Performance audit, Arizona State Board for Charter Schools

              A REPORT
TO THE
ARIZONA LEGISLATURE
Debra K. Davenport
Auditor General
Arizona State Board
for Charter Schools
Performance Audit Division
AUGUST    2003
REPORT NO. 03   07
Performance Audit
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee composed of five senators
and five representatives. Her mission is to provide independent and impartial information and specific recommendations to
improve the operations of state and local government entities. To this end, she provides financial audits and accounting servic-
es to the State and political subdivisions, investigates possible misuse of public monies, and conducts performance audits of
school districts, state agencies, and the programs they administer.
The Joint Legislative Audit Committee
Senator Robert Blendu, Chair Representative John Huppenthal, Vice Chair
Senator Gabrielle Giffords Representative Tom Boone
Senator Peter Rios Representative Ken Clark
Senator Thayer Verschoor Representative Ted Downing
Senator Jim Weiers Representative Steve Yarbrough
Senator Ken Bennett (ex-officio) Representative Jake Flake (ex-officio)
Audit Staff
Dale Chapman, Manager and Contact Person
Mark Haldane, Team leader
Danielle A. Mariano
Jesus Borboa
Copies of the Auditor General s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410   Phoenix, AZ 85018   (602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
WILLIAM THOMSON
DEPUTY AUDITOR GENERAL
August 11, 2003
Members of the Arizona Legislature
The Honorable Janet Napolitano, Governor
Ms. Kristen Jordison, Executive Director
Arizona State Board for Charter Schools
Transmitted herewith is a report of the Auditor General, A Performance Audit and Sunset
Review of the Arizona State Board for Charter Schools. This report is in response to a May
14, 2002, resolution of the Joint Legislative Audit Committee. The performance audit was
conducted as part of the Sunset review process prescribed in Arizona Revised Statutes
§41-2951 et seq. I am also transmitting with this report a copy of the Report Highlights for
this audit to provide a quick summary for your convenience.
As outlined in its response, the Arizona State Board for Charter Schools agrees with most
of the findings and plans to implement all but one of the recommendations directed at it.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on August 12, 2003.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
1 The State Board of Education and local school district governing boards are also authorized to sponsor charter schools.
Services:
The Arizona State Board for Charter Schools is one of three entities authorized to sponsor charter
schools in Arizona.1 The Board has the following responsibilities:
! Evaluate applications and grant charters to qualified applicants;
! Monitor the schools it charters to ensure they comply with federal and state laws and
charter contract requirements;
! Take disciplinary action against charter schools that violate federal, state, or charter con-
tract provisions;
! Investigate and resolve complaints from parents, students, charter school faculty and
staff, and the public regarding charter contract provisions, or, depending on the nature
of the complaint, refer the matter to the appropriate authority; and 
! Provide consumer information to prospective and current school operators and the pub-
lic. 
Board membership and staffing
The Board comprises nine voting members and three
nonvoting members:
! Three legislators who are nonvoting advisory
members and the Superintendent of Public
Instruction serve terms concurrent with their
terms in office.
! Six members of the public and two members
of the business community are appointed by
the Governor and serve staggered 4-year
terms. 
As of May 2003, the Board had six staff, including an
executive director, director of government affairs, and
various specialists. For fiscal year 2003, the Board was
authorized eight FTE.
PROGRAM FACT SHEET
Arizona State Board for Charter Schools
Program Revenue:
State General Fund Appropriations
Office of the Auditor General
$651,900 $651,870
$495,900
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
FY2001 FY2002 FY2003
Facilities and equipment:
The Board leases space in the state-owned Executive Tower at 1700 West Washington Street in
Phoenix. Its equipment includes typical office equipment such as office furniture and computers.
Mission:
The Board s mission is  to foster accountability in charter schools which will improve student
achievement through market choice. 
Program goals:
! To sponsor successful charter schools;
! To improve customer service; and
! To provide necessary oversight of sponsored charter schools.
Adequacy of performance measures:
Overall, the measures established by the Board are appropriate and appear to be generally
aligned with the Board s goals. While the Board has established several input, output, outcome,
efficiency, and quality measures, it should make some improvements to its measures. For exam-
ple, the Board has established measures to track the number of charter school applications
received and approved. However, the Board does not have an efficiency measure to report if
applications were processed in a timely manner, or a quality measure to track applicant satis-
faction with the charter school application process.
Additionally, the Board should establish measures that track the success of schools in operation.
For example, the Board could include outcome measures regarding the number of charters
granted to schools that failed within 1, 2, or 3 years; or the number of sponsored schools with a
defined percentage of students who meet or exceed Arizona standards on achievement tests.
State of Arizona
The Office of the Auditor General has conducted a performance audit and Sunset
review of the Arizona State Board for Charter Schools, pursuant to a May 14, 2002,
resolution of the Joint Legislative Audit Committee. This audit was conducted as part
of the Sunset review process prescribed in Arizona Revised Statutes (A.R.S.) §41-
2951 et seq.
The Legislature established the State Board for Charter Schools (Board) in 1994.
Under Arizona statute, the Board has authority to sponsor charter schools by
entering into charter contracts specifying how the school will be operated. The Board
is one of three entities authorized to grant charters in Arizona. The Arizona State
Board of Education and local school district governing boards may also grant
charters. Board responsibilities include evaluating charter school applications and
granting charters, monitoring sponsored schools for compliance with applicable laws
and charter contract requirements, handling complaints, and providing consumer
information to the public. Although there are three sponsoring entities in the State, the
Board sponsors over 70 percent of the State’s charter schools. As of March 2003,
the Board sponsored 329 charter schools serving approximately 54,000 students.
The Board should implement a more systematic
monitoring approach (see pages 11 through 18)
The Board should implement a more systematic approach to monitoring charter
schools, which would enable it to more effectively oversee the hundreds of schools
it regulates. Monitoring charter schools is one of the Board’s most critical functions,
as it helps ensure that the schools abide by federal and state requirements and
effectively educate Arizona’s students.
However, the Board lacks a systematic and coordinated approach for monitoring the
329 charter schools it regulates. The Board uses periodic, targeted site visits, and
statutorily required 5-year reviews, and partners with the Arizona Department of
Education to monitor schools. Through its two types of visits, board staff reviewed a
combined 158 charter schools in 2001 and 2002. Yet with 329 schools to monitor, no
board staff assigned to conduct site visits full-time, and the estimated 2 to 3 hours it
Office of the Auditor General
SUMMARY
page i
takes to conduct a site visit, not including staff preparation time and travel time, board
staff have not visited several schools. Additionally, when board staff conduct a site
visit, staff do not always review and verify compliance with mandated educational
requirements that are included in the Board’s site visit procedures. Specifically,
auditor review of all 87 site visits conducted in 2002 indicates that board staff
reviewed charter school compliance with requirements such as fingerprinting and
curriculum at fewer than half of the schools visited. Finally, board staff identified
problems during 41 of its 87 site visits in 2002, but did not follow up on 31 of the
schools to ensure they properly addressed the problems.
The Board has also partnered with the Arizona Department of Education (ADE) to
monitor charter schools, but these efforts and associated followup are not well
documented. For example, the Board relies on ADE to ensure that board-sponsored
charter schools comply with federal and state special education requirements, but
the Board’s processes for interacting with ADE, documenting charter school
compliance with these requirements, and continually being informed of a school’s
progress in addressing deficiencies are not documented in policy or procedure.
Further, the Board works with ADE on compliance with “Arizona Learns”
requirements, which implement the federal No Child Left Behind Act. Among other
things, schools that are labeled as underperforming must submit a school
improvement plan to both ADE and the Board. However, the Board has not
established any policies or procedures for accepting improvement plans and
following up on their implementation.
The Board should implement a more systematic approach to monitoring charter
schools. At its June 2003 meeting, the Board expanded its monitoring efforts by now
requiring each charter school’s independent auditor to assess, as part of its annual
audit of the school, compliance with some special education requirements,
fingerprinting, open meeting laws, and some public records law requirements.
Previously, the Board attempted to monitor much of this information through routine
site visits. However, the Board should adopt administrative rules, and policies and
procedures regarding these auditor reviews and their uses, as well as the monitoring
partnerships it has with ADE and the use of that compliance information. In addition,
the Board should require schools to submit corrective action plans for deficiencies,
and board staff should be required to verify that schools have taken corrective action,
using site visits where appropriate to follow up.
The Board should continue its efforts to more closely review
schools’ financial condition (see pages 19 through 27)
While the Board has taken steps to more closely review and monitor charter school
finances, it can further enhance these efforts. Both research and the State’s
State of Arizona
page ii
experience with charter schools indicate that financial difficulties are a major reason
for charter school closures or failures. In Arizona, 9 board-sponsored charter schools
have closed between June 2000 and April 2003 due to financial reasons. Auditors’
review of 43 charter school fiscal year 2001 and 19 fiscal year 2002 audited financial
statements revealed another 12 schools in operation with financial problems.
To help address these deficiencies, the Board recently strengthened its application
requirements and improved its application review process. Specifically, in May 2003,
the Board adopted a new application process, which is in effect for charter school
applicants for the 2004-05 school year. This new process enhances the requirements
for revenue projections and requires applicants to include secured sources of
projected revenues within their proposed budgets. Prior to this change, the Board
approved applications with uncertain or unsupported projected revenues in their
budgets. Additionally, the Board will now require applicants to adequately support its
marketing plan by identifying the number of students and market growth in the area.
Overestimating student enrollment is one reason that schools experience financial
problems, as these estimates serve as the basis for most of an applicant’s estimated
revenues. Auditor review of 13 applications submitted in fiscal year 2003 identified
several applications that did not have adequate support for the projected student
enrollment. Finally, the Board enhanced its application review process by
incorporating additional guidance for reviewers and revising the scoring. However,
the Board still needs to adopt necessary administrative rules, and policies and
procedures. The Board also should strengthen its application review committee by
including lenders with nonprofit lending experience and educational program experts
with school funding experience.
The Board should also further improve its monitoring of operating charter schools’
finances. During the audit, the Board began to change its monitoring efforts to focus
more resources on monitoring and reviewing the financial solvency of its charter
schools. Specifically, the Board has assigned one of its staff to identify and monitor
schools experiencing financial difficulties and contracted with a certified public
accountant in March 2003 to assist in these efforts. However, in addition to these
efforts, the Board should review financial information charter schools already submit
to the Arizona Department of Education and require schools to submit corrective
action plans detailing steps the school will take to address financial problems.
Additionally, if the school’s independent auditor identifies financial problems so
severe that school closure is possible, to ensure the public is adequately informed,
the Board should discuss this information at its meetings and include it in the
school’s public file.
Office of the Auditor General
page iii
Board needs additional disciplinary authority (see pages
29 through 34)
The Legislature should consider amending statute to provide the Board a wider
range of disciplinary authority to appropriately respond to charter school violations.
Currently, the Board is limited to two options: recommending the withholding of 10
percent of a charter school’s state funding or revoking a charter. The Board uses the
first option far more often than the second. However, these penalties may not be
appropriate for some charter school violations. For example, withholding 10 percent
of a school’s monthly state funding may not be appropriate for minor offenses, such
as those that do not affect the education and welfare of students. While the Board
has taken action to request the withholding of state funding 55 times in 2001 and
2002 for violations, including school noncompliance with special education
requirements and failure to submit annual audited financial statements within
statutory time frames, the Board has not taken action against schools for lesser
violations. These include failing to maintain teacher resumes on file for public review
and failing to document governing board meeting minutes. Additionally, this penalty
does not provide enough flexibility to respond adequately to violations that are more
serious. As a result, the Board could benefit from additional nondisciplinary and
disciplinary options. These options might include authority to issue nondisciplinary
letters of concern, and disciplinary options such as requiring charter school
operators to take additional training, placing a school on probation, or directing the
withholding of any amount of state funding.
