn Community Charter School, Neighborhood House Charter School, SABIS International Charter School, Somerville Charter School, and South Shore Charter School.
Finding 7. Loan agreements between charter schools and their management contractors could render the schools excessively dependent on their management contractors while reducing the schools' contracting leverage.
Finding 8. State taxpayers could be liable for unpaid debts of charter schools that lose their charters.
Financial Management and Oversight
The Massachusetts charter school initiative has defined three performance measures by which charter schools are to be evaluated and held accountable: academic program success, organizational viability, and adherence to the school charter. Financial management is a key component of a charter school's organizational viability.
The DOE's charter school regulations require a charter school applicant to demonstrate its ability to achieve fiscal and operational viability within the five-year charter term in order to obtain charter approval. The Board of Education may revoke a charter for financial insolvency. DOE regulations also require a charter school seeking renewal of its charter to demonstrate its financial viability.
In July 1998, the DOE issued Charter School Technical Advisory 98-1, which advised charter schools that they were required to follow sound business practices and generally accepted government auditing standards as conditions of their charters. The Technical Advisory outlined three essential elements of sound business practices:
The Office's review disclosed weaknesses in the financial management of some charter schools and in the DOE's oversight of charter schools' financial operations. These weaknesses undermine the accountability of the charter school initiative and increase the financial risks to state taxpayers.
Finding 9. The lack of uniformity of the audited financial statements submitted to the DOE by charter schools reduces their usefulness as a financial monitoring tool.
Finding 10. Three charter schools exhibited warning signs of financial problems that, if uncorrected, could jeopardize their future viability.
Finding 11. Independent auditors of 17 charter schools reported deficient internal control systems that could adversely affect the efficiency and integrity of the schools' business operations.
Finding 12. DOE oversight of charter schools' financial condition and business practices has been inadequate.
Procurement Procedures
Massachusetts public elementary and secondary schools are required to follow the competitive procedures of M.G.L. c. 30B in procuring supplies, services, and real property. M.G.L. c. 30B, which applies to approximately 1,500 local governmental jurisdictions in Massachusetts, requires the solicitation of informal price quotations for supply and service contracts from $1,000 to $9,999 and formal, advertised competition using sealed bids or proposals for supply and service contracts of $10,000 or more. M.G.L. c. 30B also sets forth competitive procedures for disposing of surplus supplies and acquiring or disposing of real property.
The charter school law contains no competitive requirements for charter school purchases. However, Chapter 46 of the Acts of 1997, which amended the charter school law, contained a provision requiring charter school administrators serving as procurement officers to participate in and obtain certification in the Massachusetts Certified Public Purchasing Official (MCPPO) program conducted by the Office of the Inspector General. In addition, Horace Mann charter schools are subject to the provisions of M.G.L. c. 30B.
In July 1998, the DOE issued Charter School Technical Advisory 98-1 advising charter schools that they were required, as a condition of their charters, to follow sound business practices. The advisory stated that sound business practices would include procurement procedures that maximize competition, give potential offerors sufficient information upon which to base their offers, and specify an evaluation method that defines and produces the best value offer.
Six months after the DOE issued this advisory, the Office reviewed the written procurement procedures developed by the 24 schools in this review. The Office's review of each school's procedures addressed two questions:
The Office's review disclosed that many charter schools had not developed written procurement procedures by January 1999. Of those that had developed written procurement procedures, most did not require advertised competition for any purchases, although some schools indicated in letters to the Office that they have attempted to seek informal competition for some purchases.
Finding 13. More than half of the 24 charter schools lacked written procurement procedures.
Finding 14. The written procurement procedures adopted by nine charter schools did not require advertised competition for purchases of supplies, services, and equipment.
Facility Leasing
The task of locating and paying for an adequate school facility poses a daunting challenge to prospective founders of charter schools as well as to newly chartered schools. The charter school law prohibits Commonwealth charter schools from receiving state school building assistance funds for school construction, reconstruction, or improvement work. However, the state's budget for the 1999 fiscal year included funds for grants to support charter school leasing and construction of facilities.
The Office's review of 41 real property agreements provided to the Office by the 24 charter schools in this review showed that all 24 schools occupied leased facilities as of July 1998. In some cases, these agreements had been amended to change the lease payments, add space, or extend the lease term.
The lessees for facilities used by seven of the 24 schools between March 1995 and July 1998 were not the schools themselves; in each case, the private non-profit corporation established to provide support to the school was the lessee, although the school paid the rent or occupancy charges under the lease agreement. Documents provided to the Office by the schools indicated that the schools had not executed written sublease agreements with the private non-profit corporations leasing the facilities.
The lease costs of the 24 charter schools in this review exceeded $3 million in the 1998 fiscal year. The lowest expenditure for the 1998 fiscal year was $40,000; the highest was $583,600. For all schools, lease costs as a percentage of total school expenditures totaled approximately seven percent in the 1998 fiscal year. For individual schools, lease costs as a percentage of total school expenditures ranged from four percent to 14 percent in the 1998 fiscal year.
Finding 15. Charter schools' unadvertised, noncompetitive real property transactions are vulnerable to waste and abuse.
