The charter school shell game: money, money, who’s got the money?

The charter school shell game: money, money, who's got the money?Colorado charter school audits and financial transparency run amok in Jefferson County Public Schools!

Have you ever seen someone get hustled by a street shell game? You know the kind, a charmer on a street corner makes a convincing show of  swapping a small ball between a few shells until they build up confidence in a poor unsuspecting audience member. The deceived target of the scam, brimming with certainty, puts their money on the line… and POOF! The ball disappears!

Charter school finances are the ultimate shell game when it comes to building up confidence through what looks like transparency. However, when the money hits the table, the shells switch around and POOF! No one seems to know exactly where the money went.

Trying to keep an eye on the ball (or in this case, the public tax dollars), Donald Oatman describes serious concerns with the transparency of Jefferson County Public Schools charter school finances.

Continuing our series on the following information reported by Don Oatman in the “OVERLOOKED ISSUES PERTAINING TO JEFFCO CHARTER SCHOOLS,” this section focuses on issues regarding perceptions of financial transparency and charter school audits.

ISSUE NUMBER SIX – Perceptions of financial transparency and charter school audits

The Colorado Department of Education has established standards for charter schools which “require each Charter School to conduct an annual financial audit by an independent auditor to be selected by the Charter School.”  This standard seems to imply the performance of an audit will guarantee financial transparency for charter schools.  This is not always the case as in some cases the disclosure is not provided and in other cases disclosure is provided, but in the notes to the financial statements that can be confusing and may often be overlooked by readers of these documents.

Independent audits are performed by certified public accountants and the audits must be conducted in accordance with Generally Accepted Audit Standards (GAAS) and the financial reports are to be in compliance with Generally Accepted Accounting Principles (GAAP) and must be submitted to CDE, the Office of the State Auditor, and the authorizing district (Jeffco).  All of the audited Financial Reports for Jeffco charter schools are entitled “Basic Financial Statements.”

The report of an independent auditor is to express an opinion on the financial statements and to obtain reasonable assurance they are free from any material misstatements.  A “clean” audit opinion will indicate that the financial statements present fairly, in all material aspects, the financial position of the entity being audited.

All of the audits for charter schools in Jefferson County are conducted by a single independent audit firm, John Cutler & Associates.

The audited financial statements for all of the charter schools in Jeffco include only the “Basic Financial Statements” and the accompanying Notes to the Financial Statements.  The financial statements for all governmental audits include the following statement: “The accompanying notes are an integral part of the financial statements.”

The Government Finance Officers Association (GFOA) has prepared a document entitled Governmental Accounting, Auditing, and Financial Reporting (GAAFR) which provides detailed information pertaining to the unique aspects of governmental accounting.  This publication indicates that:

” the basic financial statements represent the minimum information that must be included within a financial report of a state or local government for an independent auditor to issue a ‘clean’ audit opinion, assuring audit users that a government has complied with GAAP.”

GAAFR states: “The objective of a financial audit, as defined, is to provide users of financial reports with reasonable assurance from an independent source that the reports are reliable.”

The audits referenced in GAAFR involve specific financial statements and Required Supplementary Information (RSI).  One of the requirements for supplemental information is the “Management’s Discussion and Analysis” (MD&A).  GAAFR states that: “This analysis should provide a narrative introduction and overview that users need to interpret the basic financial statements. “ The MD&A is a statement from the management of the school and is not subjected to the audit process.  GAAFR notes:

“Although RSI by definition need not be audited, auditors are required to perform certain limited procedures in regard to RSI.  Because RSI is not part of the basic financial statements, its absence does not affect the auditor’s opinion on the fair presentation of the basic financial statements.”

One observation contained in GAAFR notes:

“Many potential users of financial statements are unaware of the fact that the financial statements are the representations of management rather than of the independent auditors.”

An additional responsibility of the auditor is to provide a “Management Letter” if there are any reportable conditions pertaining to internal control or compliance.  It does not appear that any of the audits for Jeffco charter schools have been accompanied by a management letter.