Regardless of whether the Legislature grants the Board additional disciplinary
authority, the Board should develop administrative rules to govern its disciplinary
process. The Board should also establish guidelines to assist it in making consistent
and appropriate disciplinary decisions.
Sunset Factors (see pages 35 through 41)
As part of the Sunset review process, this audit makes the following additional
recommendations:
l The Board should adopt administrative rules as required by statute to reflect its
application, monitoring, disciplinary, and other processes.
l The Board should document its process for investigating and resolving
complaints in policy and procedure, and use its accountability database to track
complaint receipt, investigation, and resolution.
State of Arizona
page iv
Office of the Auditor General
TABLE OF CONTENTS
continued
page v
1
11
11
12
16
18
19
19
20
23
27
29
29
30
33
34
35
Introduction & Background
Finding 1: The Board should implement a more
systematic monitoring approach
Monitoring charter schools important
Some monitoring efforts ineffective
More systematic monitoring approach would maximize board
efforts
Recommendations
Finding 2: The Board should continue its efforts to
more closely review schools’ financial condition
Children adversely affected when schools close
Board has improved application process
Oversight of operating school finances needs further improvement
Recommendations
Finding 3: Board needs additional disciplinary authority
Board has limited disciplinary options
Expanded options would assist Board
Board should adopt administrative rules
Recommendations
Sunset Factors
Agency Response
State of Arizona
TABLE OF CONTENTS
concluded
page vi
Figures:
1 Number of Charter Schools by Sponsor
As of March 2003
2 Revenue Sources for Charter and District Schools
for Fiscal Year 2002
(Unaudited)
3 Violations for Which the Board Requested That State
Funding Be Temporarily Withheld
2001 and 2002
Table:
1 Arizona State Board for Charter Schools
Schedule of Revenues, Expenditures, and Other Changes
in Fund Balance
Years Ended or Ending June 30, 2001, 2002, and 2003
(Unaudited)
1
3
30
7
The Office of the Auditor General has conducted a performance audit and Sunset review
of the Arizona State Board for Charter Schools, pursuant to a May 14, 2002, resolution
of the Joint Legislative Audit Committee. This audit was conducted as part of the Sunset
review process prescribed in Arizona Revised Statutes (A.R.S.) §41-2951 et seq.
Board history
The Legislature established the State Board for Charter Schools (Board) in 1994.
Under Arizona statute, the Board has authority to sponsor charter
schools by entering into charter contracts specifying how the schools
will be operated. Among other things, this action gives the schools
eligibility to receive state funding. The Board is one of three entities in
Arizona authorized by statute to sponsor charter schools. The other two
entities are the State Board of Education and local school district
governing boards. However, as illustrated in Figure 1, the Board
charters and regulates the majority of charter schools in the State.
Specifically, as of March 2003, the Board sponsored 329 schools, or 72
Office of the Auditor General
INTRODUCTION
& BACKGROUND
page 1
Mission
To foster accountability in charter
schools which will improve student
achievement through market choice.
Figure 1 Number of Charter Schools by Sponsor
As of March 2003
Source: Auditor General staff analysis of information provided by the Arizona Department of Education.
percent of all charter schools operating in the State, as compared to 125 schools for
the two other sponsoring entities.
Charter schools provide alternatives to traditional public
schools
Charter schools are public, state-funded schools that offer Arizona’s children
educational alternatives to traditional public schools. While charter schools only
became available to Arizona parents and students in the mid-1990s, they have
quickly become a popular and viable educational option. According to Department
of Education student enrollment reports, as of October 2002, nearly 74,000 Arizona
students attended charter schools. This represents about 8 percent of the over
910,000 students attending K-12 schools in the State. By comparison, the U.S.
Department of Education, National Center for Education Statistics reports that slightly
more than 1 percent of public school students in the country are enrolled in public
charter schools for the 2001-02 school year.1 Only Washington, D.C. has a larger
percentage of its public school students enrolled in charter schools (9.2 percent)
than Arizona, but Arizona has more charter schools than any other state.
One reason for charter schools’ popularity is the alternatives to traditional public
schools that these schools offer. Charter schools are generally smaller, can offer
unique programs, and target specific populations. Similarities and differences
between charter schools and individual schools within school districts (i.e., district
schools) are discussed below:
l Enrollment—Charter schools tend to be smaller than district schools. The
average enrollment at a charter school for fiscal year 2003 is approximately 160
students, and only 1 of the State’s 454 charter schools has more than 1,000
students. In contrast, the average district school had more than 600 students,
and 190 of the 1,401 district schools (13.6 percent) had more than 1,000
students in fiscal year 2002.
Similar to district schools, charter schools must enroll all eligible students who
submit timely applications. If a charter school has more applications than
openings available, it must have an equitable manner for enrolling students,
such as a lottery or waiting list. Unlike district schools, however, charter schools
recruit and market their schools to prospective students.
l Funding—Charter schools have several of the same revenue sources as district
schools, including federal and state funding, grants, loans, and donations.
Similar to district schools, charter schools receive state funding based on
student enrollment and reported attendance. However, charter schools’ state
1 U.S. Department of Education, National Center for Education Statistics. Overview of Public Elementary and Secondary
Schools and Districts: School Year 2001-02, NCES 2003-411, by Lee McGraw Hoffman. Washington, D.C.: 2003.
State of Arizona
page 2
Eight percent of
Arizona’s K-12 students
attend charter schools.
funding is based on current year attendance, while district schools’ payments
are based on the previous year’s attendance. Under this funding approach,
district schools can plan for and receive consistent payments throughout the
school year from the State, whereas charter school payments can fluctuate
dramatically, as initial monthly payments are based on estimated student
enrollments and later payments on actual enrollments. If a charter school has
overestimated enrollment, the Department of Education will adjust the school’s
monthly state funding to account for the difference and recover any
overpayments. Additionally, charter schools do not receive capital funding from
the State. As a result, charter schools have to seek their own funding to build or
lease school facilities, maintain existing facilities, or bring facilities up to
minimum standards.
State funding accounts for the majority of charter school revenues. As illustrated
in Figure 2, charter schools received 80 percent of their funding from the State
in fiscal year 2002. In contrast, district schools received approximately 48
percent of their funding from the State in fiscal year 2002. The remainder of
charter school revenues consisted of federal and local monies, and other
revenues, such as grants and donations.
l Organizational structure—Charter schools are organized and operated in a
variety of ways. They must have a governing board, which is similar to a school
district governing board, that it is statutorily authorized to make policy decisions
Office of the Auditor General
page 3
State funding accounts
for 80 percent of charter
school revenues.
Figure 2 Revenue Sources for Charter and District Schools
for Fiscal Year 2002
(Unaudited)
1 Total also includes Other Revenues totaling $724,826, which is less than 1 percent.
Source: Fiscal Year 2001-2002 Annual Report for the Arizona Department of Education.
for the school. However, unlike district schools, charter schools can be
structured as nonprofit or for-profit corporations, partnerships, or sole
proprietorships. Additionally, charter schools are independent public schools
and make most operational decisions at the school level. For example, each
charter school develops its own policies related to discipline, personnel, and
other matters. Conversely, school district governing boards set these types of
policies for the multiple schools within their districts.
l Educational structure—Although charter schools, like district schools, must
meet federal and state educational and academic requirements, every charter
school has its own individual mission or vision. As a result, charter school
operators can structure these requirements into various educational programs
that target specific student populations. For example, one Tempe charter school
attracts students who have interest and talent in the arts with an integrated
academic and arts program. Other schools offer educational programs that may
not be available in district schools, including agricultural or science and
technology programs, programs targeted to pregnant or parenting students, or
programs targeted for college-bound students.
Charter school requirements
Charter schools must comply with the academic, financial, and general requirements
imposed by state and federal law, as well as with the requirements specified in their
charter contract. These requirements include:
l Academic requirements—All charter schools must align their curricula with
Arizona’s academic standards. For example, schools must design a method to
measure progress toward the student outcomes adopted by the State Board of
Education, participate in Arizona’s Instrument to Measure Standards
(AIMS) test at the prescribed grade levels and the nationally
standardized achievement tests, and complete the elements required
by the annual report card. Schools must provide clear student
achievement performance objectives and account for student
achievement to the Department of Education.
l Financial requirements—Each charter school must submit a
detailed business plan, including start-up and operational
budgets, with its application. Additionally, in accordance with
statute, schools must submit an annual financial report to the
Arizona Superintendent of Public Instruction. Further, state laws
require charter schools to annually provide audited financial
statements to the Board and comply with the Uniform System of
State of Arizona
page 4
Arizona Department of Education
Annual Report Card
Annual report cards provide standard
information about each Arizona school to allow
comparisons to be made among schools, and
show school accomplishments from year to
year. Report cards include a school overview,
staffing information, student enrollment,
transportation policy, school resources and
honors, and academic achievement indicators.
Source: Arizona Department of Education.
Financial Records for Charter Schools (USFRCS) or, if exempt, generally
accepted accounting principles (GAAP). The Board has granted USFRCS
exemptions to most schools it sponsors.
l General requirements—Each charter school must comply with its charter
contract, as well as all applicable state, federal, and local laws, and regulations.
These include laws regarding health, safety, and civil rights, as well as local
ordinances related to the quality and location of facilities. In addition, schools
must comply with the Individuals with Disabilities Education Act, which
mandates that all public schools provide special education services and
regulations related to acceptance of federal funding. Further, schools must be
nonreligious in their programs, admission policies, and employment practices.
Finally, each charter school must submit data to the Department of Education,
including annual demographic and ethnicity data, teacher qualifications, and
money spent in the classroom.
Board responsibilities
To help assess charter school compliance with these requirements and fulfill its
statutory responsibilities, the Board performs the following activities:
l Evaluates applications and grants charters to qualified applicants. While the
Board sponsors 329 schools, it actually has approximately 250 charter
contracts, as some operators operate multiple school sites. In accordance with
statute, the Board grants charters for 15-year terms;
l Monitors schools to help ensure they comply with federal and state laws, and
charter contract requirements;
l Disciplines schools that violate statutory or contractual requirements, such as
failing to comply with special education or employee fingerprinting
requirements;
l Receives complaints from parents, students, charter school faculty, and the
public and, depending on the nature of the complaint, investigates and resolves
the matter or refers the matter to the proper agency, such as the county attorney
or Attorney General; and
l Provides consumer information to the public, school operators, and prospective
operators.
The Board annually receives approximately 60 applications for new charters or
charter school transfers from the districts or the State Board of Education. In fiscal
Office of the Auditor General
page 5
year 2003, the Board received 36 applications for new charters and approved 21 of
them. In that same year, 14 charter schools applied to transfer their charter to the
Board from the other two sponsoring entities. The Board granted charters to all 14
schools.
Organization and staffing
The Board consists of the Superintendent of Public Instruction, eight members
appointed by the Governor (six public members and two members of the business
community), and three legislators who are nonvoting advisory members. The
superintendent and legislative members serve terms concurrent with their terms in
office. The other board members serve staggered 4-year terms. The Board elects its
president and other officers annually.
For fiscal year 2003, the Board was authorized eight full-time equivalent (FTE)
positions. As of May 2003, its staff include an executive director, director of
government affairs, and four specialists and support staff. The staff review charter
school applications and make recommendations to the Board, monitor charter
school compliance with laws and regulations, and provide information to the public.
