MICHIGAN OFFICE OF THE AUDITOR GENERAL

AUDIT REPORT

PERFORMANCE AUDIT

OF

CHARTER SCHOOLS OFFICE

AND MICHIGAN RESOURCE CENTER FOR CHARTER SCHOOLS

CENTRAL MICHIGAN UNIVERSITY

October 1997

THoMAs H. McTAVISH, C.P.A.

AUDITOR GENERAL

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Audit report information may be accessed at: http: I I www.michigan.state.mi.us I audgen I

EXECUTIVE DIGEST

CHARTER SCHOOLS OFFICE AND MICHIGAN

RESOURCE CENTER FOR CHARTER SCHOOLS

INTRODUCTION

AUDIT PURPOSE

BACKGROUND

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This report, issued in October 1997, contains the results of

our performance audit* of Central Michigan University's

Charter Schools Office (CSO) and Michigan Resource

Center for Charter Schools (MRCCS).

This performance audit was conducted as part of the

constitutional responsibility of the Office of the Auditor

General. Performance audits are conducted on a priority

basis related to the potential for improving effectiveness*

and efficiency*.

In addition, the Office of the Auditor General conducted

this performance audit to address a legislative concern as

to whether the University's CSO provided effective

oversight of the public school academies* (PSA's) that the

University Board of Trustees had authorized* .

. This performance audit also included the University's

MRCCS because of its relevance to CSO activities.

PSA's, commonly referred to as charter schools, are public

schools that are authorized and operated under terms of a

contract. In December 1993, Michigan first passed PSA

legislation. Michigan's PSA law (Part 6A of the Revised

School Code) was appealed. A subsequent PSA law (Part

* See glossary on page 56 for definition.

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6B of the Revised School Code) was enacted and later

amended. At the time of our audit, all PSA's chartered* by

the University Board of Trustees operated under Parts 6A

and 6B. In July 1997, the Michigan Supreme Court ruled

that Part 6A was constitutional. This ruling resulted in

repealing Part 6B.

Act 289, P.A. 1995, imposed a cap that limits Michigan's

15 public universities to 85 PSA charters for 1996 and 100

PSA charters for 1997. A single university is limited to

authorizing not more than 50% of the total PSA's starting

in 1997.

As of May 31, 1997, there were 78 PSA's operating in

Michigan. For the 1996-97 academic year, these PSA's

enrolled 12,698 full-time equated (FTE) students and

received $71, 172,084 in State school aid*.

Central Michigan University's Board of Trustees is the

authorizing body for 40 of the 78 PSA's in Michigan. For

the 1996-97 academic year, these 40 PSA's enrolled

7,416 FTE students and received $41,763,478 in State

school aid. (See Exhibits 1 through 3 for supplemental

information related to the number of PSA's by authorizing

body, student enrollment and State school aid by

authorizing body, and other PSA statistics.)

The University's CSO was established in July 1994. The

CSO's mission* states that the University aims to be a vital

force in redefining and restructuring public education in

America by working to create an innovative and diverse

educational marketplace in Michigan that will more

effectively prepare the children in this State to seize the

opportunities of the 21st century.

*See glossary on page 56 for definition.

2

AUDIT OBJECTIVES,

CONCLUSIONS, AND

NOTEWORTHY

ACCOMPLISHMENTS

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CSO fiscal year 1995-96 revenues and expenditures were

$562,868 and $814,657, respectively. As of May 31,

1997, CSO had 8 full-time employees, 1 part-time

employee, 13 part-time temporary employees, and 3

student interns.

The University established MRCCS, which became

operational in January 1996. MRCCS is to serve as a

resource for and to provide technical assistance to

prospective authorizing bodies, the Department of

Education, and individuals on establishing and operating a

PSA. Act 154, P.A. 1995, provided $500,000 to MRCCS

for fiscal year 1995-96 funding. Act 295, P.A. 1996,

includes MRCCS fiscal year 1996-97 funding within the

University's general operations.

MRCCS's mission is to support Michigan PSA's by

providing specialists from various disciplines, maintaining

a collection of educational resource materials, and

establishing a data base of State and national information

for monitoring PSA activities. Services and information

provided by MRCCS are available to anyone interested in

PSA's.

MRCCS's fiscal year 1995-96 expenditures were

$222,115. The remaining amount of the appropriation,

$277,885, was to be used in fiscal year 1996-97. As of

May 31, 1997, MRCCS had 3 full-time employees, 2 full­

time temporary employees, and 1 student intern.

Audit Objective: To assess the effectiveness and

efficiency of CSO in authorizing PSA charters.

Conclusion: We concluded that CSO was generally

effective and efficient in authorizing PSA charters.

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However, we noted a reportable condition* related to the

PSA application process (Finding 1 ) .

Noteworthy Accomplishments: As part of CSO's

application process for prospective PSA's, CSO contracted

with the Gratiot Isabella Regional Education Service

District and utilized University faculty to provide reviews of

applicant educational goals.

CSO encourages prospective applicants to be creative and

innovative in meeting the diverse needs of their students.

Examples of some curriculum focuses of PSA's that are

chartered by the University Board of Trustees include

history and culture, arts and sciences, trade/technical,

technology, back-to-basics, and foreign language.

The University has made local, regional, and national

charter school presentations, including a presentation to

the United States House of Representatives Education

Workforce Committee.

Audit Objective: To assess the effectiveness and

efficiency of CSO in monitoring PSA's.

Conclusion: We concluded that CSO had demonstrated

limited effectiveness and efficiency in monitoring PSA's.

We noted the following six material conditions*:

• CSO needs to coordinate with other entities to

improve its oversight of PSA's (Finding 2).

CSO responded that it agrees with the corresponding

recommendation and continues to believe that the

scope and extent of an authorizing body's oversight of

*See glossary on page 56 for definition.

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PSA's should be defined. CSO will continue its efforts

to improve oversight.

• CSO needs to substantially improve its internal

control structure* for monitoring PSA's (Finding 3).

CSO responded that it agrees with the corresponding

recommendation and has dedicated additional

personnel in implementing improvements.

• CSO needs to improve monitoring of PSA boards of

directors for potential conflicts of interest (Finding 4).

CSO responded that it agrees with the corresponding

recommendation and is taking action to improve its

monitoring of PSA boards of directors.

• CSO did not follow up on some items of

noncompliance related to PSA board activities. Also,

CSO either did not obtain or did not obtain on a timely

basis some PSA board minutes. (Finding 5)

CSO responded that it agrees with the corresponding

recommendations and has established a data base to

assist in monitoring whether board minutes are

received timely, and it will establish a process to

review minutes for items of noncompliance.

• CSO did not sufficiently monitor PSA student

application periods and enrollment lotteries

(Finding 6).

*See glossary on page 56 for definition.

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CSO responded that it agrees with the corresponding

recommendation and will develop appropriate forms

and procedures for PSA's to use in documenting the

proper administration of student enrollments.

• CSO did not sufficiently monitor development of PSA

school policies (Finding 7).

CSO responded that it agrees with the corresponding

recommendation and will improve the process for

monitoring the deveiopment of PSA schooi poiicies.

We noted other reportable conditions related to oaths of

office and acceptances of public office (Finding 8), PSA

procurement policies (Finding 9), regional representatives'

activities (Finding 1 0), and coordinating regional

representatives' activities (Finding 11 ) .

Noteworthy Accomplishments: CSO created a data

base to assist in monitoring PSA compliance with the

contract and applicable laws. The data base includes

general information and information related to regional

representative visitations, PSA legal counsel, contract

amendments, financial audits, State school aid payments,

and PSA board activities.

Audit Objective: To assess the effectiveness and

efficiency of CSO in monitoring compliance with reporting

requirements for PSA's.

Conclusion: We concluded that CSO had demonstrated

limited effectiveness and efficiency in monitoring

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compliance with reporting requirements for PSA's. We

noted the following three material conditions:

• CSO did not review PSA certificates of continuing

compliance, in conjunction with other CSO monitoring

data, to determine that it had a sufficient basis for

relying on the certificates as filed. Also, because of

CSO's lack of internal coordination regarding other

monitoring data, CSO did not take corrective action

with PSA's that filed inaccurate certificates. Further,

CSO did not obtain some certificates on a timely

basis. (Finding 12)

CSO responded that it agrees with the corresponding

recommendations and is reevaluating the format of the

certificates and has developed a data base to assist in

determining when certificates are received.

• CSO did not develop written instructions to aid

regional representatives with completion of

compliance checklist and inspection reports. Also,

CSO did not ensure that reports were prepared

consistently. (Finding 13)

CSO responded that it agrees with the corresponding

recommendations that written instructions should be

developed which will assist in consistent completion

of the reports.

• CSO did not ensure that PSA's complied with

requirements related to financial statement reporting

and operating budgets (Finding 14).

CSO responded that it agrees with the corresponding

recommendation and is in the process of

7

AUDIT SCOPE

33-606-97

implementing review procedures for PSA financial

statements and operating budgets.

We also noted a reportable condition related to CSO

reporting to PSA's (Finding 15).

