Report # 03-06 OFFICE OF THE LEGISLATIVE AUDITOR STATE OF MINNESOTA

EVALUATION REPORT

JUNE 2003 PROGRAM EVALUATION DIVISION Centennial Building -Suite 140 658 Cedar Street -St. Paul, MN 55155 Telephone: 651-296-4708 Fax: 651-296-4712 E-mail:legislative.auditor@state.mn.us Web Site: http://www.auditor.leg.state.mn.us

Charter School Financial Accountability

Photo Credits: The photographs on the Charter School Financial Account ability report cover and on page 23 were provided by the Studio Academy Charter School, and those on pages 26 and 32 were furnished by the City Academy Charter School.

Program Evaluation Division The Minnesota Office of the Legislative Auditor was established in 1973, replacing the century-old Public Examiner's Office. Its role is to audit and evaluate public programs and ensure accountability for the expenditure of public funds. In 1975, the Legislature created the Program Evaluation Division within the auditor's office. The division's mission, as set forth in law, is to determine the degree to which activities and programs entered into or funded by the state are accomplishing their goals and objectives and utilizing resources efficiently.

Topics for evaluation are approved by the Legislative Audit Commission (LAC), a 16-member joint, bipartisan commission. The division's reports, however, are solely the responsibility of the Office of the Legislative

Auditor. Findings, conclusions, and recommendations do not necessarily reflect the views of the LAC or any of its members. A list of recent evaluations is on the last page of this report. A more complete list is available at OLA's website (www.auditor.leg.state.mn.us), as are copies of evaluation reports.

The Office of the Legislative Auditor also includes a Financial Audit Division, which annually conducts a statewide audit of the 25 largest agencies, an audit of federal funds, and approximately 40 financial and compliance audits of individual state agencies. The division also investigates allegations of improper actions by state employees.

Professional Staff James Nobles, Legislative Auditor Joel Alter Valerie Bombach David Chein Jody Hauer Adrienne Howard Daniel Jacobson Deborah Junod Carrie Meyerhoff John Patterson Judith Randall Jan Sandberg Jo Vos John Yunker

Support Staff Barbara Wing This document can be made available in alternative formats, such as large print, Braille, or audio tape, by calling 651-296-8976 Voice, or the Minnesota Relay Service at 651-297-5353 or 1-800-627-3529.

e-mail:legislative.auditor@state.mn.us

Reports of the Office of the Legislative Auditor are available at our Web Site: http://www.auditor.leg.state.mn.us

OFFICE OF THE LEGISLATIVE AUDITOR State of Minnesota James Nobles, Legislative Auditor June 26, 2003 Members Legislative Audit Commission In April 2002, the Legislative Audit Commission directed the Office of the Legislative Auditor to evaluate charter school financial management. Legislators were interested in the extent of charter schools' financial problems and how well the Department of Education and charter school sponsors are overseeing the schools' fiscal performance. Legislators also had questions about the state's program for reimbursing charter schools for building lease expenses.

We found that about one quarter of charter schools were in financial difficulty at the end of fiscal year 2002. A variety of factors contributed to financial problems, and all of the financially troubled charter schools are taking steps to correct their situations. The Department of Education's recent efforts to better assist charter schools have been well received, but we found that some sponsors have a hands-off approach to financial oversight. Charter schools' leases appear to be reasonable, but 11 schools have indirectly used lease aid to acquire school buildings through affiliated nonprofit corporations.

We recommend that the department modify its charter school approval process and take other steps to help charter schools improve their business operations. We also recommend that sponsors' responsibilities be more clearly defined and that the Legislature review its policies regarding charter school board membership and building ownership.

This report was researched and written by Deborah Parker Junod (project manager), David Chein, and Jan Sandberg. The Department of Education, charter schools, and sponsors cooperated fully with our evaluation.

Sincerely, /s/ James Nobles James Nobles Legislative Auditor

Room 140, 658 Cedar Street, St. Paul, Minnesota 55155-1603 Tel: 651/296-4708 Fax: 651/296-4712 E-mail:legislative.auditor@state.mn.us TDD Relay: 651/2975353 Website: www.auditor.leg.state.mn.us

Table of Contents
SUM MARY ix
INTRODUCTION 1 1.
BACKGROUND 3 Charter Schools Operating in Minnesota 4 Starting a Charter School Financial Accountability Requirements Governance and Oversight
2. FINANCIAL MANAGEMENT Charter Schools' Financial Status Financial Over sight and Assistance Conclusions Recommendations 3. LEASE AID Importance of Lease Aid Reason ableness of Leases Leasing From Affiliated Nonprofit Building Corporations Conclusions Recommendations
SUMMARY OF RECOMMENDATIONS
APPENDIX: De tailed Financial and Lease Data
FURTHER READING 63 AGENCY RESPONSE
RECENT PROGRAM EVALUATIONS List of Tables and Figures Tables Page 1.1 Charter School Closures 6 1.2 Sponsorship of Charter Schools Open in FY2003 10 2.1 Charter School and School District General Fund Balances as a Percentage of Expenditures, FY2002 16 2.2 Charter Schools in Financial Difficulty, FY2002 18 2.3 Charter School Expenditures Per ADM, FY2002 19 2.4 Financial Management Provisions in the Department of Education Model Charter School Contract 28 3.1 Lease Rates Paid by Charter Schools and the State of Minnesota, March 2003 41 A. 1 Charter School Revenue, Expenditure, and Fund Balance Data 49 A. 2 Charter School Revenue, Expenditure, and Fund Balance Data Per ADM 51 A. 3 Charter School Expenditures by Category, FY2002 53 A. 4 Charter School Expenditures Per ADM, FY2002 57 A. 5 Charter School Building Leases, FY2003 60

Figures 1.1 Charter Schools Operating and Closed, FY1993-2003, and Expected to Be Open, FY2004 4

2.1 Percentage of Charter Schools and School Districts in Statutory Operating Debt, FY2000-2002 15 3.1 Average Lease Aid Per Pupil Unit, in Constant Dollars, FY1998-2003 39

SUMMARY Major Findings: About one-fourth of the charter schools open in fiscal year 2002 had financial problems, as indicated by a negative fund balance or deficit spending combined with a low fund balance (pp. 14-17).

Poor financial planning and insufficient monitoring of actual revenues and spending were key factors underlying financial difficulties. Many problems can be traced to schools opening before they were ready to manage their business operations (pp. 20-22, 31).

Minnesota's Department of Education (MDE) has initiated several well-received efforts to help charter schools improve financial management. However, charter schools often miss critical financial reporting deadlines, making oversight by MDE and charter school sponsors more difficult (pp. 24-27, 30).

Neither the law nor contracts between sponsors and their charter schools clearly define a sponsor's financial oversight responsibilities, and many sponsors do not actively oversee and assist their schools (pp. 27-29).

Charter schools receive state aid to offset the costs of leasing a school building but are prohibited from using state aid to buy a building. In general, charter schools lease appropriate facilities and pay reasonable lease rates. However, 11 charter schools have created affiliated nonprofit corporations that buy a building and then lease it to the charter school (pp. 37-45).

Key Recommendations: MDE should ensure that new charter schools have financial management staff and systems in place before being allowed to open and should modify its model charter school contract to include detailed financial management requirements (p. 34).

MDE should initiate a process to more clearly define the scope and nature of sponsors' financial management responsibilities (p. 35).

The Legislature should consider amending the law to state that charter school contracts may be terminated for repeated failure to meet state financial reporting deadlines and should review and clarify its policy on charter school building ownership (pp. 35, 46).

Although the Legislature has tightened financial controls, about one-quarter of the state's charter schools had financial problems in fiscal year 2002. Report Summary Charter schools are publicly funded schools formed by parents, teachers, or community members. In fiscal year 2003, Minnesota had 76 charter schools. Each school is governed by a board of directors elected by the school's staff and students' parents. Charter schools must have a sponsor, such as a school district or university, that is charged with overseeing the school's academic and fiscal performance. The relationship between a charter school and its sponsor is defined by a contract that should describe, among other things, the academic program, expected student outcomes, and the school's administration.

For the most part, charter schools are subject to the same financial accountability requirements regarding use of state and federal funds as school districts. For example, charter schools must maintain financial records, have a financial audit at the end of each fiscal year, and submit detailed financial data and audit reports to MDE.

We evaluated the extent of financial problems at charter schools, the reasons for them, and the sufficiency of oversight provided by MDE and sponsors. We also assessed the state's program for reimbursing charter schools for building lease expenses.

Charter Schools Are Vulnerable to Financial Problems, But the Proportion of Charter Schools in Statutory Operating Debt Has Declined

As a key indicator of a charter school or school district's fiscal status, MDE measures the end-of-year general fund balance as a percentage of annual general fund expenditures. If the percentage is –2.5 percent or worse, the school is considered to be in statutory operating debt (SOD). The proportion of charter schools in SOD declined from 19 percent in fiscal year 2000 to 12 percent in fiscal year 2002, when about 10 percent of traditional school districts were in SOD.

Because low fund balances place charter schools at financial risk, we used criteria broader than SOD status to identify charter schools that ended fiscal year 2002 in financial difficulty (e. g., an annual operating deficit combined with a low fund balance). In all, 16 charter schools met the criteria, accounting for 24 percent of 68 charter schools open in fiscal year 2002. Two of the 16 schools have closed.

A Variety of Factors Contributed to Financial Problems, Particularly Poor Financial Planning and Tracking

A unique set of circumstances led to problems at each of the schools in financial difficulty, but we found that poor financial planning and insufficient monitoring of actual revenues and expenditures were general problems. For example, some charter schools used budgets that were not sufficiently detailed or were based on unrealistic assumptions. Some charter schools did not understand the extent of their financial problems and missed opportunities to make mid-year corrections. In some cases, the school director or board members did not grasp the importance of ongoing financial monitoring; in other cases, the director and board were not able to obtain reliable financial reports from their own accounting systems or from their contractors. Other factors contributing to financial problems included poorly functioning school boards, misunderstandings regarding state requirements, and insufficient resources to handle unexpected expenses. We recommend that MDE enhance training offered to charter school board members and that the Legislature reconsider the requirement that a majority of school board members be teachers.

Charter schools are generally subject to the same financial accountability requirements as school districts.

Some charter schools have been ill equipped to manage their finances.

Some Charter Schools Opened Without Sufficient Capacity to Manage School Finances

Quite often, charter schools attributed their financial problems to early mistakes and to having administrators and boards that were unprepared to manage a school's business operations. MDE approves charter school applications on the basis of a written proposal, and then charter schools generally spend at least 9 months in a planning stage to implement it. However, neither MDE nor sponsors formally assess new schools' readiness to open. We recommend that MDE require charter schools to demonstrate that they have financial expertise, systems, and controls in place before students arrive.

New MDE Efforts to Improve Charter School Financial Management May Be Affected by Budget Cuts

MDE monitors charter schools' compliance with laws governing the distribution and use of education aid, and in recent years has implemented several well-received efforts to better assist charter schools. For example, to address historical problems with over reporting enrollment (and receiving too much funding), the legislature directed MDE to monitor enrollment reports on a quarterly basis and adjust aid payments as needed. MDE staff also initiated an early intervention effort to identify charter schools and school districts at risk of falling into SOD. MDE staff went to the at-risk schools and used budget and financial data to demonstrate the need to increase revenues, make appropriate spending cuts, and change fiscal policies. In addition, MDE staff have made concerted efforts to improve the quality and timeliness of ad-hoc assistance.

Charter school officials generally gave MDE high marks for the training and technical assistance it provides. It is not clear, however, that MDE will be able to sustain its current level of assistance in the wake of budget cuts. For example, MDE recently eliminated the full-time position that had been allocated to charter school financial management, replacing it with quarter-time assignments to four other staff.

Charter Schools Were More Likely to Miss Financial Reporting Deadlines Than School Districts

As an accountability tool, charter schools are required to submit fiscal year financial data files to MDE by November 30 of each year and financial audit reports by December 31. Although they have improved, charter schools have a poor record of meeting these reporting deadlines compared to school districts. For example, about 29 percent of charter schools missed MDE's November 30, 2002, deadline for posting summarized audit data via the Internet compared to about 14 percent of school districts. Also, 29 percent of charter schools missed the December 31, 2002, deadline to submit financial audit reports compared to 12 percent of school districts.

Charter schools' timeliness has improved. Among 56 charter schools open in fiscal years 2001 and 2002, the percentage of late and missing audits declined from 63 percent for fiscal year 2001 to 29 percent for fiscal year 2002. We recommend that the Legislature consider amending charter school law to explicitly allow sponsors to terminate contracts for repeated failure to meet financial reporting deadlines.

SUMMARY xi The Minnesota Department of Education has increased its efforts to help charter schools, but needs to ensure that new schools have adequate financial systems in place before they open. Sponsors Vary in the Extent to Which They Oversee Financial Management, in Part Because Their Role Is Not Clearly Defined

State law gives sponsors general responsibilities to monitor a school's fiscal status and to evaluate its overall performance. A charter school must have a contract with its sponsor, and both parties can use the contract to spell out specific terms of financial oversight. However, few of the contracts we reviewed set forth specific obligations or expectations regarding the charter school's fiscal performance (e. g., budget or training requirements). The contracts also did not clarify how the sponsor would oversee financial management.

Among the 11 sponsors included in our review, interactions with charter schools ranged from a hands-off approach to more active efforts to understand schools' operations and financial status. Most of the sponsors— a mix of school districts and educational institutions— limited their oversight to receipt of the annual financial audit and perhaps an annual meeting. These sponsors provided little active assistance. Other sponsors were more active, requiring more frequent financial reports or having a charter school liaison visit the school or attend board meetings. The level and nature of assistance that sponsors should provide was a point of contention between some schools and their sponsors, and several of the charter schools were considering seeking a new sponsor. We recommend that MDE initiate a process to more clearly define sponsors' responsibilities.

Lease Aid Is an Important Revenue Source, But Some Charter Schools Are Using It to Indirectly Buy School Buildings

Charter schools are not allowed to issue bonds or levy taxes to pay for building space. Instead, the state provides lease aid that reimburses charter schools for a large portion of building lease costs if the lease terms are deemed reasonable. Charter school administrators view lease aid as essential to charter schools' financial viability; without it, they would have to rely on general education aid to pay for a facility. In general, we found that charter schools lease appropriate facilities and pay reasonable lease rates.

Although state law prohibits charter schools from using state funds to acquire buildings, 11 charter schools have established affiliated nonprofit building corporations that issued bonds or obtained loans to acquire school buildings. Charter schools then leased the building from the affiliated corporation. Many of the charter schools and sponsors we interviewed advocated allowing charter schools that have demonstrated sound fiscal and academic performance over several years to buy buildings directly. They argued that ownership can be more cost-effective in the long run. On the other hand, other officials were concerned that charter school boards and administrators may lack the sophisticated financial management skills required to arrange bond deals. Because use of nonprofit building corporations has introduced a gray area in the states' policy on building ownership, we recommend that the Legislature review and clarify the policy on use of state funds to buy charter school buildings.

Many charter school sponsors had little interaction with the schools they sponsored.

The Legislature needs to review and clarify its lease aid policy for charter schools. Introduction In 1991, Minnesota became the first state to authorize charter schools as an option within its public education system. Charter schools are publicly funded, nonsectarian schools formed by parents, teachers, or community members. Each charter school is governed by a board of directors, the members of which are elected by students' parents and the schools' staff. Within certain legal guidelines, the board governs the school's mission, education program, and administration. Every charter school also must have a sponsor, such as a school district or college, that is supposed to oversee the school's academic and fiscal performance.

While charter schools are often perceived to be largely free from state control, Minnesota's regulation of charter schools has increased in recent years, particularly in the area of financial management. Spurred by several incidences of charter schools closing amid allegations of financial mismanagement and conflicts of interest, the Legislature changed the law in 2001 to make charter schools follow the same financial accountability and audit requirements as school districts. Along with sponsors, Minnesota's Department of Education (MDE) 1 is responsible for overseeing charter schools.

In April 2002, the Legislative Audit Commission directed the Office of the Legislative Auditor to evaluate charter school financial management. We started our evaluation in February 2003 after completing other projects that the Commission had requested. Legislators were interested in current information on the extent of financial problems at charter schools, the reasons for them, and the sufficiency of oversight provided by MDE and sponsors. Legislators also had questions about the state's program for reimbursing charter school building lease expenses. In addition to providing background information on Minnesota's charter schools, our review addressed the following questions:

To what extent have Minnesota charter schools experienced financial difficulties?

What are the underlying causes of any financial problems, and how have charter schools responded? How effectively have the state and sponsors monitored charter school financial management and helped schools avoid or rectify financial difficulties? Is the lease-aid program an effective way to help charter schools obtain school facilities?

Charter schools are publicly-funded schools formed by parents, teachers, or community members.

1 Minnesota's education agency had been named the Department of Children, Families, and Learning. The 2003 Legislature changed the department's name to the Minnesota Department of Education, effective May 2003. We refer to the agency under its new name throughout the text of the report. However, we use the Department of Children, Families, and Learning in footnotes and table notes when we cite source documents published prior to the name change. To assess charter schools' financial status, we analyzed financial and student data reported to MDE for fiscal years 2000 through 2002. To identify charter schools in financial difficulty, we developed selection criteria, based primarily on the extent of deficit spending and year-end fund balances. Applied to fiscal year 2002 financial data, 16 of 68 charter schools met our criteria. Two of the schools had closed by the time we started our review, so our in-depth work focused on the remaining 14 charter schools.

To understand the circumstances contributing to financial difficulties, efforts to improve their financial status, and the roles sponsors and MDE played in resolving problems, we interviewed school directors, school board chairs, and sponsor representatives for each of the 14 charter schools in the financial difficulty group. We also reviewed annual reports, financial audit reports, sponsor evaluations, and other documents. In addition, we asked MDE staff and others to identify several charter schools that have demonstrated strong financial management practices, and we interviewed administrators at these schools.

To assess the extent to which MDE and sponsors monitor charter schools' financial status and help charter schools resolve financial problems, we relied on interviews with charter school administrators, MDE staff, and sponsor representatives. Our work with sponsors focused on the 11 organizations that sponsored the 14 schools we reviewed in depth. In total, these 11 organizations sponsored about half of the charter schools open in fiscal year 2002. In addition, we reviewed the law; MDE policies, training materials, and staffing data; and various documents related to charter school sponsorship.

To evaluate lease aid, we interviewed MDE staff about the lease aid program and analyzed data collected by MDE on lease terms and lease aid revenue for schools operating in fiscal year 2003. To determine the reasonableness of lease expenditures, we compared charter schools' rates to rates that the State of Minnesota pays for leased office space. We also included questions about facilities and lease aid in our interviews with charter school administrators and board chairpersons. Finally, we interviewed officials from 14 additional charter schools to learn more about their facilities and leases.

We focused our work on charter schools that met our criteria indicating financial difficulty. But because we selected schools based on numerical indicators, we may have missed charter schools with poor financial management practices if their fiscal year 2002 financial data did not meet our criteria. Still, we believe that the issues we identified at the 14 selected schools would likely apply to other troubled charter schools as well. We did not audit or otherwise review charter school financial records in detail.

The report is divided into three chapters. In Chapter 1, we present data on charter school openings and closures, and we describe the process for starting a charter school, financial accountability requirements, and oversight mechanisms. In Chapter 2, we address the extent of charter schools' financial problems, how problems have been addressed, and the sufficiency of MDE and sponsors' oversight and assistance. In Chapter 3, we discuss how charter schools have used state lease aid.

Background SUMMARY

Charter schools are publicly funded schools that are governed by their own boards of directors. The number of charter schools open in Minnesota has grown from 1 in fiscal year 1993 to 76 in fiscal year 2003. Another 13 charter schools are planning to open in fiscal year 2004, and 16 charter schools have closed since 1993. Charter schools in Minnesota must have a sponsoring organization. School districts sponsored about half of the charter schools operating in 2003, and colleges and universities sponsored 30 percent. State law requires sponsors and the Minnesota Department of Education to oversee charter school financial management, but it provides little guidance as to how the agencies should carry out the oversight function. In 2001, the Legislature enacted several measures aimed at improving charter school financial management and accountability, including a requirement to annually submit a financial audit report to the Department of Education.