The following are observations pertaining to situations involving items that may not provide adequate disclosure, items excluded from the MD&A, and notes that can easily be overlooked in the audited Basic Financial Statements, the MD&A and the Notes to the Financial Statements for some Jeffco charter schools as of June 30, 2014:

1. Compass Montessori Charter Schools – Golden and Wheat Ridge campuses

An item pertaining to the two Compass Montessori Charter Schools involves a related party transaction.  A related party transaction occurs when the transaction is not achieved at “arm’s length,” but comprises a situation where the transaction occurs with two or more party’s that are not independent.

The GAAFR notes the following regarding Related Party Transactions:

“While there is nothing inherently undesirable about related party transactions, they raise potential concerns regarding 1) the reasonability of the terms of the arrangement, and 2) the eventual collectability of related receivables.  Accordingly, the notes to the financial statements should disclose the terms of material related-party transactions, as well as the balances of any related receivables if not separately reported on the face of the basic financial statements.”

The Compass Montessori program has two schools (Golden and Wheat Ridge) operating with a single Executive Committee with each identified by Jeffco as a separate charter school. Information provided by the Jeffco Department of Construction for the 2004 bond program identified $763,900 for general upgrades to include a partial renovation to the HVAC system, exterior door and window replacement and exterior envelope insulation installation for the Golden school.  An amount of $102,600 was to be provided for exterior door replacement and exterior insulation and gutter installation for the Wheat Ridge school.

As referenced in the materials for Issue Five, Charter Schools Capital Improvements and Debt Service Issues, Note 10 in the Compass Montessori – Golden Campus audited Basic Financial Statements as of June 30, 2014 states:

“Due to the fact that the School’s portion of the 3B bond funds was not adequate to pay off their existing debt and transfer ownership of their facilities to Jefferson County School District, as required by 3B, the School could not currently utilize their portion of the 3B proceeds.  To make the proceeds available for the benefit of the School, the Executive Committee of the School and the Compass Montessori-Wheat Ridge Campus (same committee) passed a resolution whereby the Wheat Ridge School would receive the Schools 3B portion of bond funds to pay off the Wheat Ridge School’s debt.  In return, the Wheat Ridge School agreed to repay the School in quarterly installments, over a ten year period, in the amount of $96,846 per year.”

“The repayment is subject to annual appropriation by the Wheat Ridge School and is nontransferable.  In addition, the school does not have a written contract with the Wheat Ridge School for repayment of the funds, and there are no remedies should repayment not take place.  As a result, the receivable from the Wheat Ridge School has not been recorded in the financial statements.  Instead, the payments will be recorded as revenue when received. During the fiscal year ended June 30, 2014, the Wheat Ridge School made payments amounting to $96,846 that has been recorded by the school as other revenue.”

This note and a related Note 9 in the audited Basic Financial Statements for the Compass Montessori Wheat Ridge Charter School as of June 30, 2014 indicate that bond proceeds to be used for specific capital improvements at the Golden school were utilized to repay debt for previous capital obligations incurred by the Wheat Ridge school. This results in a double payment of a portion of the interest based on the following:

  • Payment to retire the existing debt incurred by the Compass Montessori  School Wheat Ridge campus would include a payment for the outstanding interest at the time of the retirement of the debt; and
  • Jeffco will be continuing to pay interest on the principal amount associated with the Compass Montessori debt retirement through 2024 when the 2004 bonds are retired.

Although these notes seem to provide full disclosure of this transaction, this does not appear to be the case for the following reasons:

  • The full amount of this transaction is not identified, although it can be assumed to be $968,460 based on the ten year repayment amount;
  • The date of this agreement is not provided, thus, the total remaining receivable for the Golden school and the payable for the Wheat Ridge school is unknown;
  • The lack of a transaction date also fails to identify the current outstanding receivable/payable for the two schools;
  • Because no interest rate is identified, it is assumed this is intended to be an interest-free transaction, but the notes fail to provide this information;
  • The lack of a formal agreement  between the two schools and the fact there is no remedy for non-payment,  excludes the requirement for the financial impact of this transaction to be recorded on the financial statements of the two Compass Montessori Schools through 2024 resulting in an understatement of assets for the Golden School and understatement of the liabilities for the Wheat Ridge school; and
  • The long-term obligation for one school and the long term receivable for the other school is not discussed in the MD&A section of the audited Basic Financial Statements for either school.