Budget
The Legislature appropriates monies to the Board from the State General Fund. Table
1 (see page 7) illustrates the Board’s actual and estimated revenues and
expenditures for fiscal years 2001 through 2003. As shown, the Board received a
State General Fund appropriation of $495,400 in fiscal year 2003. This represented a
more than $150,000 decrease from its appropriation in fiscal year 2002. Additionally,
the Board’s appropriations have exceeded its expenditures in recent years, allowing
it to return over 13.5 percent of its total appropriation to the State General Fund in
both fiscal years 2001 and 2002. While the Board’s largest expense is personal
services and employee-related costs, it has also had a contract with a private firm to
review charter school audited financial statements. However, this contract expired in
February 2003, and the Board entered into a new contract that redefined the services
requested and reduced the Board’s contract costs from $150 to $65 per hour.
State of Arizona
page 6
Scope and methodology
This audit focused on the Board’s review of charter schools through its application
and monitoring processes, oversight of schools including its review of charter school
finances, and enforcement authority. This audit and Sunset review includes the
following findings and associated recommendations:
l The Board should implement a more systematic approach to monitoring charter
schools by coordinating its many monitoring efforts and adequately following up
on identified problems.
Office of the Auditor General
page 7
Table 1 Arizona State Board for Charter Schools
Schedule of Revenues, Expenditures, and Other Changes in Fund Balance
Years Ended or Ending June 30, 2001, 2002, and 2003
(Unaudited)
1 Public Impact. Charter School Accountability: A Guide to Issues and Options for Charter Authorizers. Charlotte, N.C.:2000.
Hill, Paul T., Robin J. Lake, and Mary Beth Celio. Charter Schools and Accountability in Public Education. Washington,
D.C.: Brookings Institution Press, 2002.
SRI International. A Decade of Public Charter Schools. Washington, D.C.: November 2002.
State of Arizona
page 8
l While the Board has improved its oversight of charter school financial
operations, it should take additional steps in this area, including further
enhancing its review of finances at existing schools.
l The Legislature should consider expanding the number of disciplinary options
available to the Board, which would give the Board more flexibility to
appropriately discipline charter schools.
In addition, within the Sunset Factors (see pages 35 through 41), the report
recommends that the Board adopt administrative rules as required by law to reflect
its application, monitoring, and disciplinary processes; and document its process for
investigating and resolving complaints in policy and procedure, and use its
accountability database to track complaint receipt, investigation, and resolution.
Auditors used a variety of methods to study the issues addressed in the audit. They
attended eight board meetings and the Arizona Department of Education’s “Arizona
School Improvement Plan Orientation Workshops”; interviewed 5 of the 12 board
members, management, and staff; reviewed board meeting minutes from January
2001 through March 2003; and reviewed applicable statutes, policies, and
procedures. To perform more specific audit steps, they used the following methods:
l To evaluate the Board’s charter school oversight and monitoring practices,
auditors reviewed all 87 site visit reports for 2002, 42 of the Board’s charter
school public files, the Board’s compliance records and its site visit checklist,
and its accountability database. Additionally, auditors reviewed several studies
regarding charter school accountability and monitoring, including three
conducted by research organizations at the national level.1
l To determine whether the Board adequately reviews and oversees charter
school finances and financial operations, auditors reviewed and analyzed 43
fiscal year 2001 charter school audited financial statements, which consisted of
a random sample of 30 and a risk-based sample of 13 financial statements, and
19 fiscal year 2002 charter school audited financial statements, reviewed the
Board’s contract for the review of charter school audits, interviewed a certified
public accountant employed by the contractor who reviews school audits, and
reviewed the fiscal year 2001 report of findings prepared by the contractor. In
addition, auditors reviewed 8 charter school applications submitted during fiscal
year 2003 and 5 applications submitted in fiscal year 2002, observed 3
application review meetings, and contacted 6 charter school authorizers in other
states and the State Board of Education regarding their charter school
Office of the Auditor General
page 9
application and monitoring processes.1 Finally, auditors reviewed two studies
and one publication related to charter schools and charter school closures.2
l To analyze the disciplinary options available to the Board and how the Board has
used these options, auditors reviewed all disciplinary actions taken by the Board
in 2001 and 2002 and all 18 charter revocation actions initiated by the Board
from 1996 through January 2003. Further, auditors reviewed four charter school
settlement agreements resulting from revocation proceedings and attended two
disciplinary board hearings held in September and November 2002. Finally,
auditors reviewed the North Carolina State Board of Education and Washington,
D.C., Public Charter School Board disciplinary authority, and policies and
procedures.
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the State Board for Charter
Schools, its executive director, and staff for their cooperation and assistance
throughout the audit.
1 Auditors contacted the following six charter school authorizers because literature and a board manager identified them
as authorizers either employing best practices or having similar operations to the Arizona State Board for Charter Schools:
City of Chicago, Massachusetts, Minnesota, North Carolina, Texas, and Washington, D.C.
2 Bowman, Darcia Harris. Charter Closings Come Under Scrutiny. Education Week, Feb. 28, 2001.
SouthEastern Regional Vision for Education. The Charter School Review Process: A Guide for Chartering Entities, March
1998.
The Center for Education Reform. Charter School Closures: The Opportunity for Accountability; Washington D.C., October
2002.
State of Arizona
page 10
Office of the Auditor General
page 11
The Board should implement a more systematic
monitoring approach
The Board should implement a more systematic approach for monitoring charter
schools, which would enable it to more effectively oversee the schools it regulates.
The Board needs to actively monitor the schools it charters to help ensure they
comply with statutory and charter contract requirements. However, the Board lacks a
systematic and coordinated monitoring approach for the hundreds of schools it
oversees. Its current approach, which uses site visits and other monitoring tools, is
ineffective because some schools may not be visited, the reviews that do occur are
often incomplete, and followup on identified problems is inadequate. Monitoring
could be more effective and systematic if the Board adopted a coordinated
monitoring approach and consistent followup to correct noncompliance.
Monitoring charter schools important
Monitoring charter schools is one of the most critical functions that the Board can
perform, as it helps to ensure that the schools abide by federal and state
requirements and effectively educate Arizona’s students. According to a study
commissioned by the Annie E. Casey Foundation, a national nonprofit organization
that supports projects aimed at improving public education, providing ongoing
oversight gives sponsors tools to close ineffective schools, and creates incentives for
charter schools to improve.1 Additionally, a Brookings Institution study notes that
“Authorizers need to take their responsibilities toward charters seriously, which
requires creating routines for monitoring and assessing schools… and providing
ongoing assessments of schools. Authorizers must fulfill their public duties to ensure
that charter schools are held accountable for performance and to protect students
from failing schools.”2 Finally, the popularity of charter schools in Arizona is growing,
with an enrollment of nearly 74,000 students as of fiscal year 2003 according to
1 Public Impact. Charter School Accountability: A Guide to Issues and Options for Charter Authorizers. Charlotte, N.C.:2000.
2 Hill, Paul T., Robin J. Lake, and Mary Beth Celio, Charter Schools and Accountability in Public Education, Washington,
D.C., Brookings Institution Press, 2002.
FINDING 1
Charter schools must
be held accountable.
Arizona Department of Education (ADE) student enrollment reports, as compared to
a student enrollment of fewer than 50,000 in fiscal year 2000, making it even more
important to ensure that charter schools comply with federal and state educational
requirements.
According to A.R.S. §§15-182(E)(1) and 15-183(R), the Board must exercise general
supervision, oversight, and administrative responsibility over the schools it sponsors.
Therefore, the Board is responsible for monitoring charter school compliance with
statutory and charter requirements, including:
l Fingerprinting—Charter schools must ensure that all persons engaged in
instructional work directly as a classroom, laboratory, or other teacher or
indirectly as a supervisory teacher, speech therapist, or principal have a valid
class 1 or 2 fingerprint clearance card. Charter school operators must also be
fingerprinted.
l Special Education—Charter schools must make special education services
available to their students, identify students who may need these services,
evaluate student needs, and design and implement an individualized program
to assist these students.
l Public Records—Charter schools must document governing board meeting
minutes, comply with open meeting laws, and have a governing body
responsible for making the school’s policy decisions. Likewise, charter schools
must have resumes available for public review in order to document each
teacher’s educational and teaching background and experience in a particular
academic area.
l Arizona Curriculum Standards—Charter schools’ administrators and principals
must annually declare to the Board that their adopted curriculum is aligned with
Arizona standards.
l Annual Financial Report—Charter schools must provide ADE with an annual
summary of their financial activity, including beginning and ending balances,
revenues and expenses, and budget-to-actual comparisons of expenses for the
fiscal year.
Some monitoring efforts ineffective
Despite statutory responsibility for charter school oversight, some of the Board’s
monitoring efforts do not allow it to effectively monitor the hundreds of schools it
regulates. For example, the Board uses on-site visits to monitor schools, but board
staff have not visited all of the schools the Board regulates, nor were the site visits
State of Arizona
page 12
staff conducted thorough. Additionally, the Board has not adequately followed up on
deficiencies during its site visits. Further, while the Board conducts other monitoring
efforts by partnering with ADE, these efforts and associated followup are not well
documented.
Effectiveness of site visits as a monitoring tool has been limited—
Even though site visits can be useful for monitoring certain areas at charter schools,
such as student counts, resource constraints and a lack of thoroughness limit the
effectiveness of the Board’s use of site visits. Board staff conduct two types of visits:
l Site visits—Each year, board staff conduct site visits at a number of schools.
According to the Board’s executive director, the Board targets new schools in
their first year of operation or schools where a problem was brought to the
Board’s attention.1 For example, board staff may conduct site visits at schools
that have a pattern of parent complaints or receive negative media attention.
Based on the Board’s site visit procedures, site visits should focus on charter
school compliance with statutory and contractual requirements, such as
fingerprinting, student counts, and staffing numbers and qualifications. If these
site visits identify problems, the Board reports that it requires schools to take
corrective action. In 2002, board staff conducted compliance site visits at 87
schools, while in 2001, board staff conducted site visits at 40 schools.
l Five-year reviews—Additionally, A.R.S. §15-183(I) requires the Board to conduct
5-year reviews of all the schools it sponsors. While board staff visit schools to
conduct these reviews, according to the Board’s executive director, these
reviews do not assess school compliance with statute and charter requirements,
but instead focus on the school’s mission and goals, as well as developing trend
information, such as public demand for charter schools and the number of
schools that conduct strategic planning. Board staff conducted 3 of these
reviews in 2002 and another 36 reviews in 2001.
However, the effectiveness of site visits as a monitoring tool has been limited for two
reasons:
l Board lacks resources to visit all schools—The Board does not have the
necessary staff resources to conduct site visits at all of the 329 charter schools
it sponsors. The Board has six staff available to conduct site visits in addition to
their other responsibilities, but has not assigned any of its staff to conduct site
visits full-time. Additionally, while site visits take an estimated 2 to 3 hours to
conduct, not including travel time, the actual time to conduct a site visit varies
depending on the staff preparation time for the visit, the school’s location and
associated travel time (51 percent of the charter schools the Board sponsors are
outside of the Phoenix metropolitan area), the type of visit, and the number of
reviewers. As a result, although the Board reports that it targets its visits to those
1 The Board will also visit schools for open houses, graduations, and special presentations, and if a school is in close
proximity to another school targeted for a visit.
Office of the Auditor General
page 13
schools where it believes monitoring is needed most, some schools with
problems may go unmonitored.
l Site visits lack thoroughness—When board staff conduct a site visit at a school,
staff do not always review and verify compliance with mandated educational
requirements that are included in the Board’s site visit procedures. For example,
based on auditor review of the 87 visits conducted in 2002, board staff reviewed
charter school compliance with fingerprinting requirements in only 37 percent
(31 of 87) of the visits, compliance with public access to teacher's education and
teaching background information in only 38 percent (33 of 87) of the visits, and
compliance with curriculum requirements in only 34 percent (30 of 87) of the
visits.
While the Board has developed site visit procedures to direct staff during these
reviews, auditor review of the 87 visits found that staff inconsistently followed the
procedures and inadequately documented the scope of their reviews.
