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.