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Although the current Charter School Tuition Rate formula evokes criticism from many districts and charter schools, it is relatively simple and easy for districts and charter schools to understand and for the Department to administer. Changes in the formula should be made only if it can be shown that the "equity" increase clearly offsets additional burdens in administering such a formula for the districts, charter schools, and the Department. INTRODUCTIONThe charter school movement grew out of a belief that competition among existing public schools and "new" schools developed by local educators, parents, or others could provide new models of schooling and incentives that would improve the overall system of public education. ( 1 ) Currently, Massachusetts is one of 31 states, plus the District of Columbia and Puerto Rico, to enact legislation allowing for the creation of charter schools ( 2 ) . Since passage of the Education Reform Act of 1993, Massachusetts has granted Commonwealth charters to 33 schools, including eight new ones in February, 1998. Charter schools are considered one of the means for improving the conditions and opportunities for teaching and learning within the public school system by allowing greater freedom and innovation of programs, services, and administration. Each state has approached charter schools with widely differing governing legislation, some more restrictive than others. The Education Reform Act of 1993 became the Massachusetts initiative for charter schools. The intent was to provide for more than one model for educating the Commonwealth's students. Charters are granted by the Board of Education based on the quality of the proposed school design, the need for such a school in the area, the potential impact the charter school would have on the surrounding public school systems, and the strength of the founding coalition. ( 3 ) Charter schools are public schools. They must be open to all students and may not charge tuition. The primary method of funding Commonwealth charter schools is that the state dollars for education follow a child from the district school to the charter school. Commonwealth charter schools are evaluated and held accountable in several ways. After five years, the length of the initial charter, charter schools must show that they are worthy of the public tax dollars they receive and must continue to attract and keep students by meeting the expectation of those students and their families. Charter schools are continuously monitored and can have their charters suspended or revoked by the Board of Education. SCOPE OF REPORTThe Department of Education requested a series of evaluations, in accordance with the Legislative Acts of 1997, to review charter school tuition payments, innovative practices, and the possible creation of district charter schools. KPMG Peat Marwick LLP (KPMG) was hired by the Department to review the Current charter School Tuition Rate formula. The current funding formula has been criticized by districts, charter schools, and school educators because of concerns about accuracy and fairness. The objective of this analysis is to provide accurate and comprehensible information so that the Board of Education may draw conclusions and make informed policy decisions. This report represents KPMG's findings relating to our review of the current Charter School Tuition Rate formula. METHODOLOGYTo accomplish the objective of this review, KPMG performed the following tasks:
The eight charter schools in the sample represent varying grade levels, student enrollment, student demographics, and geographic locations. The sample includes charter schools that receive students from only one district as well as those that receive students from multiple districts. These schools include several that have management partnerships with national and international not-for-profit and for-profit educational services groups. Also included are schools serving "special populations" and those having extended academic days or years. Exhibit 1 outlines the locations, grade levels, student enrollments and districts sending students to each of the sample charter schools. DESCRIPTION OF CURRENT FORMULAThe majority of funding for charter schools is through the Charter School Tuition Rate. The rate formula, adopted by the Board of Education in consultation with the Executive Office for Administration and Finance, is based on the number of students attending the charter school from a district multiplied by that district's average cost per student. If students from several districts attend the charter school, a rate for each sending district is determined by this process. The formula determines the tuition paid to the charter school by each sending district that is at or below the foundation budget. If the sending district does not have a foundation budget gap (meaning that the district spends more per student than the foundation budget requires), the tuition rate is the lower of the sending district's rate or the charter school's "home" district's rate. EXHIBIT 1 CHARTER SCHOOL SAMPLE
FINDINGSAVERAGE COST PER STUDENTThe average cost per student is based on the budgeted annual expenditures of the sending districts as submitted to the Department as part of Schedule 19 -- End of the Year Report. Payments are made to the charter schools four times per year. The first payments, in September and December, are estimated payments and later payments are adjusted according to budgeted expenditures, enrollment numbers, or modifications to Schedule 19 submitted by districts. The Department uses the formula to make payments to charter schools and deducts the formula amount from the State school aid funding paid to sending districts. District schools are currently reimbursed a significant portion of their charter school tuition through the Charter School Reimbursement Formula. Schedule 19 captures both school committee and municipal spending as relates to the district in the general categories described in Exhibit 2 below. The charter school tuition rate formula is used to "exclude" certain expenses reported on the Schedule 19. Most of the "excluded" categories represent expenses that a charter school would not normally incur, except for Long Term Debt, which is treated as a separate item in the average cost per student calculation. EXHIBIT 2 SCHEDULE 19 CATEGORIES USED TO DETERMINE CHARTER SCHOOL TUITION RATE