In 1991, Minnesota became the first state to authorize charter schools (originally called "outcome based schools"). 1 Charter schools are publicly funded, nonsectarian schools that are formed by parents, teachers, or community members to foster innovative, quality education. Charter schools receive state aid, primarily based on the number of students enrolled, but they function autonomously in terms of mission and administration, and they are exempt from some statutes and rules pertaining to school districts. Each charter school is governed by a board of directors whose members are elected by the parents of children enrolled at the school and the staff employed by the school. In fiscal year 2002, charter schools received about $105 million in funding, primarily state and federal education aid. 2

As background for our evaluation of charter school financial accountability, this chapter addresses the following questions:

How many charter schools are operating in Minnesota, and how many have closed?

How are charter schools governed, and what state laws regarding financial management apply to them?

1 Laws of Minnesota (1991), ch. 265, art. 9, sec. 3. 2 Charter schools and school districts follow the state fiscal year that runs from July 1 through June 30, so traditional fall to spring school years coincide with fiscal years. To answer these questions, we reviewed state laws, legislative research reports, enrollment data provided by the Minnesota Department of Education (MDE), and other program documents. We also interviewed officials from charter schools and MDE.

CHARTER SCHOOLS OPERATING IN MINNESOTA

As shown in Figure 1.1, since first authorized, the number of charter schools operating has increased each year. The 1991 law authorizing charter schools limited the number of schools to eight. The Legislature gradually raised the cap in subsequent years and removed it entirely in 1997. In fiscal year 2003, 76 charter schools were open for the full school year with students enrolled. 3 As of June 2003, another 13 schools are planning to open in fiscal year 2004.

Since the first charter school opened in September 1992, 16 charter schools have closed under a variety of circumstances. As shown in Table 1.1, insolvency was the predominant underlying cause for most closures. Only one of the sixteen charter schools closed while fiscally healthy; its board decided to end operations because the school's start-up grant funding had ended and projected enrollment would not be sufficient to support program costs. The remaining fifteen schools closed because of varying degrees of poor financial management and insolvency. Key issues in these closures included over reporting of enrollment and inability to repay the state for excess aid, lower than expected enrollment coupled with overspending, and errors associated with special education funding. 4 In some cases, the financial management problems appeared to result from mistakes made by school administrators more skilled in developing education programs than in financial management. In other cases, however, evidence suggests that school administrators or management companies made more egregious financial management errors, including repeated overstatements of enrollment, failure to maintain accurate books and records or pay taxes, and the commitment to building leases that were clearly not in the schools' best interests. The Legislature's changes to charter school law in 2001, discussed below, were intended to address some of these problems by putting tighter controls over charter school financial management.

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY

NOTE: "Operating" includes charter schools that were open for all or part of the fiscal year. One school closed in September 2002. It is counted as operating in fiscal year 2002 and closed in fiscal year 2003. SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

0 20 40 60 80 100

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Operating Closed Expected to Be Open

Figure 1. 1: Charter Schools Operating and Closed, FY1993-2003, and Expected to Be Open, FY2004

Number of Charter Schools

Fiscal Year

Minnesota had 76 charter schools operating in fiscal year 2003.

3 One school, Mexica Multicultural, closed in September 2002 due to low enrollment. It is not included in the count of 76 charter schools operating in fiscal year 2003.

STARTING A CHARTER SCHOOL To open a charter school, an applicant (such as a group of parents, teachers, or community members) must obtain a sponsor, create a cooperative or nonprofit corporation, and complete the MDE application process. One of the first things charter school developers need to do is find an organization, often a school district or university, that will sponsor the school. The sponsor must then file an affidavit with MDE stating its intent to authorize a charter school. 5 MDE's approval of this affidavit is required for the start-up process to continue. 6

MDE requires charter school applicants to complete a lengthy, multi-part application that includes, among other things, information on the individuals proposing to develop the school; statements of the school's vision and mission; accountability measures for two academic and two nonacademic goals; a proposed school calendar; a proposed budget; a statement assuring that the school will meet special education requirements; a letter of intent from the sponsor (or copy of a school board's resolution to sponsor); and a federal grant application. 7 Under the assessment process used through May 2003, MDE staff reviewed each application, prepared a summary, and sent both to the Charter School Advisory

BACKGROUND 5 Most of the 16 charter schools that have closed did so because of financial problems.

A charter school must have a sponsor, such as a school district or university.

4 The link between reported enrollment and revenue is discussed in more detail later in this chapter. 5 If an applicant applies to a school district to sponsor a charter school, the school district board must vote within 90 days on whether to sponsor the charter school. If the school district board votes not to sponsor a charter school, state law allows the applicant to appeal to MDE. MDE may help the applicant find another sponsor, or it may elect to sponsor the charter school itself. MDE has elected to sponsor seven charter schools. Minn. Stat. (2002), §124D. 10, subd. 4. 6 Minn. Stat. (2002), §124D. 10, subd. 4. 7 Department of Children, Families, and Learning, State of Minnesota Consolidated Charter School Authorization and Title V Public Charter School Grant Application (Roseville, MN: 2003).

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Table 1.1: Charter School Closures Charter School and Dates of Operation Sponsor Reasons for Closure

Prairie Island Sept. 1994–Aug. 1996 Red Wing School District Insolvency related to low enrollment and loss of financial

support from the Prairie Island Tribe.

Dakota Open School Sept. 1994–Jan. 1998 Department of Education Poor financial management involving misreported enrollment.

Frederick Douglass Academy Sept. 1994–April 1999 Minneapolis Public Schools Poor financial management involving misreported enrollment, unreasonable lease, and poor financial records.

Summit School for the Arts Sept. 1997–Apr. 2000 Chisago Lakes School District Poor financial management related to overspending and misuse of special education funds. Success Academy Sept. 1997–May 2000 St. Paul Public Schools Poor financial management by management company involving overspending and misreported enrollment.

Toivola-Meadowlands Sept. 1993–June 2000 St. Louis County School District Low enrollment and poor financial management involving overspending that was largely related to high facility maintenance costs. Right Step Academy Sept. 1995–Aug. 2000 St. Paul Public Schools Poor financial management by management company involving delinquent taxes and poor financial records.

Central Minnesota Deaf Sept. 1997–Dec. 2000 St. Cloud Public Schools Low enrollment and poor financial management involving overspending. PEAKS – Faribault Sept. 1999–Mar. 2001 Alexandria Technical College Poor financial management by school founders involving unreasonable lease, misreported enrollment, and special education errors. Strategies for Success Sept. 1998–May 2001 St. Paul Public Schools Poor financial management by management company involving misreported enrollment. Fort Snelling Academy Sept. 2000–June 2001 Normandale Community

College Poor financial management involving overspending and misreported enrollment. Learning Adventures Sept. 1998–June 2001 St. Paul Public Schools Low enrollment and poor financial management involving overspending. PEAKS–Pillager Sept. 1998–June 2001 Central Lakes College Poor financial management by school founders involving unreasonable lease, misreported enrollment, and special education errors. Skills for Tomorrow Jr. High Sept. 1998–June 2001 St. Paul Public Schools Projected enrollment not sufficient to cover program costs once start-up funding ended. Martin Hughes Sept. 1998–Nov. 2001 Mt. Iron/Buhl School District Poor financial management by management company involving misuse of special education revenue and poor financial records.

Mexica Multicultural Sept. 2000–Sept. 2002 St. Paul Public Schools Low enrollment and poor financial management involving overspending. SOURCE: Office of the Legislative Auditor analysis of Department of Education charter school files.

Council. 8 The Advisory Council reviewed the application, met with the applicant and sponsor, and made a recommendation to the Commissioner. The 2003 Legislature, however, removed reviewing charter school applications from the list of Charter School Advisory Council responsibilities. 9 The Commissioner, in any event, has the final say and must approve or disapprove the proposal within 60 days of receipt of the sponsor's affidavit stating its intent to sponsor the school. 10

Charter schools, like school districts, get most of their revenue through state aid based on a general education funding formula that is linked to student enrollment. In fiscal year 2003, charter schools received basic education aid of $4,601 per pupil unit. 11 In addition, charter schools receive operating capital revenue, sparsity revenue, training and experience revenue, and equity revenue based on the state average amount per pupil unit and may earn basic skills revenue based on the school's student population of low income students or those with limited English proficiency. Charter schools may also receive special education aid and transportation aid if they provide transportation services. Two types of aid are unique to charter schools. Building lease aid pays for 90 percent of the cost of leasing facilities up to a maximum amount per pupil unit. The 2003 Legislature reduced the maximum building lease aid from $1,500 to the greater of $1,200 per pupil unit or the amount per pupil unit that the school received in fiscal year 2003. 12 In addition, new charter schools may receive federal and state start-up funding. Currently, charter schools are eligible for three years of federal funding: $140,000 for planning the year before the school opens, $150,000 in the first year of operation, and $125,000 for the second year of operation. In the past, the state offered start-up funding for the first two years of operation equal to the greater of $50,000 or $500 per pupil unit. 13 Due to action by the 2003 Legislature, charter schools opening in fiscal years 2004 and 2005 will not receive state start-up funding. 14 Charter schools may receive grants or gifts, but they may not issue bonds or levy taxes. 15

BACKGROUND 7 Two funding sources unique to charter schools are lease aid and start-up grants.

8 The Charter School Advisory Council was created by the 2001 Legislature. It was charged with encouraging the creation of charter schools, providing leadership and support to sponsors, providing management training to charter school boards, facilitating compliance with auditing and other reporting requirements, and recommending approval or disapproval of charter school applications. Under the original legislation, the Council was scheduled to sunset on June 30, 2003. Among other changes, the 2003 Legislature extended the sunset date to June 30, 2007. Minn. Stat. (2002), §124D. 10, subd. 2a and Laws of Minnesota (1Sp2003), ch. 9, art. 2, sec. 21. 9 Laws of Minnesota (1Sp2003), ch. 9, art. 2, sec. 21. 10 Minn. Stat. (2002), §124D. 10, subd. 4( b). 11 Minn. Stat. (2002), §126C. 10, subd. 2. Pupil units are based on average daily membership (ADM), which is the sum for all pupils of the number of days of the school year each pupil is enrolled divided by the number of days that school is in session. ADM is converted into pupil units by weighting pupils according to grade level as follows: kindergarten = 0.557; grades 1 through 3 = 1.115; grades 4 through 6 = 1.06; and grades 7 through 12 = 1.3. Pre-kindergarten students with disabilities are weighted based on the number of hours of services they receive. Minn. Stat. (2002), §126C. 05, subd. 1 and subd. 8. For an in-depth description of K-12 school funding, see Minnesota House of Representatives Research Department, Minnesota School Finance: A Guide for Legislators (St. Paul: 2002). 12 Minn. Stat. (2002), §124D. 11, subd. 4 and Laws of Minnesota (1Sp2003), ch. 9, art. 2, sec. 28. 13 Minn. Stat. (2002), §124D. 11, subd. 8. 14 Laws of Minnesota (1Sp2003), ch. 9, art. 2, sec. 51. 15 Minn. Stat. (2002), §§ 124D. 10, subd. 25( b) and 124D. 11, subd. 6.

FINANCIAL ACCOUNTABILITY REQUIREMENTS For the most part, charter schools are subject to the same financial accountability requirements regarding use of state and federal funds as are school districts. 16 This was not always the case. In 2000 and 2001, several charter schools closed amid allegations of financial mismanagement and conflicts of interest. As a result, the 2001 Legislature amended charter school law to increase charter school accountability. 17 The following requirements now apply to charter schools:

Charter schools must submit an audit report to MDE by December 31 each year. If the audit report indicates that a material weakness exists in the financial reporting systems of a charter school, the school must submit a written report to MDE explaining how the material weakness will be resolved. 18

Charter school boards must keep minutes of meetings and make them available to the public upon request. 19

Charter schools must make annual financial reports available to the public upon request. 20 Charter schools must adhere to the same requirements that apply to school districts regarding contracts for services and materials. 21 Charter schools in statutory operating debt must submit a corrective action plan and limit expenditures accordingly. 22 MDE must provide financial management training for charter school board members. 23 Charter school board members may not be employed by or serve on a board of a for-profit contractor doing business with the school. 24 As shown in the list above, charter schools must meet various reporting requirements. Like school districts, charter schools must annually report financial data to MDE using a system of accounts called the Uniform Financial Accounting and Reporting Standards (UFARS). 25 MDE uses UFARS data to monitor the fiscal health of school districts and charter schools and to track revenues and expenditures. Since school funding is based on the number of students served, charter schools, like school districts, must report regularly on the number of students attending school. Aid payments for the school year are initially based on enrollment projections made in June at the end of the prior school year. In general, MDE reconciles differences between projected and actual enrollment and adjusts aid payments at the end of the school year. The requirements for charter schools in their first three years of operation are different. These charter schools must submit quarterly enrollment reports to MDE, listing each student by grade and showing the student's start and end dates. MDE uses these data to make interim adjustments to aid payments, as needed. 26 Charter schools must also submit an annual report to the school's sponsor and MDE. 27

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Legislative action in 2001 put tighter financial controls on charter schools.

16 In general, state law and MDE procedures treat charter schools as if each one were a school district consisting of one school. For example, MDE assigns a school district number to each charter school. Whereas regular school districts submit consolidated financial reports for all the schools in the district, charter schools only have to report on a single entity.

17 Laws of Minnesota (1Sp2001), chap. 6, art. 2, sec. 20-28, 66. 18 Minn. Stat. (2002), §124D. 10, subd. 6a. 19 Ibid. 20 Ibid. 21 Minn. Stat. (2002), §124D. 10, subd. 8( i) and §123B. 52, subd. 1. 22 Minn. Stat. (2002), §124D. 10, subd. 8( i). We discuss statutory operating debt in Chapter 2. 23 Minn. Stat. (2002), §124D, subd. 4( e). 24 Minn. Stat. (2002), §124D. 10, subd. 4a.

GOVERNANCE AND OVERSIGHT Charter school oversight begins with charter school boards, but sponsors and MDE also have oversight responsibilities. In this section, we provide background information on their roles. A more detailed discussion of how they implement their responsibilities is in Chapter 2.

Charter schools must be governed by a board of directors elected by the staff employed by the school and the parents of enrolled children. By the end of the third year of operation, a majority of the school's board must be teachers unless MDE waives this requirement. 28 Boards generally set school policies, adopt budgets, and make major decisions. They usually hire directors who are responsible for the day-to-day operation and financial management of their schools.

As shown in Table 1.2, six types of organizations may sponsor a charter school. 29 Currently, 39 entities sponsor the 76 charter schools operating in fiscal year 2003. School districts sponsor the majority of charter schools (51 percent). The Minneapolis and St. Paul school districts each sponsor nine charter schools. None of the 16 other school districts that sponsor charter schools sponsor more than two. Colleges and universities sponsor 30 percent of the charter schools, with the University of St. Thomas and Central Lakes Community College each sponsoring three. MDE sponsors seven charter schools, and charitable organizations sponsor five.

The sponsor's authorization for a charter school must be in the form of a contract that, among other things, describes the school's program, including specific outcomes students are expected to achieve; the school's management and administration; and the requirements and procedures for program and financial audits. Contracts may last up to three years.

The relationship between each charter school and its sponsor is defined in a contract.

25 Minn. Stat. (2002), §123B. 77. 26 Minn. Stat. (2002), §124D. 11, subd. 9( d). 27 Minn. Stat. (2002), §124D. 10, subd. 14. 28 Minn. Stat. (2002), §124D. 10, subd. 4( c). 29 The 2003 Legislature added certain chambers of commerce, business associations, or similar nonprofit corporations to the list of eligible sponsors, but these associations may only sponsor a school that has operated for at least three years with another sponsor. Laws of Minnesota (1Sp2003), ch. 9, art. 2, sec. 22.

The sponsor's oversight responsibilities, as broadly stated in statute, are to monitor and evaluate the fiscal and student performance of the school. 30 Each charter school must report annually to its sponsor with the information the sponsor requires. 31 At the end of the contract term, the sponsor must evaluate the school's performance and decide whether to renew the contract. The sponsor must give the school 60 days notice if the contract is not renewed. The sponsor may also terminate a contract mid-term with 60 days notice. The grounds for either terminating or not renewing a contract are the same:

failure to meet the requirements for pupil performance contained in the contract;

failure to meet generally accepted standards of fiscal management; violations of law; or other good cause shown. 32

Table 1.2: Sponsorship of Charter Schools Open in FY2003 Number of Percentage Number of Charter Schools of Charter Type of Sponsor Sponsors Sponsored Schools School District 18 39 51% College or University 15 23 30

Department of Education 1 7 9 Charitable Organization a 4 57 Intermediate School District b 1 23 Education District c 0 0 0

Total 39 76 100% a Charitable organizations must belong to the Minnesota Council of Nonprofits or the Minnesota Council on Foundations, must be registered with the Attorney General's Office, and must have a year-end fund balance of at least $2 million.

b The state has three intermediate school districts that provide services, particularly in the areas of vocational and special education, to member school districts in the Twin Cities metropolitan area. c Education Districts are agreements among five or more school districts to coordinate programs and services. None of Minnesota's 18 education districts sponsored charter schools in 2003.

SOURCES: Minn. Stat.( 2002), §124D. 10, subd. 3 and 4; §§ 123A. 15– 123A. 19; §§ 136D. 01– 136D. 76; and Department of Education data.

Sponsors and the Department of Education share responsibility for overseeing charter schools' fiscal performance.

30 Minn. Stat. (2002), §124D. 10, subd. 15. A sponsor may annually assess a school up to $30 per student ($10,000 maximum) for the first three years of sponsorship and up to $10 per student ($3,500 maximum) for subsequent years to pay for monitoring and evaluation. 31 Minn. Stat. (2002), §124D. 10, subd. 14. 32 Minn. Stat. (2002), §124D. 10, subd. 23( b).

A school may appeal a sponsor's decision to terminate or not renew a contract to MDE. Unless MDE approves a different eligible sponsor for the school, the school must be dissolved. 33

MDE's other oversight responsibilities for charter schools are similar to those for school districts. For example, MDE must ensure that state academic and testing requirements are met, that teachers are licensed, and that buildings meet health and safety requirements. As the agency responsible for distributing state education aid, MDE must verify the accuracy of enrollment counts. With regard to financial matters, MDE monitors compliance with financial reporting requirements, receives and evaluates financial audits, and provides training and day-to-day technical assistance in financial management.

33 MDE may also terminate an existing contract between a charter school and its sponsor if the school has a history of financial mismanagement or repeated violations of the law. Minn. Stat. (2002), §124D. 10, subd. 23( c).

Financial Management SUMMARY Based on indicators related to year-end fund balances and deficit spending, about one-fourth of charter schools open in fiscal year 2002 were having financial problems. However, roughly the same proportion of charter schools and school districts ended the year in statutory operating debt. Key factors contributing to charter schools' financial problems included deficiencies in financial management policies and poor decisions made by school administrators and boards. The Minnesota Department of Education monitors charter schools' compliance with laws governing the distribution and use of education aid, and in recent years, has initiated several well-received efforts to better assist charter schools. Sponsors are required to monitor and evaluate charter schools' fiscal performance, but many of the sponsors included in our review had a hands-off relationship with their sponsored schools. The state, in general, has not set clear expectations for sponsors regarding the extent and nature of their oversight responsibilities. We recommend that sponsors' obligations regarding financial oversight be clarified and that the Department of Education take additional steps to improve charter schools' capacity to manage the business side of their operations.

Although charter schools are perceived to be largely free from state regulation, that is not the case— particularly regarding financial management. After several high-profile charter school closures and based on broader concerns regarding poor financial management and conflicts of interest, the Legislature amended state law in 2001 to place charter school finances under closer state scrutiny. Now, as discussed in Chapter 1, charter schools must comply with the same financial accounting and reporting requirements that apply to school districts.

This chapter discusses charter schools' financial status in fiscal year 2002 and the effectiveness of financial oversight mechanisms. Specifically, we address the following questions:

To what extent have Minnesota charter schools experienced financial difficulties?

