Auditor General DePasquale Says Audits of PA Cyber Charter School, Two Other Schools Reaffirm Need to Overhaul Charter School Law
Says all charter boards should be publicly elected, management companies subject to Open Records Law
Auditor General DePasquale Says Audits of PA Cyber Charter School, Two Other Schools Reaffirm Need to Overhaul Charter School Law
Says all charter boards should be publicly elected, management companies subject to Open Records Law
Full list of 484 school districts with students enrolled in PA Cyber Charter School
HARRISBURG (Sept. 22, 2016) – Auditor General Eugene DePasquale today said recent audits of Pennsylvania Cyber Charter School (PA Cyber), which enrolls students from 484 districts, and two related schools in Beaver County once again demonstrate the urgent need to overhaul the worst charter school law in the nation.
“Our audits of PA Cyber, the Lincoln Park Performing Arts Charter School, and, to a much lesser extent, Midland Borough School District illustrate just how poorly our charter school law is protecting students and taxpayers and ensuring that education dollars help students learn, not help individuals profit,” DePasquale said during a news conference to announce audit reports on the three schools.
“Auditors found that leaders involved with all three of these schools had intermingled relationships that put individual self-interests above student needs while controlling hundreds of millions of taxpayer education funds from nearly every district in the state,” he said.
DePasquale noted that Nicholas Trombetta, a former superintendent of the Midland Borough School District (1995 2007) is credited with:
• founding PA Cyber Charter School and serving as CEO (2000-2012),
• founding the Lincoln Park Performing Arts Center and serving as its executive director (2002 2006),
• founding the charter school management company National Network of Digital Schools (NNDS), which is now Lincoln Learning Solutions (LLS), and serving as president (2005-2008), and
• founding the Lincoln Park Performing Arts Charter School (2005), housed in the arts center, and serving as an officer.
“One reason I can say that Pennsylvania has the worst charter school law in the nation is because Trombetta, the individual behind all these entities who recently pled guilty to tax evasion, took advantage of every flaw in the law to get rich off the backs of students and taxpayers,” DePasquale said.
“Interestingly, most of the serious problems – particularly those associated with the management company, lack of transparency and related-party transactions — that we found in our audits are permitted under the current charter school law,” he said. “That is beyond ridiculous, and it needs to change now.”
Not a criticism of charter schools
“The problems I continue to point out with the charter school law should not be taken as an indictment of charter schools and performing arts in general,” DePasquale said. “We have some excellent charter schools and performing arts centers in Pennsylvania providing outstanding educational opportunities for students.
“Most of the problems we see in our audits can be traced directly back to gray areas in the 20-year-old charter school law, not issues caused by the charter schools themselves.”
Major overhaul of charter school law needed
DePasquale said the three audits brought to light two more reasons that the state’s charter school law needs to be overhauled.
“It is clear that the charter school management company was operating without boundaries or accountability to the officials from either charter school or to the taxpayers, who were footing the bill,” DePasquale said. “As a result, we really have no idea what was provided by the management company in return for the public education money it received.”
The multiple, convoluted inter-relationships between the hand-picked members of the two charter school’s boards made it clear that the public needs input into the process for selecting all individuals who will be trusted with hundreds of millions in education funding.
“I urge the legislature to make charter school management companies, which receive millions upon millions of taxpayer dollars, explicitly subject to Pennsylvania’s open records law,” DePasquale said. “The charter school law also needs to include a provision to allow public input on who is given the role of a trustee charged with overseeing cyber charter school operations.
“In the case of PA Cyber Charter School, publicly elected school boards from nearly every school district in the state are sending state and local tax dollars to the cyber school with zero input and accountability.”
These changes are in addition to the recommendations to improve accountability, effectiveness and transparency included in DePasquale’s special report on charter school law reform, which is available online.
PA Cyber Charter School
The 91-page audit report on the Beaver County-based PA Cyber Charter School, which has nearly 10,000 students enrolled from 484 school districts across the state, covers May 2011 through March 2016 and contains eight findings and 23 recommendations. Major issues include:
Problems with curriculum and management company
PA Cyber’s board and administration failed to oversee the curriculum, management, and other services provided by the management company, NNDS/LLS. During the three years ending June 30, 2014, PA Cyber paid $153.8 million — nearly half of the school’s annual expenditures — to the management company with little or no oversight and accountability.
For example:
• Rather than a cost-based fee formula, the management services agreement stipulated that NNDS/LLS would receive 12 percent of PA Cyber’s revenues received from school districts.
• The curriculum contract, worth $110 million over three years, initially had no terms or conditions in the one-page memorandum of understanding.
• During the 2014-15 school year, PA Cyber solicited bids for both curriculum and separate management services, but the same management company — NNDS/LLS — was awarded all of the contracts.
• A new five-year curriculum services agreement adopted by the board for the 2015-16 school year included a nonperformance clause with financial penalties. However, when the management company missed three of four deadlines to deliver new curriculum, PA Cyber’s board unanimously voted to waive the $4.2 million in penalties.