Noteworthy Accomplishments: CSO works with the

State Department of Education, including its Office of

Charter Schools director, intermediate school district

officials, and other authorizing bodies to monitor and assist

PSA's with reporting requirements.

Audit Objective: To assess the effectiveness and

efficiency of MRCCS in maintaining information on and

providing assistance to users interested in PSA's.

Conclusion: We concluded that MRCCS was effective

and efficient in maintaining information on and providing

assistance to users interested in PSA activities.

Noteworthy Accomplishments: MRCCS sponsors

workshops, seminars, round tables, and the annual

Michigan Charter School Exposition. These events

provide PSA networking opportunities, technical

assistance, and education about charter school programs.

Since 1995, MRCCS has had a web page that provides

immediate access to charter information.

Our audit scope was to examine the program and other

records of Central Michigan University's Charter Schools

Office and Michigan Resource Center for Charter Schools.

Our audit was conducted in accordance with Government

Auditing Standards issued by the Comptroller General of

the United States and, accordingly, included such tests of

the records and such other auditing procedures as we

considered necessary in the circumstances.

8

SUBSEQUENT EVENT

ISSUES FOR

FURTHER

CONSIDERATION OR

FOLLOW-UP

AUDIT

METHODOLOGY

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Our ability to achieve our audit objectives relating to CSO,

in accordance with Government Auditing Standards, was

impeded by the University's assertion of attorney/client

privilege for 43 records. Although the University later

removed this designation for 9 of these records, it retained

the designation for 34 records. Not having seen the

records for which the University maintained the claim of

attorney/client privilege, we could not assess if they would

affect the conclusions of this audit.

During our audit fieldwork, the constitutionality of Part 6A

of the Revised School Code (the original PSA Jaw) was

being challenged. At that time, a subsequent PSA Jaw,

being Part 68 of the Revised School Code, was in effect.

Thus, our audit was performed based on the requirements

of the Jaw that was in effect during our fieldwork.

On July 30, 1997, after completion of our audit fieldwork,

the Michigan Supreme Court ruled that Part 6A of the

Revised School Code was constitutional. This ruling

resulted in repealing Part 68 of the Revised School Code.

We noted issues during this audit that are relevant to

PSA's but were either broader in scope than our audit

objectives for the audit of CSO or required more data for

analysis than was available at the time of our audit. These

items will be considered for inclusion in future performance

audits. Also, we will conduct a follow-up review of material

conditions contained in this report at a later date.

To accomplish our objectives, we interviewed University,

Department of Education, intermediate school district, and

PSA personnel. We analyzed mission statements and

applicable statutes, policies, and procedures. We

examined CSO records for 13 PSA's for the period July 1,

1994 through November 30, 1996 and conducted site

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AGENCY RESPONSES

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visits at 10 PSA's. We obtained an understanding of

CSO's PSA application and oversight (monitoring)

processes. Also, we examined records for 2 additional

PSA's as part of our extended auditing procedures through

June 5, 1997. In addition, we analyzed data related to the

activities of MRCCS, including types, uses, and level of

services provided.

Our audit report includes 15 findings and 19

recommendations. The un-iversity's preliminary response

indicated that it agreed with 17 of our recommendations

and has begun to take steps to implement the

recommendations. The University acknowledges the

remaining 2 recommendations.

10

STATE OF MICHIGAN

OFFICE OF THE AUDITOR GENERAL 201 N. WASHINGTON SQUARE

LANSING, MICHIGAN 48913

Mr. David Brandon, Chair

Board of Trustees

and Dr. Leonard E. Plachta, President Central Michigan University

Mount Pleasant, Michigan

Dear Mr. Brandon and Dr. Plachta:

(517) 334-8050fAX (517) 334-8079

October 3, 1997

THOMAs H. McTAVISH, C.P.A.

AUDITOR GENERAL

This is our report on the performance audit of Central Michigan University's Charter

Schools Office and Michigan Resource Center for Charter Schools.

This report contains our executive digest; description of agency; audit objectives, audit

scope, subsequent event, issues for further consideration or follow-up, audit

methodology, and agency responses; background; comments, findings,

recommendations, and agency preliminary responses; various exhibits, presented as

supplemental information; and a glossary of acronyms and terms.

Our comments, findings, and recommendations are organized by audit objective. The

agency preliminary responses were taken from the University's responses subsequent

to our audit fieldwork. Annual appropriations acts require that the audited institution

develop a formal response within 60 days after release of the audit report.

We appreciate the courtesy and cooperation extended to us during this audit by the

University and the public school academies.

33-606-97

Sincerely,

Thomas H_ McTavish, C.P.A.

Auditor General

TABLE OF CONTENTS

CHARTER SCHOOLS OFFICE

AND

MICHIGAN RESOURCE CENTER FOR CHARTER SCHOOLS

CENTRAL MICHIGAN UNIVERSITY

INTRODUCTION

Page

Executive Digest 1

Report Letter 11

Pescription of Agency 15

Audit Objectives, Audit Scope, Subsequent Event, Issues for Further

Consideration or Follow-Up, Audit Methodology, and Agency Responses 17

Background 21

COMMENTS, FINDINGS, RECOMMENDATIONS,

AND AGENCY PRELIMINARY RESPONSES

Authorizing Public School Academies

1. PSA Application Process

Monitoring Public School Academies

2. Oversight Responsibilities

3. CSO Internal Control Structure

4. Potential Conflicts of Interest

5. Board Minutes

6. Student Application Periods and Enrollment Lotteries

7. Development of School Policies

8. Oaths of Office and Acceptances of Public Office

9. PSA Procurement Policies

10. Regional Representatives' Activities

11. Coordination of Regional Representatives' Activities

Compliance With Reporting Requirements

12. Certificates of Continuing Compliance

13. Compliance Checklist and Inspection Reports

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24

24

26

27

30

31

33

35

37

38

39

40

41

42

42

44

14. Financial Statement Reporting and Operating Budgets

15. CSO Reporting to PSA's

Michigan Resource Center for Charter Schools (MRCCS)

SUPPLEMENTAL INFORMATION

Exhibit 1 - Public School Academies by Authorizing Body

for the 1996-97 ,A,cademic Year

Exhibit 2 - Public School Academies Student

Enrollment and State School Aid by Authorizing Body

for the 1996-97 Academic Year

Exhibit 3 - Public School Academy Statistics

GLOSSARY

Glossary of Acronyms and Terms

14 33-606-97

46

48

49

53

54

56

Description of Agency

Central Michigan University's Charter Schools Office (CSO) was established in July

1994 and originally chartered three public school academies (PSA's) under Act 362,

P.A. 1993 (Part 6A of the Revised School Code). These charters were declared invalid

because Part 6A was being appealed, and CSO subsequently authorized its first PSA

under both Parts 6A and 68 of the Revised School Code in February 1995. In July

1997, the Michigan Supreme Court ruled that Part 6A is constitutional. This ruling

resulted in repealing Part 68.

As of May 31, 1997, the University 89ard of Trustees had authorized 66 PSA's of which

40 were operational. Of the remaining 26, the University is negotiating contracts with 8,

has contracted with 1 which will become operational during the 1997-98 academic year,

has rescinded 15 authorizations, and has terminated 2 contracts.

The CSO's mission states that the University aims to be a vital force in redefining and

restructuring public education in America by working to create an innovative and

diverse educational marketplace in Michigan that will more effectively prepare the

children in this State to seize the opportunities of the 21st century.

CSO fiscal year 1995-96 revenues and expenditures were $562,868 and $814,657,

respectively. As of May 31, 1997, CSO had 8 full-time employees, 1 part-time

employee, 13 part-time temporary employees, and 3 student interns.

The University established the Michigan Resource Center for Charter Schools

(MRCCS), which became operational in January 1996. MRCCS is to serve as a

resource for and to provide technical assistance to prospective authorizing bodies, the

Department of Education, and individuals on establishing and operating a PSA. Act

154, P.A. 1995, provided $500,000 to MRCCS for fiscal year 1995-96 funding. Act 295,

P.A. 1996, includes MRCCS fiscal year 1996-97 funding within the University's general

operations.

MRCCS's mission is to support Michigan PSA's by providing specialists from various

disciplines, maintaining a collection of educational resource materials, and establishing

15 33-606-97

a data base of State and national information for monitoring PSA activities. Services

and information provided by MRCCS are available to anyone interested in PSA's.

MRCCS's fiscal year 1995-96 expenditures were $222,115. The remaining amount of

the appropriation, $277,885, was to be used in fiscal year 1996-97. As of May 31,

1997, MRCCS had 3 full-time employees, 2 full-time temporary employees, and 1

student intern.

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Audit Objectives

Audit Objectives, Audit Scope, Subsequent Event,

Issues for Further Consideration or Follow-Up,

Audit Methodology, and Agency Responses

Our performance audit of Central Michigan University's Charter Schools Office (CSO)

and Michigan Resource Center for Charter Schools (MRCCS) had the following

objectives:

1. To assess the effectiveness and efficiency of CSO in authorizing public school

academy (PSA) charters.

2. To assess the effectiveness and efficiency of CSO in monitoring PSA's.

3. To assess the effectiveness and efficiency of CSO in monitoring compliance with

reporting requirements for PSA's.