Although the audit firm has opined that the financial statements “present fairly, in all material respects, the respective financial positon of governmental activities, business-type activities, and each major fund” for the two Compass Montessori Charter Schools, the notes to the financial statements do not appear to meet the disclosure requirements for this type of a transaction and the lack of information pertaining to this transaction in the MD&A results in a failure of full financial disclosure for these two charter schools

2. Excel Academy and Rocky Mountain Academy of Evergreen (RMAE)

As referenced in the materials for Issue Five, Charter Schools Capital Improvements and Debt Service Issues, Note 10 in the Excel Academy audited Basic Financial Statements as of June 30, 2014 states:

“Due to the fact that the Academy did not have any capital needs related to its facilities or grounds, the Academy could not currently utilize their portion of the proceeds.  In order to make funds available for the benefit of the Academy, the Executive Boards of the Academy and the Rocky Mountain Academy of Evergreen (RMAE) entered into a letter of agreement which stated the RMAE would receive the Academy’s 3B portion of bond funds in order to acquire land and build a new facility.  In return, the RMAE agreed to repay the school in quarterly installments, over a 10 year period.”

“This agreement includes a stipulation of 3% APR interest to be calculated on the outstanding  principal balance.  The accrued interest on years 1-10 of the note will be allocated and paid over years 11-15 per the agreement along with years 11-15 calculated interest and required principal payments as well.  Under the original agreement, a balloon payment of the unpaid principal and interest balance was due at the end of fiscal year 2014-2015.  In March of 2013, the Academy and RMAE amended the agreement to extend the repayment terms an additional five years.  Under the proposed agreement, RMAE will make payments on the remaining unpaid interest from years 1-10 on the note across years 11-15 and principal balance through 2020.”

 “The repayment is subject to annual appropriation by RMAE and is nontransferable.  In addition, there are no remedies should the repayment not take place.  As a result, the receivable from RMAE has not been recorded in the financial statements.  Instead, the payments will be recorded as revenue when received.  During the fiscal year ended June 30, 2014, the RMAE made payments amounting to $60,000 that has been recorded by the Academy as other revenue.”

Note 7 in the Rocky Mountain Academy of Evergreen audited Basic Financial Statements as of June 30, 2014 is similar to the note in the Excel document.

The notes in these two reports fail to mention the amounts involved and it appears the agreement had to be amended because RMAE failed to meet its financial obligation based on the original agreement.

The circumstance referencing the Excel Academy and RMAE agreement excludes a significant amount of detail regarding this transaction:

  • The timing of the transaction is not disclosed; when was the letter agreement entered into?  The fiscal years included in years 1-10 and 11-15 are not identified;
  • The full amount of the transaction is not provided;
  • It is unknown if the $60,000 payment received by Excel Academy in the 2013-2014 fiscal year represents the total payment due for the 2013-2014 fiscal year;
  • The fact that this agreement has no remedies if payment does not take place and because the payment is subject to annual appropriation,  this transaction is not  recorded on the financial statements of the two Schools  resulting in an understatement of assets for Excel Academy and an understatement of the liabilities for RMAE;
  • RMAE has established a Building Corporation to handle long-term financial transactions. In addition to the obligation to Excel Academy, RMAE also has a 30 year lease obligation with the Building Corporation; and
  • This transaction is not addressed in the MD&A portion of the June 30, 2014 Basic Financial Statements for either the Excel or RMAE charter schools.

As of June 30, 2014, the long-term debt of the RMAE lease agreement with the Building Corporation has interest payments that exceed the principal amount over the remaining life of the lease (through 2041).  The total debt service to be paid through 2041 is $10,771,102, with $5,200,000 for principal repayment and $5,571,102 in interest.

