Summary of LAO Findings and Recommendations on the 2012-13 Budget

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	Program	Budget Issue	LAO Finding Or Recommendation	Last Updated
Go Back	Charter schools	Funding determination process for nonclassroom-based charter schools	Reject Governor’s proposal to eliminate the nonclassroom-based charter school funding determination process. Doing so would remove important fiscal oversight—potentially resulting in nonclassroom-based charter schools reducing spending on instruction-related activities. Moreover, it would increase state costs by $20 million--providing more funding for certain schools without a clear rationale.	4-25-12

Detailed Narrative
Background *State Allows Charter Schools to Offer Nonclassroom-Based Instruction.* Charter schools may provide instruction either primarily in a traditional classroom setting or in a nonclassroom setting. The CDE classifies a charter school as a classroom-based school if at least 80 percent of its instructional time takes place on the school site, with the school site being a facility used principally for classroom instruction. A nonclassroom-based school, in contrast, is one in which more than 20 percent of instructional time is offered in a location different from the primary school site. Nonclassroom-based charter schools tend to rely on individualized, self-paced student learning plans. Nonclassroom-based instruction includes independent study, home study, distance study, computer-based study, and work-study. Some of these types of instruction (for example, independent study) are common in traditional public schools as well as charter schools whereas others (for example, home study) are unique to charter schools. As of 2010-11, 200 schools, or approximately 23 percent of all charter schools are nonclassroom based. *State Law Requires Additional Scrutiny Over Funding for Nonclassroom-Based Charter Schools.* Chapter 892, Statutes of 2001 (SB 740, O’Connell), required the State Board of Education (SBE) to establish a system for determining the appropriate funding level for nonclassroom-based charter schools. The board's regulations specify that funding determinations are to be based on: (1) the percentage of total expenditures for certificated staff salaries and benefits, (2) the percentage of total expenditures for instruction, and (3) the school’s student-to-teacher ratio. *Certain Thresholds Established For a School to Receive “Full” Funding.* To receive “full” funding, at least 40 percent of a nonclassroom-based charter school’s total expenditures must be spent on certificated staff compensation and at least 80 percent must be spent on instruction-related activities, along with having a student-to-teacher ratio of 25-to-1 (or equivalent to the largest unified school district in the county in which the charter school resides). Full funding means all of the school’s average daily attendance (ADA) count towards key funding calculations, including the school’s general-purpose entitlement block grant, charter categorical block grant, and lottery-based apportionment. The majority of schools (93 percent) receive full funding determinations from SBE. *A Few Schools Receive Funding Reductions.* Nonclassroom-based charter schools that devote a smaller share of their budget to teacher salaries and instruction and have higher student-teacher ratios typically receive a lower funding level—meaning a reduced amount of their ADA would count towards their funding allocations. The SBE typically reduces funding determinations to either 85 percent or 70 percent of full funding (meaning 85 percent or 70 percent of a school’s ADA is counted in the applicable funding calclations). In 2010-11, 11 schools had reduced determinations of either 85 percent or 70 percent of full funding. *State Board Considers Mitigating Factors When Making Funding Determinations.* A nonclassroom-based charter school may present additional information to CDE and SBE to request an increase its funding level if other special or mitigating factors resulted in a smaller proportion of its total funds being spent on certificated staff compensation or other instruction-related expenses. For example, SBE considers circumstances such as a one-time investment in a facility, extraneous special education costs, or school bus purchases. If a school can show that these types of expenses resulted in it not meeting the expenditure thresholds in current regulations, then SBE typically gives the school a higher funding determination than would otherwise be assigned. *Process Requires Charter Schools to Renew Funding Determinations.* Nonclassroom-based funding regulations specify a charter school’s funding determination renewal period cannot exceed five years. The CDE and SBE have the authority to require more frequent funding determination renewals. For example, a new nonclassroom-based charter school without an academic and fiscal track record would likely receive a funding determination for two years, whereas a charter school that has been open for a number of years may receive a three-year determination. Schools with strong academic performance (that receive a rank of six or higher on the Academic Performance Indicator) automatically receive funding determinations every five years (under the assumption that strong academic performance indicates the charter school is appropriately serving its students). Governor’s Proposal *Eliminates Funding Determination Process.* The administration’s proposal assumes that the funding determination process, as currently undertaken by CDE, does not add sufficient value because the vast majority of nonclassroom-based charter schools receive full funding. In response, the administration proposes eliminating the funding determination process. As a result, moving forward, nonclassroom-based charter schools would not be required to submit a determination form to receive funding. Rather than requiring expenditure and student-to-teacher ratio information, charter schools offering nonclassroom-based instruction would be required to identify the portion of their ADA that is generated through nonclassroom-based instruction. (The administration does not specify the purpose for requiring charter schools to report nonclassroom-generated ADA.) Eliminating the funding determination process would result in all charter schools receiving full funding for all students enrolled—regardless of the mode of instruction at the school site. Recommend Rejecting Governor’s Proposal *Eliminating Funding Determination Process Would Remove Important Fiscal Oversight.* The spending thresholds enforced through the funding determination process attempt to ensure nonclassroom-based charter schools invest a sufficient level of funds in instructional activities and do not misuse public funds. In 2005, RAND evaluated the state’s funding determination process and found that the process had reduced misuse of funds by nonclassroom-based charter schools and increased their spending on instruction. RAND found that nonclassroom-based charter schools substantially increased both instructional spending and spending on certificated-staff salaries as a proportion of total revenues in an effort to meet thresholds for full funding. Though this study was conducted seven years ago, it demonstrates the spending thresholds established by this process directly influenced schools’ spending practices—with the majority of schools adjusting their spending to receive full funding. This spending behavior is still evident today. *No Clear Rationale for Increasing Funding for Certain Schools.* As previously mentioned, 11 out of 200 schools received reduced funding determinations in 2010-11. By eliminating the funding determination process, the Governor’s proposal would result in these 11 nonclassroom-based schools receiving full funding for all ADA-driven programs. The administration, however, has not provided any rationale for providing these schools with a funding augmentation. The CDE estimates the statewide cost of fully funding these schools is about $20 million. (This increase in state cost would be offset by a small amount of administrative savings due to CDE and SBE no longer needing to process funding determination requests.)

