Massachusetts Office of the Inspector General Report

SABIS International Charter School: Management Issues and Recommendations

EXECUTIVE SUMMARY

November 2000

©2000 Office of the Inspector General, Commonwealth of Massachusetts. All rights reserved.

The Massachusetts charter school law, M.G.L. c. 71, §89, authorizes the Massachusetts Board of Education to grant charters to Commonwealth charter schools and Horace Mann charter schools, both of which are public schools managed by boards of trustees. This report concerns the SABIS International Charter School (hereinafter, "the School"). The School is a Commonwealth charter school, which is a public school that is chartered by the Board of Education and operates independently of any school committee. Since it was chartered in 1995, the School has contracted with SABIS Educational Systems, Inc. (hereinafter, "SABIS Inc."), a private, for-profit company, for comprehensive educational and administrative management services.

The School, located in Springfield, was among 24 Commonwealth charter schools included in a study undertaken by the Office of the Inspector General in March 1998 pursuant to Chapter 46 of the Acts of 1997. In November 1999, the Office issued a report, A Management Review of Commonwealth Charter Schools, identifying weaknesses in the contracting practices, procurement procedures, and financial management of some schools. Such weaknesses could undermine the schools’ ability to achieve their educational objectives and jeopardize the interests of state taxpayers whose dollars fund charter schools. The report findings regarding the School included the following:

• The School’s management contract with SABIS Inc. contained no performance requirements measuring students’ academic achievement, did not accurately reflect the School’s actual compensation arrangement with SABIS Inc., and contained provisions that could restrict public use of educational curricula and other intellectual property developed with public funds.
• The School’s substantial financial obligations to SABIS Inc. could render the School excessively dependent on SABIS Inc., reduce the School’s contracting leverage, and create liabilities for the Commonwealth’s taxpayers.
• The School exhibited warning signs of financial problems that, if uncorrected, could threaten the School’s future viability.
• The School reportedly failed to take timely actions to correct internal control deficiencies identified by their independent auditors.
• The School’s written procurement procedures did not require advertised competition for purchases of supplies, services, or equipment.

The Office initiated the review presented in this report in November 1999. This review was conducted in accordance with generally accepted government auditing standards. The purpose of this review was to conduct a more detailed examination of certain aspects of the School’s operations previously identified by the Office as potential sources of risk. The Office appreciates the cooperation provided to the Office by the School’s Board of Trustees and staff, SABIS Inc., and the Department of Education (hereinafter, "DOE").

Under the charter school law, charter school trustees are "public agents" with ultimate responsibility for the school. M.G.L. c. 71, §89(a) provides:

The board of trustees of a commonwealth charter school, upon receiving a charter from the board of education, shall be deemed to be public agents authorized by the commonwealth to supervise and control the charter school.

In 1996, the former Executive Office of Education issued a legal memorandum to charter schools providing a comprehensive overview of the statutes and regulations affecting the governance structure of charter schools. This legal memorandum emphasized that a Board of Trustees is responsible and accountable for ensuring that the charter school operates in accordance with the charter school law and regulations and in accordance with the representations made in the charter school application.

Charter school trustees are also 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." Because the Board of Trustees has statutory and fiduciary responsibility for oversight and control of the School, the findings and recommendations provided in this report are directed to the Board.

In March 2000, the Board of Trustees signed a new contract, which contained an effective date of July 1, 2000, with a new corporation created by SABIS Inc.: "Springfield Education Management LLC, A Delaware Limited Liability Corporation." Under M.G.L. c. 71, §89(j)(5), charter school contracts for substantially all educational services require the approval of the Board of Education. On April 10, 2000, the Board of Trustees submitted the new contract to the DOE for review and approval by the Board of Education. As of mid-November 2000, the Board of Education had not approved the new contract.

The Office’s review disclosed deficiencies in the Board’s governance of the School and oversight of its contract with SABIS Inc. The findings discussed in this report are summarized below:

1. The Board of Trustees did not employ sound business and contract oversight practices in administering the School’s financial relationship with SABIS Inc. during the first five years of School operations.