4. To assess the effectiveness and efficiency of MRCCS in maintaining information

on and providing assistance to users interested in PSA's.

Audit Scope

Our audit scope was to examine the program and other records of Central Michigan

University's Charter Schools Office and Michigan Resource Center for Charter Schools.

Our audit was conducted in accordance with Government Auditing Standards issued by

the Comptroller General of the United States and, accordingly, included such tests of

the records and such other auditing procedures as we considered necessary in the

circumstances.

Our ability to achieve our audit objectives in accordance with Government Auditing

Standards was impeded by the University's assertion of attorney/client privilege for 43

records. Although the University later removed this designation for 9 of these records, it

retained the designation for 34 records. Not having seen the records for which the

University maintained the claim of attorney/client privilege, we could not assess if they

would affect the conclusions of this audit.

17 33-606-97

CSO and MRCCS operations are accounted for in the University's financial accounting

system. As such, CSO and MRCCS financial transactions are included in annual

financial audits of the University conducted by a public accounting firm.

Subsequent Event

During our audit fieldwork, the constitutionality of Part 6A of the Revised School Code

(the original PSA law) was being challenged. At that time, a subsequent PSA law,

performed based on the requirements of the law that was in effect during our fieldwork.

On July 30, 1997, after completion of our audit fieldwork, the Michigan Supreme Court

ruled that Part 6A of the Revised School Code was constitutional. This ruling resulted in

repealing Part 68 of the Revised School Code.

Although the University Board of Trustees chartered its PSA's under both Parts 6A and

68 of the Revised School Code, CSO needs to consider the effect of the Michigan

Supreme Court ruling on Part 6A of the Revised School Code in implementing our audit

recommendations.

There are some differences between Parts 6A and 68 of the Revised School Code.

For example, Part 68 expanded on the requirements related to PSA boards of directors

and it outlined specific purposes for establishing PSA's within this State's system of

public schools.

Issues for Further Consideration or Follow-Up

We noted the following issues during this audit that are relevant to PSA's but were

either broader in scope than our audit objectives for the audit of CSO or required more

data for analysis than was available at the time of our audit. These items will be

considered for inclusion in future performance audits. Also, we will conduct a follow-up

review of material conditions contained in this report at a later date.

The Office of the Auditor General will consider the following matters when scheduling

performance audits within the Department of Education: assessing PSA monitoring

responsibilities among applicable entities, assessing the progress of students attending

PSA's, assessing the effectiveness of PSA boards as a method of local oversight, and

reviewing PSA membership reporting.

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Audit Methodology

Our audit procedures were conducted from September 11, 1996 through June 5, 1997.

We interviewed University, Department of Education, intermediate school district, and

PSA personnel. Also, we analyzed mission statements; applicable statutes, policies,

and procedures; PSA contracts; and annual reports of CSO and MRCCS for the year

ended June 30, 1996. We reviewed documentation relative to CSO, MRCCS

publications, and audit reports of other states. In addition, we conducted procedures

specific to each objective, as appropriate.

To accomplish our first objective, we obtained an understanding of the internal control

structure for the PSA application process and related contracting process. We selected

a sample of 13 PSA's. We examined CSO records for each PSA to determine if all

required information was obtained prior to and supported the authorization of each PSA

for chartering. We also examined files of some applicants who were denied a charter.

In addition, we reviewed CSO revenues and expenditures.

To accomplish our second objective, we obtained an understanding of CSO's internal

control structure for monitoring PSA's. We then examined CSO activities in detail for a

sample of 13 PSA's for the period July 1, 1994 through November 30, 1996. We

conducted site visits of 10 PSA's. We reviewed documentation at the PSA's that was

not available at CSO. We interviewed representatives from the Department of

Education and intermediate school districts. Also, we examined records for 2 additional

PSA's as part of our extended auditing procedures through June 5, 1997.

To accomplish our third objective, we determined the reporting requirements of CSO,

assessed the internal control structure over reporting, and evaluated PSA compliance

with these requirements. We verified the timeliness of CSO's reporting of all receipts,

deposits, and transfers to the PSA's. We also reviewed the timely filing of reports and

other documents by the PSA's, such as semiannual compliance certifications, annual

financial audits, and operating budgets. We verified the propriety and accuracy of State

school aid payments made to the PSA's and the 3% fees collected by the University

from the PSA's.

To accomplish our fourth objective, we analyzed data related to the activities of

MRCCS, including types, uses, and level of services provided. We also analyzed

MRCCS revenue and expenditures.

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Agency Responses

Our audit report includes 15 findings and 19 recommendations. The University's

preliminary response indicated that it agreed with 17 of our recommendations and has

begun to take steps to implement the recommendations. The University acknowledges

the remaining 2 recommendations.

The agency preliminary response which follows each recommendation in our report was

taken from the agency's written comments and oral discussion subsequent to our audit

fieldwork. Annual appropriations acts require the principal executive officer of the

audited institution to submit a written response to our audit to the Auditor General, the

House and Senate Fiscai Agencies, and the Department of Management and Budget

The response is due within 60 days after the audit report has been issued and should

specify the action taken by the institution regarding the audit report's recommendations.

20 33-606-97

Background

Public school academies (PSA's), commonly referred to as charter schools, are public

schools that are authorized and operated under terms of a contract. A contract is

established between the PSA and an authorizing body. In Michigan, authorizing bodies

may include local school districts, intermediate school districts, community colleges,

and public universities.

In December 1993, Michigan first passed PSA legislation. This first Michigan PSA law,

Act 284, P.A. 1993 (Part 6A of the Revised School Code), was repealed in January

1994 by a second PSA law, Act 362, P.A. 1993. This second PSA law (also Part 6A)

was challenged. In December 1994, the Michigan Legislature passed a new PSA law,

Act 416, P.A. 1994, that became effective March 30, 1995. This Act added Part 68 to

the Revised School Code. Parts 6A and 68 were amended by Act 289, P.A. 1995,

which became effective July 1, 1996. At the time of our audit, all PSA's chartered by

Central Michigan University's Board of Trustees operated under Parts 6A and 68. In

July 1997, the Michigan Supreme Court ruled that Part 6A is constitutional. This ruling

resulted in repealing Part 68.

Part 68 of the Revised School Code established the following purposes for PSA's:

a. Improve pupil achievement for all pupils, including, but not limited to, educationally

disadvantaged pupils, by improving the learning environment.

b. Stimulate innovative teaching methods.

c. Create new professional opportunities for teachers in a new type of public school in

which the school structure and educational program can be innovatively designed

and managed by teachers at the school site level.

d. Achieve school accountability for pupil educational performance by placing full

responsibility for performance at the school site level.

e. Provide parents and pupils with greater choices among public schools,· both within

and outside their existing school districts.

21 33-606-97

f. Determine whether State educational funds can be more effectively, efficiently, and

equitably used by allocating funds on a per-pupil basis directly to the school rather

than through school district administration.

Act 289, P.A. 1995 (the Act), imposed a cap that limits Michigan's 15 public universities

to 85 PSA charters for 1996 and 100 PSA charters for 1997. A single university is

limited to authorizing not more than 50% of the total PSA's starting in 1997.

The Act requires PSA contracts to be issued on a competitive basis taking into

consideration the resources available for the proposed PSA, the population to be

served by the proposed PSA, and the educational goa!s to be achieved by the

proposed PSA.

PSA's receive a per-pupil foundation allowance (State school aid) from the Michigan

Department of Education equivalent to that of the local school district in which the PSA

is located. The Act allows an authorizing body to charge the PSA a fee of up to 3% of

the PSA's total State school aid for considering the application, issuing a contract, or

providing oversight of the contract for a PSA. An authorizing body may provide other

services for a PSA and charge a fee for those services.

As of May 31, 1997, there were 78 PSA's operating in Michigan. For the 1996-97

academic year, these PSA's enrolled 12,698 full-time equated (FTE) students and

received $71,172,084 in State school aid.

Central Michigan University's Board of Trustees is the authorizing body for 40 of the 78

PSA's in Michigan. For the 1996-97 academic year, these 40 PSA's enrolled 7,416

FTE students and received $41,763,478 in State school aid. Of the 40 PSA's, 14 have

management companies which direct the PSA's day-to-day operations. Six PSA's

reported deficits as of June 30, 1996 ranging from $454 to $107,953. (See Exhibits 1

through 3 for supplemental information related to the number of PSA's by authorizing

body, student enrollments and State school aid by authorizing body, and other PSA

statistics.)

A PSA is not to be chartered until its application is in compliance with all State and

federal legal requirements and the policies adopted by the University Board of

22 33-606-97

Trustees, and a formal contract is completed and signed by both parties. Also, the

contract must ··be approved by the State Superintendent of Public Instruction before

receiving State funding.

Under Act 416, P .A. 1994, the University, subject to the leadership and general

supervision of the State Board of Education, has the responsibility to oversee a PSA's

compliance with the contract and all applicable laws.