An additional issue involving Excel Academy is included in Note 6 of the June 30, 2014 Basic Financial Statements which states:

On December, 2003, the Academy entered into a note payable with the District in the amount of $236,460 for the purchase of land.  The note accrues interest at a rate of 3%.  Principal in the amount of $118,230 and half of the accrued interest is due in December 2037 with the remaining principal balance of $118,230 and accrued interest due December 2038.

3. New America School – Lakewood (NASL)

This charter school is part of the non-profit New America Charter Management Organization (CMO), with schools in Colorado, New Mexico, Arizona, and Nevada.  The majority of the charter schools in Jeffco provide a copy of the audited Basic Financial Statements as a component of the school web site.   The school web site for NASL provides NAS system-wide information, but there are no materials pertaining to the fiscal aspect of the individual NAS schools. When seeking financial information for this school, the web site directs the reader to the Jeffco schools  ” Financial Transparency” web page or the CDE  “School View. “  Neither site provides any audited financial information pertaining to this charter school. A copy of the June 30, 2014 audited Basic Financial Statements was not accessible on the NAS web site, however, the most recent audited Basic Financial Statements for NAS-Lakewood for the year ended June 30, 2015 were obtained with difficulty; this information was not available on the school web page.

Note 7 of the June 30, 2015 audited Basic Financial Statements states:

“New America School –Lakewood is operated by New America Schools (“NAS”), a Colorado non-profit corporation.  NAS provides certain legal, management, accounting, and advertising services to the School.  The School has agreed to pay management fees to NAS for these services at a rate of 12.5% of per pupil revenues.  For the year ended June 30, 2015, the school paid management fees to NAS under the terms of this agreement in the amount of $323,726.”

“On November 2011, the School entered into a sublease with NAS Facilities Organization, LLC (NASFCO) for a new facility which the school occupied in June 2012.  Per the agreement, the School is liable for monthly rent expense ranging from $22,209 to $27,385.  This lease will be effective from July 1, 2012 through June 30, 2018 and the future minimum lease payments are as follows:” 

The lease payments are identified in Note 7 as $328,620 per year through 2018.  The MD&A indicates NASL expended $381,439 in rent payments to NASFCO for the year ended June 30, 2015.

What is not referenced in any of the materials is the method of allocation for Instruction and Supporting expenditures.  According to the Statement of Activities for the Year Ended June 30, 2015, NAS expended $598,630 for instruction and $1,711,661 (net of grants and capital outlay) for supportive services.  The amount for Supporting Activities indicates approximately 74 percent of the total NASL expenditures are being used to fund support services.  Either NASL is spending an excessive amount of resources for support services, of which approximately $700,000 is paid to the NAS organization, or the method of accounting for instructional and support services differs from the approach used by other charter schools which seem to expend resources in the range of 45 to 55 percent  for support services.  This situation may be indicative of an inconsistency in the manner of accounting for instructional and support services among the various charter schools.

4. Addenbrooke Classical Academy

Note 2 of the June 30, 2014 audited Basic Financial Statements states the following:

  • Legal Compliance – “The actual expenditures of the General Fund exceeded the budgeted amount by $34,904. This may be a violation of State stature.”
  • Accountability – “The Academy’s General Fund had a negative fund balance of $26,427 as of June 30, 2014. This deficit is expected to be eliminated in future years by increased revenues and reduction of some start up expenditures.”

The MD&A discloses the deficit position of the General Fund, but fails to mention the over expenditure of the General Fund budget.

5. Collegiate Academy

Note 2 of the June 30, 2014 audited Basic Financial Statements for Collegiate Academy states:  “The Academy also had a fund balance deficit in the General Fund of $119,797.  This deficit is expected to be reduced by increasing revenue and cutting expenditures in the coming years.”

Note 4 states :  ” During the year ended June 30, 2014, the District paid for and contributed assets in the amount of $314,930 to the Academy.  This contribution has been reported as a Capital Transfer from the District on the Statement of Activities.”