Additionally, the procedures do not provide adequate direction to staff, including
direction on the items to review to verify compliance with critical areas such as
fingerprinting, and does not direct board staff to evaluate several important
areas. For example, it does not direct staff to review school policies and
procedures for administering standardized tests.
Board staff do not always follow up on identified problems—In 2002,
board staff identified problems during 41 of 87 site visits. These issues included
missing fingerprint documentation, missing governing board meeting minutes that
would demonstrate compliance with open meeting laws, and missing teacher
qualification information. Although the Board does not have specific guidance about
how the follow-up process should be conducted, including formally notifying schools
of identified problems, it does maintain site visit reports indicating that when staff find
infractions or cannot verify compliance with requirements, additional information
should be requested or a follow-up visit conducted. However, auditors’ review of the
Board’s files found that staff did not follow up on 31 of the 41 visits where problems
were noted. For example:
l Compliance information unavailable—During a 2002 site visit to a Phoenix
charter school, board staff could not review the school’s compliance with
fingerprinting laws, and public records and open meeting requirements.
Documentation needed to adequately review these areas, such as fingerprint
clearance cards, teacher resumes, and governing board meeting minutes, was
not available at the school. However, neither the Board’s site visit report nor the
school’s public files indicate that board staff followed up on this missing
documentation and obtained it for review.
State of Arizona
page 14
Board did not follow up
on 76 percent of site
visits identifying
problems.
Additional monitoring efforts not well documented—In addition to
conducting site visits, the Board conducts other monitoring efforts, including
partnering with ADE to monitor charter school compliance with special education,
school achievement, and school finance requirements. However, while it appears
appropriate for the Board to work with ADE to monitor charter schools, the Board
lacks documented processes and policies and procedures for doing so, including
any related to followup. For example:
l Special education—According to the Board’s executive director, the Board relies
on ADE’s Exceptional Student Services (ESS) unit to help ensure that board-sponsored
charter schools comply with state and federal special education
requirements. ESS assigns each charter school a specialist who generally visits
the school at least twice each year to provide information and receive feedback.
ESS conducts monitoring visits once every 6 years, unless a charter school fails
to submit its special education policies and procedures on time. Additionally,
ESS assigns each school a mentor who provides up to 12 free hours of
technical assistance and reports the status of each school’s special education
program to ESS. Further, ESS investigates all parent complaints regarding
special education. According to the director of this unit, the Board is copied on
all correspondence between ESS and charter schools, including monitoring
results, complaints, and corrective action plans. In addition, when ESS
determines that a charter school is severely noncompliant with special
education requirements, it informally notifies the Board via a meeting or
telephone call. However, the Board’s processes for interacting with this unit and
documenting charter school compliance with special education requirements is
not documented in policy or procedure. Further, the Board does not have any
procedures in place to ensure that it is continually notified of a school’s progress
in implementing a corrective action plan or addressing the issue.
l School achievement—According to the Board’s executive director, the Board
works with ADE on statutorily mandated compliance with the “Arizona Learns”
requirements, which implement the federal No Child Left Behind Act.
Specifically, A.R.S. §15-241 requires ADE to compile an annual achievement
profile for each school, including scores for Arizona’s Instrument to Measure
Standards (AIMS) test, graduation rates, dropout rates, and data to determine if
schools are making adequate yearly progress. Schools are required to provide
the data necessary to compile the achievement profile to ADE. Charter schools
labeled as “underperforming” by ADE must submit a school improvement plan
to both the Superintendent of Public Instruction and the Board, as well as notify
parents of the designation and the public hearing at which the improvement plan
will be presented. In response to the schools initially labeled as
underperforming, the Board held a public meeting in February 2003, during
which 26 schools submitted improvement plans. Schools that are
underperforming for a second consecutive year are designated as “failing.”
A.R.S. §15-241(R) requires the Board to take action to restore failing charter
Office of the Auditor General
page 15
schools to acceptable performance or revoke the charter. However, the Board
has not established any processes or policies and procedures for accepting
improvement plans and following up on their implementation. Additionally,
according to the Board’s executive director, the Board does not verify that
schools are sending the required letters to parents.
l School finance—Based on a review of meeting agendas, the Board meets
biweekly with staff from ADE’s School Finance Division. Meetings have a
standard agenda to discuss and review a variety of school finance and charter
school issues, such as student count estimates and problems, school payment
issues, and mid-year closings. However, the Board has no policies detailing how
to follow up on information obtained at these meetings.
More systematic monitoring approach would maximize
board efforts
The Board can maximize its limited resources and monitoring efforts by
implementing a more systematic monitoring approach. The Board recently adopted
a new requirement that will provide it with additional monitoring information beyond
what it receives from ADE. To guide its monitoring approach, the Board should adopt
needed administrative rules, and policies and procedures. Additionally, board staff
should consistently follow up on deficiencies identified through its monitoring efforts
and conduct site visits only if warranted by the lack of school progress in addressing
identified deficiencies. Finally, to assist with its follow-up efforts, the Board should
better use its existing accountability database.
Recent change will provide more monitoring information—In addition to
the information the Board receives from ADE, the Board will soon begin to receive
additional monitoring information. At its June 2003 board meeting, the Board
adopted a legal compliance questionnaire that will require each school’s
independent auditor to assess charter school compliance with some special
education requirements, fingerprinting and open meeting laws, and some public
records law requirements. The auditors will be required to assess school compliance
in these areas beginning with the fiscal year 2003 audits. This information, which the
Board has previously sought to monitor using site visits, will assist the Board in
monitoring school compliance with these requirements.
Administrative rules, and policies and procedures, needed to guide
monitoring approach—To ensure its monitoring approach is systematic and
comprehensive, the Board should reflect the various partnering relationships it
maintains with ADE to monitor charter schools in administrative rules, and policies
and procedures. At a minimum, the policies should provide a description of each
State of Arizona
page 16
agency’s monitoring responsibilities, specific guidelines for the Board’s interactions
with ADE, and procedures for documenting information provided by ADE. Further,
the Board should establish policies and procedures for how it will use and track the
information provided by ADE. Finally, the Board should adopt rules, and policies and
procedures, reflecting its use of the newly adopted legal compliance questionnaire.
Adequate followup needed—To help ensure that schools address deficiencies
identified through its monitoring efforts, the Board should adequately follow up on
charter school actions to correct the deficiencies. The Board should establish
administrative rules, and supporting policies and procedures, that specifically detail
its follow-up process, including the steps schools must take to address deficiencies
and the steps staff must follow when conducting follow-up activities. For example, the
Board’s rules and policies should require board staff to formally notify schools of
identified deficiencies, require schools to submit corrective action plans noting how
deficiencies will be addressed and the time frames for doing so, and require board
staff to verify that schools have taken corrective action. Board rules and policies
should also include guidelines for addressing schools that do not correct
deficiencies in a timely manner, such as specifying the conditions under which the
Board will pursue disciplinary action.
Finally, because much of the information previously monitored through site visits will
now be monitored by the school’s independent auditors, the Board should redirect
its use of site visits from routine monitoring to followup. For example, if a school has
not implemented corrective actions in a timely manner or if there is a need to verify
the corrective action taken through a site visit, the Board could direct its staff to
conduct such a visit. Using the site visits for these purposes would maximize the use
of the Board’s limited resources.
Integrate database information to maximize monitoring—Finally, to
assist with its follow-up efforts, the Board should better use its existing accountability
database. While the Board uses this database on a limited basis, the database could
make it easier for the Board to document the results of site visits and follow-up efforts.
The database already contains the majority of the areas the Board is responsible for
monitoring, such as compliance with special education and standardized testing
requirements; however, the Board should modify it to reflect all areas of the Board’s
responsibility. For example, the Board should add data fields for compliance with
fingerprinting and Arizona curriculum standards. The Board would also need to
address problems with missing and/or out-of-date information related to statutory
and charter compliance. For example, the database has no data regarding which
schools submitted scores for the spring 2002 AIMS or Stanford 9 tests. To ensure that
the Board maximizes the use of this database, it should establish policies and
procedures that direct staff on the database’s use, including entering data from
ADE’s monitoring efforts, follow-up efforts, and other relevant information sources.
Additionally, the Board should provide training to its staff on how to integrate the
database into their monitoring and follow-up efforts.
Office of the Auditor General
page 17
Site visits more
effectively used as a
follow-up tool.
Recommendations
1. The Board should develop a systematic monitoring approach that is established
in administrative rules, and policies and procedures. This approach should
include:
a. Descriptions of the Board’s and ADE’s monitoring responsibilities; specific
guidelines for the Board’s interactions with ADE; documentation
requirements for the Board’s ongoing information exchanges with ADE;
and requirements for the use of and tracking of information provided by
ADE; and
b. Descriptions of and uses for any other monitoring method it uses, including
the legal compliance questionnaire.
2. The Board should develop and implement administrative rules, and supporting
policies and procedures, to govern its follow-up process. This process should
include guidelines for:
a. Formally notifying schools of identified deficiencies;
b. Charter schools to submit corrective action plans identifying planned
actions that will address deficiencies;
c. Time lines for submitting the corrective action plans;
d. Board staff to verify that schools have taken corrective action; and
e. Increasing its follow-up efforts by making greater use of site visits for
followup rather than for routine monitoring.
3. The Board should effectively use its existing accountability database by
establishing policies and procedures that direct staff on its use, including
entering data from its document reviews and follow-up efforts.
4. The Board should train its staff how to use the accountability database and how
the database can assist staff in their monitoring and follow-up efforts.
State of Arizona
page 18
Office of the Auditor General
page 19
The Board should continue its efforts to more
closely review schools’ financial condition
While the Board has taken steps to more closely review charter school applications
and monitor charter school finances in an effort to help schools address financial
problems, it can further enhance these efforts. Nine schools have closed since June
2001 due to financial insolvency, and a review of charter school fiscal year 2001 and
fiscal year 2002 audited financial statements revealed continuing financial problems
at several schools. To help address these concerns, the Board strengthened the
financial requirements for charter school applicants in May 2003 and plans to
enhance its review of charter school applicants’ financial components. Additionally,
while the Board has focused more resources on monitoring and reviewing the
financial solvency of its charter schools in response to concerns raised during the
audit, it can take further action to improve its monitoring of charter school finances.
Children adversely affected when schools close
Charter school closures are often due to financial difficulties, creating educational
upheaval for parents and students. Viable financial plans and successful financial
management of charter schools are key factors in opening and operating a charter
school. In many respects, a charter school’s financial operations are as important as
its educational operations. According to a study conducted for the U.S. Department
of Education by SRI International, an independent nonprofit research institute,
financial weakness is one of the most important factors in the decision to reject a
charter school application.1 Additionally, Education Week, a newspaper published by
a Washington, D.C. nonprofit organization that helps raise awareness and
understanding of American educational issues, reported that financial problems are
a major reason for charter school closures or failures.2
1 A Decade of Public Charter Schools, SRI International, November 2002.
2 Bowman, Darcia Harris. Charter Closings Come Under Scrutiny. Education Week, Feb. 28, 2001.
FINDING 2
State of Arizona
page 20
When charter schools close, student education can be disrupted. Parents must find
appropriate new schools for their children and student records may be difficult to
obtain. Additionally, relocating students can be time- and resource-intensive,
especially for parents of children with special needs or students who have not been
successful in traditional public schools. Moreover, closed schools may not fulfill their
legal obligations after closing. In one instance, an Arizona student was unable to
obtain her official transcripts from a charter school that had closed and, as a result,
a college scholarship was jeopardized because she was unable to provide proof of
her academic credits. An Arizona Department of Education official wrote to the
college to explain why the student’s records were unavailable. Additionally, the official
reported that she wrote similar letters to military recruiters on behalf of students who
had attended the same school and wanted to enter the armed services.
