Part two of a two-part series. Read part one.

Thursday, Sept. 25, 2008 | Charter schools were first dreamed up as hotbeds of innovation. They are public schools that are run independently by their own boards, free from school district rules and red tape.

Teachers unions are optional. Hiring isn’t controlled by the school district. Many excelling charters in San Diego chalk up their success to those freedoms.

They can hire teachers without worrying about seniority. They can choose their own custodians and spend the savings in the classroom if they get a good deal. And they generally don’t have to follow the rules that their local school board passes; instead they are run by their own boards that craft policies for each individual school.

Their freedom comes with greater responsibilities and harsher consequences, meant to make charters accountable and limit abuses. Unlike traditional schools, they can be shuttered by school districts if they break their own policies or the law, mismanage their funds, or fall short of their student goals.

But that same freedom has spawned an unintended risk for charter schools: vulnerability to fiscal mismanagement. Charter schools usually shoulder the business tasks that school districts handle for traditional schools, and some educators and boards are overwhelmed by the task.

Michael R. Hazelton is a charter school administrator who specialized in the business side of education, and his story underscores the financial perils for charters that entrust their operations to a single person. He oversaw the business side of three charter schools in four years, and each has suffered from deficits, allegations that Hazelton improperly enriched himself, or both.

His last school in Encinitas was shuttered based on allegations of fiscal mismanagement and self-dealing by Hazelton and his wife; two earlier schools he ran were destroyed or hobbled by deficits. A school outside San Bernardino tanked while both Hazelton and his corporation were paid with school funds. Another charter in downtown San Diego lost money while Hazelton boosted his own pay, according to an audit.

His “track record has not been the best,” said Gary Larson, spokesman for California Charter Schools Association.

His story is not unique: Charter advocates say far more charter schools fall prey to financial woes or mismanagement than close because test scores are faltering. Roughly 5 percent of the 1,043 charter schools that have opened in California have been shut down and an additional 17 percent have closed on their own as of July 2008, according to staff at the California Department of Education.

The California Charter Association estimates the figure slightly lower at 4 percent closed and 4 percent shuttered, and states that charters usually close for financial reasons, such as lacking affordable facilities. A nonprofit that advocates choice among schools, the Center for Education Reform, identified only two California charters that were closed for academic reasons out of 73 schools closed or shut down statewide as of February 2006.

Loath to see more scandals and school meltdowns, the group is prodding leaders and boards to seek out training and support. It is branding schools with good governance as “certified.” It aims to prevent abuses without quashing successes and recreating the bureaucracy that charters were created to escape. And it readily criticizes charters that give the movement a bad name.

“Charter schools are a viable movement that is happening across the nation,” said Emma Lechuga, who cofounded a school with Mike Hazelton and later quit because of disagreements with him. “Unfortunately, individuals like Mike put the movement in a bad light.”

Hazelton has denied the accusations of the Encinitas Union School District that led to his last school’s closing, arguing that he and his wife were unfairly attacked because their school competed successfully with district-run schools in Encinitas.

Most charters are stuck in the awkward position of competing with the same school districts that oversee them, a situation that Larson compares to Blockbuster overseeing Netflix. When school districts lose students to charter schools, they also lose funding to them.

That tension undergirds the interrelationship between school districts and charters, and politicizes the already heated debates over when troubled charters should be given a chance, and when to pull the plug.

Proposed Law Would Combat Conflicts of Interest

School districts are pushing a different solution: Making charter schools follow a key code meant to stop employees from milking public funds.

State Government Code 1090 bans public officials and employees from participating in the creation of contracts that could impact them financially. Experts dispute whether 1090, which predates charter schools, already applies to them.

Major groups such as the San Diego County Office of Education and the statewide Association of California School Administrators back a proposed law that would make charters follow the same conflict of interest rules as school districts. They invoke the notorious case of C. Steven Cox, a charter school operator who diverted millions in public funds to his own corporation. It was only after a highly unusual and rigorous audit found evidence of actual theft — not just conflicts of interest — that prosecutors could charge Cox in a case with millions at stake.

“It has to rise to the level of the worst imaginable offense before we can do anything about it,” said Pamela Bachilla, a lobbyist with School Innovation and Advocacy, a firm that advocates for school districts. “That’s ridiculous.”

Cox was also panned by the California Charter School Association, which laid some blame with the school districts charged with overseeing his many schools. It pushed for a rule that banned charters from being sponsored by faraway school districts that could only exercise limited oversight, and lobbied unsuccessfully for another that would allow the state Board of Education to stop school districts from approving future charters if they fail to properly oversee them.

Charters argue that the proposed conflict of interest law is a ham-handed way to pluck “bad apples” such as Cox, and are prodding Gov. Arnold Schwarzenegger to veto the bill, which has already passed through the Legislature.

