Charter School Case Exposes Big Loopholes in How the State Funds Schools

Last month, an explosive indictment filed in San Diego alleged a charter school scam that was both lucrative and audacious: Two men, along with a handful of close employees, managed to siphon $80 million of public education funds into “consulting” companies they controlled.

The grift was multi-faceted. In the most extreme cases, students from summer football programs were enrolled in classes, but did no schoolwork, prosecutors say. But prosecutors also allege that the schools were able to manipulate the state funding system by using irregular enrollment practices on real students. And it is unclear whether state officials have a plan to deal with all of the vulnerabilities and loopholes exposed by those lesser-known aspects of the scandal.

A3 operated at least 19 online charter schools, which were licensed to pull students from 34 counties around the state, including San Diego, according to prosecutors and independent investigators for a statewide charter schools’ association. Dehesa Elementary School District, a tiny district in East County, authorized three of the schools. One of those is scheduled to close. The future of the other two is uncertain.

Hundreds of charter schools – which are independently controlled, but publicly funded – around the state are, like the A3 schools, “non-classroom based.” In A3’s case, the schools were virtual and operated almost completely online. In other cases, non-classroom-based schools employ an “independent study” method. Students at independent study schools might show up once a week to meet with a teacher and get new assignments.

Here are three vulnerabilities the alleged A3 scam exposed in how California tracks attendance and allocates funding that could be exploited by bad actors.

The 80/40 Test

Even though non-classroom-based operations have less overhead than a typical brick-and-mortar school, they are still able to receive 100 percent funding from the state for each student they enroll. (Each student can bring in $7,000 to $10,000 per year, depending on grade level.) The school, however, is required to be able to pass what some people call the 80/40 test to qualify for full funding. That means 80 percent of its budget should go to “instruction-related” expenses and, within that, 40 percent should go to teachers’ salaries.

Schools self-report this information to the state Board of Education, which has historically approved or denied funding requests based on that self-reported information. During the 2017-18 school year, the funding determination of 115 non-classroom-based charter schools came up for review. All but four schools received 100 percent funding – and those four schools self-reported that they did not pass the 80/40 test.

California Department of Education officials, who are responsible for collecting the information, removed a webpage sometime between now and last March that listed all the schools to obtain 100 percent funding based on self-reported information.

A department spokeswoman pointed out that the self-reported 80/40 information is also subject to independent audit, by a state-approved firm. But in the case of A3, the information was audited and state officials still granted 100 percent funding status.

A3’s audited information was wildly inaccurate, according to prosecutors. Without a more robust oversight process, it is unclear whether other schools may be raking in state dollars while also not meeting the 80/40 test.

Attendance Fraud

During a given school year, any one student is supposed to represent one unit of state funding. If he or she attends school for 90 percent of the school days, he or she should receive 90 percent of a full unit of funding. In theory at least, one student should never represent more than one unit of funding.

But A3 officials figured out how to get as much as 120 percent funding for a single student, prosecutors say. In the case of A3’s summer school program, students would be un-enrolled from their traditional public school and enrolled into an A3 school during the summer. A student might get 100 percent funding for their traditional school, but then juice an extra 20 percent of funding for an A3 school.

In some cases, students were un-enrolled from their traditional school for as few as 17 days during Winter Break, prosecutors say.

State officials should be able to easily track this movement. Each student has a unique identifying number, and state officials track their movements in and out of schools through a large database. Officials could create a tool that flags students and programs that generate more than one unit of attendance funding to look for potential instances of fraud.

A provision attached to this year’s state budget mandates that department officials study the feasibility of tracking student movements. The bill language suggests Department of Education should try to take note of students who were enrolled in a charter school in the fall, but not in the spring. Tracking students only by that metric might not capture students who left their traditional public schools for a few days over winter or for several weeks in the summer.

School-to-School Movements

Loophole No. 3 is an iteration on No. 2. In some cases, A3 charter schools would un-enroll a student from one of their own schools and then enroll the student into another “sister charter school,” which they also controlled, according to an indictment. In this way, any charter school organization that controlled more than one school could access roughly 120 percent funding for each of its students.

This scheme requires an organization to run multiple attendance tracks. A hypothetical Track A might start on July 1 at School X and last until May 1. Track B might start on Sept. 1 at School Y and last until July 1. When Track A ends on May 1, a student could then be transferred onto Track B, allowing an organization to reap 120 percent funding.

“Any one organization is never supposed to get more than one unit of funding,” said Michael Simonson, deputy superintendent of business services for the San Diego County Office of Education.

He confirmed that other charter organizations that operate multiple schools could try to exploit the same loophole if they were so inclined. “If an organization is overseeing multiple schools, they could move kids between schools behind the scenes to maximize [attendance funding,]” he said.

“The world of charter school law is complex and ever evolving,” A3 Education said in a statement on its website following the indictment. “A3 Education continues to adapt to the changing legal and regulatory environment and is committed to operating within the confines of the law.” Company officials say they will make any policy revisions necessary to comply with the law.

Aside from the feasibility study, California Department of Education officials have not commented on any revisions they may be considering in the wake of the scandal.