House Education Committee

Dave Yost, Auditor of State House Bill 2

March 4, 2015 Chairman Hayes, Vice Chair Brenner, Ranking Member Fedor, and members of the committee, thank you for the opportunity to testify on this important legislation. I’d like to begin by recognizing that you are elected to set policy on this matter, and I am not. I am here today to support your work, and to offer my team’s thinking on what we have seen during the past four years of work. Yours is a somber and burdensome duty. I’m going to focus on my team’s area of expertise: accountability, finance and governance. There are many other important factors , especially on education itself that you will consider in your debate. I will not presume to offer any thinking on them. By way of background, my office audits every single charter school in Ohio. Since 2001, we have issued findings for recovery in 309 audits of community schools, with $27 million in findings for recovery, and $9 million alone during my time in office. Since I took office, a total of 22 people associated with charter schools – board members, vendors, employees – have been convicted of criminal wrongdoing, and more are waiting for their day in court. For purposes of my testimony, I hope to focus on three broad areas I mentioned – accountability, finance, and governance -- and offer an outline of possible solutions to issues we have identified. My office is forwarding a separate document that will go into a bit more detail, and offer several technical suggestions as well. My hope is to leave sufficient time today to discuss the matters on your mind, rather than to drone on about every jot and tittle. Accountability: The 105 Hour Rule Under existing law, a charter school must withdraw a student who misses more than 105 unexcused consecutive hours of school. That amounts to nearly a month.

If the student misses 104 hours, then shows up for a single day, the student gets a new 105-hour clock. The school is not required to withdraw the student and they continue to receive funding as if the student hadn’t missed a day of school. That means that it is possible for a student to show up for as few as 10 days of school and receive funding for an entire year. During our unannounced attendance audit last fall, several interviews suggested that this does occur. We are unable, based on what we know now, to say how widespread the practice is – but we do know that it is a vulnerability in the system as currently designed. It is a vulnerability that could be exploited, and should be addressed. A simple, and rational way to do this, is to revamp the 105-hour rule for truant

community school students to be more in line with the State’s truancy statute used for

traditional schools.

As defined in Ohio Rev. Code §2152.02(D), "Chronic truant" means any child of

compulsory school age who is absent without legitimate excuse for absence from the

public school the child is supposed to attend for seven or more consecutive school days,

ten or more school days in one school month, or fifteen or more school days in a school

year.

A different rule for dropout recovery schools might be appropriate, given the special

characteristics of that population. However, it can’t be the intention of the General

Assembly to spend an entire year’s worth of funding to attain 10 days of education.

Accountability: Blended Learning Blended learning is a combination of traditional classroom instruction and alternative “learning opportunities” – frequently computer-based, but sometimes other sort of activities, including internships or work experiences. Blended learning is a wonderful approach, particularly among students who may have difficulty learning in a traditional environment. However, as currently structured, it lacks sufficient accountability measures. The State of Ohio measures an academic year for community schools as 920 hours of instruction. This is easy enough to calculate in a traditional classroom, or even an internship --- count the hours. But how do we value, or weight, the time spent online? One of the great benefits of online instruction is it is self-paced. The student can breeze through the material that the student understands, and can slow down for the parts that are harder for the student. But the benefit is also a weakness: you

simply can’t count hours online as one-for-one equivalents with classroom instruction. Ohio allows a teacher to certify that a particular computer module is worth a certain amount of learning. I’m certain the vast majority of teachers are honest and trustworthy in their judgments. But there is nothing at all to prevent a certification that learning “Mary Had a Little Lamb” is worth five hours. The upshot of this problem is that my office cannot tell you whether blended learning schools are meeting the 920 hours of required instruction. Like so much else in the Department of Education, it is taken on faith, on an honor system. This is less of a problem where a school has sufficient scale to at least segregate curriculum development and approval, whether by the size of its operation and or because of its management company. Ohio should better distinguish between the legal definitions of blended learning and internet-based schools. Further, the valuation of online components should have some independent review and approval. This could be accomplished through ODE, through the sponsors by contract, or by ODE certification of independent contractors and their methodologies. In addition, because blended learning is more difficult to supervise, you may wish to consider limiting such programs to only highly ranked sponsors. Accountability: Treasurer Liability A community school treasurer should have a fiduciary duty to the school’s board. You’ve taken a step in this direction in the draft of HB2, which requires the fiscal officer to be under contract with the governing authority of the school. In the event that a school fails, and the board disbands or is otherwise unavailable, there should be a method to enforce that fiduciary duty if violated. We suggest a statutory provision allowing a sponsor to stand in the shoes of the school board as plaintiff if the school board is otherwise unable to maintain an action for recovery. Finance: Counting Students The State funds students based on attendance, and as my office’s work has amply demonstrated over the past several years, the “honor system” used in Ohio is open to abuse. During interviews, we have discovered that schools will often generate a new SSID for a student when they have difficulty finding that student’s previously assigned SSID. In 2012-13, we discovered multiple SSIDs for the same student, which wreaks havoc on efforts to track student transfers between schools.