Detailed Narrative

Background

State Allows Charter Schools to Offer Nonclassroom-Based Instruction. Charter schools may provide instruction either primarily in a traditional classroom setting or in a nonclassroom setting. The CDE classifies a charter school as a classroom-based school if at least 80 percent of its instructional time takes place on the school site, with the school site being a facility used principally for classroom instruction. A nonclassroom-based school, in contrast, is one in which more than 20 percent of instructional time is offered in a location different from the primary school site. Nonclassroom-based charter schools tend to rely on individualized, self-paced student learning plans. Nonclassroom-based instruction includes independent study, home study, distance study, computer-based study, and work-study. Some of these types of instruction (for example, independent study) are common in traditional public schools as well as charter schools whereas others (for example, home study) are unique to charter schools. As of 2010-11, 200 schools, or approximately 23 percent of all charter schools are nonclassroom based.

State Law Requires Additional Scrutiny Over Funding for Nonclassroom-Based Charter Schools. Chapter 892, Statutes of 2001 (SB 740, O’Connell), required the State Board of Education (SBE) to establish a system for determining the appropriate funding level for nonclassroom-based charter schools. The board's regulations specify that funding determinations are to be based on: (1) the percentage of total expenditures for certificated staff salaries and benefits, (2) the percentage of total expenditures for instruction, and (3) the school’s student-to-teacher ratio.

Certain Thresholds Established For a School to Receive “Full” Funding. To receive “full” funding, at least 40 percent of a nonclassroom-based charter school’s total expenditures must be spent on certificated staff compensation and at least 80 percent must be spent on instruction-related activities, along with having a student-to-teacher ratio of 25-to-1 (or equivalent to the largest unified school district in the county in which the charter school resides). Full funding means all of the school’s average daily attendance (ADA) count towards key funding calculations, including the school’s general-purpose entitlement block grant, charter categorical block grant, and lottery-based apportionment. The majority of schools (93 percent) receive full funding determinations from SBE.

