Charter school authorizers seek to ensure the quality of our nation’s public charter schools. Key to ensuring quality is having robust measures for accountability—academic, governance and financial. This work is of heightened importance given the Trump administration’s focus on expansion of school choice.

Financial sustainability is more closely intertwined with academic strategy and board governance than many district and charter school administrations appreciate. Financial accountability practices are at the core of protecting the interests of students and the public, one of three principles of quality authorizing established by the National Association of Charter School Authorizers (NACSA).

Instituting financial performance standards should enable an authorizer to monitor and evaluate a charter school’s financial sustainability in the short- and long-term. Such standards are relevant to all school types – including alternative charter schools that enroll students who have dropped out or have been adjudicated, or who face other circumstances that have prevented them from attending school.

Many cities, including Chicago and Buffalo, have recently committed to expanding the number of alternative school seats in their districts. Many are realizing this expansion by increasing the number of charter schools they authorize. This makes it even more important for charter authorizers to implement standards that help ensure school quality.

As NACSA pointed out in an October 2013 press release, alternative schools serve a different set of student needs. As such, authorizers need to “provide specialized oversight, tailoring oversight and monitoring to the circumstances of alternative schools.” This kind of specialized oversight is necessary for academic performance standards, and arguably just as much so for financial accountability.

Financial Best Practices: Supporting Academics, Promoting Sustainability

Afton Partners focuses on establishing financial best practices in public education. Since financial best practices support sustainability of effective education, our work is about much more than crunching numbers. The quality of a district or school’s governance, the design of its academic programs and its schools, and the relative success of its academic performance all significantly impact financial sustainability.

Governance and school design are just as important in the success of alternative schools as with all other school types; however, certain different characteristics can come into play with alternative schools, including:

• For-profit management: Many alternative schools are established by for-profit companies.
  Subcontracting: Alternative school operators sometimes establish a charter with the authorizer and subcontract the educational operations of a school to a community partner or other agency.
• Non-traditional school design: Often, alternative schools use technology to implement their instruction and offer more individualized student schedules.
• Student mobility: Alternative schools may have high student mobility rates throughout the year. This affects how much revenue comes to a school as well as the use of staff and instructional time.

Through some of Afton’s recent engagements, we have seen how authorizing alternative school models require a specialized approach—particularly in the area of financial accountability.

Adapting to Alternatives: Financial Accountability for Authorizers

These varying characteristics of different alternative charter schools suggest there should be differences in how authorizers implement financial practices and accountability measures for such schools. Authorizers can approach this challenge by supplementing existing processes in important ways:

Authorization application process

In their RFPs, authorizers should ask alternative charter operators specific questions that allow the authorizer to evaluate the alternative school’s finances appropriately. These questions should focus on:

• How the local entity and any potential related-party management company will implement governance, including how they will uphold the independence of financial operations between charters and subcontracted service providers as necessary to ensure financial integrity;
• How the school will maintain transparency with respect to the contractual terms of any potential management agreement – including fees and the costs of goods and services paid to any management companies and their affiliated entities, and describing the goods and services they anticipate will be provided;
• How the school’s budget will be allocated to align with student needs and the school’s design; and,
• How the school will be transparent about subcontracting school operations and the practices that the school will institute to ensure quality in those situations.

Contracting and renewal process

Authorizers should add terms in its contracts with alternative charter schools that allow for ongoing evaluation to reflect enhanced approaches to financial accountability. Examples of such terms include:

• School-specific audited financial statements. Authorizers could require all operators, including for-profit companies running alternative schools, to provide interim year-to-date and audited annual financial statements specific to the authorized school.
• Separated financial controls. Authorizers could require operators that have contracted with management companies to have separate bank accounts, an independent board and finance committee, separate accounting and financial planning teams, and clearly established protocols for ensuring the school—and not the management company—owns any goods purchased or work papers created with public funds.
• Subcontracting accountability standards. Authorizers could require operators that subcontract education services to partners or other agencies to abide by and be transparent about any contracts signed with subcontractors, the services to be provided, and the associated fees. Additionally, the authorizer could consider establishing standards for accountability that the operator must use with its own subcontractors to monitor quality, similar to those standards that the authorizer themselves is implementing with the schools it oversees.
• Financial metrics. Authorizers could establish a specific set of metrics for financial accountability and conduct compliance checks annually with alternative charter school operators.

Annual evaluation process

Authorizers should implement an annual financial evaluation of an alternative charter school that includes reviews of its prior year’s financial performance and contract compliance, its annual budget, and its current year’s interim financial statements.

These reviews should depend on quantifiable financial metrics that recognize the various school and governance designs that are prevalent in alternative schools. Both the prior-year and annual budget reviews should use scorecards that review the financial health of the alternative school, including metrics typically used at any school: liquidity, debt coverage, audit findings and operating performance. These should be enhanced with financial metrics suited to the alternative school, allowing analysis of resource allocations, mid-year per-pupil revenue fluctuations, management fees, and the use of personnel, technology and other services in alignment with meeting unique student needs.

As part of the prior-year review, a full compliance check should be done on the contractual terms to be implemented with such schools, including any of the unique aforementioned contractual terms for alternative charter schools. As part of the annual budget review, alignment to the charter agreement’s approved plan should be checked, especially resource allocation and management fees and services. In reviewing the current year’s interim financials, the authorizer should be mindful of the potential for high student mobility and the impact it could have on cash and overall financial performance. Material deviations in actual performance compared to the budget should necessitate an explanation from the operator.

Conclusion

Charter authorizers face a complex challenge in assessing alternative schools and new school models—in part because the variety of innovative approaches and school structures makes comparison and analysis more complex.

Though they certainly need to be adapted to specific circumstances, financial practices and accountability standards are by their nature similar across different systems and models. Implementing and monitoring such standards for accountability offers authorizers an important way to gauge the viability of proposed schools and assess the relative success of those already operating. Financial viability and academic performance should be evaluated in tandem, with models that fail reviews receiving the scrutiny they warrant—and successful alternative models supported to the extent they deserve.

Carrie Stewart is co-founder and managing director of education finance advisor Afton Partners; Carrie is based in Chicago.