Finding 16. Some facility information provided to the DOE in the charter school applications has proved speculative and unreliable.
Finding 17. Charter schools have not complied with the beneficial interest disclosure requirements contained in M.G.L. c. 7, §40J.
Conclusion and Recommendations
The findings summarized in this report focus exclusively on the business policies and practices of the 24 Massachusetts charter schools in this review. To date, charter school business operations have received little scrutiny. Both nationally and within Massachusetts, the debate over the charter school movement has focused primarily on educational effectiveness. The philosophy of the charter school movement is that charter schools should be free to use whatever means and processes they choose as long as the educational results are satisfactory. In Massachusetts, charter schools are evaluated primarily on the basis of the academic progress of their students.
While charter schools are required to comply with some of the same laws and regulations -- such as health, safety, and antidiscrimination laws -- that apply to other public schools, charter schools are not subject to the same legal rules governing their business operations. Unlike other public schools in Massachusetts, charter schools are not required to procure supplies, services, and real property using the competitive procedures of M.G.L. c. 30B. In addition, charter schools are permitted to incur short-term debt without being subject to the legal restrictions on borrowing by Massachusetts cities and towns.
This report identifies weaknesses in the contracting practices, internal controls, and procurement procedures of many charter schools in this review. If left uncorrected, these weaknesses are likely to undermine the schools' ability to achieve their educational objectives; they also jeopardize the interests of state taxpayers whose dollars fund those schools. These findings may be attributable in part to inadequate administrative resources. Individuals with the necessary talent, expertise, and dedication to design and implement innovative educational methods do not necessarily possess the necessary expertise, time, and motivation to develop effective internal control systems and procurement procedures. Although the DOE has informed charter schools that they are obligated to follow sound business practices -- including the adoption of written procurement procedures that maximize competition -- as conditions of their charters, the DOE has not taken steps to monitor compliance with these requirements.
In theory, the DOE's authority to revoke or deny renewal of charters to schools whose operational or financial viability is judged inadequate provides a sufficient incentive for charter schools to institute sound business practices. This theory remains largely untested: as of November 1999, the DOE had neither revoked nor denied renewal of any charters. However, the fact that the DOE's charter renewal criteria do not entail an explicit evaluation of charter schools' business practices may have reduced the likelihood that charter schools would devote scarce resources to this area of operations.
It has also been argued that the strict budgetary limitations imposed on charter schools by the state. s tuition formula provide the necessary safeguards against wasteful or inappropriate charter school expenditures. However, the Office's review revealed that some charter schools are not operating within these budgetary restrictions; instead, they have incurred substantial debts in order to supplement their state tuition payments and other sources of income. The Commonwealth could, in some circumstances, be liable for the outstanding financial obligations of these schools if the DOE revoked or failed to renew their charters. Thus, the financial exposure of these charter schools could pose significant risks to state taxpayers. If the current cap of 37 Commonwealth charter schools is increased or removed, and the number of Commonwealth charter schools increases, the outstanding financial obligations of these schools -- and corresponding risks to state taxpayers -- will escalate further.
Efficient, cost-effective business practices that reduce the risks of waste and abuse will further a charter school's educational mission. Conversely, inefficient business practices that invite waste and abuse will consume resources that could and should be devoted to improving the educational performance of the charter school's students. Strengthening charter school business operations is therefore in the interests of all charter school stakeholders: the schools themselves, parents, students, and state taxpayers.
Accordingly, the recommendations provided in this report are aimed at accomplishing this objective by implementing two policy initiatives: best value contracting and proactive oversight. These initiatives are discussed in further detail below.
Best Value Contracting
A central premise underlying the charter school initiative, nationally as well as in Massachusetts, is that a market-driven educational system will promote innovation, efficiency, and accountability on the part of charter schools as well as regular school systems. Despite the competitive model on which charter schools were founded, the charter school movement has not taken the lead in applying similar market principles to charter schools' business transactions, nor has this issue been a focus of the charter school literature.
The decision to contract out public functions to the private sector is a policy decision that may entail value judgments and accountability considerations as well as efficiency and cost analyses. However, when a charter school -- or any other public entity -- does decide to contract with the private sector, it should do so in an accountable manner that obtains the best value for the public dollar by taking into consideration its quality and performance objectives as well as price. The strategy of fostering competition in the private marketplace on the basis of quality, performance, and price is commonly referred to as "best value contracting." Competition is a key element of best value contracting. Research has consistently demonstrated that without the discipline of the competitive marketplace, contracts for supplies and services with the private sector are neither efficient nor cost-effective.
The DOE has instructed charter schools to develop competitive procurement procedures. However, only two of the 24 schools in this review had developed written procedures requiring advertised competition. This finding suggests that the current approach of encouraging each charter school to invent its own procurement procedures is unlikely to result in accountable procurements that promote best value contracting.