What are the underlying causes of any financial problems, and how have charter schools responded? How effectively have the state and sponsors monitored charter school financial management and helped schools avoid or rectify financial difficulties? To assess charter schools' financial status, we analyzed financial and student data reported to the Minnesota Department of Education (MDE) for fiscal years 2000 through 2002. 1 We also developed criteria, based primarily on year-end fund balances and the extent of deficit spending, to identify charter schools in financial difficulty. Applied to fiscal year 2002 financial data, 16 of 68 charter schools met our criteria. Two of the schools have since closed. To understand the circumstances contributing to financial difficulties, efforts to improve their financial status, and the roles sponsors and MDE played in resolving problems, we interviewed school directors, school board chairs, and sponsor representatives for each of the 14 charter schools that remained open in fiscal year 2003. We also reviewed annual reports, financial audit reports, sponsor evaluations, and other documents. In addition, we asked MDE staff and others to identify several charter schools that have demonstrated strong financial management practices, and we interviewed administrators at five selected schools. 2

To assess the extent to which MDE and sponsors monitor charter schools' financial status and help charter schools with financial management, we relied on interviews with charter school administrators, MDE staff, and sponsor representatives. Our work with sponsors focused on the 11 organizations that sponsored the 14 schools we reviewed in depth. In total, these 11 organizations sponsored about half of the charter schools open in fiscal year 2002. In addition, we reviewed laws; MDE policies, training materials, and staffing data; and various documents related to charter school sponsorship.

CHARTER SCHOOLS' FINANCIAL STATUS There are numerous indicators of fiscal health or lack of health in a school district including the presence of qualified personnel in fiscal management, appropriate financial management policies and practices, and ultimately a set of financial indicators demonstrating fiscal health. Charter schools and school districts are required to report detailed, audited revenue and expenditure data for each fiscal year (ending June 30) to MDE by November 30. As a key indicator of a charter school or school district's fiscal status, MDE measures the end-of-year general fund balance as a percentage of general fund annual expenditures. If the percentage is –2.5 percent or worse, the school is considered to be in statutory operating debt (SOD). 3 Charter schools or districts in SOD status are required by law to submit a plan to MDE laying out how the school will get out of debt and achieve a healthier fund balance. MDE must withhold state aid payments from charter schools and districts that do not provide a plan. 4

"Statutory operating debt" is a key indicator of a charter school or district's fiscal health.

1 These are the most recent fiscal years for which reliable data are available. According to MDE, charter school financial data for fiscal years 1999 and earlier are suspect due to errors and inconsistencies in the use of reporting categories. 2 The five schools are Bluffview Montessori, Math and Science Academy, Schoolcraft, Skills for Tomorrow High School, and Twin Cities Academy.

Our analysis of financial data and interviews with charter school officials showed that:

Charter schools are vulnerable to financial difficulties, but for fiscal year 2002, roughly the same proportion of charter schools and school districts ended the year in SOD. In fiscal year 2002, about 12 percent of charter schools were in SOD status compared to about 10 percent of school districts. 5 As shown in Figure 2.1, the proportion of charter schools in SOD has declined since fiscal year 2000. Several factors may have contributed to this decline. First, seven charter schools closed in fiscal year 2001 due to financial problems. Second, as discussed later in this chapter, MDE initiated an effort to proactively identify and assist charter schools and school districts at risk of being in SOD. MDE's intervention efforts may have helped some charter schools avoid deeper financial difficulty. And finally, some of the difference between fiscal years 2000 and 2001 may have resulted from a 2001 change in how MDE measures debt. 6

FINANCIAL MANAGEMENT

NOTES: Data include two charter schools in fiscal year 2002 and one charter school each in fiscal years 2000 and 2001 that closed and were deemed to be in statutory operating debt although the schools failed to report complete financial data. The formula for calculating statutory operating debt changed between fiscal years 2000 and 2001.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

18.9% 15.6% 11.8% 6.9% 10.1% 9.6%

2000 2001 2002

Charter Schools School Districts

Figure 2. 1: Percentage of Charter Schools and School Districts in Statutory Operating Debt, FY2000-2002

Fiscal Year

The proportion of charter schools in statutory operating debt has declined.

3 The SOD calculation also takes encumbered funds into account, so the percentage is the amount of the unreserved/undesignated general fund balance less encumbrances divided by general fund expenditures. 4 Minn. Stat. (2002), §124D. 10, subd. 8( h). 5 This includes two charter schools, Martin Hughes and Mexica Multicultural, that closed during or shortly after the 2001-2002 school year. According to MDE, both were in substantial debt at the time they closed.

While there is no firm rule regarding how large a fund balance charter schools should maintain, MDE staff and charter school financial auditors said that a reasonable target is a general fund balance ranging from 10 to 20 percent of general fund expenditures. As shown in Table 2.1, 53 percent of charter schools ended fiscal year 2002 with a general fund balance of 10 percent or more compared to 58 percent of schools districts. More detailed revenue, expenditure, and fund balance data are included in the Appendix.

Along with broader financial management problems that may exist, low fund balances place charter schools at financial risk. For example, a low fund balance makes it more difficult to manage cash flow or pay for large, unexpected expenses. Because of this vulnerability, we used a set of criteria broader than SOD status to identify charter schools that ended fiscal year 2002 in financial difficulty. For our review, we categorized a charter school as being in financial difficulty if it (1) had a negative general fund balance at the end of fiscal year 2002, (2) had an annual operating deficit in fiscal year 2002 larger than its year-end fund balance and its balance was relatively low, 7 or (3) had not reported final fiscal year 2002 financial data to MDE as of March 2003.

Table 2.1: Charter School and School District General Fund Balances as a Percentage of Expenditures, FY2002 General Fund Balance Charter Schools School Districts as a Percentage of Expenditures Number Percentage Number Percentage -2.5% or lower (Statutory Operating Debt) 8 a 12% 33 10% 0 to -2.5% 2 3 12 3 1 to 9% 21 31 98 29 10% or higher 36 53 200 58 No Financial Data Available 1 1

Total 68 100% 343 100%

NOTE: Fund balance is the unreserved/undesignated general fund balance less general fund encumbrances. The percentage is this net amount divided by general fund expenditures. a Includes two schools that closed in 2002 and were deemed to be in statutory operating debt though they failed to report complete fiscal year financial data.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

Low fund balances place charter schools at risk.

6 Prior to fiscal year 2001, the SOD calculation included the Food Service and Community Service funds. According to MDE, the statute was changed to more directly exhibit a district or charter's schools financial status because Food Service and Community Service funds cannot be used for K-12 operating expenditures. Similarly, other reserve accounts in the general fund are restricted to specific functions.

We identified 14 charter schools that were in financial difficulty at the end of fiscal year 2002 and were still operating at the time of our review. As shown in Table 2.2, eight of the schools had negative fund balances at the end of fiscal year 2002, including six schools in SOD. Five schools had positive ending fund balances but had operating deficits larger than their fund balances. One school failed to submit financial data to MDE. As noted earlier, two additional charter schools that had been open in fiscal year 2002 closed because of financial problems, and we did not include these schools in our detailed review. Including the two schools that closed, the 16 charter schools in financial difficulty accounted for about 24 percent of the 68 charter schools that were open in fiscal year 2002.

Factors Contributing to Financial Difficulty To better understand the set of circumstances that led to financial problems at each of the 14 schools, we analyzed revenue, spending and student demographic data, interviewed school and sponsor officials, and reviewed financial audit reports, annual reports, and other documents. This analysis showed that:

A variety of factors contributed to charter schools' financial problems, notably poor financial planning and insufficient monitoring of actual revenues and spending. When comparing the group of charter schools in financial difficulty with the remaining charter schools, we identified some differences in school characteristics, but none of these factors clearly distinguished charter schools in financial difficulty from those that were not. The schools in our financial difficulty group were more likely to be newer— open three or fewer years in fiscal year 2002— and more likely to be located in the Twin Cities metropolitan area. Of the 14 troubled charter schools, nine (64 percent) had been open three or fewer years. 8 In addition, 64 percent of all charter schools open in FY2002 were located in the seven county metropolitan area compared with 86 percent of the charter schools in financial difficulty (12 of the 14).

Charter schools in financial difficulty tended to spend slightly more on administrative expenses than other charter schools. As shown in Table 2.3, charter schools in financial difficulty spent about 19 percent of total expenditures on administrative and support costs, compared to about 15 percent for the other charter schools. 9 However, schools varied widely. Administrative expenditures for individual schools ranged from 5 percent to 34 percent for all charter schools and from 10 percent to 33 percent for charter schools in financial difficulty.

FINANCIAL MANAGEMENT We identified 16 charter schools in financial difficulty in fiscal year 2002, two of which have closed.

We included a school if expenditures minus operating revenues (excluding other sources of capital and transfers from other funds) exceeded the year-end fund balance and the fund balance was less than 5 percent of expenditures. 8 Of the 66 charter schools that were the subject of our broader analysis, 38 schools (58 percent) were in their first, second, or third year of operation in fiscal year 2002. The nine schools in our financial difficulty group accounted for 24 percent of the newer schools. The remaining five schools in our financial difficulty group accounted for 18 percent of the 28 charter schools that had been operating four or more years in fiscal year 2002.

Table 2.2: Charter Schools in Financial Difficulty, FY2002 FY2002 General Fund Fiscal FY2002 Balance as a Grades Year Revenues Less Percentage of Charter School Served Opened Location Sponsor Expenditures a Expenditures b Native Arts High School c 7-12 2001 Minneapolis Augsburg College No data reported No data reported Face to Face Academy 9-12 1999 St. Paul St. Paul Public $-98,226 -17.7% Schools

New Heights School K-12 1994 Stillwater Stillwater Public 8,176 -8.1 Schools Studio Academy 10-12 2001 Rochester College of 15,262 -6.2 Visual Arts d Heart of the Earth K-12 2000 Minneapolis Minneapolis 192,181 -4.4 Center for American Public Schools Indian Education New Visions School K-8 1995 Minneapolis Minneapolis -154,648 -4.2 Public Schools

Minnesota Institute of K-6 2001 St. Paul University of -332,457 -3.0 Technology St. Thomas Crosslake Community K-6 2001 Crosslake Department of -25,439 -2.0 School Education Excell Academy for K-4 2002 Brooklyn Park North Central -20,783 -1.3 Higher Learning University Agricultural and Food 9-10 2002 Little Canada Northeast Metro -80,118 0.3 Sciences Academy Intermediate School District High School for 9-12 1999 St. Paul St. Paul Public -25,917 0.6 Recording Arts Schools

HOPE Community K-4 2001 St. Paul University of -214,599 1.8 Academy St. Thomas

North Lakes Academy 6-9 2000 Forest Lake Department of -163,715 3.0 Education Odyssey Charter School K-11 1999 Brooklyn Osseo School -59,689 3.1 Center District

NOTE: The table excludes two schools (Martin Hughes and Mexica Multicultural) that were open in fiscal year 2002 but later closed due to financial problems. a The revenue amount used in this calculation excludes loans and transfers from other funds. b To calculate the fund balance percentage, we used the Department of Education statutory operating debt calculation formula: unreserved/undesignated general fund balance less general fund encumbrances divided by general fund expenditures. c As of April 2003, Native Arts had not submitted UFARS data or a financial audit report for fiscal year 2002.

d At the end of fiscal year 2002, the College of Visual Arts chose not to renew its contract with Studio Acadamy. Volunteers of America, a nonprofit organization, is the school's current sponsor.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

Statewide, schools in financial difficulty spent $877 more per student compared to other charter schools. However, some of this discrepancy reflects differences in spending between metro and outstate charter schools. For all charter schools, median expenditures per student for metro-area charter schools were $1,526 higher than for outstate charter schools ($10,143 per student for metro charter schools compared to $8,617 for outstate charter schools). Still, comparing metro charter schools only, median spending per student for the 11 metro schools in our financial difficulty group ($10,453 per student) was $567 higher than spending per student for other metro-area charter schools ($9,886 per student).

FINANCIAL MANAGEMENT 19 Table 2.3: Charter School Expenditures Per ADM, FY2002 Schools Not in Schools in Financial Financial Difficulty ( N= 52) Difficulty ( N= 13) All Charter Schools ( N= 65) Median Median Median Median Percentage Median Percentage of Median Percentage of Expenditures of Total Expenditures Total Expenditures Total per ADM Expenditures per ADM Expenditures per ADM Expenditures

Operating Expenditures Administration a $1,491 15. 4% $1,657 19. 5% $1,516 15. 5% Instruction 3,625 40. 8 3,959 38. 1 3,638 39. 7 Special Education 622 6.9 834 6.7 624 6.9 Food Service 248 2.4 235 2.5 235 2.5 Other Operating b 860 9.6 1,175 12. 1 905 9.7

Total Operating $7,294 79. 9% $8,289 81. 0% $7,432 80. 2% Nonoperating Expenditures Lease $1,322 13. 7% $1,459 14. 6% $1,353 14. 4% Other Nonoperating c 607 6.6 274 2.5 534 5.5 Total Nonoperating $1,937 20. 1% $1,805 19. 0% $1,910 19. 8%

Total Expenditures $9,321 100. 0% $10,198 100. 0% $9,367 100. 0%

NOTES: Our analysis excluded one charter school that, as of April 2003, had not reported any financial data for fiscal year 2002. Analysis also excludes two charter schools that were open in fiscal year 2002 and subsequently closed. Average daily membership (ADM) is the sum for all pupils of the number of days of the school year each pupil is enrolled divided by the number of days that school is in session. Data presented are medians and will not add to totals.

a "Administration" includes expenses for the school board, administration (e. g., principal and office staff), and central office services such as data processing and printing. b "Other Operating" includes, among other things, vocational instruction, instructional and pupil support services, building operations and maintenance, and student transportation. c "Other Nonoperating" includes capital outlay, community service (such as adult education), building improvements, and debt service.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

9 We had financial data for only 13 of the 14 charter schools in financial difficulty. Also, charter schools did not consistently use the same categories to report expenditures to MDE. As a result, we combined two related UFARS categories (administration and district support) for our analysis of administrative spending.

In our view, differences in school characteristics do not clearly explain why some charter schools ended up in financial difficulty while others did not, and differences in spending patterns indicate broader financial management issues. Each of the 14 schools had a unique set of circumstances that led to financial difficulties, but in general, the source of problems lay in the financial management decisions and practices of school administrators and boards. Among the 14 charter schools we reviewed in detail, we identified a number of common factors that contributed to financial difficulties at some or all of the schools.

Poor financial planning. According to charter school and sponsor representatives, poor planning and budgeting were at the root of financial difficulties at most of the 14 schools. Financial planning issues included: not having a budget; relying on one-year budgets that lacked out-year projections; overestimating student enrollment; using unrealistic assumptions regarding access to other funding sources, such as grants; and creating budgets that were not sufficiently detailed on the expenditure side. Several schools reported not having board-approved budgets until well into the school year, and one school operated two years in a row with board-approved deficit budgets (the assumption being that fundraising during the year would close the gap). Use of start-up grants also created problems for some new charter schools that relied too much on start-up money to create programs that could not be sustained with the normal aid streams.

Insufficient monitoring of actual to budgeted revenues and expenses. At many of the 14 charter schools, the director and board did not pay sufficient attention to or did not have systems in place to track actual revenues and expenditures to budgeted amounts. In some cases, the school director or board members did not grasp the importance of ongoing financial monitoring; in other cases, the director and board were not able to obtain reliable financial reports from their own accounting systems or from their contractors. For example, at one school that used in-house accounting, the financial manager was not able to produce reliable monthly financial reports. The bookkeeping problem at this school was so severe that the fiscal year 2001 financial audit report was not completed until March 2003 because of insufficient books and records. According to the directors at two other schools that used a management company, the company failed to provide accurate— or during some time periods, any— financial status reports for fiscal years 2001 and 2002. Other school directors said that they and their boards did not act quickly enough to cut costs when it became apparent that revenues and expenditures were out of line.

Lack of an independent school board. Governance issues associated with charter school boards were intertwined with financial planning and monitoring problems at some of the 14 schools. At some schools, the school director or other administrative leader also served as chair of the school board when the financial problems began. This left important budgeting and day-to-day financial management activities in the hands of one person, resulting in loss of accountability. At the time of our review, only one of the 14 schools still had this governance structure in place. Two other schools are or had been affiliated with a parent nonprofit organization, and decision making was impeded because it was unclear whether the school or the parent nonprofit was the authority. In other cases, the inherent conflicts of interest associated with a teacher-majority board exacerbated financial problems. For example, in at least one school, teachers were slow to react to revenue shortfalls because they were reluctant to cut their own salaries or lay off teachers.

Financial problems often resulted from the decisions and practices of charter school administrators and boards.

Misunderstandings regarding state requirements. Errors navigating the complexities of Minnesota's school financing system contributed to specific funding problems at several of the 14 schools, and understanding the array of state requirements was a general source of frustration. One problem for charter schools is improperly reporting enrollment because of misunderstandings regarding the definition of average daily membership. Other charter schools made errors related to special education and food service funding. In some cases, these errors meant that charter schools did not receive all of the aid to which they were entitled. In other cases, MDE audits revealed that charter schools had received too much aid, and the school did not have sufficient resources to reimburse the state.

Insufficient resources to handle unexpected expenses or low enrollment. Charter schools are often described as operating on a shoestring. Even with a solid business plan, unexpected expenses can have an adverse effect on a small school's finances. For example, one of the schools had been making headway on reducing its debt, when unexpectedly high heating costs in the winter of 2001 set the school back. Another school took out a four-year, $150,000 bank loan because it had insufficient resources to resolve a cash flow problem when a portion of state aid payments was deferred to the following year. Other charter schools found themselves in financial difficulty when the school opened with enrollment lower than planned or when enrollment dropped substantially from one year to the next and the school did not make spending cuts sufficient to cover the revenue shortfall.

In summary, many of the financial difficulties at the schools we reviewed stemmed from deficiencies in financial planning and day-to-day financial management and from governance structures that did not establish clear accountability. Interviews with administrators at the five schools identified as having strong financial management systems confirmed that charter schools need to directly address these issues to help ensure a school's fiscal health. Administrators at the five fiscally sound schools expressed common themes: develop budgets using conservative enrollment estimates; use multi-year budget projections to understand the implications of financial decisions; treat start-up grants as one-time money; recruit school board members with demonstrated skills in financial management; have qualified financial staff; provide the board with monthly reports that track revenues and expenditures to budgeted amounts; and make immediate adjustments to cut spending when revenues fall below projections.

Nearly all of the charter school administrators, board chairs, and sponsor representatives we interviewed (at the troubled and financially healthy schools) emphasized that a well-functioning board was essential to sound financial management. Many, however, said that the statutory requirement to have teachers hold a majority of board seats can undermine this goal. They argued that the teacher-majority structure carries with it inherent conflicts of interest that make financial management more difficult. For example, teachers on the board are both employees of and supervisors of the school director. Some school board chairs also noted that it is quite difficult for some teachers to avoid acting as teacher advocates rather than policy makers. Charter schools may request a waiver from the teacher-majority requirement. 10 According to MDE, six charter schools had waivers as of June 2003. MDE staff noted, however, that a charter school does not have to have a teacher-majority board until its third year of operation, and the agency expects to receive more waiver requests as newer charter schools approach the three-year mark.

FINANCIAL MANAGEMENT Minnsota's school finance system is complex and a challenge for charter schools to navigate.

Resolving Financial Problems During our interviews, we asked school representatives what steps they had taken to resolve their financial difficulties. We also obtained information from the recovery plans the six schools in SOD submitted to MDE. Our review showed that:

All of the 14 charter schools are taking steps to improve their financial status.

These steps focus on increasing revenue, cutting expenses, changing the school's day-to-day financial management, or modifying the budget process or school's governance structure.

Most schools are trying to increase revenue either by increasing enrollment or bringing in new sources of funding. Since most school funding depends on the number of students enrolled, retaining and recruiting students is critical to maintaining or increasing revenue. Several schools developed strategies to more aggressively recruit new students. These included: changing an after-school program to attract more student participation, adding a grade level to stabilize enrollment and to make the school more attractive to students, and adding transportation services to reduce student attrition. Charter schools also sought outside funding by seeking direct private donations and pursuing grants. Other revenue-raising strategies included increasing food prices to offset lunch program losses, selling educational services to other schools, and capturing (through more accurate record keeping and reporting) special education aid to which the school was entitled.