“Pennsylvanians should be particularly incensed that not only did this management company fail to deliver curriculum on time, but officials at PA Cyber also gave them a $4.2 million pass on penalties,” DePasquale said. “We also heard that because of delays in delivering the curriculum, teachers were left to fend for themselves and develop their own curriculum so they could be ready to teach students at the beginning of the school year.
“That penalty money should have been used to provide additional classroom resources to teachers and their students. Instead it went to the management company that failed to deliver on its promises.”
Board and administration failed to govern
Auditors found that PA Cyber’s board and administration failed to adequately govern numerous related-party transactions involving millions of dollars of public education funds.
Aside from the connections to the founder and CEO, auditors found that several trustees and administrators were related to other individuals or organizations doing business with PA Cyber.
A few examples of related-parties involved in decision-making roles:
• The cyber charter school CEO’s spouse served as a compensated employee and as the board secretary for the arts center;
• A trustee’s son was employed as director of operations for the management company, and as the executive director of the arts center;
• A former trustee of the cyber charter school became a senior administrator at the local school district, previously served as board president for the cyber school’s management company, and served as a board member for the arts center; and
• A trustee was co-owner of a computer equipment company that received over $1.1 million in business from the cyber charter school.
“I will be sending this audit report to the State Ethics Commission and the U.S. Department of Education, Office of Inspector General to review the variety of related-party transactions,” DePasquale said. “Again, while the state ethics act, guidelines for federal funding, and good business practices might preclude such transactions, the current charter school law does not prevent this sort of scenario from happening.”
Additionally, auditors found that a former board president’s daughter received a potentially improper dual-enrollment college tuition reimbursement of $32,328, which was not available to other students in the 2012-13 and 2013-14 school years.
The Public School Code explicitly excludes charter schools from starting dual-enrollment programs.
Student attendance not monitored
Auditors noted that PA Cyber did not monitor or enforce its own student attendance policy for its virtual classrooms from the 2011-12 through 2015-16 school years.
“We found that PA Cyber considered a student ‘present’ if he or she logged on at the beginning of the day,” DePasquale said. “After that, they made no effort to ensure students were attending online classes. Therefore, there is no way of ensuring that a student was in attendance for the day, or playing computer games or outside shooting hoops.”
Failure to collect IT equipment from students who graduated, withdrew
A review of PA Cyber’s inventory files showed that with the exception of laptop computers, the school failed to collect IT equipment from students who graduated or withdrew from the school.
Based on 2013-14 enrollment of 10,389, student IT equipment costs would have been over $10.3 million for those students, assuming that they all enrolled that year.
While 85 percent of that cost was attributable to laptop computers (valued at $839 each), which were collected by the cyber charter school, 15 percent, or approximately $1.5 million, would have been attributed to the other equipment that was not collected.
The uncollected equipment included printers, digital tablets, headphones, carrying cases and ink cartridges, with a total value of approximately $150 per student. In addition, students were provided with Fitbit exercise trackers as part of the physical education class curriculum provided through the management company.
“It was essentially a give-away,” DePasquale said. “The IT equipment — with the exception of laptops — was not collected, even if a student withdrew after only a short enrollment. Even if there is a cost associated with collecting the equipment, giving it away hardly seems like a sound financial practice. In some cases, this IT equipment could have been refurbished and provided to another student.”
Financially detrimental arrangement with performing arts center
Auditors found that in 2005, PA Cyber provided what it called a “pre-paid lease” of $10 million to a local performing arts center — founded by the charter’s CEO — while it was under construction. In 2009, PA Cyber converted the $8.5 million balance of the pre-paid lease to a 25-year note receivable, meaning the arts center now pays PA Cyber $340,000 per year.
“By our estimate, if the $8.5 million converted in 2009 had instead been invested, it would have yielded more than $1.4 million in interest income by the end of the 25 years, making PA Cyber’s arrangement a poor use of public funds,” DePasquale said, noting that his audit of the Midland Borough School District revealed the district’s pre-paid lease arrangement means the district is paying the arts center $150,000 per year for the same space.
Failure to maintain sufficient documentation to support teacher certifications
A review of PA Cyber’s teacher certification files showed that instructional certificates may be unreliable because of incomplete or missing required evaluations in educators’ personnel files.
As a result, auditors believe PA Cyber’s educators may have received instructional certificates without having first met the evaluation and requirements of PDE. PA Cyber officials blame the missing documentation on the management company NNDS/LLS which, until 2015, was charged with maintaining the files.
“The teachers may have the proper experience and credentials, but because PA Cyber failed to provide the required documentation, it raises a question that must be addressed so that parents can have confidence in the quality of education their student receives,” DePasquale said.
High advertising costs continue
DePasquale said PA Cyber continues to spend heavily – about $2 million a year – on advertising and public outreach to attract potential students from throughout the commonwealth.
“I am not happy about this advertising spending,” DePasquale said. “I do understand that some advertising may be necessary. However, I would hope that some type of agreement could be worked out between PA Cyber and the school districts to reduce the need for expensive television advertisements and billboards, and still maintain healthy enrollment numbers.”
