Report 2022-110R Recommendation 4 Responses

Report 2022-110R: Charter School Facility Grant Program and Conduit Financing Program: The Programs Are Generally Achieving Their Purpose of Increasing Charter Schools' Access to Facility Funding (Release Date: February 2023)

Recommendation #4 To: Treasurer, State

To better identify potential conflicts of interest involving the use of Facility Grant Program funding, CSFA should amend the definition of a related party in its regulations to include nonprofit CMOs and the subsidiaries of nonprofit charter schools and CMOs. In addition, CSFA should work with the Fair Political Practices Commission to ensure that its regulations address all conflict-of-interest laws, including Government Code section 1090 and the Political Reform Act of 1974.

Annual Follow-Up Agency Response From December 2025

Pursuant to recommendation #4 of report 2022-110R, the California School Finance Authority (CSFA) instituted changes to the application vetting process under the Charter School Facility Grant Program (Program) for the 2025-26 funding round and beyond. CSFA staff, with input from counsel for the State Treasurer's Office (STO) and the State Attorney General's Office (AGO), implemented two programmatic changes to address the Conflict of Interest (COI) recommendations suggested by the California State Auditor.

First, CSFA updated its Application Certification Page and its Legal Status Questionnaire to include specific references to compliance with the Government Code (GC) 1090 and the Political Reform Act (PRA). This additional language allows CSFA to react when agencies such as the Fair Political Practices Commission (FPPC) or charter authorizers inform CSFA of a violation of COI related laws.

Secondly, CSFA eliminated the "related party" definition in Program regulations and began a new COI vetting process. This vetting process requires a COI-related review of all applicants, which addresses the fact pattern suggested in the State Auditor's recommendation. This process includes the review of all disclosures submitted by Form 700 filers for first year charter schools, schools that are new to Program, schools that have a new facility not previously occupied by the Charter School, and schools that have a lease agreement that includes a change in leased space or modification of a prior lease agreement with a bona fide change in lessor.

Given the character limit on this response, we have attached a document with additional details about our vetting process.

California State Auditor's Assessment of Annual Follow-Up Status: Resolved

CSFA resolved this recommendation by amending its Facility Grant Program regulations and application process. CSFA's changes do not mirror the action we recommended. However, we agree that they address the concern we noted in the audit.

1-Year Agency Response

Given the legal hurdles of amending the definition of related party to better identify potential conflicts of interest, the California School Finance Authority (CSFA) sought legal guidance on how to proceed with this recommendation. Initial feedback from internal and external counsels as well as direction from the Fair Political Practices Commission (FPPC) did not provide CSFA with a clear path forward that is consistent with laws that govern conflict of interest determinations. In addition, given that this recommendation would require a regulatory amendment, CSFA sought legal direction from the Office of Administrative Law's (OAL) Reference Attorney. As we are awaiting a determination from the OAL, CSFA is unable to implement this recommendation currently. Once guidance is received from OAL, CSFA will confer with its counsel to take appropriate action on this recommendation and update our implementation strategy.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

CSFA contacted the Fair Political Practices Commission and therefore has partially implemented this recommendation. However, based on its response, CSFA has not yet amended the definition of a related party in its regulations to include nonprofit CMOs and the subsidiaries of nonprofit charter schools and CMOs.

6-Month Agency Response

To better identify potential conflicts of interest involving the use of Facility Grant Program funding, CSFA should amend the definition of a related party in its regulations to include nonprofit CMOs and the subsidiaries of nonprofit charter schools and CMOs.

Assembly Bill 1604 (Bonta) would, among other things, compel the California School Finance Authority to amend the definition of a related party in its regulations that guide the Charter School Facility Grant Program. CSFA is unable to provide a response to the auditor regarding a change to the definition while this matter is being legislated. If AB 1604 is enacted, CSFA will move forward accordingly with any changes to the definition of related party.

In addition, CSFA should work with the Fair Political Practices Commission to ensure that its regulations address all conflict-of-interest laws, including Government Code section 1090 and the Political Reform Act of 1974.

As stated in its 60-day response to the California State Auditor (CSA) dated April 14, 2023, the California School Finance Authority (CSFA) requested formal advice from the Fair Political Practices Commission (FPPC), per the CSA's recommendation. On April 17, 2023, CSFA received a response from the FPPC. The FPPC responded and indicated their inability to provide such advice to CSFA given that any conflict-of-interest violations would be with the agency receiving the grant funds (charter schools), not the agency (CSFA) providing the grant.

California State Auditor's Assessment of 6-Month Status: Pending

The Legislature passed Assembly Bill 1604 and as of September 20, 2023 the bill awaited a decision from the Governor. Should the bill become law, CSFA will be required to adopt a definition of related parties that includes, but is not limited to, nonprofit public benefit corporations that manage charter schools and limited liability companies of which the applicant charter school is a member.

60-Day Agency Response

Pursuant to the Auditor's suggestion, on April 7, 2023, CSFA sent a letter to the Fair Political Practices Commission (FPPC) requesting formal advice regarding conflict-of-interest laws and our Program regulations. As stated in our audit response letter dated January 27, 2023, CSFA will work towards implementing the recommendations to the best of our abilities and seek FPPC guidance to ensure our regulations address laws that govern conflict of interest, including Government Code section 1090 and the Political Reform Act of 1974. Subject to the FPPC's response to the formal advice letter, CSFA intends to initiate any such changes during the 2023-24 funding round and become effective for the 2024-25 funding round.

California State Auditor's Assessment of 60-Day Status: Pending

Although CSFA's response indicates its willingness and steps taken to implement our recommendation, we believe that CSFA should take action now to implement the portions of this recommendation that are not dependent on the FPPC.

All Recommendations in 2022-110R

Agency responses received are posted verbatim.