Nearly all schools also took steps to cut short-term or long-term expenditures. Because personnel costs are a major budget item, many of the schools cut spending on administrative and educational staff through layoffs, reducing schedules, and implementing salary freezes or reductions. Several schools achieved personnel cost savings by outsourcing benefit administration, changing insurance carriers, or requiring staff and students to perform additional tasks. One school started using teachers to oversee the lunch period (rather than aides) and reduced custodial costs by requiring students to help clean the school. Other cost-saving actions included dropping a money-losing hot lunch program, limiting instructional supplies, buying used textbooks, and increasing use of free community services. Other schools made fundamental changes to their programs to cut costs. In one case, the school spun off grades 10 to12 by establishing a new charter school that could access additional revenues through start-up funding. Several schools reduced or eliminated use of a year-round calendar option, and another school moved to a smaller location to reduce lease costs.

A well-functioning school board is essential to sound financial management.

10 Minn. Stat. (2002), §124D. 10, subd. 4( c).

Most schools changed their day-to-day financial management and monitoring practices. As discussed above, some of the charter schools did not have enough control over their financial records and day-to-day financial activities. They rectified this problem by hiring in-house business managers or changing contracting relationships to allow more control by the school. Some schools added procedures to control spending, such as requiring the use of purchase orders or reducing the use of credit cards. Several schools adopted a policy that managers would frequently review the school's financial situation and recommend changes to the board when assumptions changed or when actual revenues or expenditures did not match up with those budgeted. Administrators cited more frequent enrollment updates as key to keeping on top of the school's finances.

Some schools changed their governance structures or made other changes to improve administrators' and board members' financial management skills. In some cases, this involved creating an independent board membership and identity separate from a parent organization that had originally started the school. Several schools set up board committees that focus on certain tasks such as finance, planning, or management and expanded membership on these committees to other parents and community members with needed skills. One school uses a management team comprised of the school's principal, finance manager, and two board members to oversee school finances. Some of the charter schools with financial problems also sought additional training for administrators and board members, and most made extensive use of MDE staff expertise through frequent phone calls.

FINANCIAL MANAGEMENT 23 Financially troubled charter schools often instituted tighter controls on spending for classroom supplies. Many of the financially troubled schools cut staff or reduced pay and benefits.

Some troubled charter schools also changed their budget development and review processes. These changes included establishing a timetable and process for developing a budget and reviewing it mid-year, creating budget spreadsheets to model various assumptions, and budgeting over a multi-year period. Relying on more conservative budget assumptions also played a role in improving schools' fiscal positions, for example, by using more conservative enrollment projections or not including grants in revenue estimates until the grant is received. Several have included a reserve category in the budget. One school separated its start-up money from regular education aid, saving some of it for future needs.

FINANCIAL OVERSIGHT AND ASSISTANCE Charter school directors and school boards share responsibility for directly managing school finances, while sponsors and MDE each have oversight roles. As discussed in Chapter 1, MDE's obligations focus on proper disbursement of state and federal education aid and proper accounting for the use of those funds. Sponsors are expected to monitor and evaluate the charter schools' fiscal performance, though as we discuss below, the parameters of this responsibility are not clearly defined. Charter schools influence the extent to which MDE and sponsors are able to oversee and assist with financial management by controlling the flow of financial information. Our review focused on how sponsors and MDE have implemented their oversight authority and the extent to which they assisted charter schools in financial difficulty.

Department of Education MDE uses a variety of tools to help charter schools (and school districts) comply with school financing requirements and, in general, improve their fiscal condition and financial reporting. Among other things, MDE staff provide training and special workshops, report on data and calculations used to determine annual revenues and state aid payments, do enrollment and program audits, monitor and evaluate financial audit reports, and provide day-to-day assistance in response to questions. Overall:

MDE has initiated new efforts in recent years to more actively monitor charter school finances and to help charter schools improve financial management. The department's new efforts include checking the accuracy of enrollment reports through more frequent reporting and site visits, early intervention with charter schools showing signs of fiscal problems, and efforts to improve the quality and timeliness of day-to-day assistance.

The Department of Education oversees proper disbursement and use of education aid.

According to MDE finance and management staff, much of their work with charter schools focuses on new schools. One aspect of this assistance is quarterly monitoring of school enrollment so that state aid entitlements are adjusted to reflect actual enrollment several times during the year rather than in a single year-end adjustment. By law, this quarterly reporting is required for charter schools in the first three years of operation and is designed to alleviate problems associated with excessive over advances of state aid based on inflated enrollment estimates. 11 Because charter schools generally operate on small, tight budgets, most school and MDE officials we interviewed said that the quarterly monitoring was a good management tool, and several suggested that it be extended to all charter schools rather than only those in their first three years of operation. But, enrollment monitoring is not an automated process. MDE staff review revised enrollment estimates for reasonableness and visit each new charter school after the first quarterly report. Because of the effort required to confirm the accuracy of submitted enrollment data, MDE said that extending this monitoring activity to all charter schools would probably require changing the current part-time assignment to full-time. Currently, charter schools that have been operating four or more years are not required to adjust enrollment projections, but may submit revised enrollment data throughout the year. Those that overestimate enrollment and do not make interim adjustments will have to repay the state when actual revenues are calculated based on final reported enrollment.

In fiscal year 2001, MDE finance and management staff initiated an early intervention effort to identify charter schools and school districts at risk of falling into SOD. MDE identifies charter schools and school districts for this "watch list" based on the prior year's financial data and other available information. Indicators include such things as size of a prior year deficit relative to fund balance, deficits in special revenue accounts, or deficit spending several years in a row. According to MDE, staff provide one-on-one assistance to charter schools and districts on the watch list. Staff use schools' budget and financial data to demonstrate to administrators and school boards that they need to take near-term actions to increase revenues, make appropriate spending cuts, and institute a fiscal policy that does not allow deficit spending. According to MDE and charter school administrators, MDE staff provide a similar level of assistance to charter schools in SOD.

In addition to assisting charter schools on the watch list and in SOD, MDE staff provide ad-hoc technical assistance to charter schools. According to MDE, financial management staff made a concerted effort in the past few years to be more proactive in advising charter schools and more timely in responding to questions regarding financial management. Nearly all charter school officials interviewed during our review gave MDE staff high marks for the quality and timeliness of this question-and-answer assistance. At one school, for example, staff called MDE on nearly a daily basis after realizing the extent of their financial troubles.

FINANCIAL MANAGEMENT The department initiated an early-intervention effort to help charter schools at risk of financial problems.

11 Minn. Stat. (2002), §124D. 11, subd. 9( d). In general, a charter school or district receives aid for a fiscal year based on enrollment projections made early in the year. An adjustment payment, either from the school to the state or vice versa, is made at the end of the year if actual enrollment differs from projections. Some charter schools have gotten into financial difficulty when they seriously overestimated enrollment and were not able to repay the state.

MDE provides training on a variety of school finance issues, but based on our review, charter school administrators and boards are not uniformly taking advantage of these or other training opportunities. By law, MDE is required to provide financial management training on an ongoing basis to charter school board members, but the workshop MDE offers to meet this requirement is limited. 12 According to MDE, the agency requires interim board members at new charter schools to attend a full-day training workshop for newly approved schools. Instruction regarding the functions of a charter school board is one segment of this training. At their choice, board members can attend other MDE classes. Among other workshops, MDE offers a two-day Charter School Business Management workshop. We requested from MDE fiscal year 2003 training dates and attendance information for this training. According to the data provided, MDE held two sessions prior to the start of the 2002–2003 school year (one in July and another in August 2002). Attendance rosters showed that 38 charter schools sent at least one representative, though many sent two or three; five attendees representing three schools were listed as being school board members. Based on our interviews, the schools that have sent staff to MDE workshops found them to be helpful.

Some charter schools reported that administrators and board members were getting financial management training from other sources, including the Minnesota School Boards Association, the Minnesota Association of Charter Schools, and organizations that teach nonprofit management. However, some boards among our financially troubled schools still had not sought training in general board responsibilities or school financial management. While this lack may not be as significant for boards that have members with previous board or management experience, lack of training is a concern for charter school boards whose members are predominantly teachers or others who may lack such experience.

To help new charter schools stay on budget, MDE monitors quarterly enrollment reports. Charter school administrators and boards are not uniformly taking advantage of training opportunities.

12 Minn. Stat. (2002), §124D. 10, subd. 4( e).

Although MDE receives generally high marks from charter schools for the training and technical assistance it provides, it is unclear whether MDE will be able to sustain this level of assistance in the wake of budget cuts and staff reductions. Prior to the advent of charter schools, MDE worked with about 340 school districts. Because each charter school functions as its own district, growth in the number of charter schools combined with the level of assistance each new school generally needs has created a growing workload for MDE staff. Since fiscal year 2000, MDE has increased by about three full-time equivalent positions the amount of staff time allocated to charter schools, though the number of staff members who work with charter schools full-time, or nearly so, has declined.

In its 2003 reorganization, MDE managers said the department employed a strategy of making part-time charter school assignments to various staff specialists rather than employing as many full-time charter school generalists. Specific to financial management, for example, MDE had a full-time staff member devoted to a range of charter school financial management issues but eliminated this position when the imcumbant left early in 2003. According to MDE, the responsibilities included in this position were reassigned to four other staff on a quarter-time basis. Also as part of the reorganization, MDE made three part-time assignments at one-quarter time each for (1) revenue budgeting, (2) enrollment projections and pupil transportation, and (3) financial accounting, expenditure budgeting, and general financial management issues. As of June 2003, MDE has 25 staff members, including support staff and supervisors, in the school finance area who have charter school responsibilities on a part-time basis (with time allocated to charter school responsibilities ranging from 2 to 33 percent) but no staff assigned full-time to charter schools. MDE managers said that one staff member will be designated as a point of contact for charter schools and will refer schools to appropriate specialists as needed.

Sponsors As discussed in Chapter 1, charter school law gives sponsors general responsibilities to monitor a school's fiscal status and to evaluate its overall performance. The law also requires charter schools to provide a sponsor with annual financial audits and other annual performance reports if the sponsor requests them. At the start of our review, we assumed that charter school sponsorship was not intended to be a passive activity, particularly for new charter schools or charter schools showing signs of financial difficulty. We evaluated sponsors' oversight from this point of view, assessing the extent to which sponsors sought and received information about charter schools' financial status and the extent to which sponsors helped schools improve their fiscal condition. Our work focused on the 11 organizations that sponsored the 14 schools we reviewed in depth. In total, these 11 organizations sponsored about half of the charter schools open in fiscal year 2002. We found that:

The role of charter school sponsors is ill defined, and the scope and nature of sponsors' financial oversight activities varies widely.

While charter school law provides only a broad statement of a sponsor's role, schools and sponsors can use the charter school contract to spell out specific terms and conditions of financial oversight, though none of the 14 charter schools chose to do so in detail. MDE provides charter schools with a model contract, but the financial management section, as shown in Table 2.4, is broadly worded and generally restates or refers to statute. Few of the 14 contracts deviated significantly from the model language, clarified specific obligations, or set performance expectations (e. g., timely record-keeping, training requirements, use of a realistic budget, reaching a specific fund balance). The contracts also did not clarify how the sponsor would oversee financial management or the extent to which the sponsor would provide assistance.

FINANCIAL MANAGEMENT State law provides only a broad statement of a sponsor's role. 3

Among sponsors included in our review, interactions with charter schools ranged from a hands-off approach that consisted primarily of the schools sending required annual reports to more active efforts during the school year to understand schools' operations and financial status. Most of the 11 sponsors— a mix of school districts and educational institutions— limited their information gathering to use of annual reports and perhaps an annual meeting. Others were more active in seeking information about charter school operations by requiring more frequent financial reports or having a charter school liaison visit the school or attend board meetings. One university, for example, provided written expectations regarding financial reports and has a charter school liaison who visits its three charter schools and attends some board meetings.

Table 2.4: Financial Management Provisions in the Department of Education Model Charter School Contract

The charter school must: use UFARS financial accounting principles and methods;

comply with MARSS requirements for student accounting; have all accounting records audited annually by a public accounting firm engaged by the charter school board of directors;

comply with the same financial audits, audits procedures, and audit requirements of school districts (Minnesota Statutes sections 123B. 75 to 123B. 83) except when deviations are necessary because of the program of the charter school. provide the sponsor with a final copy of the annual audit within fifteen (15) days of its completion and acceptance.

The Department of Education, the State Auditor, or Legislative Auditor may conduct program, financial, and compliance audits.

NOTE: UFARS is the state's financial reporting system, and MARSS is the state's student attendance reporting system. SOURCE: Department of Children, Families, and Learning, Model Charter School Contract; http://cfl.state.mn.us/charter/modelcontract.pdf; accessed May 14, 2003.

Sponsors generally did not use their contracts to establish detailed financial management expectations.

13 In 2002, St. Paul Public Schools also hired a charter school liaison in an effort to be a more active sponsor.

The extent to which sponsors assisted charter schools in financial difficulty also varied, and the level of assistance was a point of contention between some of the 14 schools and their sponsors. As discussed above, some sponsors were not actively involved in monitoring charter school finances and, hence, provided little, if any, assistance. Other sponsors were more aware of ongoing problems, and provided some assistance. One sponsor, a university, spoke to the school director and school board chair about strategies for resolving problems with a management company and stressed the importance of obtaining accurate financial data. Another sponsor, a public school district, supplied the names of staff at the district and at MDE who could answer questions related to the school's specific problems (this sponsor's liaison did not have a background in school financial management). The charter schools involved did not always see this assistance in the same light and expected sponsors to do more. In the former case, the charter schools involved wanted the sponsor to intervene with a management company that was not providing adequate financial services. In the latter case, the school was already deeply in debt before the school district became involved, so school officials felt the sponsors' help was inadequate and untimely. Based on their experiences, several of the charter schools interviewed were considering seeking a new sponsor.

Misunderstandings between some of the schools included in our review and their sponsors highlight broad expectation gaps regarding sponsorship. Almost across the board, sponsors, school administrators, and others said that they did not clearly understand the role of the sponsor beyond the few specifics in charter school law. Views on what sponsors are supposed to do ranged from sponsors actively pushing charter schools to better fiscal and academic performance, to providing guidance only during start up, to being ongoing partners in developing academic programs without any oversight responsibility. Still others said that sponsorship had little practical value and should be eliminated as a requirement.

In our view, charter schools in Minnesota require active financial oversight, and by law, sponsors are to play a role. The division of oversight responsibilities between MDE and sponsors, however, is an open question that needs to be resolved in order to hold both parties accountable for adequate oversight. Among the 14 schools, most looked to MDE for practical assistance understanding revenue streams, meeting reporting requirements, and correcting deficiencies in financial management practices. Still, according to MDE and charter school officials, MDE generally got involved with these schools when it noticed a red flag indicating that financial problems already existed. Because their role is not adequately defined, it is not clear how much sponsors should be held accountable for failing to ensure that charter schools had the basic financial management capacity required to prevent problems. We discuss charter schools' readiness to manage business operations in more detail below.

Many sponsors had a hands-off relationship with their charter schools.

The extent to which sponsors should actively assist charter schools was a point of contention between some schools and their sponsors.

13 In spite of these reporting expectations, two of the three charter schools the university sponsored could not provide the requested financial information. We discuss problems with the timeliness and accuracy of charter schools' financial reports later in the chapter.

Financial Reporting MDE counts on financial audit reports and transmittal of detailed financial and enrollment data to monitor schools' financial status and compliance with various laws. As discussed above, sponsors also rely heavily on annual audit reports to oversee a school's fiscal performance. Both parties' ability to detect financial problems was impeded because of late and incomplete financial reporting. We found that:

About 30 percent of charter schools missed deadlines for reporting fiscal year 2002 financial information to MDE, though timeliness improved compared to previous years. Charter schools are more likely to miss critical financial reporting deadlines than school districts, although timely reporting by charter schools has improved. Of the 66 charter schools included in our analysis, 19 (29 percent) missed MDE's November 30, 2002, deadline for posting summarized audit data in UFARS compared to about 14 percent of school districts. An even higher proportion (50 percent) of the 14 charter schools in financial difficulty missed the deadline. Nineteen charter schools (29 percent) also missed the December 31, 2002, deadline to submit financial audit reports compared to 12 percent of school districts. However, charter schools have improved their timely submission of financial audits. Among 56 charter schools open in fiscal years 2001 and 2002, the percentage of late and missing audits declined from 63 percent for fiscal year 2001 to 29 percent for fiscal year 2002. The 12 schools in our financial difficulty group that were open both years did not show the same improvement, with 50 percent in each year missing the audit report deadline. 14

While late data and report submissions, in and of themselves, raise a red flag regarding financial management, the missing data make it more difficult for MDE to get a handle on the specifics of a school's situation. In January of each year, for example, MDE prepares a report on charter schools and school districts that ended the prior fiscal year in SOD. This designation relies on a reconciliation of financial audit reports and detailed financial data transmitted electronically. According to MDE, schools that fail to submit required financial data are excluded from the SOD analysis and are not subject to the legal requirements or scrutiny that apply to schools in SOD status. They are not required by law to submit a recovery plan and are not subject to a penalty.

MDE has little power to force charter schools to report financial data on time. If a school is in SOD status, MDE must withhold aid payments if the school does not submit on time a plan for getting out of debt. 15 MDE does not have similar authority to penalize schools that submit late UFARS data or late financial audit reports. Rather, MDE relies on phone calls and letters urging late charter schools and school districts to comply.

Charter schools were more likely than school districts to miss financial reporting deadlines.

14 To avoid confusion, our analysis of reporting timeliness excluded the two charter schools that closed, although they were required to submit fiscal year 2002 financial data and an audit report. With the two closed schools included, 31 percent of 68 charter schools missed the November and December deadlines.

Year-end financial reporting is important, but another indicator of financial management problems at charter schools is the lack of timely, accurate financial data needed to manage finances throughout the year. Among the schools we reviewed, absence of such data not only undermined day-to-day management at the school, but limited the sponsors' ability to understand the school's fiscal status as well. In one case, a sponsor noted, a charter school's financial data was so poor that 21 months elapsed between the time the sponsor reviewed the fiscal year budget and receipt of the financial audit report showing that the school had generated a large deficit. By that time, the sponsor had already reviewed a budget for a second fiscal year that, it turns out, was grossly inaccurate.

Assessing Charter Schools' Readiness to Open MDE and sponsors tended to become more active in overseeing charter schools after schools were already in debt or otherwise struggling. But, the root causes of financial problems are often related to long-standing deficiencies in financial management skills and systems. We found that:

Gaps in the charter school approval and planning process allowed some charter schools to open without sufficient capacity to manage school finances. Although charter schools go through a planning phase before opening the doors to students, some schools were not ready to operate from a financial management perspective. Among the 14 schools we reviewed, many of the administrators and board chairs said that early mistakes and "lack of readiness" were at the root of current financial problems. MDE staff and sponsor representatives we interviewed agreed.

MDE approves charter school applications on the basis of a written proposal. Once a charter school is authorized through a contract with its approved sponsor, it is eligible to apply for federal planning funds to implement its development plan. Some of the 14 schools that we reviewed spent little time in this planning phase. Two schools, for example, were approved late in the spring and opened in the fall of the same year. In response to problems associated with having only a few months between approval and opening, MDE strongly recommends that charter schools apply for authorization by March 1 of one year to open in September of the following year in order to have 12 months of federally-funded planning time.

The Department of Education encourages charter schools to take advantage of 12 months of federally-funded planning time.

15 Minn. Stat. (2002), §124D. 10, subd. 8( i) and §123B. 81, subd 4.

Once a charter school is approved, neither MDE nor sponsors have a means to stop a school from opening short of terminating the school's contract. Sponsors have a window of opportunity to withdraw from the sponsoring relationship in the 90-day period between initial approval for the school and the deadline for a signed contract between the school and a sponsor. One of the sponsors we interviewed declined to sign the initial contract with a charter school when planning for the school was not proceeding as the sponsor wanted it to. (The charter school in question went on to find another sponsor and intends to open in fiscal year 2004.) Otherwise, the decision to move from a planning stage to enrolling students is largely left up to charter schools.