Lincoln Park Performing Arts Charter School, Beaver County
The 23-page audit of Lincoln Park Performing Arts Charter School found a lack of transparency and poor oversight of the NNDS/LLS management company, which provided the brick-and-mortar charter school with management services and curriculum leases totaling nearly $3.3 million over four years.
The audit report covers July 2011 through June 2014; it includes two findings and six recommendations.
“Since Lincoln Park Performing Arts Charter School and NNDS/LLS were founded by the same individual, it is of utmost importance that school officials and trustees strive to be as transparent as possible,” DePasquale said. “Unfortunately, that has not been the case here.
“Lincoln Park Charter School must do a better job of overseeing the management company, which at present is almost entirely running the show without the necessary involvement of the charter’s board of trustees.”
Auditors found that Lincoln Park charter school granted contracts to the management company without soliciting bids for either management services or curriculum leases.
School leadership also failed to implement best practices in their use of public funds because they made inadequate agreements with the management company, including a revenue based fee structure, vague enumeration of services, automatic renewal clauses and no vendor accountability requirements.
DePasquale said the fee formula was of serious concern, noting that the agreement stipulated the management company would receive revenue payment based on the school’s revenue rather than on services provided. The revenue-based management services fees included:
• 12 percent of the tuition received from sending school districts in school years 2011-12 and 2012-13, and
• 10 percent of tuition received in 2013-14 and 2014-15.
“This fee structure further eroded the level of accountability required of the vendor, since fees were not based upon actual costs of services,” DePasquale said. “Publicly funded charter schools are meant to provide an alternative opportunity to educate students, not to line the pockets of private individuals and management companies.”
Failure to maintain bus driver qualifications, clearances
In addition to the findings associated with the management company, auditors noted the charter school was unable to produce any of the required employment qualifications and clearances for the 11 bus drivers who transported students during the 2014-15 school year.
The bus contractor eventually provided the charter school with qualifications and criminal history clearances for all 11 bus drivers. A review of this documentation did not reveal any concerns with the bus drivers and the drivers’ suitability to transport students.
“As a result of our review of bus driver qualifications and our discussion with charter school officials, they did obtain, review and maintain documentation to support that each bus driver was qualified and suitable to transport students during the 2015-16 school year,” DePasquale said.
Midland Borough School District, Beaver County
In the 29-page report on Midland Borough School District, auditors found that it had a $1.5 million balance on a long-term, pre-paid lease to use the Lincoln Performing Arts Center — founded by a former Midland school superintendent — to host arts classes and occasional special events for students and the community.
“When we asked the district to provide documentation of its use of the arts center, it provided us with letters on district letterhead announcing occasional special events, such as musical performances and arts charter school graduation ceremonies, which were sponsored by the district even though the district doesn’t enroll high school students,” DePasquale said. “With the limited use, it does not seem to be a good use of $150,000 per year in public education funds.”
Despite the fact that the district rents space from the performing arts center, the district rents out its own gymnasium and six classrooms for approximately $45,000 per year to the Lincoln Park Performing Arts Charter School, which is housed in the arts center.
“There is a lot of public money changing hands in so many various and assorted deals and agreements that it leaves one to question who is benefiting, students or the adults making the deals,” DePasquale said.
The district also paid the NNDS/LLS management company almost $800,000 in the past six years for services without utilizing an open and public procurement process.
“While the district is not required to bid for professional services, due to multiple related parties involved there should be increased transparency and accountability,” DePasquale said. “Remarkably, while individuals serving in simultaneous roles is not prohibited by the current charter school law or the Ethics Act, such situations provide an appearance of a conflict of interest that should be mitigated.”
Financial difficulties
The audit shows that the district is plagued by deficit spending, causing the general fund balance to drop nearly $1 million since 2011.
Auditors found that the school district’s general fund balance decreased from $2,916,298 in 2011, to $1,851,966 in June 2015. According to the district’s 2015-16 general fund budget, the balance is projected to have further decreased to $3,743 for the fiscal year ending June 30, 2016.
During the period of June 30, 2010, through June 30, 2015, the district’s total expenditures exceeded total revenues for four of the five years.
One of the factors cited for the increased expenditures is charter school tuition costs, which increased from approximately $862,000 in 2010 to approximately $1.25 million in 2015, an increase of approximately $400,000, or 46 percent.
Pennsylvania cannot wait to reform charter school law
“The bottom line is this: Nearly 20 years have passed since charter schools were authorized to be established. We need to revisit Pennsylvania’s charter school experience, and act now – not later – to overhaul the charter school law and do a very thorough tune-up on all aspects of charter school oversight and regulation,” DePasquale said. “We can ill afford to continue to kick the can down the road when it comes to the education of more than 132,000 Pennsylvania students in our charter school system.”
The audit reports are available online at:
• Pennsylvania Cyber Charter School
• Lincoln Park Performing Arts Charter School
• Midland Borough School District
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EDITOR’S NOTE: A list of the 484 school districts that had students enrolled in PA Cyber Charter School as of Oct. 1, 2014, is available online at: www.PaAuditor.gov.
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