In Arizona, financial difficulties resulting from a lack of student enrollment,
mismanagement, and other reasons have affected board-sponsored charter
schools. Specifically, 9 of the 13 schools that closed between June 2001 and April
2003 did so because of financial insolvency, and two of these schools closed after
operating for less than 1 year. According to Department of Education student
enrollment reports, the 9 closings displaced over 950 students.
Board has improved application process
To help reduce the potential for school closures due to financial problems, the Board
recently strengthened its application requirements and improved its application
review process. Prior to this change, while the Board required charter applicants to
submit budget and financial information, the requested information often did not
adequately address critical revenue sources. In addition, the Board’s application
review process lacked the necessary guidance to properly review and evaluate a
charter applicant’s financial information.
Stricter financial requirements now required for applicants—The Board
has initiated changes to its application process to strengthen the financial
requirements for applicants to qualify for a charter, but some additional
improvements would be beneficial. To satisfy board application requirements for
financial and budget information, charter school applicants must submit a business
plan that includes both start-up and operational budgets. The start-up budget should
reflect the applicant’s projected revenues and expenditures for the first 12 months
prior to opening, usually from the time the charter is granted by the Board to the first
state funding payment, and the assumptions that support these projections. The first
state funding payment is then made in July of the year the school opens. The
operational budget should contain the applicant’s projected revenues and
expenditures for its first 3 years of operation after opening. However, the financial
Charter school closures
disrupt student
education.
Since June 2001, nine
Arizona charter schools
closed due to financial
problems.
Office of the Auditor General
page 21
information submitted in some budgets has been unrealistic or supported by invalid
assumptions. Specifically,
l Projected revenues were not always adequately supported—The Board has
approved some applications and granted charters without critically examining
the sources of the applicant’s revenue or the likelihood of its receipt. These
projected revenues have included grants not yet awarded, unapproved loans,
and donations that have not yet been received. However, in some cases,
applicants have not supported the realistic expectation of these revenues, either
in their application or in testimony before the Board, and these revenues have
comprised more than half of the projected revenues. For example, in an
application approved in February 2003, a charter school projected a start-up
budget of no more than $50,000 with monies available from private sources, but
provided no additional information or support for these monies. In another
application approved in January 2003, a school included $200,000 in donations
and a $1.57 million small business loan as revenue, constituting over 92 percent
of its start-up budget, without providing any information on the source of the
donations and their likely receipt, and the loan’s likely approval. Additionally, the
Board approved a school’s application that included federal educational grants
of $165,000 in its first-year revenue projections, even though the school was
ineligible for the grants because of its for-profit tax status. Finally, while the Board
reports that it has required applicants to present realistic alternatives for funding
in the event that the primary sources of projected revenues are not realized in
verbal testimony before the Board, the Board has not required documentation
of alternative funding sources in the application.
l Enrollment estimates were not always supported—Student enrollment
estimates serve as the basis for most of an applicant’s estimated revenues.
However, the operational budgets applicants submitted did not consistently
contain enrollment estimates based on adequate research data. While the
Board required charter school applicants to submit a marketing plan that
supported enrollment estimates, it had no requirements for what the plan must
contain and did not provide direction to applicants regarding how to adequately
support student enrollment projections. Based on a review of 13 applications
submitted in fiscal year 2003, auditors identified two applications that
adequately detailed proposed marketing plans and how the plans would lead to
the estimated student enrollment. One applicant’s plan included information on
the demographics of the surrounding neighborhood, surveys of existing
schools, and projections of homes with children in the area, and identified
potential students for the school.
However, a review of the other 11 applications found that, more typically, schools
provided information on their planned advertising and promotion efforts, but did
not adequately support how these efforts will yield the projected student
enrollment. As a result, some charter school operators have overestimated their
projected enrollment, upon which estimated state funding payment revenue is
based. Additionally, since charter schools receive approximately 80 percent of
their funding from the State, overestimating student enrollment can severely
impact school budgets, planning, and estimated revenues.
To address many of these deficiencies, the Board recently changed the application
requirements for charter school applicants. Specifically, at its May 2003 board
meeting, the Board adopted application requirements that require start-up budgets
to include only revenues for which receipt has been guaranteed. In addition,
applicants’ projected revenues cannot include grants or federal stimulus monies
awarded by the U.S. Department of Education for the design and initial
implementation of charter schools. Additionally, the Board will now evaluate
applicants’ marketing plans with respect to the number of potential students and
growth in the target area, how parents will be attracted to the school, and
implementation costs. These factors will enable the Board to better evaluate
applicants’ enrollment estimates. These changes will go into effect for applicants
applying to open charter schools for the 2004-05 school year. However, even with
these changes, the Board’s application requirements and process are not supported
by administrative rules, or policies and procedures. Therefore, the Board should
codify its revised application process in administrative rules, and also adopt
necessary policies and procedures to support its process.
Board improved application review process—The Board has also changed
its application review process to incorporate some needed guidance to appropriately
evaluate a charter applicant’s financial information, but the review committee’s
composition should be strengthened. Prior to this change, the Board used a review
tool to assist in reviewing and scoring applications that did not provide clear
guidance or examples on how to evaluate and score an applicant’s financial
information. For example, the review tool asked raters to score financial information
on a scale of zero to three, but did not explain the criteria for ranking an application
at any of these levels. In addition, the review tool did not provide any criteria or
examples of acceptable financial documentation, or acceptable support and
assumptions for the financial information, including the projected budgets, submitted
by the charter school applicant.
However, in May 2003, the Board adopted a new application review process that
evaluates applicants’ business plans and operating budgets in detail, including the
marketing, management, and financial plans. For example, factors the Board
considers to determine the adequacy of the marketing plan include determining if the
applicant has identified the number of students and the market growth in the school’s
target area. Additionally, the Board reviews the corporate principals, organizational
structure, governing board structure and composition, and personnel duties and
qualifications in the applicant’s management plan. Finally, the Board will evaluate
start-up and operating budgets reviewing numerous items including policies and
Board will begin to
consider only revenues
for which receipt has
been guaranteed.
State of Arizona
page 22
procedures, timelines for acquiring supplies and equipment necessary to operate the
school, budget assumptions, and other materials that indicate whether the school will
be able to sustain itself.
The Board also revised its scoring criteria from a numeric zero-to-three scale to a
descriptive range that includes “falls below the expectation,” “approaches the
expectation,” “meets the expectation,” and “exceeds the expectation.” The criteria
defines each expectation category and details items to score under each
requirement; however, the Board still needs to codify the new process in
administrative rules and policies.
In addition, the Board should strengthen the composition of its application review
committees to include experts, such as lenders with nonprofit lending experience
and educational program experts with school funding experience. Currently, the
Board uses a peer review committee and in-house staff to review applications. While
the peer reviewers have experience as charter school operators, they do not have
specific expertise in lending, financing, and accounting to evaluate the financial
documents and make expert assessments about the school’s financial viability.
In contrast, the State Board of Education has promulgated rules that specify the
qualifications and requirements for individuals serving on its review committee. For
example, the State Board of Education’s rules require that the review committee
consist of an individual knowledgeable in finance, accounting, and generally
accepted accounting principles. Additionally, a study by the SouthEastern Regional
Vision for Education (SERVE), a nonprofit educational organization that promotes the
improvement of educational opportunities in the Southeastern United States,
advocates having professionals from various disciplines, including experts in finance
and representatives from community development financial institutions, to help
review charter school applications.1
Oversight of operating school finances needs further
improvement
The Board should also more strongly monitor the finances of charter schools that are
already operating. Auditors’ review of audited financial statements for 43 charter
schools identified several operating schools with financial problems. Once auditors
brought these problems to the Board’s attention, it began to enhance its oversight of
charter school finances, but needs to do more. Specifically, the Board should
increase its review of available financial information, focus its monitoring efforts on
fiscally unstable schools, and require schools with financial problems to take
corrective action.
Application review
committees should
include lending and
school funding experts.
Office of the Auditor General
page 23
1 SouthEastern Regional Vision for Education. The Charter School Review Process: A Guide for Chartering Entities, March
1998.
Several schools have continuing financial problems—Auditors reviewed
43 charter schools’ fiscal year 2001 financial statements audited by public
accounting firms, and found evidence that 21 of the schools were experiencing
financial difficulties. Eleven of these 21 schools had deficits resulting from liabilities in
excess of assets. In four instances, the deficits were serious enough that the school’s
external auditor questioned the school’s ability to continue operating. These deficits
ranged from $8,600 to nearly $500,000. Ten of the 21 schools did not have sufficient
cash or other readily available resources to satisfy obligations due within the next
year.
To determine if any of the 21 schools continue to experience financial difficulties,
auditors also reviewed the available fiscal year 2002 audited financial statements.
Based on a review of the fiscal year 2002 statements, 12 of the 21 schools continue
to have financial problems, including 6 with deficits resulting from liabilities in excess
of assets. Seven of the 21 schools appear to have improved their financial situation,
while 1 school closed because the Board revoked the school’s charter.1 One charter
school had not submitted its fiscal year 2002 audited financial statements as of May
1, 2003, even though they were due on March 31, 2003.
Board changed focus of monitoring efforts—During the audit, the Board
took some steps to improve its oversight of charter school financial solvency.
Historically, the Board’s financial oversight of charter school finances focused on
whether charter schools’ annual financial statements and audits complied with
Generally Accepted Accounting Practices (GAAP) and Generally Accepted Auditing
Standards (GAAS). The Board had retained a contractor to review each school’s
audited financial statements for compliance with GAAP and GAAS and to produce a
report of the external auditor’s findings from the audited financial statements for the
Board’s use. However, this contract did not require a review of the audited
statements for solvency or financial weaknesses, nor did the Board consistently
follow up on the report of findings.
In response to these problems, the Board has begun to change its monitoring
approach. One step the Board took was to change the requirements of an existing
staff position to identify and monitor schools experiencing financial difficulties.
Specifically, with this staff position, the Board has begun to create a database of the
2001 charter school audited financial statements in an effort to identify financial
trends and indicators of financially troubled schools. According to the executive
director, board staff will also follow up on the findings reported in the school’s annual
audits, require schools to take corrective actions to address financial problems, and
conduct financial assessments of financially at-risk schools.
A second step involved retaining the services of a certified public accountant (CPA)
in March 2003, to help monitor the financial operations of charter schools and review
school audits for solvency or other financial weaknesses. According to the contract,
the CPA will help to follow up on any findings in the audits, train the Board’s staff on
State of Arizona
page 24
Several schools have
operating deficits.
1 The Board revoked this school’s charter for its failure to give the AIMS test and submit its fiscal year 2001 audited financial
statements in a timely manner.
Office of the Auditor General
page 25
reviewing financial information submitted by schools, and conduct a desk review of
a sample of the charter school audited financial statements to determine compliance
with financial requirements and evaluate operational stability.
Additional actions can further strengthen oversight—The Board can take
additional steps to strengthen its oversight of school finances. These steps include:
l Reviewing financial information charter schools already submit to the Arizona
Department of Education (ADE)—According to statute, charter schools must
submit information required by the annual financial report to the ADE by October
15 of each year. This information includes beginning and ending balances,
revenues and expenses, and budget-to-actual expenses for the prior fiscal year.
The annual financial report presents condensed financial activity of charter
schools for comparison purposes and includes information that can assist
sponsors, school governing boards, ADE, legislators, and taxpayers in
determining whether charter schools are meeting their stewardship
responsibilities. The Board should review this information annually.