Since the enactment of M.G.L. c. 30B in 1990, more than 1,500 local jurisdictions in Massachusetts -- including local and regional school districts -- have conducted best value procurements for their supplies, services, and real property acquisitions. Horace Mann charter schools are also subject to the requirements of M.G.L. c. 30B. Thus, most vendors serving Massachusetts public schools are familiar with M.G.L. c. 30B and accustomed to competing for school contracts. Charter school procurement officers are already required to participate in the Massachusetts Certified Public Purchasing Official (MCPPO) program, which offers three seminars on best value contracting. The most efficient means of ensuring best value contracting by charter schools is to require them to use the widely accepted and well-documented competitive procedures of M.G.L. c. 30B.
Some private management contractors providing comprehensive educational and administrative services to Massachusetts charter schools are selected by the charter school founders before the schools are chartered. To address these circumstances, the recommendations in this report would exempt these management contracts from the competitive requirements of M.G.L. c. 30B in cases where the management contractor was selected prior to and included in the original charter application. In these cases, the DOE would be responsible for conducting a full assessment of the management contractor's qualifications and price to provide the services specified in the application.
Otherwise, this report recommends that each charter school electing to contract with a private management contractor for educational and administrative services -- or for administrative services exclusively -- be required to develop a detailed scope of work, including performance standards and requirements, for the services to be procured; conduct an advertised competition; evaluate and compare offers from qualified contractors; and select the best offer. This market-driven approach to contracting for management services would increase the likelihood of obtaining high-quality services on favorable terms. While incumbent management contractors may prefer not to be required to compete for charter school contracts, the prospect of initial vendor resistance should not deter charter schools, the DOE, and the Legislature from promoting competition and accountability through best value contracting.
Proactive Charter School Oversight
Charter school proponents on the national level have begun to recognize the need to shore up the business side of charter school operations if the charter school movement is to survive over the long term. For example, the Hudson Institute, whose "Charter Schools in Action" project generated two major reports on its research on charter schools in 14 states, including Massachusetts, has cited the "lack of business acumen and managerial competence" as a start-up problem that charter schools themselves need to address.
To strengthen charter schools' business operations, the second policy initiative recommended in this report is an effective and reliable system within the DOE for conducting proactive oversight. The starting point for this system is the DOE's charter school application process, which should enable the DOE to conduct a meaningful evaluation of the administrative and financial capacity of charter school applicants. The Accountability Plan developed by newly chartered schools should include a business plan for the school's operations and finances. As part of its oversight function, the DOE should provide assistance to new and existing charter schools to facilitate the adoption of sound business systems and practices. To ensure genuine accountability, the DOE must also establish reliable methods of monitoring each school's financial condition, internal control systems, and compliance with its business plan.
Although the Massachusetts charter school law is considered a strong state oversight model on a national level, the oversight requirements of the law have not been fully or effectively implemented. The DOE has recently taken steps to improve its charter school oversight function. However, notwithstanding the evident dedication of the two professional staff members of the DOE's charter school office, the charter school office has lacked sufficient staff resources to provide effective, proactive oversight of the business operations of Massachusetts charter schools.
The recommendations provided below would benefit the charter school community and state taxpayers by improving DOE oversight in at least three areas. First, the DOE would ensure that newly chartered schools possess sufficient resources and information to institute and administer sound business policies and practices. Deficient business operations and noncompetitive procurement methods are unlikely to improve charter schools' educational outcomes, nor is there any evidence that Massachusetts charter schools have developed innovative administrative systems or procedures that are worthy of replication.
Second, the DOE would identify and address operational problems at charter schools before these problems became insurmountable. Charter school advocates within the research community have raised legitimate concerns about the appropriateness of relying on the chartering agency's ability to shut down a school as the primary tool for holding schools accountable.
And third, the DOE would ensure genuine administrative accountability by holding all charter schools to clear standards of financial and operational performance. After five years, when a charter school applied to the DOE to renew its charter, the DOE would have compiled full information on the school's operations and track record.
This policy initiative will require the Commonwealth to increase its investment in charter school oversight. The DOE's charter school office will require additional staff resources in order to fulfill its current oversight responsibilities and to implement the recommendations listed below.
Recommendations
The Inspector General recommends the following measures to strengthen the Massachusetts charter school initiative, increase charter school accountability, and protect the public's investment in charter schools:
1. The DOE should strengthen and systematize its oversight of charter schools' business operations and financial condition.
2. The DOE should require each charter applicant to submit a detailed business plan for administering the school's operations and finances.
3. Charter schools should be required to use the competitive procedures of M.G.L. c. 30B to procure supplies and services, and to acquire and dispose of real property.
4. The DOE should provide charter schools with comprehensive information on their legal obligations.
5. The DOE should ensure that the Board of Education has approved the terms of all educational services contracts requiring Board approval.
6. The DOE should develop and disseminate sample management contract provisions that protect the interests of charter school students, other public school students, and state taxpayers.
7. The DOE should contract for and disseminate prototype accounting manuals for larger and smaller charter schools.
8. The DOE should improve and standardize the annual independent audits conducted at charter schools.
9. The DOE should devote the necessary additional resources to ensure effective, proactive charter school oversight.
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©1999 Office of the Inspector General, Commonwealth of Massachusetts. All rights reserved.
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