An extended planning period is important, but ensuring that a school acquires staff with the necessary expertise and sets up financial systems and controls is even more so. One of the sponsors we interviewed uses a start-up checklist that, among other things, tracks progress in setting up the business side of school operations. Other interviewees also cited specific tasks that should be completed during a school's planning phase. Although we did not develop a comprehensive list, suggested benchmarks that new charter schools should meet before opening include having:

a comprehensive, multi-year business plan that includes budget projections and a marketing plan supporting enrollment projections;

a financial manager (or other administrative staff) on board and trained in all state reporting systems and procedures; written financial management policies, including controls over check writing, cash, and access to accounts; financial management software installed and tested; a schedule for producing financial reports that will be used to monitor cash flow and to track actual revenues and expenditures to budget; and board members with financial expertise.

Ensuring that new charter schools have the capacity to manage business operations before enrolling students should be a high priority.

The decision to move from the planning stage to enrolling students is largely left up to charter schools.

A final check to ensure that charter schools have these people and systems in place could be the responsibility of either the sponsor or MDE, though MDE managers told us that the department's preference is for sponsors to be actively involved in ensuring that charter schools meet these benchmarks with MDE making the final check.

CONCLUSIONS Legislative changes in 2001 tightened controls over charter school financial management, but we found that gaps remain. While many of Minnesota's charter schools are financially sound, we identified at least 16 charter schools that had financial problems of varying degrees of severity at the end of fiscal year 2002. Key factors underlying these problems included deficiencies in financial management policies and poor decisions made by school administrators and boards. Many of the charter schools we reviewed in depth were suffering the consequences of early mistakes and not acting decisively enough when problems, such as lower than expected enrollment, arose. In addition, charter schools as a group have a poor track record meeting year-end financial reporting deadlines, which makes it more difficult to detect problems. Although a variety of factors affect the quality of charter school financial management, the experience and technical expertise of charter school administrators and board members is critical. Adequate training for board members, administrators, and business managers is crucial. Systematically assessing whether new charter schools have the capacity to manage the school's business operations before students are enrolled should also be a high priority.

MDE and sponsors both have oversight roles with respect to charter school financial management. MDE monitors charter schools through systems for controlling payment and use of state education aid and has, in recent years, initiated several well-received efforts to better assist charter schools. The value of sponsors' contributions to financial oversight is less clear. Assessing the sufficiency of sponsors' oversight activities was difficult because expectations for their performance in law, contracts, or policy are vague. If one assumes that sponsors are, at least to some extent, responsible for actively ensuring that charter schools have in place sound financial management systems, then many sponsors included in our review failed to meet that expectation. Many had a hands-off relationship with their schools, and if they got more actively involved, it was generally after significant financial problems had already surfaced. Financial oversight based merely on review of annual audit reports may be appropriate for charter schools with a track record of sound financial management, but is not sufficient for new or struggling schools that would benefit from active oversight. Most of the sponsor representatives we interviewed argued that ultimately, it was not a sponsor's responsibility to manage the school's finances, and we agree. But, if sponsors are to serve as financial overseers, we find it appropriate for sponsors to do more than watch from a distance.

FINANCIAL MANAGEMENT RECOMMENDATIONS Strengthen Charter School Financial Management

RECOMMENDATIONS To enhance charter school administrators' and board members' capacity to manage school finances, MDE should:

Implement a two-stage approval process that requires new charter schools to demonstrate that they have skilled personnel and financial systems in place before enrolling students;

Modify the model charter school contract to include more detailed requirements regarding budgeting, financial reporting, and training for school administrators and board members;

Enhance training offered to charter school board members to better meet the intent of the law; and

To the extent possible, expand quarterly enrollment monitoring to all charter schools.

MDE, in conjunction with the Charter School Advisory Council, is considering options to modify the charter school approval process to include some type of readiness check before a new school opens. Still in the early stages of discussion, the department is considering such issues as how formal the assessment should be and the benchmarks that charter schools should meet before opening. Assuming that MDE identifies requirements for training, budgeting, and financial policies and controls, these benchmarks could serve as a good starting point for modifying the model contract as well. While sponsors and charter schools are not obligated to follow MDE's model, the contracts we reviewed closely mirrored the MDE language. Because we see no reason for this pattern to change and because the language can be modified to reflect a charter school's unique circumstances, we think the model contract is a good vehicle for establishing more specific expectations for financial management and fiscal performance.

As MDE acknowledges, the financial management training that MDE currently offers to fulfill its obligation to provide school board member training is quite brief and is limited to interim board members available at that time. Because charter school boards play a critical role setting financial policy and monitoring fiscal status, training should be more thorough and offered more frequently. To meet its obligation, MDE may be able to facilitate access to board training offered by other organizations.

As discussed earlier in the chapter, charter schools have found that quarterly enrollment monitoring (and any resulting adjustments to aid payments) to be a very useful tool, and administrators that we interviewed suggested that it would equally benefit older charter schools, not just those in the first three years of operation. We qualified our recommendation because of the clear resource constraints associated with it. While we support use of site visits to confirm data reports, MDE may be able limit the cost of implementing this proposal by limiting visits only to new schools and those older schools for which MDE has information indicating a possible problem.

Improve Oversight

RECOMMENDATIONS To improve oversight of charter school financial management:

MDE should initiate a process to more clearly define the scope and nature of the sponsor's role regarding charter school financial management and recommend to the Legislature any needed changes to charter school law.

The Legislature should consider amending charter school law to state that charter school contracts may be terminated for repeated failure to meet deadlines for submitting financial data and financial audit reports.

The Legislature should consider amending charter school law to remove the requirement that teachers constitute a majority of charter school board members.

We think there is a clear need to clarify a host of issues related to charter school sponsors, starting with basic questions regarding their purpose and, assuming that sponsors are still found to be necessary, their scope of responsibility and expected outcomes of their actions. We expect the process to distinguish more clearly between MDE and sponsors' obligations and to identify the training and resources needed to implement the sponsorship model. While we recommend that MDE initiate this process, other groups need to be involved, including the Charter School Advisory Council, sponsors, charter schools, and other interested groups.

While the situation has improved over the past several years, late reporting of UFARS financial data and financial audit reports is still a problem that impedes timely oversight of charter schools' financial status. At this time, MDE does not have a clear, effective mechanism to enforce reporting deadlines. Making failure to meet these deadlines grounds for terminating the charter school's contract gives MDE some "teeth."

The requirement that teachers constitute a majority of charter school board members has created governance challenges of sufficient magnitude that more flexibility is in order. Of primary concern are the conflicts of interest inherent in such a structure with teachers being both supervisors and employees of school directors. In addition, the requirement limits charter schools' abilities to recruit a sufficient number of board members with desired skills and experience and places a particularly difficult burden on teachers at very small charter schools. If the Legislature decides that teachers should continue to be represented on charter school boards, we suggest teacher representation be less than a majority.

Lease Aid SUMMARY Charter schools are not allowed to issue bonds or levy taxes to pay for building space. Instead, the state provides lease aid that reimburses charter schools for a large portion of building lease costs. Charter school administrators view lease aid as essential to charter schools' financial viability. Without it, charter schools would have to rely on general education aid to pay for a school building. Although good comparisons are difficult to make, charter school lease rates appear to be reasonable when compared to rates state government pays to lease office space. In addition, charter schools generally lease less space than the amount called for in Minnesota Department of Education guidelines. Although state law prohibits charter schools from issuing bonds and from acquiring buildings with state funds, 11 charter schools have established affiliated nonprofit building corporations that issued bonds or obtained loans to acquire school buildings. Charter schools then leased the building from the affiliated corporation. We think the time is right for the Legislature to once again weigh the advantages and disadvantages of allowing charter schools to buy buildings.

Under state law, charter schools cannot use state funds to acquire land or buildings. 1 They are also prohibited from levying taxes or issuing bonds, methods used by traditional school districts to pay for facilities. 2 As a result, charter schools lease space from a variety of public and private entities. Recognizing that operating capital revenue included in the general education formula was not sufficient to fund appropriate facilities as well as other capital needs, the 1997 Legislature established building lease aid to help charter schools pay for leased space. 3

This chapter addresses the following question: Is the lease-aid program an effective way to help charter schools obtain school facilities?

To answer this question, we interviewed Minnesota Department of Education (MDE) staff about the lease aid program, and we analyzed data collected by MDE on lease expenditures and lease aid payments for charter schools operating in

1 Minn. Stat. (2002), §124D. 11, subd. 7. 2 Minn. Stat. (2002), §124D. 10, subd. 25( b). 3 Laws of Minnesota (1Sp1997), ch. 4, art. 5, sec. 13. fiscal year 2003. To determine the reasonableness of lease expenditures, we compared the rates that charter schools pay for leased space to rates that the State of Minnesota pays for leased office space in the same area. In our interviews with charter school administrators and board chairpersons, we included questions about facilities and lease aid. Finally, we interviewed officials from 14 additional charter schools to learn more about their facilities and leasing arrangements.

IMPORTANCE OF LEASE AID If it finds the lease to be appropriate, MDE will reimburse charter schools for 90 percent of the amount they pay to lease building space up to a maximum. For fiscal year 2003, the maximum is $1,500 per pupil unit. 4 Lease aid may not be used for custodial, maintenance, utility, or any other operating costs. Although not the major source of funding,

Lease aid is an important component of charter school financing. Total lease aid payments (in constant 2003 dollars) increased from $1.3 million in fiscal year 1998, the first year charter schools were eligible to apply for lease aid, to $15.1 million in fiscal year 2003. 5 This increase is due primarily to the increase in the number of charter schools and the number of students attending charter schools. As shown in Figure 3.1, after adjusting for inflation, lease aid has averaged about $1,100 per pupil unit since fiscal year 2001. 6 The sharp increase in lease aid per student between 1999 and 2000 is the result of a change in the lease aid formula. The 1999 Legislature increased the percentage of lease expenditures eligible for reimbursement from 80 to 90 percent. 7

As shown in Table 2.3 in Chapter 2, lease expenditures accounted for 14 percent of charter school spending in fiscal year 2002. In total, charter schools collected $12.1 million in lease aid in 2002, accounting for 12 percent of their revenues. Total lease aid for fiscal year 2003 will be about $15.1 million, with all but 1 of the 76 charter schools operating receiving lease aid. 8 The amount of lease aid varied widely among schools, ranging from $11,611 to $873,547, with the average school receiving $201,943. Table A. 5 in the Appendix provides detailed information about lease expenditures and lease aid for the charter schools operating in 2003.

Because charter schools may not issue bonds or levy taxes, the state provides lease aid to help pay for facilities.

4 Minn. Stat. (2002), §124D. 11, subd. 4. As discussed in Chapter 1, "Pupil Units" equal average daily membership with students weighted by grade level. Average daily membership (ADM) is the sum for all pupils of the number of days of the school year each pupil is enrolled divided by the number of days that school is in session. Lease aid for fiscal year 2003 was less than expected because the 2002 Legislature required MDE to reduce lease aid for all charter schools by an amount sufficient to make retirement contributions for former employees of charter schools that closed without making the required contributions. Laws of Minnesota (2002), ch. 392, art. 6, sec. 4. As a result, MDE reduced total 2003 lease aid by $282,210; each charter school's lease aid was reduced by about 1.8 percent. 5 All amounts cited for fiscal year 2003 are preliminary and subject to final enrollment counts. Seventeen percent of 2003 lease aid revenue is deferred until fiscal year 2004.

6 Our inflation adjustment was based on the Bureau of Labor Statistics' consumer price index for all urban consumers (CPI-U); http://data.bls.gov/cgi-bin/surveymost; accessed May 16, 2003. 7 The 1999 Legislature also increased the maximum amount allowed from an amount based on the state average debt service revenue plus capital revenue to $1,500 per pupil unit. Laws of Minnesota (1999), ch. 241, art. 5, sec. 12. 8 Eci' Nompa Woonspe in Morton owns its building, which it received as a gift, and did not request lease aid.

Our interviews with charter school administrators included several questions about their building leases and lease aid. We found that:

Charter school administrators believe that lease aid is essential to charter schools' financial viability.

All of the charter school administrators we interviewed said that they rely heavily on lease aid as an integral part of their funding. For example, one charter school administrator said: "Lease aid is extremely important to charter schools. [Our school] would not be financially viable without it." Another administrator pointed out the practicality of lease aid when he commented: "This is a good way to help schools. Giving charter schools bonding options in addition to districts would be a public relations nightmare. The public would not understand why there were multiple bonds." Some charter school officials felt compelled to tell us that lease aid is inadequate. According to one administrator: "This is a great system, and we could use more of it. Why is only 90 percent reimbursed? Even that 10 percent takes away from the program."

Because fiscal year 2003 lease aid is capped at $1,500 per pupil unit, 12 of the 75 charter schools (16 percent) receiving lease aid in 2003 will receive less than 90 percent of their actual lease costs. 9 On average, lease aid will cover about 85 percent of lease expenditures in 2003. The 2003 Legislature reduced the maximum lease aid payment for new charter schools to $1,200 per pupil unit. 10 This could potentially reduce the amount of lease aid for many new charter schools. For example, had the $1,200 per pupil unit limit been in effect for all charter schools in 2003, 35 (47 percent) would have received lease aid of less than 90 percent of lease expenditures.

LEASE AID 39 $0 $200 $400 $600 $800 $1,000 $1,200

1998 1999 2000 2001 2002 2003

2003 Dollars

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

Figure 3.1: Average Lease Aid Per Pupil Unit, in Constant Dollars, FY1998-2003

Fiscal Year NOTE: Pupil units are a measure of average student enrollment weighted by grade level. Dollar values were adjusted for inflation using the Bureau of Labor Statistics' consumer price index for all urban consumers (CPI-U).

In recent years, lease aid has averaged about $1,100 per pupil unit.

9 This calculation is before the 1.8 percent reduction in fiscal year 2003 lease aid (see footnote 4).

REASONABLENESS OF LEASES State law lists three criteria that MDE must use to determine whether a charter school's request for lease aid will be approved. The criteria are: (1) the reasonableness of the price based on current market values; (2) the extent to which the lease conforms to state laws and rules; and (3) the appropriateness of the lease in the context of the space needs and financial circumstances of the charter school. 11 In addition, charter school buildings must meet state and local health and safety requirements. 12 Charter schools may not lease property from a related party unless the party is a nonprofit corporation or a cooperative. 13

When it receives a request for lease aid, MDE reviews the lease to determine the reasonableness of the price and the appropriateness of the space. MDE does not use a formula to determine reasonableness. Rather, it considers each lease as a separate case, sometimes comparing the lease to rates paid by other charter schools in the area and sometimes examining local newspaper advertisements or consulting local realtors to determine if the school's rate is consistent with local rates. For fiscal year 2003, MDE assigned one full-time staff person to lease aid and a range of other financial management issues involving charter schools. In prior years, that person was assisted by a supervisor with general responsibility for school facilities who made site visits to examine the suitability of the facility and the appropriateness of its space. 14 The supervisor's position was eliminated in March 2002, and MDE now requires that charter schools submit pictures of the space, recent building inspection and fire marshal reports, and other documentation with the lease aid application. As discussed in Chapter 2, MDE recently eliminated the full-time position and added lease aid responsibilities to another staff position in fiscal year 2004, with 25 percent of that person's time allocated to lease aid. 15

Due to staff reductions, Department of Education staff no longer make site visits to assess whether lease rates and building space are appropriate.

10 Existing charter schools would get the greater of $1,200 per pupil unit or the amount of lease aid they received per pupil unit in 2003. Laws of Minnesota (1Sp2003), ch. 9, art. 2, sec. 28. 11 Minn. Stat. (2002), §124D. 11, subd. 4. 12 Minn. Stat. (2002), §124D. 10, subd. 8. MDE requires that charter school buildings be inspected by the State Fire Marshal's Office for compliance with fire safety codes, be inspected for asbestos by an inspector accredited by the Environmental Protection Agency, meet federal and state laws requiring accessibility for people with disabilities, have an emergency evacuation plan, and comply with an MDE checklist of other health and safety requirements. 13 Minn. Stat. (2002), §124D. 10, subd. 23a. 14 According to MDE, the supervisor visited most of the new charter schools that opened between 2000 and 2002 and about half of the established schools that had opened in the 1990s.

15 A second person will be responsible for calculating lease aid. Ten percent of that person's time will be devoted to lease aid.

State law requires MDE to consult with the Department of Administration before approving a charter school lease with a for-profit or sectarian organization. 16 MDE routinely sends copies of all new charter school leases to the Department of Administration, but as a practical matter, not until after the leases are signed. Administration Department staff review the leases, sometimes noting terms that could be unfavorable to the school, and return them with attached comment sheets to MDE. Since the leases have already been signed, the Department of Administration's comments have little impact. In general, MDE officials told us that MDE rarely rejects a charter school lease agreement.

To independently assess the reasonableness of charter school lease rates, we compared them to rates that the state pays for leased office space in the Twin Cities metro area and outstate. Table 3.1 presents the results of our analysis. We found that:

Charter school lease rates appear to be reasonable when compared to state government leases in the same geographic areas.

On average, Twin Cities metro-area charter schools paid $11.48 per square foot in 2003 whereas the state paid an average of $16.67 per square foot for its metro-area office space. Outstate differences were smaller: $9.76 per square foot for charter schools verses $11.36 for state offices.

This comparison has several shortcomings. First, we did not have information on the condition of the state-leased buildings, nor did we have information about the desirability of the location, factors that could influence lease rates. Second, we did not have information about the terms of the state leases, such as whether maintenance and utilities were included. Third, state office buildings may cost more to construct and maintain because they tend to be divided into smaller units (offices or cubicles) than classrooms. Fourth, school buildings may have special requirements, such as space for auditoriums, gyms, cafeterias, and laboratories, which may increase their cost or require remodeling. Some of the charter school lease expenditures included one-time renovation costs that rolled into the lease rate, and others included separate agreements to rent gym space (sometimes from a nearby health club). 17 Nevertheless, we think this comparison provides a general picture of the reasonableness of lease rates.

LEASE AID Table 3.1: Lease Rates Paid by Charter Schools and the State of Minnesota, March 2003 Metropolitan Area Outstate Average Rate Average Rate Per Square Foot N Per Square Foot N Charter Schools $11. 48 47 $9.76 28 State of Minnesota 16. 67 141 11. 36 285

SOURCE: Office of the Legislative Auditor analysis of data from the departments of Administration and Education. Charter school lease rates compare favorably with rates the State of Minnesota pays for office space.

16 Minn. Stat. (2002), §124D. 10, subd. 17.

As a secondary check on the reasonableness of charter school lease rates, we compared a subset of charter school leases to commercial lease rates for some metro area cities using listings on the Minnesota Commercial Association of Realtors web site. 18 Again, we did not have information about the terms of the lease, the condition of the building, or the desirability of the location. In addition, we restricted our comparison to the metro area because there were too few outstate listings. Our analysis indicated that advertised commercial lease rates in the metro area averaged about $12 per square foot. This is above the average rate paid by metro charter schools, but below the rates for metro office space that the state is paying (possibly the result of differences between state and commercial office space or perhaps due to recent market trends not reflected in the state's existing leases).

Charter schools' fiscal year 2003 lease rates vary considerably, from a low of $1.95 per square foot to a high of $21.92. From our discussions with school administrators, we learned that schools lease space from a variety of sources. Some have been able to find space at low rates in older, unused buildings owned by a local school district (which is often the school's sponsor), a church, or an affiliated organization. Others have had to lease from private developers at higher rates. For each school, we compared the rate it paid to the rate the state of Minnesota paid for office space in the same city or county. 19 Only seven charter schools paid rates that were more than 10 percent higher than the rates paid by the state for offices in the same city or county. Four of the seven were in Rice County, where the state was paying an unusually low rate for its office space. The other three had additional costs for gym space or had one-time expenses that MDE determined to be reimbursable (such as remodeling or transporting mobile classrooms). Taking these circumstances into account, none of the charter schools appears to be paying an unreasonable rate for its leased space.

