January 29, 2015; Star-News (Wilmington, NC)

NPQ has written previously about the problems associated with for-profit companies who manage nonprofit charter schools in, for instance, North Carolina, where State Rep. Larry Hall, the Democratic Leader of the House, has announced that he will file a bill next week to hold North Carolina’s charter schools more accountable in how they spend state funds. At least 35 charter schools have been shut down in North Carolina, often due to financial mismanagement or non-compliance.

The bill is being filed close on the heels of an auditor’s report on Kinston Charter Academy, which closed in September of 2013. According to Hall, the bill will seek to end the “reckless mismanagement” of public funds by some charters. The Kinston Charter Academy audit found that the school had for years mismanaged its finances and inflated expected student enrollment numbers. Nevertheless, it still received nearly $700,000 in taxpayer funds in 2013, only two months before it closed. Some of that was then deployed to pay the previous year’s bills, as well as some truly astounding financing costs:

“The School paid extremely high fees on two short-term loans obtained on May 31, 2013 and June 27, 2013. These loans were paid in full on July 22, 2013, after the School received its initial installment for 2013-14. Because traditional financing was unavailable given the School’s financial situation, the Chief Executive Officer/Principal (CEO) found financing through two companies that required $15,000 ‘financial services fees’ and $15,000 ‘origination fees’ on each $100,000 loan.

“The School actually received $170,000 but paid back $230,000. Given these fees and the short-term duration of the loans, the School ultimately paid interest rates of 515.29% on one loan (25 days) and 247.74% on the other loan (52 days).”

The auditor’s report also found that the CEO’s wife and daughter, neither of whom had any experience in education or administration, were on staff. The CEO and his wife, who was on staff as the dean of students, also paid themselves $11,000 in unused vacation time less than a month before the school closed, even as other employees were owed $370,000.

In fact, they had the staff sign a “Consent to Payroll Benefits Delay.” According to the audit, that document stated:

“The Undersigned hereby acknowledges that Kinston Charter Academy, in an effort to meet its cash flow needs and remain open, has experienced delays in payment of health insurance premiums and retirement contributions. This will acknowledge that I have been made aware of this issue…and consent to the same with the understanding the school will get this resolved by July 30, 2013.”

The audit found, of course, that “despite the employees signing those releases, the School had no authority to skip these required submissions of employee withholdings.”

The CEO’s wife was chair of the school’s board, which also contained the CEO’s first cousin as a member. The wife, who is an attorney, was also paid for legal representation of the school. A second daughter was paid for website design services.

Mind you, all of this was going on even while the school was on increasing levels of probation:

  • On June 5, 2008, DPI placed the School on “Financial Probationary Status” due to the School’s $354,292 deficit fund balance for the fiscal year ended June 30, 2007.
  • On March 24, 2010, DPI raised the action to the highest level, “Financial Disciplinary Status.”
  • On March 8, 2012, DPI notified the School that the remaining allotments for the 2011-12 school year would be provided in monthly installments rather than a lump sum installment for the final third of the academic year. However, during the 2012-13 and 2013-14 school years, DPI returned the School to the three installments per year schedule rather than keeping it on a monthly installment schedule.
  • On June 5, 2013, DPI placed the School on “Governance Cautionary Status” for failure to submit employee benefit contributions.
  • On August 2, 2013, the Office of Charter Schools sent the School a letter warning of the potential closing of the School.
  • On August 16, 2013, the Office of Charter Schools raised the disciplinary status to “Governance Noncompliance Status” and sent another letter indicating DPI’s intention to recommend initiation of revocation of the School’s charter at the next State Board meeting on September 4, 2013, for failure to respond to or resolve issues identified in the June 2013 letter.

No wonder Hall thinks further regulation is needed. The lack of state oversight is truly scary. Hall observes that this case is unfortunately not an outlier: “This type of situation happens with too much frequency in this state, where financial irregularities have happened and [the N.C. Department of Public Instruction] and other agencies can’t properly monitor the money.”—Ruth McCambridge