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Charter Management Organizations and the Need for Reform

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Two recent audits and a guilty plea show strong evidence of the need for reform of Pennsylvania’s charter law to provide for more effective oversight of the substantial public money going to the charter sector.  The Inspector General of the US Department of Education and the Pennsylvania Auditor General have both recently concluded that Pennsylvania’s charter law does not provide sufficient oversight or control over charter management organizations. CMOs are organizations that manage charter schools. Although charter schools in Pennsylvania must be organized as non-profits, CMOs can be and often are for-profit organizations. The Pennsylvania charter law doesn’t mention them because the legislature apparently did not envision such entities in the late 1990s when it wrote the law. But they have become an increasingly important part of the charter sector. The two audits highlight challenges that the growth and operation of CMOs present to effective oversight of public funds going to charter schools.

The Office of Inspector General of the U.S. Department of Education found that “charter school relationships with CMOS posed a significant risk to Department program objectives” due to conflicts of interest, related-party transactions, and insufficient segregation of duties between the schools and the CMOS managing them. The audit stressed the risk of waste, fraud, and abuse; and lack of accountability over federal money as a result of charter school boards “ceding fiscal authority to CMOs.” The audit criticizes the DOE for its lack of effective internal controls and inadequate monitoring. In essence, the DOE hands over millions to state educational agencies and leaves it to them to make sure the funds are used as intended. How much money?  At least $400 million in federal funds from FY 2010 to 2012 went to all charter schools but the audit notes that “[w]e were unable to determine total Federal funding amounts that [State Education Agencies] provided to charter schools with CMOs because the Department did not track and the [agencies] did not consistently track that information.”

The audit stressed the risk of waste, fraud, and abuse; and lack of accountability over federal money as a result of charter school boards “ceding fiscal authority to CMOs.”

Pennsylvania’s DOE was unable to tell the IG which schools had CMOs. The IG was able to discern from its investigation and stressed, as an example of a violation of program integrity requirements, that at one Pennsylvania charter school, four members of the charter school board were also key officers of the CMO operating the school. Two of them signed the management contract on behalf of both the school and the CMO. How about financial risks? The head of another CMO in Pennsylvania used his authority to write checks without the charter school board’s approval to write himself $11 million in checks from the school account during 2008-2009.

The Auditor General of Pennsylvania, Eugene DePasquale, recently completed audits of the PA Cyber Charter School, which enrolls thousands of students from across Pennsylvania, and the Lincoln Park Performing Arts Charter School. Both schools were founded by Nicholas Trombetta. Trombetta also founded the Lincoln Park Performing Arts Center and was its executive director while he was still the CEO of Pa Cyber. The Performing Arts Center housed the Lincoln Park Performing Arts Charter School, founded by Mr. Trombetta who was an officer of the school. To top it off, Trombetta also founded the CMO which ran both schools—National Network of Digital Schools (NNDS) now known as Lincoln Learning Solutions (LLS). Trombetta was the president of the CMO from 2005-2008. This audit notes that PA Cyber paid the CMO 12% of its revenues as a management fee—for very ill-defined management services. This fee amounted to $153.8 million for the three years covered by the audit. The school also paid the CMO $110 million under a curriculum contract that had no terms or conditions initially. In 2015-2016, the school entered into a new curriculum contract with the CMO which provided for a nonperformance penalty. But the school’s board waived the $4.2 million in penalties that the CMO owed for missing three of the four deadlines under the agreement.  The audit notes numerous other related-party issues between the school and the CMO. PA Cyber gets tuition money from 484 different Pennsylvania school districts. Those districts have no control or supervisory authority over the school or its CMO despite their financial “contributions.”

DePasquale’s audit of the Lincoln Park Performing Arts Charter School adds to the concerns. LPPACS also has a management agreement with the same CMO as PA Cyber—a 12% fee of all tuition received by LPPACs for management and a 10% fee for curriculum. Those costs amounted to over $3 million for the years 2011 to 2015. Again the fees had no clear connection to actual costs and the contract lacked any real accountability requirements.

Nicholas Trombetta recently pled guilty to federal charges that he stole $8 million in public funds through his manipulations of PA Cyber, NNDS/LLS, and the for-profit entities he founded. Trombetta is an extreme example of what can happen in the absence of rigorous oversight but unfortunately he is not as much of an outlier as we might like to think. Some Pennsylvania CMOs have successfully argued that they are private entities who are not covered by the Right to Know laws. Pennsylvania needs to update its charter laws to ensure that entities that get public money also get public supervision and oversight on how they use that money.

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