Report 2022-110R All Recommendation 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 for Legislative Action

To ensure that students from low-income areas receive the maximum benefit from the Facility Grant Program, the Legislature should amend state law to define the admissions priority that charter schools must give students who either attend the nearest local public elementary school or reside in that public school's attendance area.

Recommendation for Legislative Action

To mitigate the negative impact that charter school closures may have on students' education, the Legislature should amend state law to give the Office of the Attorney General the authority to approve, conditionally approve, or deny the sale or lease of a charter school facility if the charter school benefited significantly from Facility Grant Program funds and paid rent to a closely associated entity. To facilitate this authority, the law should include a means by which the Attorney General would receive notification about such sale or lease agreements. For example, the Legislature could require the organization that owns the facility to notify the Attorney General.

Recommendation for Legislative Action

To enable CSFA to provide increased oversight of charter schools that received Facility Grant Program funds, the Legislature should clearly define the organizational types of charter schools and require charter schools to respond to the California Department of Education's annual survey.

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.

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.

Recommendation #5 To: Treasurer, State

To ensure that charter schools are appropriately disclosing information about related parties as part of the Facility Grant Program application process, CSFA should annually review a sample of applications to determine whether charter schools correctly reported that their lessors were not related.

1-Year Agency Response

Given the pendency of recommendation #4, the California School Finance Authority (CSFA) is unable to implement a review of applications to determine whether charter schools correctly reported that their lessors were not related parties. Once guidance is received from Office of Administrative Law (OAL), CSFA will confer with its counsel to take appropriate action on recommendation #4 which will allow CSFA to determine its implementation strategy of recommendation #5.

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

Although we appreciate CSFA's efforts regarding the steps it has taken to implement recommendation 4, CSFA should take steps to implement this recommendation in the meantime. Specifically, CSFA is not precluded from reviewing a sample of applications to determine whether the applicants correctly reported that they were not related to their lessors.

6-Month Agency Response

As stated above, if AB 1604 is enacted, CSFA will move forward accordingly with any changes to the definition of related party. How that definition impacts our review of a sample of applications to determine whether charter schools correctly reported that their lessors were not related will be determined at that time.

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

60-Day Agency Response

Under current program regulations, applicants are required to provide all information requested for CSFA to determine eligibility, including related party certification. Schools are not awarded until they provide all necessary information. The aforementioned FPPC guidance will potentially have effects on, or information related to, this suggested review as it correlates with conflict-of-interest laws. Pending the FPPC guidance, CSFA expects any changes related to audit procedures to be made during the 2023-24 funding round and become effective for the 2024-25 funding round. CSFA will also work with the Office of Administrative Law on any needed regulatory guidance.

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

CSFA's response suggests a holistic approach to addressing this recommendation, which may in part benefit from guidance about potential conflicts of interest or changes to its regulations. However, we believe that CSFA should take steps to implement this recommendation now to ensure that charter schools correctly reported that they were not related to their lessors.

Recommendation #6 To: Treasurer, State

To ensure that applicants meet a key program eligibility requirement, CSFA should require Facility Grant Program applicants to provide documentation that they are not operating as or by a for-profit organization. It should also adopt and begin following procedures to verify an applicant's compliance with this requirement.

1-Year Agency Response

Charter School Facility Program Regulations Section 10170.3 sets forth criteria for Eligible Applicant to the program. Section 10170.3(g) states "the Charter School shall not operate as, or be operated by, a for-profit corporation, a for-profit educational management organization, or a for-profit charter organization."

For the current 2023-24 funding round, to determine charter school are not operating as for-profit entities and ensure applicants meet this program eligibility requirement:

- Analysts used data from a completed Payee Data Record Form (Form STD 204) as documentation to complete the inaugural for-profit review.

- Form STD 204 is completed by all applicants to receive funding from the State Controller's Office and contains a Tax Identification Number (TIN) or Employer Identification Number (EIN).

- Staff utilizes the Internal Revenue Service's (IRS) website, https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations, to determine applicants' profit status.

- The school must be a charitable entity and have tax-exempt status to receive payment.

- For applicants identified as school district or county office of education dependent, staff reviewed authorizer information to determine that applicants are not for-profit.

- Supporting documentation demonstrating steps noted above have been submitted to the Auditor as supplementary information.

For the upcoming funding rounds, 2024-25 and beyond, new applicants will be requested to submit non-profit/501(c)(3) verification and confirmed with a completed Form STD 204 or proof of school district or county of education dependency in their charter petition.

Repeat applicants that have a change to their TIN or EIN will be required to submit an updated Form STD 204 and that new form will also be used to confirm status as mentioned above.

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

6-Month Agency Response

Since our 60-day response to the State Auditor, CSFA has implemented a document-based vetting process for the 2023-24 funding round. It includes tax-status document review, follow-up, and additional verification (when needed) to ensure that applicants are not operating as or by a for-profit organization. CSFA will continue to work with the Department of Finance on securing funding to perform this determination as prescribed.

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

The document-based vetting process CSFA developed implements the part of our recommendation to adopt procedures to verify applicants are not operating as or by a for-profit organization. The CSFA explained to us that it is in the midst of evaluating applicants for the 2023-24 funding round and has not yet begun vetting applicants' compliance with this requirement. We look forward to assessing CSFA's progress on this recommendation at the 1-year response in February 2023.

60-Day Agency Response

CSFA will implement a document-based vetting process for the 2023-24 funding round. It would include document review, follow-up, and additional verification when needed. CSFA believes an independent verification from official third-party sources to be a best practice. On average there are approximately 400 applicants for each funding round. Therefore, there could be up to 400 FTE hours that need to be committed to each funding round, accounting for 20% of a FTE's annual hours. This support can be achieved with one or two Staff Services Analysts to ensure no delay or interruption in funding. As stated in the Audit, this provision should become obsolete in 2026, barring any legislative changes.

In addition, CSFA is in the final phases of developing policies and procedures for monitoring compliance associated with the proposed independent verification. CSFA expects these policies and procedures to be completed prior to the 6-month reporting period. CSFA is also permitted to review prior rounds for compliance and will consider this action if additional resources are available and staff levels permit.

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

As we noted in our audit report, CSFA did not express concerns about its ability to implement our three recommendations with existing personnel and resources when we discussed them in advance of its formal response to our draft audit report. Notwithstanding CSFA's ability to implement this recommendation with existing personnel and resources, which we did not audit, CSFA should require applicants to submit documents that demonstrate their eligibility for Facility Grant Program funding.

All Recommendations in 2022-110R

Agency responses received are posted verbatim.