The California Department of Education is looking into the loss of upwards of “tens of millions of dollars” in federal and state funds from start-up charter schools that either never opened or failed after their first year or two of operation.
Richard Zeiger, chief deputy superintendent in the California Department of Education, first made that assertion at the State Board of Education meeting on September 7 after the closure of a West Sacramento career technical education charter school.
Zeiger said the state finds itself having to balance wanting to encourage innovation with ensuring that state and federal funds are not misspent.
The California College, Career and Technical Center, or CCCTEC, opened last September, in a vast building in an industrial park leased from a high tech company that moved its operations overseas.
But despite making grand promises of what it hoped to achieve, backed up by its slogan “where eagles soar and students thrive,” the school had problems virtually from day one, leading eventually to its declaring bankruptcy and closure on September 2, 2011.
At its September meeting, the State Board of Education was informed that the school had closed and relinquished its charter, after spending nearly $1 million in grants and loans from state and federal sources. “This is not an isolated case of a start-up charter getting into trouble,” Zeiger, the chief deputy to State Superintendent of Public Instruction Tom Torlakson, told the board. “This happens with great regularity.”
In a later interview with EdSource Extra, Zeiger said the department is still researching the issue of funds spent by failed charter schools that never opened or failed early on. Although these comprise a small fraction of the nearly 1400 California charters awarded in nearly two decades, “we’re easily into the tens of millions of dollars, and it wouldn’t surprise me if it went higher,” he said.
Jed Wallace, president of the California Charter Schools Association, said he could not comment on Zeiger’s assertions without further details. “It is pretty hard to react to something when there has been no release of data,” he said.
Wallace said the main challenge for beginning charter schools are the difficulties they face in getting funds for which they are eligible, including unnecessary delays by government agencies. “The challenge that these schools face are profound,” he said.
Eric Premack, executive director of the Charter Schools Development Center, said that in the case of charters granted by the State Board, as was the case with CCCTEC, it typically takes months to go through the appeals process, and “schools come out of the chute late,” resulting in a cascade of financing and other difficulties.
But what is clear is that in the drive to encourage charter schools to open, new schools are eligible for a range of federal and state funds which they can receive even if the school struggles to open or to sustain itself.
For example, new charter school operators can be awarded up to $600,000 in federal start-up grants through the Public Charter School Grant Program, up to $250,000 from the state’s Charter School Revolving Loan Fund, as well as hundreds of thousands of dollars in state funds based on the school’s projected “average daily attendance.”
As the California Department of Education website states, “charter schools that are in their first year of operation may receive a special advance and or special allocation such as General Purpose Entitlement, Charter Schools Categorical Block Grant, and certain state and federal categorical programs.”
“All this is money that can be given in advance before the school has ever opened,” said Zeiger. “If the school runs into difficulties, it may never open at all. Or you discover after a year that it has not been viable, then what do you do?”
Although not alleging that schools broke the law, Zeiger said part of the problem is the law itself. “The law was written to encourage start-ups, and one way to do that was to make money easily available,” he said.
Without providing specifics, Zeiger said that there has been an “unusually high” default rate on loans made from the revolving loan program. He said the process in the past has been to “push money out the door and end up with a bunch of bad loans.”
“We are now looking into that,” Zeiger said.
In fact, the state education code specifically states that priority in granting loans “shall be given to new charter schools for start-up costs.” To repay the loans, the law requires the state to automatically deduct payments from the annual amount it gives the charter school for its operations (known as its annual “apportionment”), over a period of up to five years. However, if the charter school never opens, or goes out of business within a year or two, collecting on the loan becomes extremely difficult.
Premack said that the regulations around the loans were “unusually lax,” and that “more work is needed in this area” to lower the possibilities of default.
Another problematical area is that first-year charter schools get a lump sum payment based on their projections of what their “average daily attendance” will be after it opens. Schools have to file those projections by the end of July, before any students have actually enrolled. By contrast, regular public schools and established charter schools are paid based on their actual attendance, not estimates.
But Zeiger said that, as in the case of the now defunct CCCTEC, some “badly overestimate” the number of students they eventually enroll. Charter schools are required to report their actual attendance on their 20th day of classes, which should give the state an opportunity to adjust how much a school gets paid. But it is not entirely clear how the state recovers its funds if they have advanced far more dollars than can be justified by actual attendance.
In fact, CCCTEC’s founder and former superintendent Paul Preston said that 400 Sacramento-area students had signed up for the school. He expected that about 200 would show up. Instead, he said on the 20th day of classes, 84 students were enrolled, and “average daily attendance” was 44. According to one California Department of Education report, the state overpaid the school $219,000 in this one category alone.
Preston, who insists that the educational model on which his school was based works, blamed some of the low enrollment on the local fire marshal who last fall delayed issuing a permit for the building until three weeks after the scheduled opening day. As a result, students who intended to enroll at CCCTEC turned to other schools instead. “I knew we were in trouble the day we started,” Preston said.
Yet in one of many reports send to the school in its final months, the California Department of Education alleged that the “school had failed to meet generally accepted accounting principles or engaged in fiscal mismanagement.” Zeiger said the state will have to ramp up its oversight of charter schools “because it is our responsibility to make sure that taxpayer monies are being spent responsibly, especially in these difficult times.”
He said finding the right balance between fiscal accountability and fostering innovation will be a challenge. “But we have to start that discussion.”
Said Jed Wallace of the California Charter Schools Association, “There will always be some number of charter schools that launch badly or don’t get off the ground.” To help minimize their problems, he said, the state has to be much more responsive in processing claims for funds. “We are highly motivated to make sure that resources are used as wisely as possible.”
For more on the growth of charter schools in California, see EdSource’s several reports on the subject.
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