The bill would also force board members to live in the area served by the school, preventing experts who don’t live nearby from overseeing schools. It would also keep employees such as teachers off their governing boards to avoid conflicts.

That would undermine the do-it-yourself quality of charters, said Eric Premack, director of the Charter Schools Development Center.

“We can get around the we-them relationship that decimates so many traditional school districts,” Premack said, noting that nonprofit boards routinely and legally include employees. “There are other ways to mitigate those conflicts of interest,” such as employees recusing themselves from voting on their salaries.

The clash over the law is unsurprising. Tension is already built into the relationship between charter schools and school districts, which oversee the same schools they compete with, and districts are sometimes accused of unfairly eliminating their rivals.

Shutting down the last school that Hazelton headed, Theory Into Practice Academy, spurred similar complaints from parents and charter advocates who argued that Encinitas Union School District discounted their efforts to reform the school, such as remaking their board and firing Hazelton and his wife, the principal.

“The school district gets to be the judge and jury,” said parent Tim Cusac.

Weak Oversight by Boards and Educators

Ideally a board or principal would squelch financial mismanagement before a school was endangered, preventing the heartbreak and controversy of closing a charter. But educators who lack financial savvy may not discover problems until they become glaringly obvious.

A recent study by the National Charter School Research Project at the University of Washington found that charter leaders tend to be newcomers to running schools, less seasoned than their counterparts in traditional public schools.

Management expertise was a liability for two of the educators who partnered with Hazelton as their financial guru.

One was Lechuga, the cofounder of a small nonprofit that helped high school dropouts earn their degrees. Leaders at a San Bernardino-area school district rejected her efforts to form a school singlehandedly, but got behind the idea once she paired with Hazelton. Another principal who joined with Hazelton, Jacqueline Hicks, said her heart was in counseling teens, not handling “the business side” of Cortez Hill Academy.

Boards are also vulnerable, often lacking the training and expertise to oversee schools, said Priscilla Wohlstetter, director of the Center on Educational Governance at the University of Southern California.

Weak boards with revolving doors were unable to properly oversee Hazelton or effectively question how he managed his schools.

Board members were constantly changing at Las Banderas, which only learned of its financial woes from an outside audit. Teacher and board member JoAnne Hux confessed she still doesn’t understand how the school was being run and why another corporation founded by Hazelton was contracting with the school. Even the school district representative on the Las Banderas board was clueless.

“I wasn’t really knowledgeable as to how they actually were to operate,” said Marge Mendoza-Ware, a board member at the Colton Joint Unified School District. “… Finance was not my area of expertise.”

Similar turnover afflicted the Cortez Hill board, which replaced at least five of its seven voting members under Hazelton. Board members weren’t aware of financial problems until after Hazelton quit with the rent unpaid. Months later an audit concluded that deficits had grown and Hazelton had given himself an unauthorized $18,350 raise.

“The board was not very functional under Mike,” said Will Stillwell, secretary of the Cortez Hill Academy board. “We were supposedly over him, but we were not.”

Hazelton made it even tougher to track school finances because he formed corporations that contracted — or tried to — with his schools. Hiring a nonprofit or corporation as a manager is legal and common among charters, but it complicates oversight of public funds. Questions about whether Hazelton was double-dipping by earning a Las Banderas salary and paying his corporation as well went unanswered; the corporation never filed its tax returns, leaving no paper trail to track who earned money from the group.

“You lose the opportunity to follow the money” when outside corporations are involved, said Herbert Fischer, formerly superintendent in San Bernardino County, where the California Charter Academy scandal erupted. “The school district or the county office of education can’t oversee a private entity.”

To avoid the headaches and risks of running their own operations, some “dependent charters” pay school districts to manage functions such as finances, payroll and staffing, freeing them to focus on instruction. That model provides more oversight from experienced bookkeepers and business staffers, said Susan Fahle, assistant superintendent of business for Chula Vista Elementary School District.

But dependency means “you’re stuck with their rules and procedures,” said Tad Parzen, a charter school consultant. Instead of relying on school districts or a single financial expert, many Southern California charters have remained independent but outsourced their operations to a recognized nonprofit or corporation. Several have sprung up across the state, and the California Charter Schools Association recommends them to newly started schools.

It is a delicate question of balancing the risks and rewards of the freedom that charter schools enjoy — a question that still worries parents such as Ginger Relyea, a mother who loved the educational outlook of Theory Into Practice Academy but condemned the way that Hazelton ran the school.

“I still really believe in charter schools. They fulfill a need,” Relyea said. “But the system is broken.”

Please contact Emily Alpert directly at emily.alpert@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

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