STAT OF CALIFORNIA STANDARD AGREEMENT STD 213 (Rev 06i03) AGREEMENT NUMBER CN150487 REGISTRATION NUMBER 1 . This Agreement is entered into between the State Agency and the Contractor named below: STATE AG NAME California Department of Education NAME State Controller?s Office The term of this June 20, 2016 Agreement is: through June 30, 2017 3. The maximum amount of this Agreement is: 300,000.00 Three hundred thousand dollars and zero cents. 4. The parties agree to comply with the terms and conditions of the following exhibits which are by this reference made a part of the Agreement. Exhibit A Scope of Work 7 pages Exhibit Budget Detail and Payment Provisions 3 pages Exhibit General Terms and Conditions GIA 610 Check mark one item below as Exhibit D: Exhibit - Special Terms and Conditions (Attached hereto as part of this agreement) 1 pages Exhibit - Special Terms and Conditions Exhibit Additional Provisions 1 pages items shown with an Asterisk are hereby incorporated by reference and made part of this agreement as it attached hereto. These documents can be viewed at IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto. California Department of Generai Services Use Onty CONTRACTOR NAME {if other than an individ State Controller?s Office 0 i. state whethera corporation, partnership, etc) BY (A uthorized Signature) 5 DATE SIGNEDHM not type} PRINTED TITLE OF PERSON SIGNING Larry Norris, Chief, Administration Disbursement Division ADDRESS 300 Capitol Mall, Suite 1525 Sacramento, CA 95814 AGENCY NAME California Department of Education -. A. .t v. ri-ICIv: LJC-eizi I LETTER STATE OF CALIFORNIA ev (AuthoW? nature) DATE type} PRINTED NAME AND TITLE OF PERSON SIGNING Nick Schweizer, SAFTIB Deputy Superintendent ADDRESS 1430 Street, Sacramento, CA 95814 Exempt per: STATE OFFICE CDE Agreement No. CN150487 EXHIBIT A SCOPE OF WORK GENERAL SCOPE: The interagency agreement is entered into between the Contractor, State Controller's Office, herein referred to as 800 and the California Department of Education, herein referred to as CDE. The 800 shall conduct an audit on the California Virtual Academies (CAVA) as described herein. PROJECT MONITORS: The CDE assigns Tami Pierson 916?323?6797) as the state project monitor to oversee this project. Said monitor is not authorized to make any commitments or make any changes that will affect the price, terms, or conditions of this agreement without a formal contract amendment. The contractor assigns Jim L. Spano (ispano@sco.ca.dov, 916-323-5849) contractor project monitor to oversee this project. Said monitor is not authorized to make any commitments or make any changes that will affect the price, terms, or conditions of this agreement without a formal contract amendment. BACKGROUND: This Agreement with the CDE resulted from various general concerns related to the non?profit CAVA. The concerns include: (1) poor student performance rates; (2) possible overstated attendance and enrollment records to spike funding; (3) related- party relationships and transactions between the not?for-profit charter schools and the for-profit Inc.; and (4) the charter schools organizational independence from K-1 2, Inc. CAVA is a non?profit public benefit corporation that was founded in 2002. It has a network of 14 virtual public charter schools in California funded principally through State of California public education money. The charter schools? fiscal year (FY) 2014-15 independent audit reports state that CAVA contracts solely with K-12, Inc. as its sole curriculum provider and that K-12, lnc. would provide management, accounting and operational services, and record-keeping services. The reports disclosed that K-1 2, Inc. charged CAVA $68,832,010 for services performed, curriculum, and instructional materials. The reports also indicate that 2, Inc., through a service agreement it has with CAVA charter schools, will provide balanced budget credits/deficit credits (collectively called ?balanced budget credits?) to Inc. The agreement indicated that the charter schools would be invoiced up to the amount necessary to assure that schools do not end a fiscal year with an accumulated deficit. The balanced budget credits represent a portion of accumulated liabilities. In addition, the reports indicated that if a CAVA charter school ends a year in a positive net 1 STATE OFFICE CDE Agreement No. CN150487 EXHIBIT A asset position and K-I2, Inc. has issued balanced budget credits in prior years, the charter school would have to pay the outstanding balance. As of June 30, 2015, CAVA reported $25,498,143 due to 2, Inc. The above information in the independent audit reports conflicts with the Memorandum- of Understanding (MOU) available online between California Virtual Academy Maricopa and the charter school's authorizing school district, the Maricopa Unified School District. The MOU states, in part, ?any contract or arrangement between the Charter School and K-1 2, Inc. shall provide that any charges or obligations of the Charter School in any fiscal