The 14 financially stressed charter schools identified in Chapter 2 paid slightly more for their space ($11.40 per square foot) than other schools ($10.70 per square foot). This is primarily because 12 of the 14 charter schools experiencing financial difficulty are in the Twin Cities metro area where lease rates are higher. The 12 metro charter schools in financial difficulty and the 35 other metro charter schools both paid, on average, $11.48 per square foot for leased space. 20

Lease rates vary considerably among charter schools.

17 Gym costs are usually included in the expenditures eligible for lease aid, but the gym's square footage (or a pro-rated amount) is generally not counted as part of the building's square footage. As a result, the rates per square foot for schools that rent gym space outside their buildings are overstated.

18 Minnesota Commercial Association of Realtors, Minnesota Commercial Property Exchange; http://www.mncar.org/index.cfm; accessed March 6, 2003. The average is based on advertised rates for office space in Minneapolis, St. Paul, Brooklyn Center, Roseville, Stillwater, and North St. Paul. When a range of rates was listed for a building, we used the midpoint.

19 We used counties when the state did not have leased office space in the same city. Several outstate schools were located in counties with no state offices, but none of these schools were paying rates more than 10 percent above the average rate for all outstate state offices. 20 We identified only two outstate charter schools as being in financial difficulty. Their average lease payment was $10.90 per square foot, slightly above the average rate of $9.67 paid by the 26 other outstate schools. We also found that: Charter schools lease a reasonable amount of space. While not specific to charter schools, MDE has issued square footage guidelines for school building construction. Recognizing that space needs vary according to the programs that the school offers, the guidelines suggest that an average elementary school with less than 500 students needs between 125 and 155 square feet per student; middle schools require 170 to 200; and high schools need 200 to 320 square feet per student. 21 On average, charter schools lease 22,573 square feet of space, or about 150 square feet per student (ADM). This includes classrooms, labs, and offices, and it usually includes auditoriums and cafeterias or lunchrooms. As noted above, it may include gym space. 22 In comparison, MDE data indicate that in 2003, school districts averaged 246 square feet per student. 23 School districts with fewer than 500 students, a group more comparable in size to charter schools, averaged 340 square feet of building space per student. Thus, compared to regular school districts, charter schools use a reasonable amount of space.

Edison Academy in Duluth leased the most space (nearly 114,000 square feet), but it also had the most students (751 ADM). Three schools leased over 300 square feet per student: Hanska Community School, Native Arts High School, and El Colegio Charter School. All of these schools had relatively few students (between 15 and 60) resulting in high costs per student. 24

LEASING FROM AFFILIATED NONPROFIT BUILDING CORPORATIONS

As noted earlier, state law prohibits charter schools from issuing bonds and from using state funds to acquire buildings. However, we found that:

To circumvent the prohibition against using state funds to buy buildings, some charter schools have established affiliated nonprofit building corporations that issue bonds or obtain loans to acquire school buildings.

LEASE AID On average, the amount of space charter schools lease is within Department of Education guidelines.

21 Department of Children, Families, and Learning, Guide for Planning School Construction Projects in Minnesota (Roseville, MN: 2003), 66-68. Amounts exclude swimming pools and space intended primarily for community use. 22 Some schools had arrangements with nearby YMCAs or gym clubs to use their facilities. Typically, the payments for using the gym facilities were included in the lease amount but the square footage was not, thereby overstating the rate paid per square foot for the main school building. 23 Data furnished by MDE, based on 2003 building square footage and 2002 average daily membership for 349 school districts.

24 El Colegio leases from an affiliated company, a topic discussed in the next section. It planned for a larger enrollment than the 60 students it has, and the $1,500 per pupil unit limitation on lease aid means that the school's lease aid is only 57 percent of its lease costs. Hanska Community School has by far the most square feet per student (855). It has only 25 students, and leases a former New Ulm elementary school building that is now owned by a nonprofit corporation. The school paid only $1.95 per square foot in 2003, so its lease costs are manageable. Native Arts High School has only 15 students and is one of the schools we identified as financially stressed. The school recently moved to a smaller facility.

As of fiscal year 2003, 11 charter schools had affiliated nonprofit building corporations that arranged for bonds or loans to purchase a school building. In turn, the charter schools signed leases with the affiliated nonprofits, and state lease aid provided most of the revenue to repay the bonds or loans. We did not assess the legality of this arrangement. According to MDE, the department consulted with the Attorney General's Office in 1999 regarding this type of lease arrangement. The Attorney General provided some analysis of the practice but did not provide an opinion on its legality. We are not aware of any legal challenges to this practice.

We interviewed officials from the 11 schools that chose this route to acquire facilities. All of the schools that formed affiliated nonprofit companies to acquire a building said they did so because they could not find a suitable building for lease in the area where they wanted to locate the school. Two of the schools were leasing property that the owner decided to sell. Unable to find other available facilities, they each formed affiliated nonprofit companies to buy their buildings. Four schools formed affiliated nonprofit companies to purchase and renovate existing buildings. Four schools constructed new buildings. In one case, the building's owner, a nonprofit corporation, created a new nonprofit corporation affiliated with the school after the building was built.

The most common financing mechanism was one in which a city housing and redevelopment agency issued tax-exempt bonds. Principal and interest on the bonds is covered by the lease payments the school makes to the affiliated nonprofit corporation. Eight schools obtained financing in this manner, and two others used a combination of bonds and bank loans. One school was able to obtain all of its financing through a bank loan.

The average lease rate for the 11 charter schools that established affiliated nonprofit corporations to purchase or construct a facility was $12.98 per square foot in 2003, compared with an average rate of $10.47 for the other charter schools. These 11 schools also had more space than other schools (157 versus 147 square feet per student). As a result, the charter schools that established affiliated nonprofit corporations to purchase or construct a facility had lease expenditures in 2003 equal to $1,964 per student compared to $1,408 for the other schools. On the other hand, none of these schools met our criteria for being in financial difficulty. Furthermore, if these schools remain successful and repay the bonds, their costs in the long run may be lower when the bonds are paid off. 25 Any long-term savings on the part of schools would result in a reduction in state-funded lease aid.

One issue raised by the use of affiliated building corporations is whether charter schools should be allowed to own their buildings outright. Most of the charter school administrators we interviewed thought that charter schools that demonstrate sound academic performance and financial stability (for example, those that had their contract renewed after three years and had positive fund balances) should be allowed to own buildings because it is more cost-effective in the long run. Schools would have to pay for their facilities, but they would not have to pay rates that cover property taxes and provide profits to private developers.

The 11 charter schools that formed affiliated companies to acquire buildings said that they could not find suitable space to lease.

25 Schools would still have to pay for remodeling and renovation of their building as the need arises. MDE's current practice is to allow lease aid to be used to pay for major remodeling or renovation of a building, but not for routine maintenance.

Another issue is whether the state would be at risk by allowing charter schools to own buildings. Administrators at the 11 schools maintained that the individuals at risk if the school closes and stops making lease payments are the bond investors and that neither the municipality that issued the bonds nor the State of Minnesota are financially at risk. Bondholders would presumably take possession of the building if the school closed and could sell it to minimize their losses.

A few charter school administrators counseled against lifting the ban on building ownership. One administrator noted that charter school boards are, for the most part, made up of teachers and parents who usually lack financial training. He felt that charter school boards might not be able to successfully undertake all the necessary steps to complete a complicated bond deal that provides the greatest benefit to the school. Another administrator was concerned that charter school buildings could be used as a form of land speculation. A group could, theoretically, form a charter school to acquire a building paid for primarily with state lease aid. If property values increase as they normally do, the school could then sell the building for a profit.

CONCLUSIONS Lease aid is essential to charter schools. Without the ability to raise funds through property taxes, charter schools are dependent on lease aid to help pay for their facilities. Charter schools appear to be entering into reasonable lease agreements, in terms of both lease rates and the amount of space leased.

We think it is a good time to reassess the state's policy prohibiting use of state funds to buy charter school buildings. Leasing charter school facilitates has both advantages and disadvantages. For example, lease transactions are relatively straightforward and leasing may give a charter school more flexibility as its facility needs change. On the other hand, buying a building can be more cost-effective in the long run and would benefit charter schools that want to locate in an area without suitable lease space available. Charter schools' use of affiliated corporation arrangements has introduced a gray area in the state's policy. While the charter schools in these arrangements are leasing their facilities, they are also indirectly using state funds to acquire buildings. The state also has more experience with charter schools since lease aid was established in 1997. With these issues in mind, we think the time is right for the Legislature to once again weigh the advantages and disadvantages of allowing charter schools to buy buildings.

LEASE AID Charter schools' use of affiliated corporations to purchase buildings has introduced a gray area in the state's policy on building ownership. RECOMMENDATIONS RECOMMENDATION The Legislature should review and clarify, as needed, the policy on use of state funds to buy charter school buildings.

Whether charter schools should be allowed to buy buildings is a policy decision that takes a variety of factors into account, including potential risks for the state and for charter schools. The Legislature has a range of options available, from maintaining the status quo, to explicitly allowing charter schools to create affiliated nonprofit building corporations, to allowing charter schools to finance the purchase of facilities directly.

If the Legislature were to allow direct ownership, it could require charter schools to demonstrate financial stability before they can use state aid to construct or purchase a building. For example, it could limit this option to charter schools that have been through at least one three-year contract renewal or that meet a financial threshold, such as a minimum fund balance. 26 The Legislature could also require that, if a charter school closes, any net proceeds from the building's sale be returned to the state. Alternatively, if the Legislature decides that charter schools should not be allowed to use state funds to acquire buildings, directly or indirectly, it could prohibit the practice of using affiliated nonprofit building corporations. Should the Legislature choose this course, it would also have to decide how to treat the 11 charter schools that currently use this arrangement.

26 In theory, the marketplace should place restrictions on which charter schools could finance building projects. Charter schools perceived to be in danger of failing would be less likely to attract investors.

Summary of Recommendations Strengthen Charter School Financial Management (p. 34) To enhance charter school administrators' and board members' capacity to manage school finances, MDE should:

Implement a two-stage approval process that requires new charter schools to demonstrate that they have skilled personnel and financial systems in place before enrolling students;

Modify the model charter school contract to include more detailed requirements regarding budgeting, financial reporting, and training for school administrators and board members;

Enhance training offered to charter school board members to better meet the intent of the law; and

To the extent possible, expand quarterly enrollment monitoring to all charter schools.

Improve Oversight (p. 35) To improve oversight of charter school financial management:

MDE should initiate a process to more clearly define the scope and nature of the sponsor's role regarding charter school financial management and recommend to the Legislature any needed changes to charter school law.

The Legislature should consider amending charter school law to state that charter school contracts may be terminated for repeated failure to meet deadlines for submitting financial data and financial audit reports.

The Legislature should consider amending charter school law to remove the requirement that teachers constitute a majority of charter school board members.

Clarify Lease Aid Policy (p. 46) The Legislature should review and clarify, as needed, the policy on use of state funds to buy charter school buildings.

Detailed Financial and Lease Data APPENDIX

Table A. 1: Charter School Revenue, Expenditure, and Fund Balance Data Fiscal Year 2002 Revenues and Expenditures General Fund Balances b FY2001 FY2002 FY2002 Revenues General General Statutory Total Total Less Fund Fund Operating Charter School Revenues a Expenditures Expenditures Balance Balance Debt Ratio Academia Cesar Chavez $1,983,609 $1,656,130 $327,479 $-575 $321,360 29. 9 % Achieve Language Academy 2,598,906 2,241,262 357,644 443,851 905,733 36. 9 Agricultural & Food Sciences 854,468 934,586 -80,118 Not open 2,594 0.3 Aurora 833,702 802,555 31,147 -34,424 15,604 2.3 Avalon 1,367,731 1,244,466 123,265 Not open 123,266 10. 3 Bluffview Montessori 1,300,929 1,210,349 90,580 69,252 212,758 20. 6 Cedar-Riverside Community 990,645 945,738 44,907 300,161 340,794 74. 2 City Academy 1,201,964 1,238,541 -36,577 332,086 295,452 31. 8 Community Of Peace 4,501,277 4,190,920 310,357 1,012,338 1,325,503 34. 7 Concordia Creative Learning 1,358,412 1,254,532 103,880 2,782 100,553 9.2 Coon Rapids Learning 932,768 1,040,776 -108,008 127,115 60,993 6.0 Covenant Academy 552,402 431,317 121,085 Not open 121,087 34. 9 Crosslake Community 453,134 478,573 -25,439 16,337 -9,103 -2.0 Cyber Village Academy 1,449,759 1,512,446 -62,687 99,039 82,184 5.9 ECHO 887,702 823,516 64,186 147,336 173,759 24. 1 Eci' Nompa Woonspe' 1,086,349 1,082,945 3,404 205,192 295,606 45. 6 Edison -Duluth 6,342,530 6,304,887 37,643 193,972 219,076 4.2 El Colegio 909,804 876,974 32,830 1,317 42,581 5.6 Emily 709,830 695,876 13,954 192,249 214,664 42. 4 Excell Academy 857,080 877,863 -20,783 -11,862 -10,712 -1.3 Face To Face Academy 569,220 667,446 -98,226 -12,666 -116,205 -17.7 Family Academy 1,908,546 1,844,386 64,160 -16,241 31,160 1.9 Four Directions 1,335,080 1,309,574 25,506 211,852 263,355 24. 8 Friendship Academy 497,408 504,383 -6,975 52,797 52,388 22. 4 Great River Education 519,777 479,260 40,517 -16,023 26,559 5.7 Hanska Community 355,391 379,406 -24,015 142,868 118,852 33. 7 Harvest Preparatory Academy 4,155,970 3,601,116 554,854 -12,361 27,683 1.0 Heart of the Earth 2,799,975 2,607,794 192,181 -490,838 -103,392 -4.4 Higher Ground Academy 3,441,058 3,186,903 254,155 -111,386 231,439 12. 2 HOPE Community Academy 4,479,303 4,693,864 -214,561 260,529 59,137 1.8 Jennings Experiential 1,105,735 1,041,134 64,601 -12,983 104,418 10. 2 La Crescent Montessori 521,681 520,623 1,058 76,906 72,923 15. 2 Lafayette 586,713 523,426 63,287 41,075 109,511 25. 6 Lake Superior 646,550 575,758 70,792 108,397 180,593 33. 4 Lakes Area 470,717 391,912 78,805 95,596 174,905 50. 7 61 61

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Table A. 1: Charter School Revenue, Expenditure, and Fund Balance Data (continued) Fiscal Year 2002 Revenues and Expenditures General Fund Balances b FY2001 FY2002 FY2002 Revenues General General Statutory Total Total Less Fund Fund Operating Charter School Revenues a Expenditures Expenditures Balance Balance Debt Ratio Math and Science Academy $2,009,668 $1,886,858 $122,810 $46,168 $172,476 9.3 Metro Deaf 1,575,634 1,720,716 -145,082 573,484 428,388 25. 2 MN Business Academy 3,725,205 3,795,498 -70,293 153,385 161,098 4.4 MN Institute of Technology 4,152,581 4,485,038 -332,457 223,454 -111,097 -3.0 MN International 730,223 699,019 31,204 Not open 41,567 6.3 MN New Country 1,050,175 933,006 117,169 160,005 278,610 32. 2 MN Transitions 3,838,835 3,407,652 431,183 61,778 485,742 20. 1 Native Arts No data reported 688 No data reported Nerstrand 1,166,219 1,118,486 47,733 199,799 247,740 23. 6 % New Heights 1,051,055 1,042,879 8,176 -145,359 -77,499 -8.1 New Spirit 3,005,607 2,723,502 282,105 266,901 535,515 33. 0 New Visions 4,775,422 4,930,070 -154,648 -51,460 -189,881 -4.2 North Lakes Academy 1,146,932 1,310,647 -163,715 44,965 38,477 3.0 Odyssey 1,732,678 1,792,367 -59,689 110,083 54,112 3.2 PACT 2,313,825 2,344,408 -30,583 260,527 292,088 13. 3 Pillager Area 483,659 331,848 151,811 Not open 159,497 68. 5 Recording Arts 1,200,070 1,225,987 -25,917 27,013 6,979 0.6 Ridgeway Community 648,115 616,363 31,752 Not open 42,889 7.8 Riverbend Academy 1,468,824 1,346,154 122,670 299,251 421,159 32. 2 Riverway Learning Community 763,376 755,265 8,111 16,053 26,835 4.0 Rochester Off Campus 806,580 852,830 -46,250 525,925 479,674 58. 4 Schoolcraft Learning 1,409,537 1,215,169 194,368 69,057 263,423 25. 7 Community

Skills for Tomorrow 1,380,346 1,376,369 3,977 597,109 602,433 44. 8 Sojourner Truth Academy 1,731,339 1,817,818 -86,479 509,243 422,765 37. 1 St. Paul Family Learning 1,506,203 1,515,434 -9,231 126,021 102,413 7.8 Center

Studio Academy 919,058 903,796 15,262 -89,618 -54,611 -6.2 Twin Cities Academy 1,407,103 1,362,231 44,872 252,897 297,768 24. 2 Twin Cities International 1,631,239 1,514,326 116,913 Not open 140,318 9.9 Village School of Northfield 547,408 509,105 38,303 105,147 143,447 30. 4 World Learner 573,088 572,488 600 61,635 61,999 13. 3 Yankton Country 497,202 464,076 33,126 53,216 43,231 9.4

a Revenue totals exclude transfers from other funds and loan amounts. b General fund balance is defined as the unreserved/undesignated general fund balance less general fund encumbrances. The percentage used to determine statutory operating debt status is this net amount divided by general fund expenditures.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

APPENDIX 51 Table A. 2: Charter School Revenue, Expenditure, and Fund Balance Data Per ADM Fiscal Year 2002 Revenues and Expenditures Per ADM General Fund Balances Per ADM b Revenues FY2001 FY2002 FY2002 Total Total Less General General Statutory FY2002 Revenues Expenditures Expenditures Fund Fund Operating Charter School ADM Per ADM a Per ADM Per ADM Balance Balance Debt Ratio

Academia Cesar Chavez 161 $12,315 $10,282 $2,033 Not open $1,995 29. 9% Achieve Language 299 8,686 7,491 1,195 $1,577 3,027 36. 9 Academy Agricultural & Food Sciences 46 18,443 20,172 -1,729 Not open 56 0.3 Aurora 91 9,114 8,774 341 -555 171 2.3 Avalon 105 13,051 11,875 1,176 Not open 1,176 10. 3 Bluffview Montessori 195 6,655 6,192 463 392 1,088 20. 6 Cedar-Riverside Community 108 9,166 8,750 415 2,992 3,153 74. 2 City Academy 111 10,847 11,177 -330 2,656 2,666 31. 8 Community Of Peace 472 9,538 8,881 658 2,400 2,809 34. 7 Concordia Creative Learning 134 10,143 9,367 776 19 751 9.2

Coon Rapids Learning 120 7,759 8,657 -898 1,152 507 6.0 Covenant Academy 20 28,314 22,107 6,206 Not open 6,206 34. 9 Crosslake Community 53 8,500 8,977 -477 430 -171 -2.0 Cyber Village Academy 180 8,069 8,417 -349 484 457 5.9 ECHO 113 7,852 7,284 568 1,501 1,537 24. 1 Eci' Nompa Woonspe' 44 24,831 24,753 78 5,070 6,757 45. 6 Edison -Duluth 737 8,610 8,559 51 245 297 4.2 El Colegio 70 12,911 12,445 466 21 604 5.6 Emily 81 8,789 8,617 173 2,362 2,658 42. 4 Excell Academy 81 10,579 10,835 -257 Not open -132 -1.3 Face To Face Academy 50 11,328 13,283 -1,955 -273 -2,313 -17.7 Family Academy 183 10,438 10,087 351 -144 170 1.9 Four Directions 68 19,741 19,364 377 3,380 3,894 24. 8 Friendship Academy 47 10,656 10,805 -149 Not open 1,122 22. 4 Great River Education 46 11,251 10,374 877 -454 575 5.7 Hanska Community 30 11,748 12,542 -794 3,218 3,929 33. 7 Harvest Preparatory 364 11,409 9,886 1,523 -39 76 1.0 Academy

Heart of the Earth 282 9,939 9,257 682 -2,124 -367 -4.4 Higher Ground Academy 347 9,915 9,182 732 -311 667 12. 2 HOPE Community Academy 449 9,975 10,453 -478 661 132 1.8