Student Transportation Services (3300) is treated as a separate average cost per student category. If the charter school is providing transportation, it is reimbursed based on the average cost per student of transportation in the sending district. If the charter school does not provide transportation to its students, or transportation is provided by the sending district, or the sending district does not provide transportation to any students, no transportation payment is made to the charter school. Next year, charter schools will be reimbursed by the sending district for actual transportation costs. Most of the other Schedule 19 categories that are excluded from the average cost per student calculation are expenses that a charter school would not incur, including the cost of educating students with IEPs that are 502.5 or higher. Long-term debt principal and interest (8100 and 8200) are treated as a separate item in the average cost per student calculation. If the sending district has a SBAB ( 5 ) grant, the amount of that grant is deducted from capital debt expenditures and only the balance over the grant is included in the average cost per student formula. Exhibit 3, on the following page, shows how the tuition rate is calculated where there is an SBAB grant deduction from capital debt expenditures. CAPITAL DEBT EXPENDITURESIn most cases district capital expenditures are not fully incorporated in the average cost per student formula. Of the 33 sending districts that have students in this study sample of charter schools, two-thirds have some capital expenditures for facilities included in their average cost per student. Five large sending districts have no long-term (capital) debt interest or principal included in their average cost per student calculations. These districts -- Boston, Fall River, Lawrence, Springfield, and Worcester -- do have capital debt, but their SBAB grant brings the amount in the formula to $0. Only the portion of capital debt that exceeds the SBAB grant is included in the formula. SBAB grants provide for reimbursement to municipalities/school committees for a portion of long-term debt retirement and service for those projects approved by the Department. The grant levels are a minimum of 50%. If a district has its project fully funded, the SBAB grant amount would automatically cause no capital funding for that project to be included in the calculation of the average cost per student. Of the districts related to this sample that have a portion of long term debt included in their average cost per student, it is on average only 63% of the identified long term debt principal and interest. If the SBAB grant amount were included in THIS PAGE SHOULD BE EXHIBIT 3 CALCULATION OF AVERAGE COST PER PUPIL The actual exhibit is attached at the end of this document (on paper). It must be typed into the document and reduced a bit if possible. calculating the average cost per student, tuition payments to charter schools would be sizably increased in several cases. (See Exhibit 4.) As an example, including the SBAB amount in calculating the Springfield average cost per student would result in an increase from $5,992 to $6,565. EXHIBIT 4 AVERAGE COST PER STUDENT IF SBAB GRANT AMOUNTS WERE INCLUDED IN FORMULA
Capital outlay for any project is usually highest at start-up. Because charter schools are not eligible for SBAB grants, generally cannot bond, and must get loans or rent, capital costs are a significant burden. Capital funding was identified as the single most pressing issue by charter schools in this study. Most charter school staff indicated that they believe that no capital expenditures of the sending districts are included in the Charter School Tuition Rate calculation. COMPARISONS OF CHARTER SCHOOL AND DISTRICT EXPENDITURESComparisons of expenditures between charter schools and districts, as well as between charter schools, is extremely difficult because of varying charts of accounts and reporting formats. While the district schools must report financial and budgetary information in a similar manner through Schedule 19, a single school's expenditures are not easily reported in a format designed for districts. Charter schools are required to submit year-end financial statements and independent audits to the Department, but neither these statements nor the internal budgets of charter schools follow any "standard" chart of accounts. The breakdown of revenues is similar across charter schools, but expenditures or costs are difficult to categorize and summarize except at the highest level. Exhibit 5 outlines some of the reporting categories for selected charter schools. EXHIBIT 5 SELECTED CHARTER SCHOOL REPORTING CATEGORIES
Expenditure pattern comparisons between district and charter schools can be made by classifying charter school expenditure items into the most closely associated Charter School Tuition Rate categories. Although the categorization of charter school expenditures into these categories is subjective due to the varying reporting formats, it does provide an overview of the differences in how funds are expended. Exhibit 6 shows the percent of total expenditures attributed to a specific category for the average of district schools and charter schools within the study sample. EXHIBIT 6 PERCENT OF TOTAL EXPENDITURES BY ATEGORIES
