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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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r L
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.
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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
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AUDIT SCOPE
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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.
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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
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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.
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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:
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(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