Jennings Experiential 112 9,851 9,275 576 -123 930 10. 2 La Crescent Montessori 65 7,976 7,959 16 1,323 1,115 15. 2 Lafayette 59 9,897 8,830 1,068 1,045 1,847 25. 6 Lake Superior 76 8,460 7,534 926 1,504 2,363 33. 4 Lakes Area 30 15,913 13,249 2,664 1,978 5,913 50. 7 Math and Science Academy 259 7,767 7,292 475 218 667 9.3

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Table A. 2: Charter School Revenue, Expenditure, and Fund Balance Data Per ADM (continued) Fiscal Year 2002 Revenues and Expenditures Per ADM General Fund Balances Per ADM b Revenues FY2001 FY2002 FY2002 Total Total Less General General Statutory FY2002 Revenues Expenditures Expenditures Fund Fund Operating Charter School ADM Per ADM a Per ADM Per ADM Balance Balance Debt Ratio Metro Deaf 56 $28,359 $30,970 $-2,611 $8,193 $7,710 25. 2% MN Business Academy 340 10,958 11,165 -207 694 474 4.4 MN Institute of Technology 440 9,442 10,198 -756 810 -253 -3.0 MN International 39 18,543 17,751 792 Not open 1,056 6.3 MN New Country 111 9,446 8,392 1,054 1,709 2,506 32. 2 MN Transitions 399 9,625 8,544 1,081 217 1,218 20. 1 Native Arts 24 No data re-ported 23 No data re-ported Nerstrand 151 7,738 7,421 317 1,312 1,644 23. 6 New Heights 127 8,266 8,201 64 -1,270 -609 -8.1 New Spirit 231 13,038 11,815 1,224 1,036 2,323 33. 0 New Visions 228 20,929 21,607 -678 -239 -832 -4.2 North Lakes Academy 149 7,702 8,801 -1,099 311 258 3.0 Odyssey 213 8,147 8,428 -281 548 254 3.2 PACT 311 7,431 7,530 -98 839 938 13. 3 Pillager Area 44 11,063 7,590 3,472 Not open 3,648 68. 5 Recording Arts 88 13,606 13,900 -294 183 79 0.6 Ridgeway Community 54 11,942 11,357 585 Not open 790 7.8 Riverbend Academy 138 10,636 9,748 888 2,122 3,050 32. 2 Riverway Learning 60 12,772 12,636 136 373 449 4.0 Community Rochester Off Campus 101 7,997 8,456 -459 5,840 4,756 58. 4 Schoolcraft Learning 159 8,849 7,629 1,220 469 1,654 25. 7 Community Skills for Tomorrow 127 10,893 10,861 31 7,171 4,754 44. 8 Sojourner Truth Academy 172 10,059 10,562 -502 2,405 2,456 37. 1 St. Paul Family Learning 144 10,453 10,517 -64 674 711 7.8 Center Studio Academy 106 8,652 8,509 144 -924 -514 -6.2 Twin Cities Academy 167 8,430 8,161 269 1,459 1,784 24. 2 Twin Cities International 116 14,054 13,047 1,007 Not open 1,209 9.9 Village School of Northfield 63 8,653 8,048 605 1,616 2,268 30. 4 World Learner 82 6,964 6,957 7 772 753 13. 3 Yankton Country 32 15,665 14,621 1,044 3,130 1,362 9.4

NOTE: Average daily membership (ADM) is the sum for all pupils of the number of days of the school year each pupil is enrolled divided by the number of days that school is in session. a Revenue totals exclude transfers from other funds and loan amounts. b General fund balance is defined as the unreserved/undesignated general fund balance less general fund encumbrances. The percentage used to determine statutory operating debt status is this net amount divided by general fund expenditures.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

APPENDIX 53 Table A. 3:

Charter School Expenditures by Category, FY2002 Operating Expenditures Nonoperating Expenditures Special Food Other Total

Other Total Total Charter School Administration a Instruction Education Service Operating b

Operating Lease Nonoperating c Nonoperating Expenditures Academia Cesar Chavez

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Table A. 3:

Administration a Instruction Education Service Operating b Operating Lease Nonoperating c Nonoperating Expenditures

Emily $81,921

Excell Academy

Face To Face Academy
222,829 159,139 92,814 9,350 80,832 564,964 102,400 82 102,482 667,446 33.4 23.8 13.9 1. 4 12.1 84.6 15.3 0. 0 15.4

Family Academy
320,062 596,188 439,711 49,707 78,308 1,483,976 257,665 102,745 360,410 1,844,386 17.4 32.3 23.8 2. 7 4.2 80.5 14.0 5. 6 19.5

Four Directions
174,044 536,469 132,957 42,791 149,115 1,035,376 106,650 167,548 274,198 1,309,574 13.3 41.0 10.2 3. 3 11.4 79.1 8. 1 12.8 20.9

Friendship Academy
146,526 233,288 4,770 23,275 27,332 435,191 48,737 20,455 69,192 504,383 29.1 46.3 0. 9 4.6 5. 4 86.3 9. 7 4.1 13.7 Great River Education 94,463 235,304 28,840 0 7, 447 366,054 85,904 27,302 113,206 479,260 19.7 49.1 6. 0 0.0 1. 6 76.4 17.9 5. 7 23.6

Hanska Community

Harvest Preparatory Academy

Heart of the Earth
555,660 987,415 72,129 152,107 326,421 2,093,732 381,196 132,866 514,062 2,607,794 21.3 37.9 2. 8 5.8 12.5 80.3 14.6 5. 1 19.7

Higher Ground Academy
425,517 1,149,638 214,842 122,753 596,050 2,508,800 469,806 208,297 678,103 3,186,903 13.4 36.1 6. 7 3.9 18.7 78.7 14.7 6. 5 21.3

HOPE Community Academy
1, 160,582 1,777,696 105,068 261,048 417,909 3,722,303 731,789 239,772 971,561 4,693,864 24.7 37.9 2. 2 5.6 8. 9 79.3 15.6 5. 1 20.7

Jennings Experiential
217,581 300,507 122,873 0 147,489 788,450 196,259 56,425 252,684 1,041,134 20.9 28.9 11.8 0. 0 14.2 75.7 18.9 5. 4 24.3

La Crescent Montessori
59,266 219,259 47,794 2,161 38,965 367,445 116,148 37,030 153,178 520,623 11.4 42.1 9. 2 0.4 7. 5 70.6 22.3 7. 1 29.4

Math & Science Academy

317,844 799,535 129,363 0 135,752 1,382,494 453,264 51,100 504,364 1,886,858 16.8 42.4 6. 9 0.0 7. 2 73.3 24.0 2. 7 26.7

APPENDIX 55 Table A. 3:

Charter School Expenditures by Category, FY2002 Operating Expenditures Nonoperating Expenditures Special Food Other Total Other Total Total Charter School Administration a Instruction Education Service Operating b Operating Lease Nonoperating c Nonoperating Expenditures Metro Deaf
$245,259 $0 $1,171,573 $15,593 $78,508 $1,510,933 $159,727 $50,056 $209,783 $1,720,716 14.3% 0.0% 68.1% 0.9% 4.6% 87.8% 9.3% 2.9% 12.2%

MN Business Academy
658,601 1,202,229 168,043 38,702 939,923 3,007,498 749,275 38,725 788,000 3,795,498 17.4 31.7 4. 4 1.0 24.8 79.2 19.7 1. 0 20.8

MN Institute of Technology
613,967 1,789,955 422,740 205,560 659,008 3,691,230 778,920 14,888 793,808 4,485,038 13.7 39.9 9. 4 4.6 14.7 82.3 17.4 0. 3 17.7

MN International
237,272 252,504 12,507 26,774 73,365 602,422 69,082 27,515 96,597 699,019 33.9 36.1 1. 8 3.8 10.5 86.2 9. 9 3.9 13.8

MN Transitions
550,381 1,384,430 271,951 235,334 205,164 2,647,260 507,128 253,264 760,392 3,407,652 16.2 40.6 8. 0 6.9 6. 0 77.7 14.9 7. 4 22.3

Nerstrand
99,963 544,061 78,239 0 108,305 830,568 212,400 75,518 287,918 1,118,486 8.9 48.6 7. 0 0.0 9. 7 74.3 19.0 6. 8 25.7

New Heights
209,264 397,757 107,430 30,543 84,980 829,974 187,500 25,405 212,905 1,042,879 20.1 38.1 10.3 2. 9 8.1 79.6 18.0 2. 4 20.4

New Spirit
369,559 1,235,088 127,896 124,144 173,061 2,029,748 420,840 272,914 693,754 2,723,502 13.6 45.3 4. 7 4.6 6. 4 74.5 15.5 10.0 25.5

New Visions
799,810 1,315,965 1,273,439 191,462 769,155 4,349,831 480,000 100,239 580,239 4,930,070 16.2 26.7 25.8 3. 9 15.6 88.2 9. 7 2.0 11.8

North Lakes Academy
180,441 702,847 87,373 0 64,302 1,034,963 172,356 103,328 275,684 1,310,647 13.8 53.6 6. 7 0.0 4. 9 79.0 13.2 7. 9 21.0

Odyssey
184,496 754,682 177,329 40,564 294,466 1,451,537 294,066 46,764 340,830 1,792,367 10.3 42.1 9. 9 2.3 16.4 81.0 16.4 2. 6 19.0

PACT
367,288 979,264 302,367 18,193 260,908 1,928,020 314,435 101,953 416,388 2,344,408 15.7 41.8 12.9 0. 8 11.1 82.2 13.4 4. 3 17.8

Pillager Area
56,258 116,869 59,873 0 36,993 269,993 35,000 26,855 61,855 331,848 17.0 35.2 18.0 0. 0 11.1 81.4 10.5 8. 1 18.6

Recording Arts
132,152 765,491 96,656 20,751 103,607 1,118,657 102,905 4,425 107,330 1,225,987 10.8 62.4 7. 9 1.7 8. 5 91.2 8. 4 0.4 8. 8

Ridgeway Community
116,831 225,174 44,476 22,599 125,285 534,365 60,000 21,998 81,998 616,363 19.0 36.5 7. 2 3.7 20.3 86.7 9. 7 3.6 13.3

Riverbend Academy
133,317 670,879 177,085 0 98,938 1,080,219 248,154 17,781 265,935 1,346,154 9.9 49.8 13.2 0. 0 7.3 80.2 18.4 1. 3

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Table A. 3: Charter School Expenditures by Category, FY2002 (continued) Operating Expenditures Nonoperating Expenditures Special Food Other Total Other Total Total Charter School Administration a Instruction Education Service Operating b Operating Lease Nonoperating c Nonoperating Expenditures

Riverway Learning
$112,886 $233,397 $95,237 $24,075 $50,168 $515,763 $123,266 $116,236 $239,502 $755,265

Community
14.9% 30.9% 12.6% 3.2% 6.6% 68.3% 16.3% 15.4% 31.7%

Rochester Off Campus
136,178 430,042 62,579 5,303 49,678 683,780 95,109 73,941 169,050 852,830 16.0 50.4 7. 3 0.6 5. 8 80.2 11.2 8. 7 19.8

Schoolcraft Learning
155,453 575,235 73,512 72,459 128,101 1,004,760 155,507 54,902 210,409 1,215,169

Community
12.8 47.3 6. 0 6.0 10.5 82.7 12.8 4. 5 17.3

Skills for Tomorrow
171,104 669,142 133,556 17,070 225,400 1,216,272 135,378 24,719 160,097 1,376,369 12.4 48.6 9. 7 1.2 16.4 88.4 9. 8 1.8 11.6

Sojourner Truth Academy
260,973 936,674 76,057 94,097 150,362 1,518,163 210,000 89,655 299,655 1,817,818 14.4 51.5 4. 2 5.2 8. 3 83.5 11.6 4. 9 16.5

St. Paul Family Learning
234,534 510,901 285,048 176,266 110,771 1,317,520 182,346 15,568 197,914 1,515,434

Center
15.5 33.7 18.8 11.6 7. 3 86.9 12.0 1. 0 13.1

Studio Academy
175,980 476,023 29,307 0 37,178 718,488 129,820 55,488 185,308 903,796 19.5 52.7 3. 2 0.0 4. 1 79.5 14.4 6. 1 20.5

Twin Cities Academy 230,860 607,296 23,482 59,241 201,822 1,122,701 218,525 21,005 239,530 1,362,231 16.9 44.6 1. 7 4.3 14.8 82.4 16.0 1. 5 17.6 Twin Cities International 378,934 588,323 56,609 79,996 173,061 1,276,923 207,247 30,156 237,403 1,514,326 25.0 38.9 3. 7 5.3 11.4 84.3 13.7 2. 0 15.7 Village School of Northfield 73,844 192,084 52,717 14,382 32,525 365,552 137,572 5,981 143,553 509,105 14.5 37.7 10.4 2. 8 6.4 71.8 27.0 1. 2 28.2 World Learner 109,191 279,856 68,795 12,180 9,247 479,269 0 93,219 93,219 572,488 19.1 48.9 12.0 2. 1 1.6 83.7 0. 0 16.3 16.3
Yankton Country 96,415 152,412 22,276 0 41,248 312,351 38,053 113,672 151,725 464,076 20.8 32.8 4. 8 0.0 8. 9 67.3 8. 2 24.5 32.7

a "Administration" includes expenses for the school board, administration (e. g., principal and office staff), and central office services such as data processing and printing. b "Other Operating" includes, among other things, vocational instruction, instructional and pupil support services, building operations and maintenance, and student transportation. c "Other Nonoperating" includes capital outlay, community service (such as adult education), building improvements, and debt service. SOURCE: Office of the Legislative Auditor analysis of Department of Education data.

APPENDIX 57 Table A. 4: Charter School Expenditures Per ADM, FY2002 Operating Expenditures Per ADM Nonoperating Expenditures Per ADM Special Food Other Total Other Total Charter School ADM Administration a Instruction Education Service Operating b Operating Lease Nonoperating c Nonoperating Total Academia

Cesar Chavez 161 $2,178 $3,280 $411 $419 $1,803 $8,091 $1,524 $667 $2,191 $10,282
Achieve Language Academy 299 843 4,567 586 343 701 7,039 267 184 452 7,491
Agricultural and Food Sciences 46 6,095 1,956 1,267 0 5, 221 14,538 2,920 2,715 5,634 20,172
Aurora 91 2,077 3,429 26 771 905 7,208 1,266 300 1,566 8,774
Avalon 105 1,226 5,794 570 0 1, 020 8,611 2,150 1,114 3,264 11,875
Bluffview Montessori 195 903 2,552 210 206 660 4,531 1,557 104 1,661 6,192
Cedar-Riverside Community 108 1,706 5,050 327 551 304 7,938 624 188 812 8,750
City Academy 111 1,823 7,020 501 0 494 9,838 1,083 256 1,339 11,177
Community Of Peace 472 1,057 4,839 546 0 605 7,048 1,219 614 1,833 8,881
Concordia Creative Learning 134 1,513 2,840 1,155 0 889 6,397 1,346 1,624 2,970 9,367
Coon Rapids Learning 120 1,338 3,302 1,432 0 1, 081 7,154 732 771 1,504 8,657
Covenant Academy 20 4, 306 9,733 3,209 102 2,074 19,425 1,798 885 2,683 22,107
Crosslake Community 53 1,368 2,902 323 226 2,504 7,322 1,459 196 1,655 8,977
Cyber Village Academy 180 2,388 2,565 341 0 987 6,281 2,055 82 2,137 8,417
ECHO 113 966 3,425 413 410 778 5,993 531 761 1,291 7,284
Eci' Nompa Woonspe' 44 3,822 9,311 775 268 3,725 17,901 87 6,765 6,852 24,753
Edison-Duluth 737 969 3,175 1,232 353 1,364 7,092 1,334 133 1,467 8,559
El Colegio 70 1, 902 4,702 344 184 1,277 8,409 4,015 21 4,036 12,445
Emily 81 1,014 3,410 595 496 1,178 6,693 1,056 868 1,924 8,617
Excell Academy 81 3, 260 4,298 547 500 652 9,257 1,304 274 1,579 10,835
Face To Face Academy 50 4, 434 3,167 1,847 186 1,609 11,243 2,038 2 2, 039 13,283
Family Academy 183 1,751 3,261 2,405 272 428 8,116 1,409 562 1,971 10,087
Four Directions 68 2,573 7,932 1,966 633 2,205 15,309 1,577 2,477 4,054 19,364
Friendship Academy 47 3, 139 4,998 102 499 586 9,323 1,044 438 1,482 10,805
Great River Education 46 2, 045 5,093 624 0 161 7,923 1,859 591 2,450 10,374
Hanska Community 30 1,647 3,220 468 677 4,476 10,489 0 2, 054 2,054 12,542
Harvest Preparatory Academy 364 626 3,874 537 424 1,897 7,359 1,592 935 2,528 9,886
Heart of the Earth 282 1,972 3,505 256 540 1,159 7,432 1,353 472 1,825 9,257

CHARTER SCHOOL FINANCIAL ACCOUNTABILITY Table A. 4: Charter School Expenditures Per ADM, FY2002 (continued) Operating Expenditures Per ADM Nonoperating Expenditures Per ADM Special Food Other Total Other Total Charter School ADM Administration a Instruction Education Service Operating b Operating Lease Nonoperating c Nonoperating Total
Higher Ground Academy 347 $1,226 $3,312 $619 $354 $1,717 $7,229 $1,354 $600 $1,954 $9,182
HOPE Community Academy 449 2,584 3,959 234 581 931 8,289 1,630 534 2,164 10,453
Jennings Experiential 112 1,938 2,677 1,095 0 1, 314 7,024 1,748 503 2,251 9,275
La Crescent Montessori 65 906 3,352 731 33 596 5,618 1,776 566 2,342 7,959
Lafayette 59 1,098 3,089 796 311 1,078 6,372 626 1,832 2,457 8,830
Lake Superior 76 1, 469 3,804 706 0 377 6,354 769 410 1,180 7,534
Lakes Area 30 1,961 6,173 1,352 0 457 9,943 2,576 730 3,306 13,249
Math & Science Academy 259 1,228 3,090 500 0 525 5,343 1,752 197 1,949 7,292
Metro Deaf 56 4,414 0 21,087 281 1,413 27,195 2,875 901 3,776 30,970
MN Business Academy 340 1,937 3,536 494 114 2,765 8,847 2,204 114 2,318 11,165
MN Institute of Technology 440 1,396 4,070 961 467 1,498 8,393 1,771 34 1,805 10,198
MN International 39 6,025 6,412 318 680 1,863 15,298 1,754 699 2,453 17,751
MN New Country 111 461 4,746 998 0 476 6,682 1,252 458 1,710 8,392
MN Transitions 399 1,380 3,471 682 590 514 6,638 1,272 635 1,907 8,544
Nerstrand 151 663 3,610 519 0 719 5,511 1,409 501 1,910 7,421
New Heights 127 1,646 3,128 845 240 668 6,527 1,475 200 1,674 8,201
New Spirit 231 1,603 5,358 555 539 751 8,805 1,826 1,184 3,010 11,815
New Visions 228 3,505 5,767 5,581 839 3,371 19,064 2,104 439 2,543 21,607
North Lakes Academy 149 1,212 4,720 587 0 432 6,950 1,157 694 1,851 8,801
Odyssey 213 867 3,548 834 191 1,385 6,825 1,383 220 1,603 8,428
PACT 311 1,180 3,145 971 58 838 6,192 1,010 327 1,337 7,530
Pillager Area 44 1,287 2,673 1,369 0 846 6,176 801 614 1,415 7,590
Recording Arts 88 1, 498 8,679 1,096 235 1,175 12,683 1,167 50 1,217 13,900
Ridgeway Community 54 2,153 4,149 820 416 2,309 9,846 1,106 405 1,511 11,357
Riverbend Academy 138 965 4,858 1,282 0 716 7,822 1,797 129 1,926 9,748
Riverway Learning Community 60 1,889 3,905 1,593 403 839 8,629 2,062 1,945 4,007 12,636
Rochester Off Campus 101 1,350 4,264 620 53 493 6,779 943 733 1,676 8,456
Schoolcraft Learning Community 159 976 3,611 461 455 804 6,308 976 345 1,321 7,629