year in excess of the amounts available for payment at the end of each fiscal year will be forgiven by Inc. and shall not be carried over as an obligation in the next succeeding fiscal year.? Various newspaper articles cited that: (1) fewer than half of the students who enrolled in the online high school earned diplomas; (2) teachers were asked to inflate attendance and enrollment records to spike funding; and (3) some of the charter schools board members were related to top CAVA administrators who were handpicked by K-12, Inc. The articles also cited general concerns related to the nature and extent of services that K-12, Inc. provided to the charter schools. In a response to one of the newspaper articles, K-12, Inc. released a statement that stated, in part, ?Each CAVA school is governed by a separate and independent charter school board.? However, a review of the organizational structure presented in the charter schools? June 30, 2015 audit report indicated instances in which the same individual served on the board of multiple charter schools and instance in which individuals who served as charter school management also served on the school?s board. As indicated above, the note disclosures for the independent audit reports indicated that K-12, Inc. would provide management. STATUTORY PROVISIONS: Education Code section 47604.3 states: A charter school shall respond to all reasonable inquiries, including, but not limited to, inquiries regarding its financial records, from its chartering authority, the county office of education that has jurisdiction over the school's chartering authority, or from the Superintendent of Public Instruction and shall consult with the chartering authority, the county office of education, or the Superintendent of Public Instruction regarding any inquiries. Education Code section 47604.5 states: The state board, whether or not it is the authority that granted the charter, may, based upon the recommendation of the Superintendent, take appropriate action, including but not limited to revocation of the school?s charter, when the state board finds any of the following: Gross financial mismanagement that jeopardizes the financial stability of the 2 VI. STATE OFFICE CDE Agreement No. CN150487 EXHIBIT A chanerschool Illegal or substantially Improper use of charter school funds for the personal benefit of any officer, director, or fiduciary of the charter school. Substantial and sustained departure from measurable successful practices such that continued departure would jeopardize the educational development of the school?s pupils. Failure to improve pupil outcomes across multiple state and school priorities identified in the charter pursuant to subparagraph (A) of paragraph (5) of subdivision of Section 47605.6. PURPOSE: The 800 will perform a preliminary survey of available information prior to initiating an audit of the CAVA and related charter schools to include, but not limited to: Review of independent audit reports of charter schools related to CAVA. Review of original signed contractual documentations, agreements, and amendments between CAVA charter schools and Inc. Review of newspaper articles related to CAVA. The 800 will conduct a review of CAVA and related charter schools to verify whether they: Compiled with their contractual agreements with authorizing entities. Accurately reported attendance, enrollment, and cohort dropout/graduation outcome data results to the CDE. Appropriately allocated and reported shared expenses. Appropriately identified, accounted for, and disclosed related?party relationships and transactions in its independent audit report. Are organizationally independent from K-12, Inc. The 800 will complete the following enoaqement plannino tasks. A. Understanding processes and controls related to approval and oversight responsibilities for charter schools Research relevant information for the individual charter schools 1 . Review the independent audit reports and note disclosures of charter schools related to CAVA to assess organization structure, financing arrangements, and potential related?party activities as applicable. . Review original signed contractual documentations, agreements, and amendments between CAVA charter schools and K-12, Inc. 3 STATE OFFICE CDE Agreement No. CN150487 EXHIBIT A C. Review compliance with contractual agreement between authorizing entities and the individual charter schools 1 . Contact authorizing entities and obtain a copy of the individual charter schools? contractual agreements. 2. Review contractual agreements and assess whether the charter schools complied with the agreements with the authorizing entities. The SCO will complete the following tasks during the fieldwork portion of the audit. D. Conduct site visits at the CAVA in Simi Valley and the following 14 charter schools: 1. Independent charter schools California Virtual Academy Fresno California Virtual Academy Kings California Virtual Academy San Joaquin California Virtual Academy San Mateo California Virtual Academy Sonoma California Virtual Academy Sutter California Virtual Academy Jamestown Insight @San Joaquin (new independent charter school starting operations in FY 2015-16). 