Other charter school authorizers also use financial reporting as a means of
identifying fiscally unstable schools, as well as for closely monitoring schools
with financial problems. For example, the Massachusetts Department of
Education requires its schools to annually submit financial statements for the
prior year and projections of income and expenses for the upcoming school
year in order to examine differences between the projected year’s budget and
the previous year’s actual performance. This practice helps identify financially
troubled schools and triggers additional monitoring. Additionally, the Chicago
Public Schools and the District of Columbia Public Charter School Board require
that charter schools provide these authorizers with copies of their annual
budgets and cash flow projections for each fiscal year. 1 Finally, the D.C. Board
expects the schools it sponsors to provide it with interim financial statements.
l Requiring schools to take corrective action to address financial problems—For
those schools with financial problems, the Board should require that these
schools submit corrective action plans detailing steps the school will take to
address the financial problems. Board staff should then review these corrective
action plans and monitor school progress in implementing the plans. In addition,
if the school’s independent auditor identifies financial problems so severe that
school closure is possible, to ensure the public is adequately informed, the
Board should discuss these schools at its meetings and include this information
in the school’s public file. At least one other charter school authorizer does
something similar. The North Carolina State Board of Education’s Charter
School Advisory Committee receives a “watch list” that contains schools having
financial problems and they discuss this list at their meetings.The Board also
Board has begun to
monitor charter school
finances.
1 Chicago public schools require that schools annually submit quarterly cash flow projections.
State of Arizona
page 26
could consider publishing a list of schools experiencing financial problems on
its Web site.
l Developing needed administrative rules, and supporting policies and
procedures regarding its fiscal oversight practices—Currently, the Board lacks
any guidance regarding its oversight practices for charter school finances. The
Board should adopt needed administrative rules and generate policies and
procedures that specify the type of financial information and documentation it
should review and the frequency of reviews. Likewise, policies and procedures
should also contain guidelines for following up on findings or concerns noted by
board staff and schools’ external auditors and ensuring that schools take
corrective actions. These guidelines should be similar to the follow-up process
and guidelines recommended in Finding I (see pages 11 through 18).
Office of the Auditor General
page 27
Recommendations
1. The Board should codify its application process by establishing necessary
administrative rules, and supporting policies and procedures.
2. The Board should improve the review of financial information provided in charter
school applications by:
a. Establishing necessary administrative rules, and supporting policies and
procedures for the review and scoring of financial information in the charter
school application; and
b. Restructuring the application review committee to include lenders with
nonprofit lending experience and educational program experts with school
funding experience.
3. The Board should improve its oversight efforts of operating schools by:
a. Annually reviewing the financial information submitted to the Arizona
Department of Education as part of the annual financial report;
b. Requiring schools with financial problems to submit corrective action plans
detailing steps the school will take to address the problems and monitoring
school progress in implementing the plans;
c. Identifying at board meetings and in its public files schools whose
independent auditor has found financial problems so severe that closure is
possible; and
d. Developing necessary administrative rules, and supporting policies and
procedures, to guide its financial oversight practices.
State of Arizona
page 28
Board needs additional disciplinary authority
The Legislature should consider amending statute to provide the Board with
additional disciplinary authority to appropriately respond to charter school violations.
Currently, the Board is limited to exercising two options: recommending the
withholding of 10 percent of a charter school’s state funding or revoking a charter.
However, an expanded array of nondisciplinary and disciplinary options may be more
appropriate for some charter school problems or violations. These options might
include issuing a nondisciplinary letter of concern; or disciplinary actions such as
requiring staff to take additional training, withholding a board-determined amount of
state funding, or placing a school on probation. Regardless of whether the Board
receives additional disciplinary authority, it should develop necessary administrative
rules and supporting policies to govern its disciplinary process.
Board has limited disciplinary options
Statute currently makes two disciplinary options available to the Board. Specifically,
when the Board finds that a charter school has violated state or federal law, or has
violated the terms of its charter, A.R.S. §§15-183 and 15-185(H) allow the Board to
take one of the following actions:
l Withhold 10 percent of a school’s funding—The Board can request that the
Arizona State Board of Education (SBE) withhold up to 10 percent of a school’s
monthly state funding for a violation of federal or state law, or contractual
requirements. However, while SBE usually withholds funds as requested, the
authority to withhold 10 percent of a school’s state funding actually only delays
these payments to the school. Once schools demonstrate that the violation has
been corrected, the Board will direct SBE to forward any withheld monies to the
schools.
Office of the Auditor General
page 29
Board has only two
disciplinary options
available.
FINDING 3
l Revoke a charter—If the violation is severe, the Board can act to revoke a
school’s charter. If the Board decides to pursue this course of action, statute
requires the Board to schedule and hold a revocation hearing and send the
school a Notice of Intent to Revoke 90 days prior to the scheduled hearing.
The Board uses the first action far more frequently than the second. As illustrated in
Figure 3, during 2001 and 2002, the Board took action to request that SBE withhold
state funding from charter schools 55 times, for infractions ranging from school
noncompliance with special education requirements to schools not
submitting their annual audited financial statements within statutory
time frames. Prior to July 2000, the Board did not have authority to
request the withholding of state monies and thus could not exercise
this disciplinary option.
Until July 2000, the only disciplinary option available to the Board
was revocation of a school’s charter. While the Board initiated
revocation proceedings against six schools during its first 5 years
of operation (1996-2000) and revoked one charter, it has initiated
this action against more schools in 2001 and 2002. Specifically, the
Board initiated revocation proceedings against ten schools in 2001
and 2002, but revoked only one charter. The Board initiated these
proceedings in response to violations that have threatened the
health or welfare of students, such as failing to fingerprint
uncertified employees; or, if schools have multiple serious
violations, including failing to provide special education services
and not administering the Arizona’s Instrument to Measure
Standards (AIMS) test. For these ten cases, two schools voluntarily
surrendered their charter; the Board dismissed four notices once
the schools remedied the violations; and the Board entered into
agreements with the other schools to allow them to continue
operating with certain restrictions.
Expanded options would assist Board
The Board’s limited disciplinary options do not always provide an
action that is equivalent to the level of the violation. The withholding of
10 percent of a school’s monthly state funding may be too harsh for minor offenses
and may not provide enough flexibility in the case of more serious violations.
Therefore, the Legislature should consider granting the Board expanded disciplinary
options.
Current disciplinary options not appropriate for some offenses—For
some incidents of noncompliance, withholding 10 percent of a school’s state funding
State of Arizona
page 30
Type of
Violation
Number of
Violations
Failure to submit the Annual
Financial Report to the
Arizona Department of
Education 2
Failure to submit independent
auditor’s report on time 44
Failure to comply with special
education provisions 5
Failure to administer the AIMS
test 4
Total violations 55
Figure 3 Violations for Which the Board
Requested That State Funding
Be Temporarily Withheld
2001 and 20021
__________________
1 Numbers do not reflect violations committed by a school
that resulted in the revocation of that school’s charter.
Source: Auditor General staff analysis and summary of
information contained in the Arizona State Board
for Charter Schools board meeting minutes for
2001 and 2002.
may be too strong of an action. For example, failing to have faculty resumes on file
for public review or failing to document governing board meeting minutes are both a
statutory and contract violation. However, charter school noncompliance with these
requirements does not necessarily impair children’s welfare or education, and in fact,
the Board has not taken disciplinary action against schools that have not complied
with these requirements.
The limited number of disciplinary options available to the Board also may restrict its
ability to take appropriate action when schools commit violations that are more
serious. For example, if a school fails to administer the AIMS test, a primary tool for
assessing pupil achievement, it not only violates statute, but also jeopardizes
students’ education and could prevent them from graduating. In fiscal year 2002,
seven charter schools failed to give the AIMS test to their students. In response, the
Department of Education withheld state monies from these schools, while the Board
initiated revocation proceedings against two schools because these schools also
had not submitted their annual audited financial statements. The Board
recommended that 10 percent of four schools’ state funding be withheld and took no
further action against one school. However, for these five schools, more serious
action may have been warranted.
Finally, the Board cannot increase the amount of state funding withheld or take
increasingly severe action if schools have multiple violations or if violations become
more serious. Instead, the Board can only add the additional violations to the original
reason for withholding a school’s funding. For example, in 2002 the Board was
already withholding 10 percent of the state funding from three schools for their failure
to comply with special education requirements. The schools later failed to submit
their Annual Financial Report, a condensed summary of their financial activity for the
fiscal year, to ADE. However, unless the Board decides to revoke a school’s charter,
it could not take additional or progressive disciplinary action against the schools
because it does not have the authority to do so.
Board needs greater range of nondisciplinary and disciplinary
options—The Legislature should consider amending A.R.S. §§15-183 and 15-
185(H) to provide the Board with additional nondisciplinary and disciplinary options.
Expanded options would allow the Board to impose discipline that is more consistent
with the charter school violation, provide the Board with greater flexibility, and allow
for progressive discipline in the event of increasingly severe or multiple violations.
Changes to statute could include:
l Letters of concern—Letters of concern act as nondisciplinary advisory letters
that can be issued when there is insufficient evidence to support direct action
against a charter school, but sufficient evidence for the Board to notify the
charter school of its concern and require the school to take necessary corrective
action. Letters of concern are not a disciplinary action, but as is the case with
other Arizona regulatory agencies, can be used as a factor in determining future
Office of the Auditor General
page 31
Board’s limited options
hamper progressive
discipline.
Withholding state
funding may be
inappropriate for some
offenses.
disciplinary actions. For example, both the Arizona Medical Board and Arizona
Board of Osteopathic Examiners in Medicine and Surgery have the authority to
use nondisciplinary advisory letters or letters of concern when there is
insufficient evidence to take action, but sufficient evidence to notify physicians
of their concerns.
l Mandatory training—Mandatory training would also be an appropriate tool or
action for the Board to address minor infractions. The Board could require
charter school governing board members and administrators to take specific
training that would address the school violation or concern. For example, if a
school has not followed special education requirements, the Board could
require the school operators to take additional special education training that the
Department of Education currently provides. Similarly, the North Carolina Office
of Charter Schools requires some charter school governing boards to obtain
mandatory management training to address charter school violations or
deficiencies. In these cases, schools can choose the necessary training from
several training groups, such as the National Charter School Institute, which
provides training on topics ranging from running a governing board meeting to
developing appropriate personnel policies.
l Increase amount of withholding—Specific authority to increase the amount of
state funding withheld would give the Board increased flexibility to take
appropriate action, especially in circumstances where progressive discipline is
warranted. In the 2003 legislative session, the Board sought this additional
authority. Specifically, the Legislature considered House Bill 2097, which would
have provided the Board with authority to direct ADE to withhold any portion of
the school’s state funds. Although defeated, this proposed legislation would
have allowed the Board to impose withholdings greater than 10 percent for more
serious or multiple violations. According to legislative analysts, other measures
contained in the bill led to its defeat. However, the State Board of Education
(SBE) has similar authority to withhold any portion of state funding from school
districts. A.R.S. §15-272 authorizes the SBE to withhold any portion of state
funding if a school district has failed to comply with the uniform system of
financial records.
l Probation—Authority to impose probation would give the Board greater latitude
to ensure violations are addressed by requiring that specific terms and
conditions be met before the probation can be lifted. Other charter school
authorizers also have the authority to use probation, including North Carolina,
the District of Columbia (D.C.), and Texas. For example, the North Carolina State
Board of Education has the authority to place charter schools on probation for
a variety of violations. These violations include failure to submit required financial
data, a nonfunctioning school governing board, and failure to comply with health
and safety standards. While on probation, schools must correct any deficiencies
within specific time frames. If a school has not corrected the noted deficiencies
State of Arizona
page 32
while on probation, the North Carolina Board will take additional progressive
disciplinary action.
If the Legislature amends statute to provide the Board with additional disciplinary
options, it would have the effect of also providing the SBE and local school districts
with this same authority. Statutes authorizing the use of current disciplinary options
pertain to all three charter school authorizers in the State.