Also under Act 416, P.A. 1994, the authorizing body is to provide sufficient monitoring

of a PSA to ensure compliance with applicable laws and terms of the contract. In

addition, Act 289, P.A. 1995, which became effective July 1, 1996, requires the

authorizing body to provide sufficient oversight to ensure that the authorizing body can

certify that a PSA is in compliance with statutes, rules, and terms of the contract. The

authorizing body has the responsibility to oversee compliance with specific reporting

requirements.

Act 154, P .A. 1995, provided funding for MRCCS to serve as a resource for and to

provide technical assistance to prospective authorizing bodies, the Department of

Education, individuals on establishing and operating a PSA, and other interested

parties.

23 33-606-97

COMMENTS, FINDINGS, RECOMMENDATIONS,

AND AGENCY PRELIMINARY RESPONSES

AUTHORIZING PUBLIC SCHOOL ACADEMIES

�nMMI=MT ....... ""l.IIWI.._I. I

Audit Objective: To assess the effectiveness and efficiency of the Charter Schools

Office (CSO) in authorizing public school academy (PSA) charters.

Conclusion: We concluded that CSO was generally effective and efficient in

authorizing PSA charters. However, we noted a reportable condition related to the PSA

application process.

Noteworthy Accomplishments: As part of its application process for prospective

PSA's, CSO contracted with the Gratiot Isabella Regional Education Service District

and utilized University faculty to provide reviews of applicant educational goals.

CSO encourages prospective applicants to be creative and innovative in meeting the

diverse needs of their students. Examples of some curriculum focuses of PSA's that are

chartered by the University Board of Trustees include history and culture, arts and

sciences, trade/technical, technology, back-to-basics, and foreign language.

The University has made local, regional, and national charter school presentations,

including a presentation to the United States House of Representatives Education

Workforce Committee.

FINDING

1. PSA Application Process CSO needs to improve its documentation to support the competitive selection of

PSA's.

Section 380.513(1) of the Michigan Compiled Laws requires the University's Board

of Trustees, as an authorizing body, to issue PSA contracts on a competitive basis.

This Section also requires that the authorizing body take into consideration

24 33-606-97

available resources, the population to be served, and the educational goals to be

achieved.· On December 2, 1994, the University Board of Trustees approved

selection criteria for use in evaluating PSA applications. These criteria provide for

assessing educational goals, curriculum, instructional design,

assessment/evaluation, personnel, facilities, the business plan, and compliance.

CSO used a screening committee comprised of University and other educational

professionals to review applications. PSA applicants who successfully met the

CSO's criteria for chartering were formally issued contracts (chartered) by the

University Board of Trustees.

Our review of CSO files for 13 of the PSA's which were chartered disclosed:

a. Records for 11 PSA's did not document how the population to be served was

considered in the selection of PSA's. An assessment of the population to be

served helps determine the viability for operating a PSA.

b. Records for 1 PSA did not document a review of educational goals. A review

of the educational goals may help determine if the PSA's goals are

measurable and achievable.

c. Records for all 13 PSA's did not document how available resources were

considered in the selection of PSA's. An assessment of available resources

helps determine the likely financial viability for operating a PSA and should

include a determination as to the PSA's ability to apply resources to be

operationally ready prior to student enrollment.

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Prior to the University Board of Trustees signing a contract with one PSA

applicant, CSO expressed concerns related to the operational readiness of

the applicant. CSO records did not reflect resolution of some of these

concerns (chairs, furniture, desks, supplies, etc.) prior to the signing of the

contract. Subsequent to the signing of the contract, this PSA still experienced

operational readiness problems. These problems continued after the PSA

ended its association with a potential management firm.

25

Subsequent CSO site visits reflected the lack of operational readiness. Also,

the management firm that was retained to oversee the PSA's day-to-day

operations pointed out a series of concerns, which included absence of

student schedules and classroom and office furniture.

Some PSA records lacked a sufficient review of, and related documentation for,

two or more of the criteria. For example, one PSA was operational only during

fiscal year 1995-96 and enrolled only seven students. For this PSA, we couid not

determine the adequacy of CSO's review regarding the population to be served

and available resources. This PSA, in September 1996, requested CSO to

dissolve the contract because the PSA concluded that the contract was cost

prohibitive in relation to the number of students served.

Without sufficient documentation of application reviews, CSO cannot demonstrate

that the PSA's were selected on a competitive basis. Issuing contracts on a

competitive basis helps ensure that the applicants who have the best potential for

long-term success are selected to be PSA's.

RECOMMENDATION

We recommend that CSO improve its documentation to support the competitive

selection of PSA's.

AGENCY PRELIMINARY RESPONSE

While the University Board of Trustees issued all PSA contracts on a competitive

basis, CSO agrees that the documentation of the competitive selection process

can be improved, and it will develop appropriate forms to use in documenting the

process.

MONITORING PUBLIC SCHOOL ACADEMIES

COMMENT

Audit Objective: To assess the effectiveness and efficiency of CSO in monitoring

PSA's.

26 33-606-97

Conclusion: We concluded that CSO had demonstrated limited effectiveness and

efficiency in monitoring PSA's. We noted six material conditions. CSO needs to

coordinate with other entities to improve its oversight of PSA's. CSO needs to

substantially improve its internal control structure for monitoring PSA's. CSO needs to

improve its monitoring of PSA boards of directors for potential conflicts of interest. CSO

did not follow up on some items of noncompliance related to board activities and either

did not obtain or did not obtain on a timely basis some PSA board minutes. CSO did

not sufficiently monitor PSA student application periods and enrollment lotteries. CSO

did not sufficiently monitor development of PSA school policies.

We noted other reportable conditions related to oaths of office and acceptances of

public office, PSA procurement policies, regional representatives' activities, and

coordinating regional representatives' activities.

Noteworthy Accomplishments: CSO created a data base to assist in monitoring PSA

compliance with the contract and applicable laws. The data base includes general

information and information related to regional representative visitations, PSA legal

counsel, contract amendments, financial audits, State school aid payments, and PSA

board activities.

FINDING

2. Oversight Responsibilities

CSO needs to coordinate with other entities to improve its oversight of PSA's.

Section 380.517(2) of the Michigan Compiled Laws states that, subject to the

leadership and general supervision of the State Board of Education, the

authorizing body has the responsibility to oversee a PSA's compliance with the

contract and all applicable laws.

Act 289, P.A. 1995, further added to the oversight role of authorizing bodies. Act

289 states that authorizing bodies shall oversee, or shall contract with intermediate

school districts (ISD's), community colleges, or State public universities to oversee,

each PSA operating under a contract issued by the authorizing body. The

oversight shall be sufficient to ensure that the authorizing body can certify that the

PSA is in compliance with statutes, rules, and the terms of the contract.

27 33-606-97

The University's first operational* PSA was authorized in February 1995. CSO has

concluded that other governmental bodies and entities also have legal

responsibilities for overseeing PSA's. On August 29, 1996, the CSO requested

that the State Superintendent of Public Instruction establish a special task force on

oversight responsibilities for the authorizing bodies of PSA's. On November 4,

1996, in response to CSO's request, the Superintendent of Public Instruction

established a short-term referent group. This referent group met on March 24,

1997. After that meeting, the referent group drafted an outline of potential

responsibilities of authorizing bodies, ISD's, Department of Education, and the

State Board of Education. However, at the time of our review, there had not been

any substantive issues resolved regarding oversight

During our audit, we noted weaknesses in CSO oversight of PSA's regarding

criminai records checks, use of certified teachers, and provision of special

education services. Our site visits to 10 PSA's identified areas of concern which

may involve other oversight entities:

a. The PSA's had not obtained criminal records checks for some employees.

Also, 8 PSA's did not hire some staff as conditional employees pending the

results of criminal records checks.

Sections 380.1230 and 380.1230a of the Michigan Compiled Laws require a

PSA to obtain criminal records checks for teachers, administrators, and other

employees occupying positions requiring State Board of Education approval.

These sections also require individuals to be conditional employees until the

PSA receives the results of the criminal records checks.

b. Eight PSA's employed individuals to teach who did not have certificates or

permits to teach.

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Section 380.515 of the Michigan Compiled Laws requires a PSA to use

certificated teachers. Michigan Administrative Code R 390.1105 allows PSA's

to employ as teachers individuals who have received a permit to teach from

the Department of Education.

* See glossary on page 56 for definition.

28

c. One PSA was beginning to provide special education services at the time of

our site visit. This PSA had students with special education needs who had

been attending the PSA for more than one year without special education

services being provided.

Special education services are required to be provided by Section 380.1751 of

the Michigan Compiled Laws.

CSO informed us that it relies on ISD's and the Department of Education to

monitor the preceding areas. However, without sufficient communication and

coordination with these entities, CSO lacks assurance as to PSA compliance with

contractual and statutory requirements.

RECOMMENDATION

We recommend that CSO coordinate with other entities to improve its oversight of

PSA's.

AGENCY PRELIMINARY RESPONSE

The State Constitution and the Revised School Code charge the State Board of

Education with significant responsibility and authority for leadership, general

supervision, and oversight of PSA's. CSO continues to believe that the State

Board of Education or the Superintendent of Public Instruction should provide rules

or regulations that would define the scope and extent of authorizing body oversight

of PSA's within the constitutional and statutory framework of Michigan's public

education system. CSO agrees that the University Board of Trustees, as the

authorizing body for more than half of the existing charter schools in Michigan,

through the administrative function of CSO, should continue to take an active part

and help to expedite the effort to clarify oversight responsibility for PSA's. On

September 11, 1997, the director of CSO and the Superintendent of Public

Instruction had a preliminary discussion on oversight.

