Auditor criticizes Pa. Cyber Charter School

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Pennsylvania Cyber Charter School follows state laws and other requirements, but state Auditor General Jack Wagner questioned some of the school's practices, its hefty bank account and $2 million advertising budget in an audit released Thursday.

Those practices were among the reasons that the school's "business expenses," which totaled $12.6 million in 2008-09, placed as the third-highest of all 500 school districts and 127 charter and cyber charter schools filing reports that year.

The audit comes as former executives and vendors of the school are the subject of an ongoing federal grand jury probe.

The audit questioned school practices that helped it to amass an unrestricted fund balance of more than $13 million for 2009-10 and $11 million for 2008-09, calling them the "highest amounts among all operating charters and cyber charters."

The online education giant has about 11,000 students statewide. In recent years, school districts have paid about $100 million a year for students who choose to attend the public cyber charter school.

"While I have long supported alternative forms of education, as the state's independent fiscal watchdog, I cannot look the other way and ignore a broken system in which charter and cyber charter schools are being funded at significantly higher levels than their actual cost of educating students," Mr. Wagner said.

"It is time for the Pennsylvania Department of Education, along with the General Assembly and the Corbett administration, to fix Pennsylvania's flawed funding formula for charter and cyber charter schools and restore fairness to the system."

PA Cyber released a response emphasizing that the audit found that the school was in compliance.

"We strive every day to give Pennsylvania's children unique, innovative educational opportunities that will help them excel," PA Cyber chief executive officer Michael Conti said in the statement. "That we fulfilled our obligation to a thorough and efficient system of public education -- well, that's just great news."

PA Cyber stated that "the additional observations in the final audit are outside the scope of the law" and expressed hope that the General Assembly would complete a long-discussed overhaul of the 1997 law governing most aspects of charter schools.

Asked to comment on the auditor general's report, Tim Eller, spokesman for the state Department of Education, focused on the fund balance, saying in an email, "Nearly every traditional public school district and charter school maintain some level of surplus funds with a fair number of them with a balance that is more than $13 million."

Mr. Wagner focused on five "observations" in the audit which, for the most part, covered July 1, 2008, through July 18, 2011. The audit report included responses from the school.

• The school built an unreserved fund balance of more than $13 million as of June 30, 2010, which the auditor general viewed as "inappropriate" and a "clear indication" that the formula funding cyber charter schools is flawed.

The school maintained the fund balance for the year ended June 30, 2012, was 11 percent of annual expenditures and is "far from excessive." It noted some funds have been assigned for anticipated increases in employer retirement and health-care contributions. It said the balance also is needed to fund the operation of the school for several months at the beginning of each school year before district payments arrive.

• The school spent $2 million in 2009-10 and $1.5 million in 2008-09 for advertising. The auditor general questioned whether this could be better spent on student education services.

The school said charter schools are required to engage in outreach and noted that traditional school districts "operate with a captive audience" of students whereas charter schools do not.

"Without a carefully planned and budgeted marketing and advertising effort, the school would lose students and could face financial disaster culminating in the inability to educate existing students and, ultimately, the loss of hundreds of jobs," the school said.

• The report criticized the school's contract with National Network of Digital Schools Management Foundation, saying it is based on 12 percent of the school's revenue rather than on the services provided.

The school responded that the fees were reasonable.

• The auditor general recommended the school apply for 501(c)(3) tax-exempt status under the federal Internal Revenue Code as many cyber charters in the state have done. He noted that this would result in the filing of an IRS Form 990, which would provide more public information.

The school replied that it had a legal opinion stating it did not need to do so, but will file a formal application to the IRS anyway.

Mr. Wagner repeatedly has been critical of the funding formula for cyber charter schools.

The audit found that tuition payments by school districts for regular education provided by PA Cyber ranged from $6,414 for each student from the Altoona Area School District to $17,755 per student from the affluent Lower Merion School District outside Philadelphia. Payments for special education students who chose charter schools are generally much higher.

Mr. Wagner found that nationally, it costs an average of around $6,600 to educate a student online.

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