By far the largest expenditure category for both district and charter schools is instruction (69.9% and 61.7%, respectively). One major difference between the types of schools is in the administrative category where districts spend 3.5% of their total budget and charter schools spend 13.3%. ( 6 ) The various capital/facility categories also show marked differences between the charter and district schools. Capital expenditures are 0.5% for districts (net after SBAB for deductions) and 6.9% for charter schools. Rentals is only 0.3% for districts, but 5.8% for charter schools. While it is difficult to capture capital debt costs for charter schools, the expenditure does vary from charter to charter depending on where it is located and if it rents purchases or uses donated space. These expenditures range from approximately $110,000 for City on a Hill to a high of approximately $1,600,000 for Boston Renaissance (10% and 20% of their tuition revenue, respectively). These high level comparisons show that the major spending differences, as outlined by the current average cost per student calculation, place a higher burden of capital/facility related expenditures on charter schools than is currently funded by the Charter School Tuition Rate formula. SPECIAL EDUCATION (SPED) POPULATIONSMost charter schools in this sample indicated that their percent of special needs students (with identified Individual Education Plans--IEP) was similar to that of the district schools. Charter schools also indicated that many of these special needs students were classified at a lower level than they would have been in traditional settings, and that they have students with special needs who receive special services but who do not have IEPs. Districts, on the other hand, believe that the majority of higher prototype special needs students are still in district schools and, in some cases, are moving back from charter schools. Exhibit 7 details the special education student enrollment, by prototype ( 7 ) , of charter schools and the state as a whole. EXHIBIT 7 SPECIAL EDUCATION STUDENT ENROLLMENT BY PROTOTYPE
These data suggest that state-wide charter schools educate a lower percentage of students with IEPs than the state as a whole. It also indicates that the charter schools are handling a higher percent of level 1 (502.1) students and a lower percent of students at other levels than the state. A table of the data for individual charter schools and their "home" districts are displayed on the following page (Exhibit 8). Generally, the charter schools have a lower number of students with IEPs than their districts. For some charter schools, such as Atlantis and Seven Hills, there is little or no difference. Others, such as Community Day, have no students with IEPs. Generally, the percentage of students at the lower prototypes for the charter schools is considerably higher than for districts, and the percentage of students at the higher prototypes for charter schools is considerably lower than for districts. These data, provided for one year, show no trends. Moreover, they do not indicate the costs incurred by districts and charter schools for the provision of special education services. Special education costs per student vary substantially, depending on the expense of the particular services required for each child. The expense of providing such services may also be affected by efficiencies of scale on the part of a district or by particular features of a charter school's program. Because the charter school tuition rate includes the average cost per special education student (prototypes .1-.4), charter schools may have special education costs that in some cases could be less and in some cases could be more than costs represented in the funding formula, depending on the particular needs of the students enrolled. The complex factors involved in determining equitable funding for special education are beyond the scope of this study. The Department of Education may wish to study these factors thoroughly in order to evaluate the charter school tuition rate in regard to special education. Such a study should include a comparison of the actual special education services provided by districts and charter schools, the costs of those services, and how prototypes and services may differ from one school setting to another. Any change in the formula should be weighed against potential unintended consequences, such as complexity of administration and reporting, or financial incentives for labeling or segregating schools. EXHIBIT 8 SAMPLE CHARTER AND "HOME" DISTRICT SCHOOL SPED ENROLLMENTS
* Community Day develops an Individualized Learning Plan for every child, which includes the provision of special services to children with special needs. OTHER ISSUESDifferential Costs For Educational Levels Information gathered by the Department about the regular day costs (not including special education, bilingual, occupational, transportation, food service, or capital costs) per student for FY96 vary greatly and show that, on average, the costs for senior high, junior high and elementary schools are not pronouncedly different as would be suggested by discussions with district representatives. Exhibit 8 shows the figures collected by the Department and provided as part of the background material for this report for each of the main sending districts in this sample of charter schools. As shown below, one district has its highest costs for elementary level, four for junior high level, and two for senior high level. EXHIBIT 8 REGULAR DAY COSTS BY GRADE TYPE (1995-1996)
Although, there appears to be significant differences in spending based on grade levels for some districts, these differences may be offset by the fact that many of the charter schools span more than one educational level, and several have plans to become K-12. Only two charter schools in this sample, Community Day and City on a Hill, do not have a current student enrollment that spans more than one educational level. Therefore, the different expenditure levels that can be associated with elementary, middle and high school are, for the most part, averaged out for the charter schools as well as the district schools. Expansion Costs Cost Verses Average Cost Per studentThe current formula assumes that there is an average cost to educate an individual student. However, if one student is subtracted from a school, costs are not necessarily reduced by the average cost per student. It would take a given number of students to be able to eliminate a class, the teacher, and the materials to support that class. The addition of a student to a charter school could have minimal cost impact if that student is added to an already existing, under-enrolled class. However, if the addition of a student required expansion costs such as an additional teacher, expanded facilities, or equipment, that cost would far exceed the average cost per student paid to the school. Despite this flaw in the