CSO is in the process of completing its follow-up with all 40 PSA's, chartered by

the University Board of Trustees, on the status of obtaining criminal records checks

for all teachers. Also, CSO is determining whether all schools had certified

teachers or teachers who had been granted permits to teach by the Department of

Education for the 1996-97 academic year.

29 33-606-97

CSO is exploring the possibility of contracting with ISD's or other governmental

agencies to provide criminal records checks and teacher certification verification.

CSO is also exploring ways to ensure that appropriate special education services

are provided by PSA's.

F!ND!NG

3. CSO Internal Control Structure

CSO needs to substantially improve its internal control structure for monitoring

PSA's.

Improving CSO's internal control structure is essential to CSO's ability to oversee a

PSA's compliance with the contract and applicable laws. The effectiveness of an

internal control structure can materially affect the University's ability to reliably fulfill

its statutory responsibility as an authorizing body. CSO's oversight is statutorily

required to be sufficient in order for it to be able to certify that a PSA is in

compliance with statutes, rules, and terms of the contract.

Our audit identified material opportunities for improving controls relating to

monitoring potential conflicts of interest, board minutes, student application periods

and student enrollment lotteries, and development of school policies. The CSO

also needs to improve its internal control structure effectiveness and efficiencies in

other areas that are identified in this report.

As a new University operation, CSO had experienced problems in defining

oversight responsibilities and with establishing an effective and efficient internal

control structure over its operations. A variety of factors had contributed to the

internal control structure weaknesses. Since it began operation, CSO had

expended a substantial amount of effort in processing PSA applications and

assisting PSA's with initial start-up issues.

Improvements in the CSO internal control structure will help in improving the

quality of information available in CSO's data base and facilitate CSO's oversight

administrator in following up on identified areas of concern. CSO added an

30

33-606-97

oversight administrator to its staff in September 1995. During our audit, we noted

CSO efforts to improve its internal control structure.

To correct weaknesses noted, CSO personnel may require assistance from other

University personnel with more experience in establishing and assessing internal

control structures.

RECOMMENDATION

We recommend that CSO substantially improve its internal control structure for

monitoring PSA's.

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendation. CSO informed us that the University has

hired an in-house attorney to assist with CSO administrative issues. Also, the

University has temporarily assigned a University administrator who has experience

in establishing and assessing internal control structures to work with CSO in a

chief financial officer capacity. Both of these positions will assist current CSO

personnel in implementing improvements.

FINDING

4. Potential Conflicts of Interest

CSO needs to improve its monitoring of PSA boards of directors for potential

conflicts of interest.

The contract between the University Board of Trustees and a PSA prohibits

individuals from being a PSA board member when the individual is: 1) a member

appointed or controlled by another profit or nonprofit corporation; 2) an employee

of the PSA; or 3) a University official who is a representative of the University.

Section 380.517(2) of the Michigan Compiled Laws requires the University to �

oversee the PSA's compliance with the contract. Also, other sections of the

Michigan Compiled Laws prohibit specific conflicts of interest.

Each PSA board of directors consists of 5 to 9 members. CSO developed an

academy board questionnaire to monitor, among other things, potential conflicts of

interest. CSO implemented the questionnaire for prospective PSA board members

31 33-606-97

in April 1996. On October 24, 1996, CSO also sent the questionnaire to already

appointed PSA board members for completion.

Our site visits and review of CSO academy board questionnaires, board minutes,

and other CSO records for 13 PSA's disclosed:

a. CSO records, as of December 31, 1996, did not contain academy board

questionnaires for 23 board members. These records also did not reflect

follow-up of incomplete academy board questionnaires for 14 board members

or follow-up of specific responses indicating a potential conflict of interest for 1

board member.

b. CSO had not timely identified potential conflicts of interest for 9 board

members. In addition, our site visits and review of CSO records identified 2

board members who had potential conflicts of interest. CSO was not aware of

these two potential conflicts of interest.

The potential conflicts of interest included board members who had loaned

money to or contracted with PSA's, who were employees of corporations

which contracted with or provided services to the PSA, and who were

employees of the PSA.

Upon identification of potential conflicts of interest, CSO contacted 8 of the 11

board members to resolve the situations. These 8 were resolved by

resignation of the board members. One board member resigned prior to CSO

follow-up of the potential conflict of interest. At the time we completed our

fieldwork, CSO was following up with the respective PSA's regarding the two

board members with potential conflicts of interest.

Obtaining, reviewing, and following up on academy board questionnaires, board

minutes, and other PSA documentation would help ensure compliance with the

PSA contract and resolution of potential conflicts of interest on a timely basis.

RECOMMENDATION

We recommend that CSO improve its monitoring of PSA boards of directors for

potential conflicts of interest.

32 33-606-97

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendation. CSO informed us that, of the 23

questionnaires that had not been received as of December 31, 1996, 2 were for

board members originally appointed in April 1996. The other 21 were for board

members who received the questionnaire in October 1996. Of the 23

questionnaires cited in the finding, 22 have now been received by CSO or will not

be received because the person who received the questionnaire is no longer

serving as a board member.

CSO informed us that it will continue to ensure that academy board questionnaires

are received from ali prospective PSA board members and reviewed prior to

appointment by the University Board of Trustees. CSO has established a data

base and master calendar of regularly scheduled board meetings that will assist in

monitoring whether board minutes have been received from PSA's on a timely

basis. Also, CSO is taking steps to refine the academy board questionnaire and

eliminate the current wording of the question that primarily accounted for the

incomplete questionnaires cited by the auditors. It is important to realize that it is

not possible to identify or prevent all potential conflicts. Once CSO has identified a

conflict of interest that has occurred or is about to occur, CSO will continue to take

appropriate follow-up action.

FINDING

5. Board Minutes

CSO did not follow up on some items of noncompliance related to board activities.

Also, CSO either did not obtain or did not obtain on a timely basis some PSA board

minutes.

The contract between the University Board of Trustees and a PSA requires that the

PSA provide minutes of all PSA board meetings no later than 10 days after such

minutes are approved. Section 380.517(2) of the Michigan Compiled Laws requires

the University to oversee each PSA's compliance with the contract and all

applicable laws.

33 33-606-97

Our review of board minutes for 13 PSA's (obtained from CSO or the PSA's)

disclosed:

a. Seven PSA boards did not designate the term length of each board director as

required by the contract.

b. Three PSA boards did not adopt their bylaws as required by Section 380.512a

of the Michigan Compiled Laws.

c. Two PSA boards did not appoint an individual to post meeting dates as

required by Section 15.265 of the Michigan Compiled Laws, commonly known

as the Open Meetings Act. Section 380.513(8)(a) of the Michigan Compiled

Laws and the University Board of Trustees contract with each PSA require the

PSA to comply with the Open Meetings Act.

Also, our review of CSO records, as of November 30, 1996, for 13 PSA's disclosed

that CSO did not have board minutes for 3 PSA's. In addition, CSO records for 7

of the remaining 10 PSA's did not contain some PSA board minutes. Further,

some of the PSA's did not submit board minutes to CSO on a timely basis. Some

minutes had been outstanding for over a year.

Obtaining and reviewing board minutes on a timely basis is an essential aspect of

monitoring and would help disclose instances of potential noncompliance for

follow-up and resolution.

RECOMMENDATIONS

We recommend that CSO follow up on items of noncompliance related to PSA

board activities.

We also recommend that CSO obtain PSA board minutes on a timely basis.

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendations. CSO informed us that it has established a

data base and master calendar of regularly scheduled board meetings that will

assist in monitoring whether board minutes have been received from PSA's on a

timely basis. CSO will establish a process for the review of all board minutes and

34 33-606-97

the follow-up of items of noncompliance. For the 1996-97 academic year, all board

minutes for the PSA's cited by the auditors have now been received.

FINDING

6. Student Application Periods and Enrollment Lotteries

CSO did not sufficiently monitor PSA student application periods and enrollment

lotteries.

The contract between the University Board of Trustees and a PSA requires the

student application period to include evening and weekend times. Aiso, the CSO's

enrollment guidelines issued during April 1996 to PSA's suggest a specific two­

week period as the application period for potential new students for the upcoming

academic year.

Section 380.514(3) of the Michigan Compiled Laws requires the PSA to perform a

student enrollment lottery, using a random process, when the number of student

applications exceeds the spaces available. This Section also requires enrollment

in a PSA, that is authorized by a university, to be open to all students who reside in

the State and meet the admission policy. CSO requires lotteries to be conducted

by a certified public accountant, an intermediate school district, a local school

district, or at a public meeting. Applicants who are not selected in the lottery are to

be placed on a first-come, first-served waiting list.

Our review of CSO and PSA files for the student application periods for the 1996-

97 academic year and the related lotteries disclosed:

a. For the 10 PSA's we visited:

33-606-97

(1) Three PSA's did not have application periods that were at least two

weeks in length.

