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.
- Two contracts based the management contractor's compensation on the school's surplus revenues.
- Two contracts based the management contractor' s compensation on a percentage of school expenses.
- Three contracts did not accurately reflect the actual compensation arrangements between the schools and their management contractors.
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.
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:
- a documented system of internal controls;
- a documented procurement process that promotes competition, fairness, and best value contracting; and
- written policies and procedures ensuring that the school's procurement process is consistent with and based upon its internal control system and requiring sufficient record-keeping for audit purposes.
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.
- Some charter schools have reportedly taken timely actions to strengthen their internal control systems in response to deficiencies cited by their independent auditors.
- Some charter schools have reportedly failed to take timely actions to correct previously identified deficiencies in their internal control systems.
Finding 12. DOE oversight of charter schools' financial condition and business practices has been inadequate.
- Charter schools are not currently required to provide the DOE with management letters issued by their independent auditors reporting on internal control deficiencies.
- The annual reports issued by some charter schools have not consistently complied with financial reporting requirements.
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:
- Did the school adopt written procurement procedures, as required by the 1998 DOE advisory?
- If so, did the school's written procurement procedures require formal competition and best value contracting, as required by the DOE advisory?
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.
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.
- Six charter schools leased their facilities from related parties or organizations.
- By funding noncompetitive, negotiated facility costs, the Commonwealth's $2.8 million facility grant program for charter schools will not promote best value leases.
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.
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