2. Under California Virtual Academy Los Angeles Management Organization - Insight Los Angeles a California Virtual Academy Los Angeles 3. Under California Virtual Academy San Diego Management Organization 0 Insight San Diego - California Virtual Academy San Diego 4. Under the California Virtual Academy Maricopa Management Organization - California Virtual Academy Maricopa - California Virtual Academy High Maricopa For these Charter Schools for FY 2014?15 and FY 2015-16, the SCO will: E. Assess validity of attendance, enrollment, and cohort dropout/graduation outcome data results the individual charter schools reported to the CDE STATE OFFICE CDE Agreement No. CN150487 EXHIBIT A 1. Understand processes and controls established by individual charter school to accurately report attendance, enrollment, and cohort drOpout/graduation outcome data results to the CDE. 2. Verify the accuracy of attendance, enrollment, dropout, and graduation data reported to the CDE. a. Obtain and review a sample of independent study agreements individual charter schools have with parents and students b. Verify that charter schools maintained documentation supporting compliance with such agreements 0. Verify that the above data the charter schools reported to the CDE is supponed F. Assess the accuracy of the charter schools allocation of shared costs reported by individual charter schools 1. Understand processes and controls established by CAVA to ensure that shared teacher expenses, rent, and utilities among the various charter schools are appropriately allocated and reported by the individual charter schools. 2. Assess whether the shared expenses were appropriately allocated and reported by the individual charter schools. G. Assess whether the individual charter schools properly identified and disclosed related-party transactions and arrangements 1. Understand processes and controls established by individual charter schools: a. To identify, account for, and disclose related-party relationships and transactions b. To authorize and approve significant transactions and arrangements with related parties and transactions outside the normal course of business 2. Assess whether all related-party relationships and transactions were properly identified and disclosed in the independent audit report. H. Assess organizational independence of individual charter schools and K-12, Inc. 1. Understand contractual agreements that individual charter schools have with K- 12, inc. for: (1) curriculum and instructional materials; (2) administrative and technology services; (3) management; (4) accounting; (5) operations; and (6) record-keeping services. VII. STATE OFFICE CDE Agreement No. CN150487 EXHIBIT A 2. Assess organizational independence of the individual charter schools and 2, Inc. by identifying, reviewing, and comparing key personnel and their roles at CAVA, the charter schools, and K-12, inc. 3. Assess potential conflict of interest in the contractual agreements individual charter schools have with 2, Inc. for the above services. AUDITING STANDARDS: The audit will be conducted in accordance with generally accepted government auditing standards. DELIVEFIABLE: The 800 will: 1. Provide written updates at the end of each month to the CDE Contract Monitor on progress of all tasks. 2. Issue a draft audit report to the CAVA, and provide a copy to the CDE, by February 28, 2017, that will verify whether charter schools: Complied with their contractual agreements with their authorizing en??es. Accurately reported attendance, enrollment, and cohort dropout/graduation outcome data results to the CDE. Appropriately allocated and reported shared expenses. ApprOpriater identified, accounted for, and disclosed related-party relationships and transactions in its independent audit report. Are organizationally independent from K-12, Inc. 3. Provide the CAVA fourteen (14) calendar days to respond in writing to the findings in the draft audit report. 4. Issue the CDE a final audit report by March 31, 2017. 5. Provide the CDE with five hard copies and CAVA with one hard copy of the final audit report. STATE OFFICE CDE Agreement No. CN150487 EXHIBITA TIMELINE Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun 2016 2016 2016 2016 2016 2016 2016 2017 2017 2017 2017 2017 2017 Engagement Planning Fieldwork Updatesto CDE Draft Report Final Report STATE OFFICE CDE Agreement No. CN150487 EXHIBIT BUDGET DETAIL AND PAYMENT PROVISIONS INVOICING AND PAYMENT: For services satisfactorily rendered, and upon receipt and approval of the invoices, the State agrees to compensate the Contractor for actual expenditures incurred in accordance with the rates specified herein, which is attached hereto and made a part of this agreement. Invoices shall include the Agreement Number and shall be submitted in arrears, not more frequently than in duplicate to: California Department of Education Audits and Investigations Division 1430 Street, Suite 5319 Sacramento, CA 95814 Attention: Tami Pierson BUDGET CONTINGENCY CLAUSE (Rev. 9/12): A. It is mutually understood between the parties that this Agreement may have been written before ascertaining the availability of congressional or legislative appropriation of funds, for the mutual benefit of both parties in order to avoid program and fiscal delays that would occur if the Agreement were executed after that determination was made. B. This Agreement is valid and enforceable only if sufficient funds are made available to the State by the United States Government or the California State Legislature for the purpose of this program. In addition, this Agreement is subject to any additional restrictions, limitations, conditions, or any statute enacted by the Congress or the State Legislature that may affect the provisions, terms or funding of this Agreement in any manner. C. It is mutually agreed that if the Congress or the State Legislature does not appropriate sufficient funds for the program, this Agreement shall be amended to reflect any reduction in funds. D. Pursuant to GO, Section 927.13, no late payment penalty shall accrue during any time period for which there is no Budget Act in effect, nor on any payment or refund that is the result of a federally mandated program or that is directly dependent upon the receipt of federal funds by a state agency. E. CDE has the option to terminate the Agreement under the 30?day termination clause or to amend the Agreement to reflect any reduction in funds. STATE OFFICE CDE Agreement No. CN150487 EXHIBIT PAYMENT: Costs for this Agreement shall be computed in accordance with State Administrative Manual Sections 8752 and 8752.1. Nothing herein contained shall preclude advance payments pursuant to Article I, Chapter 3, Part 1, Division 3, Title 2 of the Government Code of the State of California. STATE OFFICE CDE Agreement No. CN150487 EXHIBIT BUDGET DETAIL State Controller?s Office Interagency Agreement Contract Term: June 20, 2016 June 30, 2017 Staff Classification Rates Fiscal Year 2015-16 Supervising Management Auditor $122.95 Senior Management Auditor $110.68 Staff Management Auditor Specialist $96.64 Associate Management Auditor $92.39 Staff Services Management Auditor $76.82 Fiscal Year 2016-17 Supervising Management Auditor $125.37 Senior Management Auditor $112.86 Staff Management Auditor Specialist $98.55 Associate Management Auditor $94.21 Staff Services Management Auditor $78.34 Salary including overhead $275,000.00 Travel 25,000.00 Total $300,000.00 These are the classifications needed to complete all work. Both the quantity of hours and number of staff per classification used per month will vary based on the complexity of the work. Billable Rate Calculation: Salary State Administrative Manual (SAM) Factor Overhead Factor. The allocation between salary (including overhead) and travel will vary based on the extent and location of site visits. The billing rates are subject to change on an annual basis due to the changes in salary and SAMfoverhead factor calculations. The CDE will be notified 90 days in advance of any billing rate adjustments and an amendment to the Agreement will be required. The SAM factor is provided on an annual basis by the Department of Finance for staff benefits applied to the hourly rates for staff changes. The overhead factor is determined on an annual basis for department-wide federal approved indirect cost rates. STATE OFFICE CDE Agreement No. CN150487 EXHIBIT SPECIAL TERMS CONDITIONS RESOLUTION OF DISPUTES: If the contractor disputes any action by the project monitor arising under or out of the performance of this contract, the contractor shall notify the project monitor of the dispute in writing and request a claims decision. The project monitor shall issue a decision within 30 days of the contractor's notice. If the contractor disagrees with the project monitor's claims decision, the contractor shall submit a formal claim to the Superintendent of Public Instruction or the Superintendent?s designee. The decision of the Superintendent shall be final and conclusive on the claim unless the decision is arbitrary, capricious, or grossly erroneous or if any determination of fact is unsupported by substantial evidence. The decision may encompass facts, interpretations of the contract, and determinations or applications of law. The decision shall be in writing following an opportunity for the contractor to present oral or documentary evidence and arguments in support of the claim. Contractor shall continue with the responsibilities under this Agreement during any dispute. STATE OFFICE CDE Agreement No. CN150487 EXHIBIT ADDITIONAL PROVISIONS RIGHT TO TERMINATE: Either agency reserves the right to terminate this agreement upon thirty (30) days advance written notice to the other. The agency providing services shall be reimbursed for all reasonable expenses incurred up to the date of termination.