Board should adopt administrative rules
Regardless of whether the Board receives additional disciplinary authority, it should
adopt necessary administrative rules and supporting guidelines to govern its
disciplinary process. Pursuant to A.R.S. §15-182(E)(5), the Board must adopt rules
for its own governance. Statute also requires the Board to establish rules for
administrative hearings. However, the Board has not established these required
rules. This failure could subject board actions to questions of appropriateness and
validity. The Board should also establish guidelines that will assist it in making
consistent and appropriate disciplinary decisions. Guidelines should include a
hierarchy of disciplinary actions and specify factors, including the violation’s severity,
the charter school’s history, and other aggravating or mitigating circumstances that
the Board should consider when imposing disciplinary action.
Other charter school authorizers maintain specific guidelines for disciplining
noncompliant schools. For example, the North Carolina Charter Schools Advisory
Committee has specific guidance that governs its disciplinary process. These
guidelines outline violations and identify the actions that the Committee can
recommend to the North Carolina State Board of Education, which is the state’s only
authorizer. Under this process, there are four phases of noncompliance. For each
phase, the guidelines communicate how close the school is to having its charter
revoked, require corrective action, and establish time lines for compliance. In
addition, at any point in the process, the Charter School Advisory Committee may
suggest to the North Carolina State Board of Education that a noncompliant school
be moved more quickly toward revocation.
Office of the Auditor General
page 33
Board should adopt
required rules.
Recommendations
1. The Legislature should consider revising A.R.S. §§15-183 and 15-185(H) to
grant the Board authority to impose a greater array of nondisciplinary and
disciplinary options for charter school violations. Specifically, the Legislature
should consider giving the Board authority to:
a. Issue nondisciplinary Letters of Concern and define when it would be
appropriate for the Board to issue these letters, which can also be used in
determining future disciplinary actions;
b. Impose mandatory training for charter school governing board members,
and operators/administrators;
c. Direct the State Board of Education to withhold any portion of a charter
school’s state funding; and
d. Impose probation with specific terms.
2. Regardless of whether the Board receives additional disciplinary authority, the
Board should adopt appropriate administrative rules to govern its disciplinary
process.
3. The Board should develop and implement disciplinary guidelines that include
consideration of the violation’s severity, the charter school’s violation history, any
other aggravating or mitigating factors, and the disciplinary actions available to
the Board.
State of Arizona
page 34
1. Objective and purpose in establishing the Arizona State Board for Charter
Schools.
The Legislature established the Arizona State Board for Charter Schools (Board)
in 1994 to sponsor and regulate charter schools. While the Board is one of three
entities in the State authorized to grant charters, as of March 2003, the Board
sponsored over 70 percent of the charter schools in the State. In addition to the
Board, the State Board of Education and local school districts can grant
charters.
The Board’s mission statement is as follows:
“To foster accountability in charter schools which will improve student
achievement through market choice.”
In support of its mission, the Board performs the following functions:
l Charter authorization—The Board grants charters to qualified applicants for
charter schools. It evaluates applications from new applicants, charter
school operators wishing to transfer sponsorship to the Board, and board-sponsored
operators seeking to expand their number of sites.
l Oversight—The Board exercises general supervision over charter schools
it sponsors through its review of schools’ annual financial audits, statutorily
required 5-year reviews, and site visits.
l Complaint resolution—The Board receives complaints from parents,
students, charter school faculty, and the public on a broad range of charter
school issues. According to the Board’s executive director, the Board
investigates and resolves complaints or, depending on the nature of the
complaint, refers the matter to the appropriate agency, such as the county
attorney or the Attorney General.
Office of the Auditor General
page 35
SUNSET FACTORS
l Public information—The Board provides information to the public and
existing and prospective charter school operators regarding schools,
operating requirements, and other useful information.
2. The effectiveness with which the State Board for Charter Schools has met its
objectives and purposes and the efficiency with which it has operated.
The Board has generally met its objective and purpose through its sponsorship
of over 300 charter schools. However, there are a number of ways in which the
Board could improve its efficiency and effectiveness. First, while the Board
monitors charter schools, including conducting statutorily required 5-year
reviews and periodic site visits, the Board should implement a more systematic
monitoring approach. This would enable the Board to more effectively oversee
the schools it regulates with its available resources. Monitoring charter schools
is one of the most critical functions that the Board can perform, as it helps
ensure that schools comply with federal and state requirements, and effectively
educate Arizona students. However, the Board’s current monitoring approach,
which uses charter school site visits and other monitoring tools, is not fully
effective. The Board cannot visit all 329 schools in a timely manner with its
limited number of staff, and the site visits it does conduct are not thorough. In
addition, deficiencies are not adequately followed up. Further, its other
monitoring efforts are not well documented.
Given the number of schools the Board regulates and its limited resources, it
should adopt a more coordinated monitoring approach using its various
monitoring methods. As part of this process, board staff should also consistently
follow up on deficiencies identified through its monitoring efforts and use site
visits as a follow-up tool (see Finding 1, pages 11 through 18).
Additionally, the Board should continue with its efforts to more closely review
charter school applications and monitor charter school finances. Some charter
schools in the State have closed for financial reasons, while several operating
schools have significant financial problems. To begin addressing these
concerns, the Board has strengthened the financial requirements for opening a
school and plans to enhance its review of applicant financial information.
Specifically, at its May 2003 board meeting, the Board adopted new charter
school application requirements that require start-up budgets to include only
revenues for which receipt has been guaranteed. The Board has also enhanced
its application review process. Additionally, while the Board has improved its
monitoring and review of operating charter schools’ finances, it should increase
its review of available charter school financial information and require schools
with financial problems to take corrective action (see Finding 2, pages 19
through 27).
State of Arizona
page 36
3. The extent to which the State Board for Charter Schools has operated within the
public interest.
The Board has generally operated within the public interest by granting charters
to qualified applicants and providing public information on charter schools.
Consistent with its legislative mandate, the Board has granted hundreds of
charters and regulated 329 charter schools as of March 2003. These schools
provide educational alternatives to students and market choices to parents.
Additionally, the Board has processes in place to provide charter school
information to current and prospective school operators and the public. For
example, the Board provides prospective charter operators with information
about the chartering process and referrals to other state and federal agencies
dedicated to assist charter schools. The Board also works with the Arizona
Charter Schools Association to provide operators with support and training. In
addition, the Board maintains a Web site that informs operators of upcoming
training and educational opportunities, as well as provides information to the
public about charter schools, including a “Frequently Asked Questions”
component. Finally, the Board publishes a newsletter that also provides useful
information to the public and charter school operators.
4. The extent to which rules and regulations promulgated by the State Board for
Charter Schools are consistent with legislative mandate.
While the Board is mandated by statute to promulgate administrative rules, it has
failed to do so. Pursuant to A.R.S. §15-182(E)(5), the Board must adopt rules for
its own governance. These rules pertain to the management of matters affecting
charter schools’ procedural or substantive rights. Statute also requires the
Board to establish rules for administrative hearings. By not establishing rules
regarding its various processes, including its application and chartering,
oversight, and disciplinary processes, the Board has not provided the public
with the opportunity to provide input and comment on them. Additionally, without
rules, the Board’s actions could be jeopardized.
Although the Board has undertaken efforts to adopt rules, it has never
proceeded through the entire rule-making process. For example, the Board
drafted proposed rules and submitted them to the Governor’s Regulatory
Review Council (GRRC) for courtesy reviews in 1999 and 2001. While not part of
the formal rule-making process, GRRC performed the courtesy reviews, but
found the Board’s rules to be deficient in many areas. For example, GRCC
stated that the proposed rules were duplicative of the Board’s statute, that time
lines for processing an application were nonexistent, and that the proposed
rules failed to define the factors used to consider accepting or rejecting an
Office of the Auditor General
page 37
Board has failed to
adopt any required
rules.
application. According to the Board, it lacks sufficient expertise to redraft the
rules, and has not discussed draft rules with GRRC since May 2002.
The Board should initiate the rule-making process and adopt all necessary rules
as required by statute. According to the Board’s executive director, the Board
plans to begin the formal rule-making process in fiscal year 2004, after it
approves the proposed rules.
5. The extent to which the State Board for Charter Schools has encouraged input
from the public before adopting its rules and the extent to which it has informed
the public as to its actions and their expected impact on the public.
Since the Board has not promulgated rules, it has not requested public input
regarding the proposed rules. While it filed a Notice of Proposed Rule Making
with the Secretary of State in 2000, drafted proposed rules, and submitted those
rules to GRRC for informal courtesy reviews, it has never formally submitted
rules to GRRC. Soliciting public input is required only after the Board formally
submits its rules to GRRC. According to the Board, it will review proposed rules
at a public meeting after it submits them to GRRC for review. However, in
addition to soliciting input at a public meeting, the Board should solicit input
from its various constituent groups and stakeholders, such as the Arizona
Charter Schools Association and the Arizona Regional Resource Center, while
drafting proposed rules.
The Board has complied with open meeting laws by posting public meeting
notices at least 24 hours in advance at the required locations and making
meeting agendas available to the public, and having a statement of where
meeting notices will be posted on file with the Secretary of State.
6. The extent to which the State Board for Charter Schools has been able to
investigate and resolve complaints that are within its jurisdiction.
Statute authorizes the Board to receive and investigate complaints regarding
charter schools, and while the Board has a process for doing so, this process is
not supported by rules. According to the Board’s executive director, the Board
receives complaints from parents, students, charter school operators, and the
public; and received 98 written complaints in fiscal year 2002. The Board
categorizes the complaints it receives as follows:
l Physical or sexual abuse of a student by school staff or faculty;
l Failure to provide special education services;
State of Arizona
page 38
l Fraud, such as failure to purchase books or equipment with grants or funds
received for that purpose; and
l Contract and compliance-related issues, such as problems reporting
Average Daily Membership, teaching religion, or failing to administer the
required tests.
Based on the type of complaint it receives, the Board will either refer the
complaint to the appropriate agency or investigate and resolve the complaint if
it is within the Board’s jurisdiction. According to the Board’s executive director,
the Board refers the first three categories to the appropriate law enforcement or
state agency and provides any requested assistance and documentation to
these agencies. For example, abuse complaints are referred to the appropriate
law enforcement agency, special education complaints are referred to the
Department of Education, and fraud complaints are referred to the Attorney
General’s Office.
The Board investigates and resolves contract or compliance-related complaints.
The Board will also attempt to provide assistance in resolving noncontract-related
complaints, such as complaints regarding school uniforms or unfair
treatment by a teacher, even though it does not have jurisdiction in these
matters. However, the Board lacks administrative rules regarding complaint
processing and a reliable system to track the complaints it receives and their
investigation and resolution. Currently, while the Board’s staff maintain a list
documenting the receipt of complaints, the Board does not track their
investigation, referral, or disposition.
Therefore, the Board should adopt all necessary rules, and supporting policies
and procedures, to guide its complaint receipt, investigation, and resolution
process. Additionally, the Board should automate its complaint tracking by
possibly incorporating the function into an existing board database, such as its
accountability database, which already has the capability to track complaint
processing.
7. The extent to which the Attorney General or any other applicable agency of state
government has the authority to prosecute actions under the enabling
legislation.
A.R.S. §41-192 authorizes the Attorney General to prosecute actions and
represent the Board. The Board refers complaints alleging school involvement
in fraudulent behavior directly to the Attorney General’s Office for investigation
and possible prosecution.
Office of the Auditor General
page 39
Board should document
its complaint-handling
process.
8. The extent to which the State Board for Charter Schools has addressed
deficiencies in the enabling statutes, which prevents it from fulfilling its statutory
mandates.