A Few Schools Receive Funding Reductions. Nonclassroom-based charter schools that devote a smaller share of their budget to teacher salaries and instruction and have higher student-teacher ratios typically receive a lower funding level—meaning a reduced amount of their ADA would count towards their funding allocations. The SBE typically reduces funding determinations to either 85 percent or 70 percent of full funding (meaning 85 percent or 70 percent of a school’s ADA is counted in the applicable funding calclations). In 2010-11, 11 schools had reduced determinations of either 85 percent or 70 percent of full funding.

State Board Considers Mitigating Factors When Making Funding Determinations. A nonclassroom-based charter school may present additional information to CDE and SBE to request an increase its funding level if other special or mitigating factors resulted in a smaller proportion of its total funds being spent on certificated staff compensation or other instruction-related expenses. For example, SBE considers circumstances such as a one-time investment in a facility, extraneous special education costs, or school bus purchases. If a school can show that these types of expenses resulted in it not meeting the expenditure thresholds in current regulations, then SBE typically gives the school a higher funding determination than would otherwise be assigned.

Process Requires Charter Schools to Renew Funding Determinations. Nonclassroom-based funding regulations specify a charter school’s funding determination renewal period cannot exceed five years. The CDE and SBE have the authority to require more frequent funding determination renewals. For example, a new nonclassroom-based charter school without an academic and fiscal track record would likely receive a funding determination for two years, whereas a charter school that has been open for a number of years may receive a three-year determination. Schools with strong academic performance (that receive a rank of six or higher on the Academic Performance Indicator) automatically receive funding determinations every five years (under the assumption that strong academic performance indicates the charter school is appropriately serving its students).

Governor’s Proposal

Eliminates Funding Determination Process. The administration’s proposal assumes that the funding determination process, as currently undertaken by CDE, does not add sufficient value because the vast majority of nonclassroom-based charter schools receive full funding. In response, the administration proposes eliminating the funding determination process. As a result, moving forward, nonclassroom-based charter schools would not be required to submit a determination form to receive funding. Rather than requiring expenditure and student-to-teacher ratio information, charter schools offering nonclassroom-based instruction would be required to identify the portion of their ADA that is generated through nonclassroom-based instruction. (The administration does not specify the purpose for requiring charter schools to report nonclassroom-generated ADA.) Eliminating the funding determination process would result in all charter schools receiving full funding for all students enrolled—regardless of the mode of instruction at the school site.

Recommend Rejecting Governor’s Proposal

Eliminating Funding Determination Process Would Remove Important Fiscal Oversight. The spending thresholds enforced through the funding determination process attempt to ensure nonclassroom-based charter schools invest a sufficient level of funds in instructional activities and do not misuse public funds. In 2005, RAND evaluated the state’s funding determination process and found that the process had reduced misuse of funds by nonclassroom-based charter schools and increased their spending on instruction. RAND found that nonclassroom-based charter schools substantially increased both instructional spending and spending on certificated-staff salaries as a proportion of total revenues in an effort to meet thresholds for full funding. Though this study was conducted seven years ago, it demonstrates the spending thresholds established by this process directly influenced schools’ spending practices—with the majority of schools adjusting their spending to receive full funding. This spending behavior is still evident today.

No Clear Rationale for Increasing Funding for Certain Schools. As previously mentioned, 11 out of 200 schools received reduced funding determinations in 2010-11. By eliminating the funding determination process, the Governor’s proposal would result in these 11 nonclassroom-based schools receiving full funding for all ADA-driven programs. The administration, however, has not provided any rationale for providing these schools with a funding augmentation. The CDE estimates the statewide cost of fully funding these schools is about $20 million. (This increase in state cost would be offset by a small amount of administrative savings due to CDE and SBE no longer needing to process funding determination requests.)