(2) Four PSA's did not have application periods during the period June 1

through June 15 as CSO guidelines suggest.

35

(3) Five PSA's reported having application periods; however, documentation

was not present to support when the application periods were held or if

the application periods included weekend and evening hours.

Lotteries were held after 6 of the 10 student application periods. Two of these

lotteries were associated with application periods that were less than the

suggested two-week period. When application periods are not sufficiently

long, some potentiai appiicants may miss the opportunity to participate in the

lottery and would be placed on a first-come, first-served waiting list. Applicants

would not be able to attend the PSA unless space would become available by

students leaving the PSA.

Monitoring adherence to the contract and to the CSO's suggested application

period length and time frames would assist CSO and PSA's in ensuring that

potential applicants have an opportunity to take part in PSA enrollment

opportunities.

b. CSO records did not contain adequate documentation of the lotteries held for

the 1996-97 academic year. Based on data compiled by CSO, 10 of the 13

PSA's in our review were required to hold a lottery.

After our review, CSO developed an open enrollment report and obtained

enrollment and lottery procedure information from the 13 PSA's. Each report

contained the number of students authorized by CSO, the number of student

applications, and whether a lottery was held. If a lottery was held, the time,

date, location, and method of the lottery were provided.

Because enrollment in a PSA that is authorized by a university is open to all

students who reside in the State and meet the admission policy, it is important that

CSO ensure that PSA student application periods are sufficiently long to allow all

students who reside in the State to consider enrollment opportunities. Also,

adequate documentation regarding the enrollment lottery process is important to

monitor compliance with the contract and applicable law.

36 33-606-97

RECOMMENDATION

We recommend that CSO sufficiently monitor PSA student application periods and

enrollment lotteries.

AGENCY PRELIMINARY RESPONSE

CSO agrees that adequate documentation of student application periods and the

enrollment lottery process is important and will develop appropriate forms and

procedures for PSA's to use in documenting proper administration of enrollment

lotteries. The open enrollment report developed earlier this year provides a good

starting point.

FINDING

7. Development of School Policies

CSO did not sufficiently monitor development of PSA school policies.

Pursuant to CSO's PSA application procedures and the contract between the

University Board of Trustees and the PSA's, PSA's are required to develop school

policies. As a general practice, school policies are incorporated into student

handbooks, which are distributed to students. Student policies address various

areas, such as student conduct, dress code, and absences.

During the application process, CSO requests information related to how the PSA

applicant intends to address school policies. However, CSO does not

subsequently monitor the development of these policies.

To illustrate the significance of monitoring development of PSA policies, we

identified a policy at one PSA that we believe was not in compliance with State

law.

The policy addresses student pregnancy and states that a student will not be

allowed to attend classes beyond the first trimester of pregnancy; however, special

arrangements can be made in individual cases to allow a student to complete a

term through correspondence.

37 33-606-97

Section 380.1301 (1) of the Michigan Compiled Laws prohibits the expulsion or

exclusion of a student because of pregnancy.

Monitoring the development of PSA school policies would help ensure PSA

compliance with the contract and all applicable laws.

RECOMMENDATION

We recommend that CSO sufficiently monitor development of PSA school policies.

AGENCY PRELIMINARY RESPONSE

CSO agrees that the process for monitoring the development of PSA school

policies can be improved. The inappropriate policy at the one PSA, identified by

the auditors, has been revised by the PSA.

FINDING

8. Oaths of Office and Acceptances of Public Office

CSO did not obtain oaths of office and acceptances of public office from some PSA

board members at 4 of the 13 PSA's in our sample.

Section 512a(4)(b)(vi) of the Michigan Compiled Laws and the contract between

the University and a PSA state that membership on PSA boards constitutes

holding a public office and requires that each board member file an acceptance of

office and take and file an oath or affirmation before assuming office.

CSO monitoring of PSA board members' oaths of office and acceptances of public

office would help ensure that board decisions are made by duly authorized

persons.

RECOMMENDATION

We recommend that CSO obtain oaths of office and acceptances of public office

from PSA board members.

38 33-606-97

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendation. With the repeal of Part 6B of the Revised

School Code, board members' oaths of office and acceptances of public office are

no longer required to be submitted. However, because PSA board members are

public officials and CSO has a process in place to obtain these documents from

the PSA before the contract is issued by the University Board of Trustees, CSO will

continue to do so. As of July 2, 1997, the documents had been obtained for all

current PSA board members.

FINDING

9. PSA Procurement Policies

CSO did not ensure that PSA's had adopted written procurement policies.

Section 380.1274(1) of the Michigan Compiled Laws requires each PSA board to

adopt written procurement policies. Also, the contract between the University

Board of Trustees and a PSA requires adoption of procurement policies.

Our review of CSO records for 13 PSA's disclosed that CSO did not determine that

the PSA's adopted procurement policies, as required.

Our site visits to 10 PSA's disclosed that 1 PSA did not have written procurement

policies and 5 PSA's had procurement policies that had not been adopted by the

PSA's boards.

RECOMMENDATION

We recommend that CSO ensure that PSA's adopt written procurement policies.

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendation and will provide suggested language to

PSA's for a policy to be adopted at the first PSA board meeting. CSO is currently

following up with the PSA boards cited in the finding.

39 33-606-97

FINDING

10. Regional Representatives' Activities

CSO's monitoring of its regional representatives' activities requires improvement.

Regional representatives are employed by CSO as liaisons between CSO and

PSA's. CSO requires regional representatives to attend at least three PSA board

meetings for each PSA during the academic year. During these meetings, the

regional representative is required to perform duties, such as observe the conduct

of the meeting, check the posting of the board meeting calendar, and assess board

member relations with the PSA administration and the management company (if

one is contracted with). The regional representatives are also to report their

observations and recommendations to CSO.

CSO requires that all monitoring activities performed by regional representatives

be documented on activity forms and forwarded to CSO biweekly.

Our review of the activity forms for 13 PSA's disclosed that regional

representatives for 12 of the PSA's did not report attending the required number of

board meetings. Regional representatives for 6 of the PSA's did not document

attending any board meetings.

Regional representatives' attendance at the required number of board meetings

would help CSO ensure that board activities are in compliance with legal

requirements and identify potential areas for CSO assistance.

RECOMMENDATION

We recommend that CSO monitor its regional representatives' activities as

required by its own guidelines.

AGENCY PRELIMINARY RESPONSE

CSO acknowl�dges the recommendation. CSO established regional

representatives as additional liaisons between CSO and PSA's chartered by the

University Board of Trustees. The role played by the regional representatives was

especially important during the start-up and first years of operation for the PSA's.

CSO is in the process of reevaluating the need for and future role of the regional

representatives.

40

33-606-97

FINDING

11. Coordination of Regional Representatives' Activities

CSO needs to improve its effectiveness and efficiency by coordinating regional

representatives' activities with other CSO monitoring functions to obtain information

needed by CSO for monitoring purposes.

CSO employs regional representatives to help monitor and provide assistance to

its PSA's. Regional representatives assist CSO with its oversight responsibilities

by conducting weekly monitoring activities and annual inspections. Each regional

representative is assigned between 3 and 10 PSA's to monitor and assist.

Regional representatives were not required to obtain necessary information that

CSO did not receive from PSA's on a timely basis.

Although regional representatives visited each PSA several times during the audit

period, effort was not coordinated within CSO for regional representatives to

obtain, for example, outstanding insurance policies, board minutes, and other

required information. To illustrate, CSO's records for 12 of the PSA's reviewed

disclosed that insurance policies were not submitted on a timely basis. Each

contract requires the PSA to submit a copy of insurance policies, with specific

required elements, within 30 days after signing the contract.

CSO sent notices of noncompliance related to insurance policies to most of the 13

PSA's. However, the insurance policies were not always received from the PSA's

upon notification. For example, 1 PSA was sent six notices before complying but

the regional representative had visited the PSA several times during this time

period.

As liaisons between CSO and the PSA's, regional representatives could assist

CSO in obtaining needed information on a timely basis.

RECOMMENDATION

We recommend that CSO improve its effectiveness and efficiency by coordinating

regional representatives' activities with other CSO monitoring functions to obtain

information needed by CSO for monitoring purposes.

41 33-606-97

AGENCY PRELIMINARY RESPONSE

CSO acknowledges the recommendation. As stated in the response to Finding 10,

CSO is in the process of reevaluating the need for and future role of the regional

representatives. CSO will consider this recommendation as part of the evaluation.

COMPLIANCE WITH REPORTING REQUIREMENTS

COMMENT

Audit Objective: To assess the effectiveness and efficiency of CSO in monitoring

compliance with reporting requirements for PSA's.

Conclusion: We concluded that CSO had demonstrated limited effectiveness and

efficiency in monitoring compliance with reporting requirements for PSA's. We noted

three material conditions. CSO did not review PSA certificates of continuing

compliance, in conjunction with other CSO monitoring data, to determine that it had a

sufficient basis for relying on the certificates as filed. Also, because of a lack of internal

coordination regarding other monitoring data, CSO did not take corrective action with

PSA's that filed inaccurate certificates. Further, CSO did not obtain some certificates

on a timely basis. CSO did not develop written instructions to aid regional

representatives with completion of compliance checklist and inspection reports. Also,

CSO did not ensure that reports were prepared consistently. CSO did not ensure that

the PSA's complied with requirements related to financial statement reporting and

operating budgets.