   • Although SABIS Inc. charged the School more than $950,000 in management fees between 1995 and 1999, the School paid the salaries of the on-site staff who administered the School’s business operations on a daily basis during this period.

   • The Board of Trustees authorized more than $300,000 in reimbursements to SABIS Inc. for "corporate support" expenses that were neither specified in the 1995 contract nor substantiated with invoices.

   • The Board of Trustees inappropriately ceded responsibility to SABIS Inc. for selecting and engaging the services of the School’s independent auditor.

2. The contract with SABIS Inc. executed by the Board in March 2000 would significantly increase the School’s exposure to fraud, waste, and abuse.

• The new contract would significantly increase SABIS Inc.’s financial control over the School while reducing Board oversight.
• The new contract would significantly increase SABIS Inc.’s potential compensation while eliminating the School’s ability to invest in School programs and operations.
• The indefinite term of the new contract would insulate SABIS Inc. from competition in the future, thereby reducing its incentives to provide efficient, high-quality services to the School.
• The new contract would allow SABIS Inc., but not the School, to terminate the contract after five years.
• The dispute resolution and termination provisions of the new contract would undermine the Board’s ability to terminate the contract if SABIS Inc. failed to perform.

3. The Board of Trustees did not accurately document its official actions and policies.

The Board of Trustees of the SABIS International Charter School, like other charter school boards of trustees, is comprised of unpaid members of the community who volunteer to devote time and effort to the worthy goal of improving educational opportunities for Springfield’s children. The Office has no reason to doubt the Board Chairman’s description of the Board members as well intentioned and committed to the School’s success.

It should also be recognized that charter schools in Massachusetts and elsewhere have been evaluated primarily on the basis of the academic progress of their students. Accordingly, charter schools have been given wide latitude in establishing their internal operating procedures. While the Department of Education’s small charter school office has provided assistance to charter schools, it has not provided detailed information to charter school boards of trustees concerning their statutory and fiduciary obligations. Moreover, charter applicants and charter schools applying for renewal of their charters have not been required to demonstrate that they are capable of instituting and maintaining efficient, effective business systems and practices.

Nevertheless, the Board of Trustees of the SABIS International Charter School has been entrusted with the responsibility of operating a public school serving 1,200 children. Over the past five years, the Commonwealth has invested more than $23 million in the School. The educational and financial stakes are high, not only for the students, parents, teachers, and staff in the immediate School community, but for the School’s other stakeholders, such as the children and families of children on the School’s waiting list and the state taxpayers whose dollars fund the School. It is essential that the Board be willing and able to devote the care, time, and expertise necessary to fulfill its statutory and fiduciary responsibility to supervise and control the School.

The Board has recently taken steps to address some deficient management controls and clarify its contracting arrangements with SABIS Inc. The Board is to be commended for initiating improvements in the governance of the School. Sound business systems and contracting practices are fundamental to the capacity of any organization, whether public or private, to sustain growth and achieve its long-term objectives. Accordingly, the Inspector General offers the following recommendations to address the issues raised in this report:

1. The Board of Education should disapprove any contract between the School and SABIS Inc. containing the risky and unfavorable provisions discussed in Finding 2 of this report.
2. The Board of Trustees should evaluate alternatives to recontracting with SABIS Inc. to manage the School’s business operations.
3. If the Board of Trustees elects to recontract with SABIS Inc. or to contract with a different management contractor for administrative services, the Board should direct its legal counsel to draft a new contract that will require and enable the Board to exercise appropriate financial oversight and control over School resources and operations.
4. The Board of Trustees should directly select, contract with, and oversee the School’s independent auditor.
5. The Board of Trustees should assign responsibility for administering and monitoring the School’s management contract with SABIS Inc. (or another management contractor) to a School employee with appropriate financial and managerial skills and experience.
6. The Board should continue to seek guidance concerning the legal requirements governing the Board and School employees.
7. The Board should conduct or commission a systematic analysis of the School’s financial requirements before borrowing additional funds from SABIS Inc. or any other source.

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©2000 Office of the Inspector General, Commonwealth of Massachusetts. All rights reserved.

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