The simple solution is to follow the example of every other state in the Union, save one, and allow ODE to know the identity of the student behind those numbers. We are one of only two states that hamstring our Department of Education like this. It will increase the accuracy of our data, prevent funding errors and make sure that children don’t fall through the cracks. The cry of privacy is misplaced. The Department of Taxation knows all about our finances, even our social security numbers. The Department of Jobs and Family Services knows who gets child care subsidies and food stamps. The Department of Health protects the identity of tens of thousands of AIDS tests. You want government to run like a business? What business could run without knowing the identity of its customers? Put privacy protections in place. Enforce them with criminal penalties. But for the love of God, give these people the basic tools they need to do their jobs! Finance: Facilities I support the Governor’s initiative to make some dollars available for community schools to acquire facilities. It won’t be enough, though. Currently, because of short investment horizons, facilities are often funded by front-loaded leases that use a high proportion of revenue in early years to retire the debt over a short amortization. Then, if the school fails, the realty company, often controlled by the management company, owns the building. It is worth recognizing the interest the state has in that building – but for the state funding, the building would not have been acquired. Education of our children ought not be a back-door means to acquire real estate. You may wish to consider enacting a provision of law that would operate to place a lien on a community school building representing the proportional risk actually assumed by the State – an interest that could be released at a certain milestone of time or money. That way, a successful school gains the proper fruits of its work, but a school that fails early does not reap a windfall from a piece of property that was financed by a front-loaded lease. Finance: Reporting Currently, community schools report their finances on an enterprise model. That was an appropriate approach under the professional standards in place at the time community schools began in Ohio. However, the standards have evolved since then. Under current professional guidance, community schools ought to change their accounting and reporting model to the government model. This is the same model traditional public schools must

use. I am asking the General Assembly to require community schools to use the same accounting model that traditional public schools do. A phase-in period of a year would be appropriate to allow necessary modifications. It is important to understand that an accounting model is simply the way an entity’s finances are presented. A change in an accounting model does not require a change in the business model – it’s like writing an instruction manual in a different language. The operation is the same. This is valuable for several reasons. But among the most important, it allows for more apt comparisons between educational sectors. A more important change involves the “20 percent footnote.” A common model for financing community schools is that the community school board acts as little more than a pass-through for state money to get to the management company, which then hires the teachers, buys the books, etc. In this model, virtually all the money is spent by a private company and is out of sight of the public. Ohio’s only window into this activity is a narrow footnote prepared by the management company, audited by its CPA firm, and given to the community school for inclusion in its financial statements. My staff is distributing a handout to you that shows what the information in this footnote looks like. We are proposing that the information in this footnote be expanded to include the level of information currently reported under USAS by traditional public schools. You are also receiving a handout that would show this expanded information. This compromise protects the agility, privacy and trade secrets of a private company while still providing substantially more information about how public money is spent. Governance When everyone is responsible, no one is responsible. Ohio’s fragmented system of oversight -- spread among ODE, governing boards and sponsors – is further complicated by other players who have duties delegated by contract, including management companies and sponsor contractors who serve as de facto authorizers. In particular, ODE’s role should be explicit. Is it a sponsor, a coach, a regulator, a funder, a licenser? In part, ODE’s muddled role in community schools is a by-product of its muddled role in education in general. At a minimum, ODE should not act as a sponsor. Under HB 555, ODE is to evaluate the effectiveness of sponsors – how can it evaluate itself?

I would like to offer a few observations related to governance:

I support the new conflict of interest rules and contracting limitations

contained in HB2. In addition, the General Assembly should consider phasing

out the authority of a local school district to sponsor its own conversion

school. A sponsor’s duty is to oversee, and if necessary, to close a school.

Where a local school district is sharing services with its conversion school –

and therefore shifting a portion of its fixed operation costs to the conversion

school – it has a financial incentive not to take quick action to close a problem

conversion school. I am not aware of any instance where this has happened;

I am merely pointing out the existence of the conflict of interest.

Currently, ODE has a new responsibility under HB 555 to rank sponsors.

However, the statute gives little guidance to ODE on how to accomplish it.

The General Assembly should give thought to establishing its objectives and

set out the goals it hopes the rankings will encourage. This is an important

step in sharpening the role of the sponsors. ODE also needs statutory

authority to require sponsors to provide the information the Department will

need for the rankings.

The General Assembly should consider creating incentives for high-

performing sponsors. These incentives could include halving the frequency

of evaluations after consecutive top rankings; allowing some lines of business

to be available only to highly ranked sponsors; or creating financial penalties

or bonuses for those at the very top or bottom of the rankings. For example.

A school with 100 students could expect foundation money of about

$580,000, and the sponsor’s 3% fee would be $17,400. An additional one-

percent for an exemplary sponsor would be $5800. Although there might

need to be a cap on such a “bonus,” the money involved is not an outrageous

sum for an organization we are asking to provide the primary oversight.

This is not an exhaustive list of necessary reforms. Many, of course are well outside my office’s expertise. I am here today, not as an expert that understands all things, but as a student whose duties have provided a very close view of certain parts of a complex and malfunctioning system. With that in mind, I would be happy to answer any questions you may have.