We also noted a reportable condition related to CSO reporting to PSA's.

Noteworthy Accomplishments: CSO works with the State Department of Education,

including its Office of Charter Schools director, intermediate school district officials, and

other authorizing bodies to monitor and assist PSA's with reporting requirements.

FINDING

12. Certificates of Continuing Compliance

CSO did not review PSA certificates of continuing compliance, in conjunction with

other CSO monitoring data, to determine that it has a sufficient basis for relying on

42 33-606-97

the certificates as filed. Also, because of CSO's lack of internal coordination

regarding other monitoring data, CSO did not take corrective action with PSA's that

filed inaccurate certificates. Further, CSO did not obtain some certificates on a

timely basis.

The contract between the University Board of Trustees and a PSA requires each

PSA to submit semiannual certificates. These certificates are signed by the PSA

board president certifying that the PSA is in compliance with the contract and ail

applicable laws. CSO relies on the certificates as a basis for monitoring the PSA's

compliance with the contract and all applicable laws. Section 380.517(2) of the

1\Aichigan Compiled Laws states that an authorizing body has the responsibility to

oversee a PSA's compliance with the contract and all applicable laws.

Our review of 30 certificates and related requirements for filing certificates for the

13 PSA's in our sample disclosed:

a. Twenty-nine certificates were submitted when the PSA's were not in full

compliance with the contract and all applicable State laws. For example:

(1) Some of the PSA's did not submit board minutes on a timely basis.

(2) Some PSA's did not have or adopt written procurement policies.

(3) Some PSA's had not submitted insurance policies on a timely basis, had

not obtained adequate insurance coverage, had not included the

University as a coinsured party, or had not submitted proof of insurance

coverage for part or all of the time that the PSA's were operational.

Because CSO had not sufficiently coordinated its monitoring data, it may not

be aware of such noncompliance occurrences in order to take corrective

action with the PSA.

b. Twelve of the 30 certificates were not submitted on a timely basis (within 30

days). Some certificates were received several months late.

43 33-606-97

Without sufficiently considering other monitoring data and receiving certificates on

a timely basis, CSO had incorrectly relied on the submitted certificates to conclude

that the PSA's were in full compliance with the contract and all applicable laws.

RECOMMENDATIONS

We recommend that CSO review PSA certificates of continuing compliance, in

conjunction with other monitoring data, to determine that it has a sufficient basis for

relying on the certificates as filed.

We also recommend that CSO take corrective action with PSA's that file inaccurate

certificates.

We further recommend that CSO obtain all certificates on a timely basis.

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendations and is reevaluating the format of the

certificates to make them more useful for monitoring and follow-up purposes. CSO

has developed a data base to assist in determining when certificates are received.

FINDING

13. Compliance Checklist and Inspection Reports

CSO did not develop written instructions to aid regional representatives with

completion of compliance checklist and inspection reports. Also, CSO did not

ensure that reports were prepared consistently.

In spring 1996, CSO implemented these reports, which are completed by regional

representatives, as a means to evaluate University-authorized PSA's. The reports

are completed based on on-site inspections of the PSA's and are intended to

document the PSA's conformity with basic standards and criteria established by

the authorizing body, some of which are also included within the contract and

applicable law.

The reports include 128 observations related to basic standards and criterion in

areas such as a PSA's interior and exterior facilities, instructional organization,

administrative organization, and PSA board operation.

44 33-606-97

Reports Were completed for 9 of the 13 PSA's in our sample. Reports were not

applicable to the remaining 4 · PSA's in our sample because they became

operational during the 1996-97 academic year.

Our review disclosed:

a. 'vVritten instructions had not been developed informing regional

representatives on how to complete the reports. Specific instructions as to the

type of information needed to address each report category would be

beneficiaL

b. Regional representatives did not consistently prepare the reports. While

reports cover a variety of areas, our analysis concentrated on report

preparation for 36 (28%) of the 128 observations that relate to instructional

organization, administrative organization, and PSA board operation. These

observations include items such as enrollment, pupil accounting, insurance,

procurement, specialized staff, board policy structure, and conduct of board

meetings. We reviewed report comments and noted:

33-606-97

(1) Enrollment comments varied from identifying the number of students

enrolled at the PSA to identifying the individual responsible for

maintaining the enrollment information.

CSO personnel informed us that this item was intended to identify current

enrollments at the PSA.

(2) Pupil accounting comments varied from identifying the ISO to identifying

specific PSA administrators.

CSO personnel informed us that this item was intended to identify when

the last ISO pupil accounting audit was done. ·

(3) Procurement comments varied from identifying the individual responsible

for procurement to identifying that bids were used.

45

CSO personnel informed us that this item was intended to identify the

individual responsible for procurement.

(4) Insurance comments varied from identifying the insurance company

providing the coverage to identifying the types of insurance coverage.

The lack of written instructions and inconsistent completion of the reports

diminishes their usefulness as an effective and efficient monitoring tool to help

assess PSA compliance with some contractual and statutory requirements.

RECOMMENDATIONS

We recommend that CSO develop written instructions to aid regional

representatives with completion of the compliance checklist and inspection reports.

We also recommend that CSO ensure that all reports are prepared consistently.

AGENCY PRELIMINARY RESPONSE

CSO agrees that written instructions should be developed to assist in the

completion of the reports and that the reports should be prepared consistently.

CSO informed us that it is currently evaluating who should prepare these reports

and expects that greater consistency will be an outcome of this evaluation.

FINDING

14. Financial Statement Reporting and Operating Budgets

CSO did not ensure that PSA's complied with requirements related to financial

statement reporting and operating budgets.

The contract between the University Board of Trustees and a PSA requires the

PSA to comply with generally accepted accounting principles (GAAP). Section

380.517(3)(d) of the Michigan Compiled Laws allows an authorizing body to revoke

a PSA's contract if the PSA fails to comply with GAAP. Also, Section 380.517(2) of

the Michigan Compiled Laws states that an authorizing body has the responsibility

to oversee a PSA's compliance with the contract and all applicable laws.

46 33-606-97

Our review of CSO records for 9 of the 13 PSA's in our sample that were

operational as of the fiscal year ended June 30, 1996 disclosed that 4 PSA's did

not have financial statements that complied with GAAP.

GAAP reporting standards require financial statements to include the statement of

revenues, expenditures, and changes in fund balances - budget to actual. The

financial statements of 3 PSA's did not include this statement. These 3 PSA's also

did not submit Board approved annual operating budgets for the fiscai year ended

June 30, 1996 as required by the contract between the University Board of

Trustees and a PSA. The contract requires a PSA to submit the operating budget

at least 60 days prior to the beginning of each fiscal year. One of the 3 PSA's also

had an operating deficit as of the fiscal year ended June 30, 1996 as reflected in

the Department of Education annual report, dated March 31, 1997, addressed to

the Legislature.

GAAP reporting standards also require financial statements to include the General

Fixed Assets Account Group. The financial statements of 1 PSA did not include

this group. The group accounts for the PSA's general fixed assets separately from

the general fund because these assets are not financial resources available for

expenditure.

CSO review of PSA financial statements and operating budgets is critical to the

effective monitoring of PSA operations.

RECOMMENDATION

We recommend that CSO ensure that PSA's comply with all requirements related

to financial statement reporting and operating budgets.

AGENCY PRELIMINARY RESPONSE

CSO agrees with the recommendation. CSO informed us that it is in the process

of implementing review procedures of PSA financial statements and operating

budgets and has developed a statement of standards that PSA's should be

complying with for these financial documents. In addition, CSO has created a chief

financial officer position to assist in this implementation.

47 33-606-97

FINDING

15. CSO Reporting to PSA's

CSO did not report annual financial information to each PSA on a timely basis.

The contract between the University Board of Trustees and a PSA requires CSO to

annually submit to the PSA a written report summarizing all receipts, deposits, and

transfers made on behalf or for the benefit of the PSA (as of the fiscal year-end)

including, without limitation, State school aid payments and any other funds for

which the University Board of Trustees acted as fiscal agent. Each contract

requires CSO to provide the information to the PSA by July 30.

Our review of CSO files disclosed that CSO had not forwarded the annual financial

information to 9 of 13 PSA's until October 1996. CSO is not required to forward

the information to the remaining 4 PSA's until July 1997 because they opened in

September 1996.

This information is important to the PSA's in verifying that they received the correct

amount of State school aid from the University. Any errors in the amount received

by CSO and forwarded to the PSA's can be discovered prior to the next academic

year if the information is sent on a timely basis.

RECOMMENDATION

We recommend that CSO submit annual financial information to each PSA on a

timely basis.

AGENCY PRELIMINARY RESPONSE

CSO agrees with this recommendation. CSO informed us that the annual financial

information for fiscal year 1996-97 was submitted to each PSA on July 25, 1997.