APPENDIX 59 Table A. 4: Charter School Expenditures Per ADM, FY2002 (continued) Operating Expenditures Per ADM Nonoperating Expenditures Per ADM Special Food Other Total Other Total Charter School ADM Administration a Instruction Education Service Operating b Operating Lease Nonoperating c Nonoperating Total
Skills for Tomorrow 127 $1,350 $5,280 $1,054 $135 $1,779 $9,598 $1,068 $195 $1,263 $10,861
Sojourner Truth Academy 172 1,516 5,442 442 547 874 8,821 1,220 521 1,741 10,562
St. Paul Family Learning Center 144 1,628 3,546 1,978 1,223 769 9,144 1,266 108 1,374 10,517
Studio Academy 106 1,657 4,481 276 0 350 6,764 1,222 522 1,745 8,509
Twin Cities Academy 167 1,383 3,638 141 355 1,209 6,726 1,309 126 1,435 8,161
Twin Cities International 116 3,265 5,069 488 689 1,491 11,001 1,786 260 2,045 13,047
Village School of Northfield 63 1,167 3,036 833 227 514 5,779 2,175 95 2,269 8,048
World Learner 82 1,327 3,401 836 148 112 5,824 0 1, 133 1,133 6,957
Yankton Country 32 3,038 4,802 702 0 1, 300 9,841 1,199 3,581 4,780 14,621

NOTE: Average daily membership (ADM) is the sum for all pupils of the number of days of the school year each pupil is enrolled divided by the number of days that school is in session. a "Administration" includes expenses for the school board, administration (e. g., principal and office staff), and central office services such as data processing and printing. b "Other Operating" includes, among other things, vocational instruction, instructional and pupil support services, building operations and maintenance, and student transportation. c "Other Nonoperating" includes capital outlay, community service (such as adult education), building improvements, and debt service. SOURCE: Office of the Legislative Auditor analysis of
Department of Educationdata.
Table A. 5: Charter School Building Leases, FY2003
Lease Square Lease Lease Lease Square Amount Per 2003 Feet Amount Aid

Charter School Amount Feet Square Foot ADM Per ADM Per ADM Approved
Academia Cesar Chavez $283,535 38,693 $7.33 215 180 $1,319 $250,500
Achieve Language Academy 289,340 38,924 7.43 290 134 998 255,628
Agricultural & Food Sciences 266,264 17,751 15. 00 155 115 1,718 235,241
Aurora 126,960 7,200 17. 63 108 67 1,176 112,167
Avalon 209,703 17,461 12. 01 120 146 1,748 185,269
Bluffview Montessori 306,863 25,000 12. 27 190 132 1,615 271,109
Cedar-Riverside Community a 42,462 10,918 3.89 102 107 416 37,515
Chiron 205,951 21,588 9.54 170 127 1,211 181,955
City Academy 120,000 10,000 12. 00 100 100 1,200 106,018
Community Of Peace 1,001,131 77,511 12. 92 531 146 1,885 873,547
Concordia Creative Learning 169,579 16,730 10. 14 132 127 1,285 149,821
Coon Rapids Learning 208,889 14,530 14. 38 183 79 1,141 184,551
Covenant Academy 95,003 9,269 10. 25 40 232 2,375 76,569
Crosslake Community 92,306 7,801 11. 83 64 122 1,442 81,551
Cyber Village Academy 349,152 22,888 15. 25 192 119 1,818 308,471
ECHO 90,000 10,530 8.55 126 84 714 79,514
Edison -Duluth 983,223 113,869 8.63 751 152 1,309 868,664
El Colegio 269,056 20,700 13. 00 60 345 4,484 153,138
Emily 57,000 13,250 4.30 73 182 781 50,359
Excell Academy 175,384 15,562 11. 27 99 157 1,772 143,022
Face To Face Academy 102,400 10,745 9.53 50 215 2,048 90,469
Family Academy a 373,943 22,186 16. 85 229 97 1,633 330,374
Four Directions a 111,082 10,665 10. 42 75 142 1,481 98,139
Friendship Academy 47,807 4,225 11. 32 64 66 747 42,237
Great River Education a 60,672 5,395 11. 25 45 120 1,348 53,603
Hanska Community 41,600 21,375 1.95 25 855 1,664 36,753
Harbor City International a 153,612 11,424 13. 45 100 114 1,536 135,714
Harvest Preparatory Academy 580,000 72,500 8.00 375 193 1,547 512,422
Heart of the Earth 433,333 38,216 11. 34 270 142 1,605 382,844
Higher Ground Academy 540,652 48,000 11. 26 367 131 1,473 477,658
HOPE Community Academy 631,806 39,267 16. 09 430 91 1,469 558,192
Jennings Experiential 202,167 19,020 10. 63 90 211 2,246 172,280
La Crescent Montessori 103,200 10,460 9.87 55 190 1,876 81,693
Lafayette 58,779 17,320 3.39 78 222 754 51,930
Lake Superior 135,181 6,985 19. 35 83 84 1,629 119,430
Lakes Area 79,200 6,680 11. 86 35 191 2,263 69,972
MN Institute of Technology 756,000 72,000 10. 50 393 183 1,924 583,940
Math & Science Academy a 453,742 20,700 21. 92 275 75 1,650 400,875
Metro Deaf 162,930 15,000 10. 86 75 200 2,172 110,848
MN Business Academy 782,496 65,254 11. 99 452 144 1,731 691,324
MN International a 41,292 3,500 11. 80 55 64 751 36,481
MN New Country 173,327 15,000 11. 56 97 155 1,787 153,132 72

APPENDIX 61
Table A. 5: Charter School Building Leases, FY2003 (continued)
Lease Square Lease Lease Lease Square Amount Per 2003 Feet Amount Aid

Charter School Amount Feet Square Foot ADM Per ADM Per ADM Approved
MN Transitions $698,900 72,243 $9.67 650 111 $1,075 $617,469
Native Arts 73,252 5,000 14. 65 15 333 4,883 28,713
Nerstrand 218,772 17,700 12. 36 153 116 1,430 193,282
New Century 103,563 15,723 6.59 90 175 1,151 91,496
New Heights 187,500 31,555 5.94 136 232 1,379 165,654
New Spirit 670,000 56,000 11. 96 280 200 2,393 436,310
New Visions 389,864 36,000 10. 83 238 151 1,638 344,439
North Lakes Academy 172,356 21,520 8.01 161 134 1,071 152,274
North Shore 286,316 33,000 8.68 206 160 1,390 252,956
Odyssey 375,375 34,500 10. 88 276 125 1,360 331,639
PACT 379,562 33,850 11. 21 320 106 1,186 335,338
Partnership Academy 114,696 13,776 8.33 120 115 956 101,332
Pillager Area a 36,250 5,000 7.25 42 119 863 32,026
Prairie Creek 90,000 9,315 9.66 102 91 882 79,514
Recording Arts 122,342 8,913 13. 73 124 72 987 108,088
Ridgeway Community 63,000 7,500 8.40 47 160 1,340 55,660
Riverbend Academy 233,364 30,100 7.75 132 228 1,768 206,174
Riverway Learning Community 120,750 11,500 10. 50 75 153 1,610 106,681
Rochester Off Campus 113,619 9,004 12. 62 103 87 1,103 100,381
Sage Academy 91,616 7,642 11. 99 50 153 1,832 80,941
Schoolcraft Learning Community 160,249 17,268 9.28 161 107 995 141,578
Skills for Tomorrow a 160,324 11,000 14. 57 127 87 1,262 141,644
Sojourner Truth Academy 210,000 25,000 8.40 228 110 921 185,532
St. Paul Family Learning Center 194,937 17,829 10. 93 124 144 1,572 172,224
Studio Academy 119,696 12,000 9.97 112 107 1,069 105,750
Trio Wolf Creek 13,143 1,772 7.42 43 41 306 11,611
Twin Cities Academy a 218,525 30,673 7.12 180 170 1,214 193,064
Twin Cities International a 108,875 10,500 10. 37 160 66 680 96,190
Village School of Northfield 129,388 10,078 12. 84 56 180 2,310 103,442
Watershed 96,276 7,513 12. 81 86 87 1,119 85,059
WISE 264,000 32,700 8.07 124 264 2,129 157,069
World Learner 124,979 8,000 15. 62 98 82 1,275 110,417
Yankton Country 30,384 2,683 11. 32 38 71 800 26,844

Average 236,519 22,573 10. 83 164 150 1,489 201,943

NOTES: Average daily membership (ADM) is the sum for all pupils of the number of days of the school year each pupil is enrolled divided by the number of days that school is in session. 2003 ADM data are subject to change. Eci' Nompa Woonspe' owns its building and did
not receive lease aid. It is not included in this table.
a Lease amount includes rental of off-premise gym space.

SOURCE: Office of the Legislative Auditor analysis of Department of Education data.
Further Reading
Boyd, William Lowe, Debra Hare, and Joe Nathan. What Really Happened?
Minnesota's Experience with Statewide Public School Choice Programs.
Minneapolis, MN: University of Minnesota, 2002.

California State Auditor. California's Charter Schools: Oversight at All Levels
Could be Stronger to Ensure Charter Schools' Accountability. Sacramento, CA:
Bureau of State Audits, 2002.

Florida Office of Program Policy Analysis and Government Accountability.
Program Review: Charter Schools Need Improved Academic Accountability and
Financial Management. Tallahassee, FL: Florida Legislature, 2000.

The Improve Group. Charter School Evaluation: Minnesota's Charter Schools.
Roseville, MN: Minnesota Department of Children, Families, and Learning,
2003.

Minnesota House of Representatives Research Department. Charter Schools.
St. Paul: 2001.

Minnesota School Finance: A Guide for Legislators. St. Paul: 2002.

Palmer, Louann Bierlein and Rebecca Gau. Charter School Authorizing: Are
States Making the Grade? Washington, DC: Thomas B. Fordham Institute, 2003.
June 16, 2003
Mr. James Nobles Office of the Legislative Auditor
Room 140 Centennial Building
658 Cedar Street
St. Paul, MN 55155

Dear Mr. Nobles:
Thank you for the Office of the Legislative Auditor's (OLA) report with regard to charter school financial accountability in Minnesota. We appreciate the hard work and recommendations made by OLA staff in the report.

As background, in February 2003 the Minnesota Department of Education (MDE) created the Division of Choice and Innovation. Creation of the division was in response to the growth of school choice options, particularly charter schools, over the past ten years, as well as the recognition that with substantial growth and change comes greater accountability and additionalmanagement responsibilities for charter schools and MDE. We believe the new division, as well as other changes at MDE, will offer the following to charter schools:

A "one-stop shopping" destination for questions and information. While many staff members throughout MDE are involved with charter school issues, the Division of Choice and Innovation offers charter schools, parents and teachers a first place to call. From there, the staff in the division works with other MDE staff in order to provide charter schools with a streamlined information process.

More individual attention to charter schools, as their issues are significant given the nature of the issues they face when opening and operating new schools.

Greater expertise and technical services from MDE employees. Four MDE employees within the Division of Program Finance have been directed to assign 25 percent of their time to work with charter schools on financial issues such as general education, pupil counts, transportation funding, and special education data and payment funding. We believe this will be of great assistance to charter schools by giving them the technical
expertise and information that has been available to school districts.

Additional financial management training for charter schools, available effective June 2003.

While we believe the changes implemented at MDE represent a good start, we recognize that there is more work to be done. The following represents MDE's responses to recommendations made by OLA.

Recommendation #1: Implement a two-stage approval process that requires new charter schools to demonstrate that they have skilled personnel and financial systems in place before enrolling students. MDE believes it is essential that we increase the amount of cooperative interaction between the Department, the sponsor, and the school during its "planning year," the period of time between when MDE approves the school's sponsor and when the school opens.

As your report notes, MDE is considering options to modify the charter school approval process. At this time, MDE is not prepared to support a two-stage approval process until we have finished assessing the benchmarks that charter schools should obtain before opening its doors to students.

Recommendation #2: Modify the model charter school contract to include more detailed requirements regarding budgeting, financial reporting, and training for school administrators and board members. MDE supports this recommendation and will begin working in collaboration with stakeholders this summer to improve the model charter school contract along the lines recommended by the OLA. However, it is important to recognize the inherent difficulties in creating a "one size fits all" model given the variety of school concepts and of people who develop and staff them. Not every charter school administrator may need the same kind of training (depending on his or her past experience) and not every administrator may need to perform the same functions at each school.

Recommendation #3: Enhance training offered to charter school board members to better meet the intent of the law.

MDE has already started to implement enhanced financial management training to charter school board members. The financial management section of the Division of Program Finance is offering various training programs, which are open to board members. In addition to the financial responsibilities charter school board members share, and given the makeup of board members–many who are teachers and administrators-there is a real advantage to these individuals in having a thorough understanding how the charter school business office should function.

The following programs are now being offered at MDE:
Two-day comprehensive charter school financial workshops offered during the summer.

One-day school finance accounting programs conducted throughout the year.

One-day "year-end" financial workshops for charter schools completing their first year of operation (by invitation).

One-day "year-end" financial workshops for all charter schools that are not in their first year of operation.

Most significantly MDE will now offer, prior to the beginning of this school year, a five-day workshop for new charter schools. This is intended to comply with Minnesota law as well as to meet most basic managerial and accounting needs. A component of this training program is especially designed to meet the needs of school board members. The Minnesota School Board Association has agreed to work with MDE in program design and implementation. It will cover the role of board members, an understanding of the board's statutory obligations, basic elements of the school finance (such as the responsibility of the board to approve and oversee a budget), how to conduct meetings, hiring staff, and other issues dealing with public relations and board governance.
Recommendation #4: To the extent possible, expand quarterly enrollment monitoring to all charter schools.

While MDE supports this recommendation, staffing levels will make it difficult to expand to quarterly enrollment monitoring. However, new charter schools and charter schools that have experienced financial difficulties will be monitored more thoroughly to ensure that financial accountability is in place.

Recommendation #5: MDE should initiate a process to more clearly define the scope and nature of the sponsor's role regarding charter school financial management and recommend to the Legislature any needed changes to charter school law. MDE supports this recommendation and has already begun scheduling a series of meetings this summer with key stakeholders to develop a plan for increasing the effectiveness of sponsors. The first meeting, which will take place in July, will build on the previous research done in this area by the Center for School Change at the University of Minnesota and other entities.

Recommendation #6: The Legislature should consider amending charter school law to state that charter school contracts may be terminated [by sponsors] for repeated failure to meet deadlines for submitting financial data and financial audit reports. MDE supports this recommendation and will likely include it in its policy recommendations to the Legislature for next year. Although sponsors essentially already have this power under current law, perhaps stating it explicitly will help to better motivate schools to meet current deadlines for financial reporting. MDE will be working with charter schools to ensure that financial data is submitted in a timely manner.

Recommendation #7: The Legislature should consider amending charter school law to remove the requirement that teachers constitute a majority of charter school board members.

MDE supports this recommendation and will include it in its policy recommendations to the Legislature for next year. While having teachers constitute a majority of a charter school board should continue to be permitted, it should not be required.

Recommendation #8: The Legislature should review and clarify, as needed, the policy on use of state funds to buy charter school buildings. MDE supports this recommendation and will work with stakeholders this year to reach agreement on a specific proposal to be presented to the Legislature next year. The OLA's report correctly identifies the key issues to be considered. MDE would support limiting the "building buy" option to more established charter schools that meet certain criteria in such areas as age of the school and financial status. In a situation where the charter school that owns a building closes, MDE would favor requiring the proceeds from the sale of facilities to be returned to the State after paying off any debts owed by the school.

Again, we thank you for your work in creating this report, and welcome the opportunity to address these important issues. Please contact Chas Anderson at 651-582-8207 if you should have any questions or comments.

Sincerely,

Cheri Pierson Yecke, Ph. D.
Commissioner

C: Chas Anderson, Assistant Commissioner
Tom Melcher, Director of Program Finance
Morgan Brown, Director of Choice and Innovation
Richard Guvernmont, Supervisor, Program Finance 80

Recent Program Evaluations
Residential Facilities for Juvenile Offenders, February 1995 95-01
Health Care Administrative Costs, February 1995 95-02
Guardians Ad Litem, February 1995 95-03 Early Retirement Incentives, March 1995 95-04
State Employee Training: A Best Practices Review, April 1995 95-05
Snow and Ice Control: A Best Practices Review, May 1995 95-06
Pollution Control Agency's Use of Administrative Penalty Orders, Update July 1995 95-07
Development and Use of the 1994 Agency Performance Reports, July 1995 PR95-22
State Agency Use of Customer Satisfaction Surveys, October 1995 PR95-23
Funding for Probation Services, January 1996 96-01 Department of Human Rights, January 1996 96-02
Trends in State and Local Government Spending, February 1996 96-03
State Grant and Loan Programs for Businesses February 1996 96-04
Post-Secondary Enrollment Options Program, March 1996 96-05
Tax Increment Financing, March 1996 96-06 Property Assessments: Structure and Appeals,
A Best Practices Review, May 1996 96-07 Recidivism of Adult Felons, January 1997 97-01
Nursing Home Rates in the Upper Midwest, January 1997 97-02
Special Education, January 1997 97-03 Ethanol Programs, February 1997 97-04
Statewide Systems Project, February 1997 97-05 Highway Spending, March 1997 97-06
Non-Felony Prosecution, A Best Practices Review, April 1997 97-07
Social Service Mandates Reform, July 1997 97-08 Child Protective Services, January 1998 98-01
Remedial Education, January 1998 98-02 Transit Services, February 1998 98-03
State Building Maintenance, February 1998 98-04 School Trust Land, March 1998 98-05
9-1-1 Dispatching: A Best Practices Review, March 1998 98-06
Minnesota State High School League, June 1998 98-07
State Building Code, January 1999 99-01 Juvenile Out-of-Home Placement, January 1999 99-02
Metropolitan Mosquito Control District, January 1999 99-03
Animal Feedlot Regulation, January 1999 99-04 Occupational Regulation, February 1999 99-05
Directory of Regulated Occupations in Minnesota, February 1999 99-05b
Counties' Use of Administrative Penalties for Violations of Solid and Hazardous
Waste Ordinances, February 1999 99-06 Fire Services: A Best Practices
Review, April 1999 99-07 State Mandates on Local Governments,
January 2000 00-01 State Park Management, January 2000 00-02
Welfare Reform, January 2000 00-03 School District Finances, February 2000 00-04
State Employee Compensation, February 2000 00-05 Preventive Maintenance for Local Government
Buildings: A Best Practices Review, April 2000 00-06
The MnSCU Merger, August 2000 00-07 Early Childhood Education Programs,
January 2001 01-01 District Courts, January 2001 01-02
Affordable Housing, January 2001 01-03 Insurance for Behavioral Health Care,
February 2001 01-04 Chronic Offenders, February 2001 01-05
State Archaeologist, April 2001 01-06 Recycling and Waste Reduction, January 2002 02-01
Minnesota Pollution Control Agency Funding, January 2002 02-02
Water Quality: Permitting and Compliance Monitoring, January 2002 02-03
Financing Unemployment Insurance, January 2002 02-04
Economic Status of Welfare Recipients, January 2002 02-05
State Employee Health Insurance, February 2002 02-06 Teacher Recruitment and Retention: Summary
of Major Studies, March 2002 02-07 Local E-Government: A Best Practices Review,
April 2002 02-08 Managing Local Government Computer Systems:
A Best Practices Review, April 2002 02-09 State-Funded Trails for Motorized Recreation,
January 2003 03-01 Professional/Technical Contracting,
January 2003 03-02 MinnesotaCare, January 2003 03-03
Metropolitan Airports Commission, January 2003 03-04 Preserving Housing: A Best Practices Review,
April 2003 03-05 Charter School Financial Accountability,
June 2003 03-06 Controlling Improper Payments in the Medical
Assistance Program, forthcoming 03-07 Higher Education Tuition Reciprocity,
forthcoming 03-08

Evaluation reports can be obtained free of charge from the Legislative Auditor's Office, Program Evaluation Division, Room 140, 658 Cedar Street, Saint Paul, Minnesota 55155, 651/296-4708. Full text versions of recent reports are also available at the OLA web site: http://www.auditor.leg.state.mn.us