Note 9 states: “In December 2013, the Academy entered into a short-term loan arrangement with the District to meet its budgetary requirements for the school year.  This loan arrangement operates like a line of credit with a maximum amount of $200,000.  The agreement is in effect until June 30, 2014.   At June 30, 2014, the Academy owed the District $75,496 under this agreement. “

This obligation is identified as a liability on the Collegiate Academy balance sheet, however, there is no reference to an interest rate for this line of credit, thus, it is assumed to be an interest-free loan.

The contents of Note 9 are inconsistent with information contained in the MD&A for Collegiate Academy which states:

“The school approached the Jefferson County Board of Education on December 10, 2013 requesting a $400,000 line of credit to be repaid over a period of five years.  After reviewing the school’s strategic plan, marketing plan, and financial plan, the Board of Education approved a loan not to exceed $400,000 on January 6, 2014.  The line of credit is to be repaid in full by June, 30, 2018.”

The above is followed by a discussion of the situations causing shortfalls and the manner in which they are to be addressed with a final comment as follows:

“Consequently, the School substantially reduced the projected deficit of $255,000 and ended the fiscal year borrowing approximately $75,000 from the approved $400,000 district line of credit to meet the statutory TABOR reserve requirement.  Management continues to implement measures to eliminate the negative fund balance in the coming year.”

There is a major inconsistency between information contained in Note 9 and the unaudited MD&A for Collegiate Academy.

6. Montessori Peaks Charter School

Note 2 of the June 30, 2014 audited Basic Financial Statements; Stewardship, Compliance and Accountability states:  “At June 30, 2014, actual expenditures in the General Fund exceeded budgeted amounts by $46,566.  This may be a violation of state statute.”

The over expenditure of the budget is not noted in the MD&A.

7. Mountain Phoenix Community School

The Notes included in the June 30, 2014 audited Basic Financial Staments for this school include the following:

Note 2: Stewardship, Compliance and Accountability:

Legal Compliance

  • “The actual expenditures of the General Fund exceeded the budgeted amounts by $12,736. This may be a violation of State statute.”

Accountability

  • “As of June 30, 2014 the School had a government-wide net position deficit of $360,170.  This deficit was created as the Corporation received a loan from a bond issuance to purchase the School’s current facility and to construct its facility.  The payment of the debt principal is not scheduled to begin until fiscal year 2015.”
  • As of June 30, 2014, the School reported a loss of $802,170 resulting in a negative fund balance of $156,668. During 2014, the District authorized that the school may have up to $250,000 negative pooled cash position, which will be reimbursed within the next five years.”

Note 5: Long-Term Debt includes the following information:

2012 Revenue Bonds

The schedule of future debt service requirements for the Mountain Phoenix Community School are as follows:

Debt Service Obligation – 2015 through 2043

Principal               $ 6,370,000

Interest                    8,508,850

Total                      $14,878,850

Based on this payment schedule, MPCS will be paying 33 percent more for interest than is due for the principal amount of the bonded debt.

Note 5 – Line of Credit

  • “In March 2014, the School entered into a short-term loan arrangement with the District to meet its budgetary requirements for the school year. This loan arrangement is in effect until June 30, 2019.  As of June 30, 2014, the School owed the District $96,908 under this agreement.”

The note provides no reference to an interest rate, thus, it must be assumed the loan is an interest free transaction.

The MD&A for this school references the General Fund negative fund balance, the over expenditure of the budget and the loan from the District.  Regarding the long-term lease payments, the MD&A states:  “MPCS entered into a lease agreement with the MPCS Building Corporation during Fiscal Year 2013 for use of the school facility.  The bonds under which the lease was based were issued in October 2012.  Under the terms of the new agreement, MPCS will make monthly payments ranging from $28,043 to $44,138, through September 2042.”

More information regarding this and additional charter school issues can be found in the full report at  http://goo.gl/vcXF8G

Posted in Charter Info, Colorado Charter Schools, Colorado Department of Education, Jeffco, Jefferson County Public Schools, Money, Montessori Peaks Academy, Reports Tagged with: , , , , , ,

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