48 33-606-97

COMMENT

MICHIGAN RESOURCE CENTER FOR

CHARTER SCHOOLS (MRCCS)

Background: The University established MRCCS which became operational in January

1996. MRCCS is to serve as a resource for and provide technical assistance to

prospective authorizing agencies, the Department of Education, and individuals on

establishing and operating a PSA. Act 154, P.A. 1995, provided $500,000 to MRCCS

for fiscal year 1995-96 funding. Act 295, P.A. 1996, included MRCCS fiscal year 1996-

97 funding within the University's general operations.

The mission of MRCCS is to support Michigan PSA's by providing specialists from

various disciplines, maintaining a collection of educational resource materials, and

establishing a data base of State and national information for monitoring PSA activities.

MRCCS has developed publications, newsletters, and brochures describing MRCCS

and its sponsored activities, as well as produced informative videos on PSA's. MRCCS

maintains a web page with information on PSA law in Michigan and around the country,

PSA facts, PSA essays and position statements, research and reports on PSA's by

university and public policy institutes, information on how to obtain grants, and video

clips on PSA's.

MRCCS's fiscal year 1995-96 expenditures were $222,115. The remaining amount of

the appropriation, $277,885, was to be used in fiscal year 1996-97.

Audit Objective: To assess the effectiveness and efficiency of MRCCS in maintaining

information on and providing assistance to users interested in PSA's.

Conclusion: We concluded that MRCCS was effective and efficient in maintaining

information on and providing assistance to users interested in PSA activities.

Noteworthy Accomplishments: MRCCS sponsors workshops, seminars, round

tables, and the annual Michigan Charter School Exposition. These events provide PSA

networking opportunities, technical assistance, and education about charter school

programs. Since 1995, MRCCS has had a web page that provides immediate access

to charter information.

49 33-606-97

THIS PAGE INTENTIONALLY BLANK

50 33-606-97

SUPPLEMENTAL INFORMATION

51 33-606-97

PUBLIC SCHOOL ACADEMIES

By Authorizing Body

For the 1996-97 Academic Year

Intermediate School Districts

9%

Local School Districts 4%

PSA's by Authorizing Body Universities

Intermediate School Districts Local School Districts Community Colleges

Total PSA's

PSA's by University Central Michigan University(CMU) Gra�d Valley State University (GVSU) Saginaw Valley State University (SVSU) Eastern Michigan University (EMU) Northern Michigan University (NMU) Oakland University (OU) Wayne State University (WSU)

Total PSA's by University

68

7

3

0

---=rs ---

---

40

12

9

2

2

2

1

�

Source: Department of Education records

33-606-97 52

Universities 87%

u 59%

UNAUDITED

Exhibit 1

PUBLIC SCHOOL ACADEMIES

Student Enrollment and State School Aid by Authorizing Body

For the 1996-97 Academic Year

Intermediate

School

Districts 7%

Local School

Districts

4%

Universities

89%

\

Universities

Intermediate School Districts

Local School Districts

Community Colleges Totals by Authorizing Body

svsu 8%

GVSU 16%

Central Michigan University (CMU)

Grand Valley State University (GVSU)

Saginaw Valley State University (SVSU)

Wayne State University (WSU)

Northern Michigan University (NMU)

Eastern Michigan University (EMU)

Oakland University (OU) Totals by University

Source: Department of Education records

33-606-97

FTE Student

Enrollment

11,343

830

525

0

12,698

State School Aid

Amount

$ 63,397,001

4,796,533

2,978,550

0

$ 71,172,084

-CMU66%

FTE Student State School Aid

Enrollment Amount

7,416 $ 41,763,478

1,859 10,502,232

912 4,889,181

411 2,384,184

339 1,650,019

240 1,372,817

166 835,090

11,343 $ 63,397,001

53

\

I

I !

I I

I�

UNAUDITED

Exhibit 2

CENTRAL MICHIGAN UNIVERSITY

Charter Schools Office

Public School Academy Statistics

* Contract voluntarily rescinded December 6, 1996.

Sources:

UNAUDITED

Exhibit 3

(A) Directory of Public School Academies as of September 19, 1996 and April17, 1997 and other related

CSO documentation.

(B) Michigan Department of Education 1995-96 Report to the House and Senate Committees on Education:

A Description of Michigan PSA's dated January 10, 1997.

33-606-97 54

33-606-97 55

lllllllilllr£til1B1Billlll 4/28/95 95-96 $ $ $ $

1mnrn:mmt11:1ramg$@Ittrt::rn:::=r:: :nn11=g$MmMm::1 rn:rnt::::1i1t in:u::: m1::::::r:::1::•~gm1:Q1t · m:::rrt:?.itiit~rn 4/28/95 95-96 1,174,542 1,069,718 104,824

ttttttr1:11@1l~P-:tftt:1tnrurrmt:~$£~n~1:nt:t tr1:m::11lJU=oi1::n:n:::nrnt:11~:zzta$.O:Ltttt:9om$.q4:: 4/28/95 95-96 1,305,337 833,300 472,037

@ttt:m=:t:f P.t.ffl!§t.®.I@C:IIIlIM=ttmrm::~m11:1mt 4/28/95 95-96

r=rnr:=:rr:rnm:=tm2ir.~n:=m:::mr=nttt rmr:n¥.Mnrnm::::tt @rrnntttrtmttt 4/26/96 96-97

r1:::m:t1@@lt?.11ng$f:m::tt@t:tt m::m:i@tgµfg~:@::1:c:1m1::=mt&:i}§~e.:: tr:t•i:11~~H!:fQgf trn:t•tr!1tP.1iip;J$@T:tt:1:11un1i$: 7/20/95 · 95-96 1,499,339 1,457,769 41,570

=t:r::::1:r:::r:•:•r1tzaiiji:•:rmnnr:::mr1 :rrm:ta$i~ mttt m:rr=::ttffiP.$tUta:: ::1t:::::==tr111i1Jtt ••• •fr:r::@tt)iit?:m;:: 7/18/96 96-97

m•tt:rn::mr!t.t~t.iit::r:=:rmrnt@t tt:tJ~,$.f~ t:rrt 7 /18/96 96-97

·•tt@m:r1rrtm2§t.S.:S.tttttittt@ r::@@Jiif$tttttr :::rrrm:tmrtwtrr ::mrnm1:=11i1r,~~m m=::r::rrn:::ttmiai'Wirn, 4/28/95 96-97

iff'@ltttttntra~;ig$:=t=Itr:@ttttrnm:m:::m:g$;mnn@:t tttrtmt$~tti9@tmn:n:rrm:uifAJ~itrmtrt::a~iim:i.Ifl 4/28/95 95-96 335,251 254,649 80,602

=r:::mmm:m:::nwlmgig~:nm:nrn::n::::mrn::rr::::tiiti~fttt r:r::tt::::ri§§~JJ.ii ::rrtrn:::::1::::1:uu~,t' •tttrr:•:wBni44I 2/17 /95 95-96 (3,169) 266,196 263,481 (454)

11:nrrn:m@::iM4~t.®:::mnm1mtrmm: 1@11:®.i~1mittt 4/28/95 96-97

authorized

chartered

cso

effectiveness

efficiency

FTE

GAAP

internal control

structure

lSD

33-606-97

Glossary of Acronyms and Terms

The University Board of Trustees has approved the PSA

application.

The applicant has met all contract requirements and the

contract has been approved by the State Superintendent of

Public Instruction before receiving State funding.

The University's Charter Schools Office.

Program success in achieving mission and goals.

Achieving the most outputs and outcomes practical for the

amount of resources applied or minimizing the amount of

resources required to attain a certain level of outputs or

outcomes.

full-time equated.

generally accepted accounting principles.

The management control environment, management

information system, and. control policies and procedures

established by management to provide reasonable

assurance that goals are met; that resources are used in

compliance. with laws and regulations; and that valid and

reliable performance related information is obtained and

reported.

intermediate school district.

56

material condition

mission

MRCCS

OAG

operational

performance audit

public school academy

(PSA)

reportable condition

33-606-97

A serious reportable condition which could impair the ability

of management to operate a program in an effective and

efficient manner and/or could adversely affect the opinion of

an interested person concerning the effectiveness and

efficiency of the program.

The agency's main purpose or the reason the agency was

established.

Michigan Resource Center for Charter Schools.

Office of the Auditor General.

The charter has been authorized, the contract has been

signed, the charter terms are in effect, the children are

enrolled, and instruction is being provided.

An economy and efficiency audit or a program audit that is

designed to provide an independent assessment of the

performance of a governmental entity, program, activity, or

function to improve public accountability and to facilitate

decision making by parties responsible for overseeing or

initiating corrective action.

A public school that is authorized and operated under the

terms of a contract (also commonly referred to as a charter

school).

A matter coming to the auditor's attention that, in his/her

judgment, should be communicated because it represents

either an opportunity for improvement or a significant

deficiency in management's ability to operate a program in

an effective and efficient manner.

57

State school aid

33-606-97

Payments made to school districts based on membership

counts as reported by the school districts and audited by the

intermediate school districts, pursuant to the State School

Aid Act (Act 94, P.A. 1979, as amended).

58

oag