Report 2022-110R Recommendation 6 Responses

Report 2022-110R: Charter School Facility Grant Program and Conduit Financing Program: The Programs Are Generally Achieving Their Purpose of Increasing Charter Schools' Access to Facility Funding (Release Date: February 2023)

Recommendation #6 To: Treasurer, State

To ensure that applicants meet a key program eligibility requirement, CSFA should require Facility Grant Program applicants to provide documentation that they are not operating as or by a for-profit organization. It should also adopt and begin following procedures to verify an applicant's compliance with this requirement.

1-Year Agency Response

Charter School Facility Program Regulations Section 10170.3 sets forth criteria for Eligible Applicant to the program. Section 10170.3(g) states "the Charter School shall not operate as, or be operated by, a for-profit corporation, a for-profit educational management organization, or a for-profit charter organization."

For the current 2023-24 funding round, to determine charter school are not operating as for-profit entities and ensure applicants meet this program eligibility requirement:

- Analysts used data from a completed Payee Data Record Form (Form STD 204) as documentation to complete the inaugural for-profit review.

- Form STD 204 is completed by all applicants to receive funding from the State Controller's Office and contains a Tax Identification Number (TIN) or Employer Identification Number (EIN).

- Staff utilizes the Internal Revenue Service's (IRS) website, https://www.irs.gov/charities-non-profits/search-for-tax-exempt-organizations, to determine applicants' profit status.

- The school must be a charitable entity and have tax-exempt status to receive payment.

- For applicants identified as school district or county office of education dependent, staff reviewed authorizer information to determine that applicants are not for-profit.

- Supporting documentation demonstrating steps noted above have been submitted to the Auditor as supplementary information.

For the upcoming funding rounds, 2024-25 and beyond, new applicants will be requested to submit non-profit/501(c)(3) verification and confirmed with a completed Form STD 204 or proof of school district or county of education dependency in their charter petition.

Repeat applicants that have a change to their TIN or EIN will be required to submit an updated Form STD 204 and that new form will also be used to confirm status as mentioned above.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

6-Month Agency Response

Since our 60-day response to the State Auditor, CSFA has implemented a document-based vetting process for the 2023-24 funding round. It includes tax-status document review, follow-up, and additional verification (when needed) to ensure that applicants are not operating as or by a for-profit organization. CSFA will continue to work with the Department of Finance on securing funding to perform this determination as prescribed.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

The document-based vetting process CSFA developed implements the part of our recommendation to adopt procedures to verify applicants are not operating as or by a for-profit organization. The CSFA explained to us that it is in the midst of evaluating applicants for the 2023-24 funding round and has not yet begun vetting applicants' compliance with this requirement. We look forward to assessing CSFA's progress on this recommendation at the 1-year response in February 2023.

60-Day Agency Response

CSFA will implement a document-based vetting process for the 2023-24 funding round. It would include document review, follow-up, and additional verification when needed. CSFA believes an independent verification from official third-party sources to be a best practice. On average there are approximately 400 applicants for each funding round. Therefore, there could be up to 400 FTE hours that need to be committed to each funding round, accounting for 20% of a FTE's annual hours. This support can be achieved with one or two Staff Services Analysts to ensure no delay or interruption in funding. As stated in the Audit, this provision should become obsolete in 2026, barring any legislative changes.

In addition, CSFA is in the final phases of developing policies and procedures for monitoring compliance associated with the proposed independent verification. CSFA expects these policies and procedures to be completed prior to the 6-month reporting period. CSFA is also permitted to review prior rounds for compliance and will consider this action if additional resources are available and staff levels permit.

California State Auditor's Assessment of 60-Day Status: Pending

As we noted in our audit report, CSFA did not express concerns about its ability to implement our three recommendations with existing personnel and resources when we discussed them in advance of its formal response to our draft audit report. Notwithstanding CSFA's ability to implement this recommendation with existing personnel and resources, which we did not audit, CSFA should require applicants to submit documents that demonstrate their eligibility for Facility Grant Program funding.

All Recommendations in 2022-110R

Agency responses received are posted verbatim.