I A l? Of Mr.? YORK HE A LEXANDER B. I IIOM AS P. 1m SIAIF STREEI A TF I FR Barn YORK [333? FIRST DEPLTY I FR Tel 518-474 2909 Far SIR-471 5320 December 8, 2014 Honorable Bill de Blasio City Hall New York, New York 10007 Re: Fiscal Oversight of Charter Schools Dear Mayor de Blasio: In May 2013 I sent the attached letter to Chancellor Walcott, with copies to the heads of the other chartering entities, recommending that future grants and renewals of charters include clear audit authority language to provide state and local of?cials with access to ?nancial records related to the expenditure of public ?mds. At that time, our focus was on schools that were established in conjunction with a business or other corporate entity, whether for?pro?t or not-for-pro?t. However, in the past year, there has been a number of new charters of all types, with 30 schools set to open in the city in 2015. With annual state ?nancial aid now topping $1 billion and reports of rent for one city charter costing taxpayers upwards of $18,000 per pupil, there is added concern for oversight of 'their ?nances. At the same time, however, efforts to oversee these entities? ?nancial operations by our of?ce have been signi?cantly curtailed, and most recently even the City?s authority is being threatened by lawsuits. While barred from auditing charter schools in New York City by the Legislature last year at the governor?s insistence, Comptroller DiNapoli continues to audit charters outside of the city and continues to ?nd de?ciencies in contracting, budgeting and other ?nancial operations. These audits have regularly identi?ed fraudulent and questionable spending that total millions of dollars. For example, our 2014 audit of the Oracle Charter School in Buffalo found the Board had not performed an appropriate cost analysis of potential new building sites. As a result, the school agreed to pay more than $5.1 million for the acquisition and renovation of its building ?nanced at a 20 percent interest rate. Auditors found that the building was acquired and renovated for approximately $1.4 million, and that a developer fee and interest costs will total more than $3.7 million over the term of the school?s 15-year lease. Clearly, the need for ?scal oversight of charter schools has intensi?ed. It would seem prudent to at least maintain, if not increase, the ?scal oversight of these entities just as we do with all other publicly funded schools funded by state and local taxes. Accordingly, I write to renew our recommendations that the city make it a condition of any grant or renewal of any charter that appropriate state and local oversight bodies be given complete and unfettered access to ?nancial records relating to costs incurred by the charter for purposes of audit, whether such records are held by the school or its af?liated entity. In addition, we ask again that you consider adopting a regulatory amendment or support a legislative change to institutionalize this requirement and put schools on notice that relevant ?nancial records cannot be shielded from oversight bodies of state and local governmental entities. We would be happy to speak with you ?thher regarding this matter and assist in any way you deem appropriate. - Iy yours, LZJ I i I Pete Grannis cc: Dean Fuleihan Chancellor Carmen Farina Enclosure . we Ln?. ?Train. STATE OF NEW YORK OFFICE OF THE STATE COMPTROLLER THOMAS P. 110 STATE STREET ALEXANDER B. STATE COWTROLLER ALBANY, NEW YORK 12236 FIRST DEPUTY COWTROLLER Tel: 518-474-2909 Fax: 518-473-5220 May 8, 2013 Dennis M. Walcott, Chancellor New York City Department of Education Tweed Courthouse 52 Chambers Street New York, NY 10007 Re: Charter Schools Established in Conjunction with Business or Corporate Entities Dear Chancellor Walcott: The purpose of this letter is to recommend that you take action in connection with any grants or renewals of charters involving schools that are established in conjunction with a business or other corporate entity, whether for-pro?t or not-for-pro?t, to make clear to such entities that access to relevant ?nancial records related to the expenditure of public funds must be provided at the request of appropriate State and local of?cials. We believe such action is critical to ensure proper ?scal oversight of charter schools in this State. On December 7, 2012 Comptroller DiNapoli issued an audit report of the ?Oversight of Financial Operations at the Brooklyn Excelsior Charter School? (?Report?), a copy of which is enclosed. Brooklyn Excelsior is a charter school that is governed by a board of trustees and is managed and operated by National Heritage Academies, Inc. NHA is a separate, privately-held for-pro?t corporation incorporated in Michigan that at the time of the audit operated 71 charter schools across the nation. The relationship between the school and NHA is governed by a management agreement that provides that NHA is to be responsible for all aspects of Brooklyn Excelsior?s operations. These responsibilities include eStablishing the school?s curriculum, providing all educational services, administering the school, including its personnel, purchasing and payroll functions, and contracting for any and all other services. In exchange for performing these services, NHA receives all of the school?s revenues. For the fiscal year ended June 30, 2010, these revenues totaled $10.23 million. The Comptroller?s Report contained several material ?ndings concerning the ?scal Operations of the school and the inadequate oversight provided by the school?s trustees. A primary ?nding in this regard was that auditors could not verify the true cost of the school?s operations or determine the extent to which the more than $10 million in annual public funding was actually used on behalf of the school?s students because NHA of?cials refused to provide ?nancial records to support any of the signi?cant costs allocated to the school. As one example of this, auditors could not determine the basis for approximately $1.7 million in costs allocated to the school (including ?forecasted purchases?) by NHA because NHA took the position that its allocation methodology and related information were private and pr0prietaiy. The issues of transparency and accountability for public funding are fundamental to government in New York, particularly within the educational realm where local taxes are ostensibly directly tied to costs incurred. For such transparency and accountability to be thwarted by an entity interposed between a charter school and the public should be anathema to all. Schools, unlike Brooklyn Excelsior, thatare not af?liated with a separate management company are not able to assert a private corporate preprietary interest to shield from state and local oversight records that pertain to the expenditure of the public funds entrusted to them. And neither should those schools that have such relationships. Accordingly, we are formally recommending that you make it a condition 'of any grant or renewal of a charter involving the management of such school by a separate corporate entity that complete and unfettered access to ?nancial records relating to costs incurred by the charter with respect to its operations, administration or management must be provided to State and local oversight bodies for purposes of audit, whether such records are held by the school or its af?liated entity. We also recommend that you consider adopting a regulatory amendment or seek a legislative change to ?irther strengthen this requirement and to put such schools on notice that relevant ?nancial records cannot be shielded from oversight bodies of State and local governmental entities. We would be happy to speak with you further regarding this matter and assist in any way you deem appropriate. Thank you. Ve ly yours, Pete Grannis Enclosure cci James Merriman