The Legislature has amended several board statutes in recent years, some of
which have enhanced the Board’s ability to fulfill its statutory mandate. For
example:
l In 2000, the Board supported and the Legislature passed statutory
changes that allow the Board to recommend to the Department of
Education that 10 percent of a charter school’s state funding be withheld
for schools that fail to comply with federal and state law, or contractual
requirements.
l In 2000, the Board also supported legislation that added misappropriation
of charter school funds to the criminal code.
l In 2003, the Board supported and the Legislature considered House Bill
2097, which would have provided the Board with authority to direct the
Department of Education to withhold up to 100 percent of a school’s state
funding for failure to comply with legal or contractual requirements.
Although defeated, this proposed legislation would have allowed the Board
to impose withholdings greater than 10 percent for more serious or multiple
violations. According to legislative analysts, other measures contained in
the bill led to is defeat.
Additionally, the fiscal year 2004 omnibus budget reconciliation bill (Laws 2003,
Ch. 264 §20) suspended the State Board of Education’s (SBE) authority to
sponsor any additional charter schools in fiscal year 2004 and requires the SBE
to enter into an intergovernmental agreement with the Arizona State Board for
Charter Schools requiring the Board to provide oversight for SBE-sponsored
charter schools in fiscal year 2004. This law eliminates the duplication of charter
granting between the two state agencies and transfers approximately $185,000
annually and three FTE to the Board.
9. The extent to which changes are necessary in the laws of the State Board for
Charter Schools to adequately comply with the factors listed in the subsection.
Based on audit work, the Legislature should consider amending A.R.S §§15-183
and 15-185(H) to provide the Board with an expanded range of nondisciplinary
and disciplinary options to more appropriately respond to both minor and major
statutory and contract violations. The changes could include authority to use
nondisciplinary letters of concern, and disciplinary options such as requiring
State of Arizona
page 40
mandatory training, directing the withholding of any amount of state funding,
and placing schools on probation. (see Finding 3, pages 29 through 34).
10. The extent to which the termination of the agency would significantly harm the
public health, safety, or welfare.
Termination of the Board could potentially harm the public welfare since the
Board oversees and monitors 329 charter schools that educate approximately
54,000 students. Without the Board to monitor and enforce charter school
compliance with federal and state laws and accountability for student
achievement and academic progress, students may not receive the education
to which they are entitled. If the Board were terminated, other authorizers in the
State, such as the State Board of Education and local school districts, may not
be able to assume the regulation of these schools. Specifically, as indicated in
Sunset Factor No. 8, Laws 2003, Ch. 264 §20 suspended the State Board of
Education’s authority to sponsor any additional charter schools in fiscal year
2004 and requires the SBE to enter into an intergovernmental agreement with
the Arizona State Board for Charter Schools requiring the Board to provide
oversight for SBE-sponsored charter schools in fiscal year 2004. Additionally,
statute prohibits local schools districts from sponsoring charter schools outside
of their districts, and only eight local school districts currently sponsor charters.
As a result, other local school districts would need to agree to sponsor charter
schools and establish the necessary regulatory systems and expertise in order
to assume the regulation of the hundreds of charter schools sponsored by the
Board.
11. The extent to which the level of regulation exercised by the State Board for
Charter Schools is appropriate and whether less or more stringent levels of
regulation would be appropriate.
The audit found that the current level of regulation exercised by the State Board
for Charter schools is generally appropriate.
12. The extent to which the State Board for Charter Schools has used private
contractors in the performance of its duties and how effective use of private
contractors could be accomplished.
The Board has relied on private contractors to perform activities beyond its staff
resources. For example, the Board had contracted with a private certified public
accounting firm to annually review each charter school’s audited financial
statements for compliance with accounting and auditing standards and to
forward a report of audit findings to the Board. This contract ended in February
Office of the Auditor General
page 41
2003, and the Board’s staff now perform many of this contractor’s functions.
However, the Board revised the scope of services requested from a certified
public accountant and entered into a new contract with a different contractor in
March 2003. The contractor will review charter school audited financial
statements for financial solvency concerns and other financial weaknesses, in
addition to compliance with accounting and auditing standards. Additionally, the
Board has a contract with the Department of Administration for accounting
services.
This audit did not identify any further uses for private contracts.
State of Arizona
page 42
Office of the Auditor General
AGENCY RESPONSE
State of Arizona
“To foster accountability in charter schools, which will improve student achievement through market choice.”
Arizona State Board for Charter Schools
Fax: (602) 364-3089
August 6, 2003
Debbie Davenport
Auditor General
Office of the Auditor General
2910 North 44th Street, Suite 410
Phoenix, Arizona 85018
Dear Ms. Davenport,
Thank you for the opportunity to provide comments on the evaluation of the Arizona State Board
for Charter Schools that was conducted as part of the Sunset review process prescribed in
Arizona Revised Statutes (A.R.S.) § 41-2951 et seq. We are pleased with the Auditor General’s
report that supports some of the Board’s current practices and directions, as well as providing
observations and recommendations that will help the Board refine some processes and policies
that will help strengthen Arizona’s Charter School system. The success of Arizona’s charter
school movement is a result of the commitment, dedication and extraordinary hard work of past
and present legislators, policy makers, board members, charter operators, and staff who work
together to embrace public school choice for parents and students.
The Board appreciates and respects the professionalism of the team of auditors who have worked
on this report. We take the recommendations seriously and have deliberated and discussed at
length each and every one. The Board’s goal is to glean from this audit all possibilities that will
make the Board more responsive and effective and our schools more successful.
Please feel free to contact me at (602) 364-3080 if additional information is needed.
Sincerely,
Kristen Jordison
Executive Director
Arizona State Board for Charter Schools 1
Arizona State Board for Charter Schools
Response to the Auditor General’s Performance Audit
INTRODUCTION
Less than a decade ago the Arizona State Legislature passed a law (A.R.S. § 15-181 and
15-182) that allowed for the establishment of charter schools and created the Arizona
State Board for Charter Schools (the “Board) as one of three possible charter school
sponsors in the state. Pursuant to this law (A.R.S. 15-182.E) the Board is responsible for
granting charters to qualified applicants, exercising general supervision over these
schools, making recommendations to the legislature, determining the policy of the Board,
and delegating the execution of this policy to it’s staff and the Superintendent of Public
Instruction. As a public service, the Board provides information to schools and the public
through the Board’s website, the public charter files, and monthly publications of the
Board’s activity. Additionally, the Board receives complaints from parents, students,
charter school faculty and the public that are processed and made public.
Arizona has created an education marketplace with the creation of charter schools. A
marketplace where parents and students, the “customer”, have many choices to satisfy
their differing needs. Unlike school districts that have students automatically assigned to
them, charter schools must attract their students to survive. Thus, their “product” or
educational service must meet the needs of the customer and the regulatory body in order
to sustain their business. If the educational program that is offered is not desired on the
market or does not meet the standards laid out by the state, the business will close.
So how is this working in Arizona? The answer is simple, the vast majority of charter
schools in Arizona have been successful.
· According to a study of parent satisfaction conducted in the spring of 2002
sixty-seven percent of parents graded their charter school an A+ or an A. 1
· According to a national survey conducted by the Thomas B. Fordham
Institute, Arizona ranked 1st in the nation in state policies for charter
schools; 3rd in the nation for overall policies and practices, and 9th in the
nation for charter school sponsors. In terms of grades, Arizona received
an A+ for financial audits and progress reports required; an A for clear
special- needs students provisions; an A for reports reviewed, problems
1 Solmon, Lewis C. (2003). Findings from the 2002 Survey of Parents with Children in Arizona Charter
Schools: How Parents Grade Their Charter Schools. Prepared for the Arizona State Board for Charter
Schools.
Arizona State Board for Charter Schools 2
flagged and school notified, and an A- for charter school sponsors making
decisions on merit, not politics.2
· When compared to Arizona district school students, Arizona charter
school students are making greater gains in reading and are making about
the same gains in math. Additionally, the academic gains are greater the
longer a student attends a charter school.3
· The closure rate for charter schools is very small. A rate significantly
lower than the rate of small business closures.
· The Arizona charter school law has repeatedly been named the strongest
charter school law in the nation by the Center for Education Reform. 4
The Board appreciates the professionalism of the team of auditors who worked on this
audit for the past year. The audit supports some of the Board’s current practices and
directions, as well as providing observations and recommendations that will help the
Board refine some processes and policies that will help strengthen Arizona’s charter
school system.
2 Palmer, L. B., & Gau, R. (June 2003). Charter School Authorizing: Are States Making the Grade?
Published by the Thomas B. Fordham Institute with support from the Walton Family Foundation.
3 Solmon, L., Garcia, D., & Paark, K. (March 2001). Does Charter School Attendance Improve Test
Scores? The Arizona Results. A Project of the Goldwater Institute’s Center for Market-Based Education.
4 Charter School Laws Across the States Ranking Scorecard. Center for Education Reform
[http://www.edreform.org/charter_schools/states/arizona.htm].
Arizona State Board for Charter Schools 3
AUDITOR GENERAL FINDING 1
The Board should implement a more systematic monitoring approach
Oversight of charter school compliance includes many variables such as academic
achievement, fiscal accountability, and general compliance with federal, state, and local
laws and regulations. The Board is not the governing body of the charter school and thus
is not responsible for the daily operations of the school. The Board is not the Arizona
Department of Education and thus is not responsible to Department’s state and federal
statutory requirements. And the Board is another agency or entity, such as a local
municipality dictating the zoning requirements for charter schools. The Board is,
however, responsible for the general oversight of charter schools much like the other state
agencies that oversee private contracts. Thus, the Board needs to respect their role and
work cooperatively with each body to ensure proper communication between these
entities and charter schools and provide the discipline when the charter school fails to
properly follow the statutory requirements, if necessary.
For example, the audit notes that the Board has not established any policies or procedures
for accepting school improvement plans and following up on their implementation. The
Board did require each school to submit a copy of their school improvement plan to the
Board as outlined in statute. It is appropriate to say that the Board has not followed-up
on the implementation of these plans. However, this is due to the fact that the Board does
not have the authority to do so. This authority has been given to the Department of
Education for the development of solutions teams and includes a specific state
appropriation to do so. As another example, Arizona Learns outlines the Board’s
responsibilities and the Board has established a study committee to develop
recommendations for implementation of this role.
Existing Effective Monitoring Approach
The audit report indicates that the Board utilizes three monitoring tools to assess school
compliance with laws and charter requirements (i.e., site visits, five year reviews, and
partnering with Department of Education). While these three methods are utilized
effectively in oversight, many other methods are also used to monitor compliance of
charter schools. Some of the specific examples of oversight methods, as provided to the
auditors, are outlined below:
Academic Accountability
· Requires each governing board, charter administrator, and charter
principal to submit their respective declaration indicating that the
adopted/implemented curriculum is aligned with the Arizona Academic
Standards.
· Prior to the approval of any new charter, the curriculum must demonstrate
alignment with the Arizona Academic Standards.
Arizona State Board for Charter Schools 4
· Review curriculum samples for alignment to the Arizona Academic
Standards for every school adding grade levels to their contract.
· Hold schools accountable for properly administering required tests by
withholding 10% of monthly state aid.
· Work with Department of Education, Exceptional Student Services Unit to
hold schools accountable for special education policies and services.
· Work with the Department of Education to hold schools accountable for
the proper and timely submission of their School Improvement Plans.
· Work with the Department of Education on statutorily mandated
compliance with Arizona Learns and No Child Left Behind.
Fiscal Accountability
· Constantly monitor individual schools state aid revenues through meetings
and data analysis with the Department of Education School Finance Unit.
· Established policy to safeguard the estimated enrollment list by requiring
schools to maintain specific documentation for each student submitted for
payment.
· Hold schools accountable for timely submission of their annual audit.
· Developed new legal compliance questionnaire and audit guidelines.
· Moved up the annual audit submission deadline from March 30 to
November 15th starting with the FY 2004 audits.
· Follow- up with aud it findings.
· Work with the Department of Education Audit Unit on Average Daily
Membership audits.
· Work cooperat