formula, there is not likely to be a solution that doesn't itself create more significant flaws. Quarterly Payment MethodBecause most charter schools do not have the larger cash flow pool of another entity to support them at the beginning of the school year, the quarterly payment of the Charter School Tuition Rate causes cash flow issues for many. Those charter schools that have a relationship with a management group or organization seem better able to absorb the up-front expenses than those which are totally community based. In addition, the total tuition payment from the state can change after the second quarter distribution, based on changes in the approved budgets of the various districts. This can have either a positive or negative effect on the charter school and also adds uncertainty to the budget and expenditure process. As charter schools become longer established, they may be able to develop better reserves which could assist with cash flow as well as revenue stream changes. The Board may wish to consider changing the payment schedule to charter schools, either by increasing the number of times per year a payment is made, or by changing the timing of the quarterly payments, e.g. moving the payment schedule up one month. Title 1 FundingThe Commonwealth's federal Title 1 funding is calculated and divided among districts annually by the Department based on aggregate demographic data of the population residing in the district. Charter schools are given Title 1 funds based on their previous year's enrollment of eligible students. As a result, charter schools may not be receiving their share of Title 1 funds, especially in cases where a charter school's annual enrollment growth rate is significant. The Board may wish to consider providing Title 1 funding to charter schools based on their percentage of the district's identified Title 1 population as reported on the April 1 enrollment report for the following school year. End of Year Pupil and Financial ReportThe completed Schedule 19 of the End of Year Report outlining both school committee and city/town expenditures related to education is not formally audited by the Department. This information is "reviewed" for accurateness based on a reasonableness test and compared to historical data. The reporting categories on Schedule 19 are not necessarily the categories used internally by a district, and districts appear to have varying opinions as to what may be placed into a specific category. This lack of consistency could lead to a district reporting expenditure data in a different category than intended. There is no benefit to a district to underreport expenditures on Schedule 19 as this data provides the basis for calculating various State aid payments to districts. However, inadvertent placement of an expense in the wrong category on the Schedule could have considerable impact on the calculation of the average cost per student. For example, if expenses of residential placement for special needs students (IEP 5) were included within "Instructional Services" (2000) instead of within "Payments to Other Districts, States, or Non-Public Schools" (9100, 9200, or 9300), then those costs would be incorrectly included in the average cost per student calculation. Additional technical assistance to districts on preparation of Schedule 19 could help assure that data is reported as intended. The Department should also publish clear and concise documentation which accurately explains what is included in the average cost per student calculation. Special Education Prototype 5 StudentsSeveral districts appear to be under the misconception that residential placement costs of special needs students with an IEP of 5 or higher are included in the average per student calculation. This cost, however, should be included within categories 9100, 9200, and 9300 based on State regulations, which are not included in the Charter School Tuition Rate calculation. If these costs are erroneously reported in one of the categories listed above, the average cost per student could increase significantly. CONCLUSIONSThis review of the current formula for calculating the Charter School Tuition Rate identifies some areas of concern. The key issues are equitable capital funding for charter schools and the inclusion of special needs expenditures within the average cost per student. The current formula is relatively simple. It is easy for the districts and charter schools to use and for the Department to administer. Any changes to the formula to make it more "equitable" may also inherently make it more complicated. For example, a formula that tries to "correct" for all types of students (special needs, bi-lingual, etc.) would require detailed enrollment and expenditure reporting for both the charter schools and the districts. This additional reporting might lead to adjustments to funding after the fiscal/school year has begun, as well as additional calculation requirements for the Department. Ensuring equity relative to costs at different educational levels or for type of student would also likely require using a multi-part formula taking into account several student counts and much more extensive expenditure methods. It could also lead to disputes between districts and charter schools, and would create an incentive to label students in order to receive increased funding. Changes in the formula relating to capital expenditures should be weighed to ensure that the inequity balance is not completely thrown in the direction of the districts. In general, districts have large debt associated with their need for multiple facilities and sites, which is greater than the charter school's single facility. If the Department can find a separate mechanism to support capital costs of the charter schools, this would probably provide the least resistant way to address this issue. Charter School Tuition Rate formula changes should only be made where it is shown that the "equity" increase clearly offsets additional burdens in administering such a formula for the districts, charter schools, and the Department. It should also take into account that it is unlikely that a completely equitable formula will ever be developed. |
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