The Pennsylvania Department of the Auditor General under Republican Auditor General Timothy DeFoor has released an audit of five of Pennsylvania’s cyber charter schools. There’s good news and bad news, and once more, evidence that Pennsylvania’s cyber charter laws need to be updated.
A cyber charter is a privately owned and operated school, funded by taxpayer dollars, that delivers instruction over the internet via computer. Pennsylvania is currently the nation’s leading state for cyber charters, with 13 charters serving nearly 60,000 students. The five schools chosen for the audit represent more than half of the state’s total cyber charter enrollment.
State audits of the cyber charters have been relatively rare and infrequent, so this new audit is the first look in many years at how the cyber charter businesses use the taxpayer dollars they collect.
It’s about time.
The Good News
The good news is that the cyber charters have not done anything illegal.
That’s actually not nothing. In Ohio, the Electronic Classroom of Tomorrow (ECOT) was behind the state’s largest cyber charter network, until the Ohio Department of Education determined that ECOT had been lying about the number of students enrolled and over-billing the state, triggering state and federal investigations that ECOT owed the state over $100 million; some analysis showed that they have overbilled the state by almost twice that amount.
The Pennsylvania auditor’s finding that the five cyber charters studied have billed districts correctly and appropriately for the students enrolled is welcome news. The audit set out to look at the finances of the cyber charters (sources, expenditures, and current standings), and it found nothing actually illegal.
The Bad News
The bad news is that the cyber charters have not done anything illegal.
The auditor general, based on the audit findings, recommends that the state assign a task force to develop a funding formula that is “equitable, reasonable, and sustainable,” which suggests that the current formula is none of those things.
Pennsylvania’s cyber charters are soaking Pennsylvania taxpayers. The audit adds some numbers to just how much soaking is going on, and how current cyber charter law fails to be equitable, reasonable, or sustainable.
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The audit covers the period between July 1, 2020, and June 30, 2023. The five cyber charters are Commonwealth Charter Academy, Pennsylvania Leadership Charter School, Insight PA Cyber Charter School, Pennsylvania Cyber Charter School, and Reach Cyber Charter School.
Here are some of the specifics revealed in the audit.
Cyber Charter Tuition
Every school district pays a different tuition rate to attend a cyber charter school. The audit notes:
Each of Pennsylvania’s 500 school districts is required to calculate its own specific regular and special education tuition rates each year based on its prior year budgeted expenditures, resulting in 1,000 different rates paid to the same cyber charter school.
It’s a funding system that is different from that of other states that allow cyber charters. Many states use a flat fee for cyber charter tuition, while others tie funding to successful course completion by the student. According to the National Education Policy Center, no state has tied tuition directly to cyber charter costs.
Pennsylvania’s tuition system results in wildly different costs. The audit found tuition for a regular education student ranges from $6,975 up to $25,150, and special education rates running from $18,329 up to $60,166. These tuition costs are paid for different students to attend exactly the same school.
In addition, special ed funding is not connected to the needs of the student. This can have a major impact on the sending school and create real financial windfalls for the charters.
Meanwhile, as DeFoor noted in a press conference, it’s hard to know exactly how much cyber charters spend on education because reporting requirements are so lax.
The audit notes that having a wide variety of tuition rates all detached from the actual costs puts the charter in danger of being underpaid and the taxpayers in danger of overfunding the cyber charter. But from the rest of the audit, it’s clear that only one of those issues is actually occurring.
The COVID Windfall
During the height of the pandemic, some cyber charters experienced a considerable boost in enrollment. Insight PA more than doubled its enrollment, and Reach initially ballooned from 3,393 to 8,138. In many cases, after the peak year of 2020-21, enrollment subsided. The state enrollment in that year was over 60,000 and then dropped a few thousand in subsequent years. Reach dropped from its peak to 6,919.
The one notable exception was the 800-pound gorilla of Pennsylvania cyber charters. Over the four years of the audit, Commonwealth Charter Academy grew steadily from 9,294 students up to 20,358.
All of those extra students bringing a hefty profit margin with them allowed cyber charters to bank hundreds of millions of dollars. The fund balances of the five cyber charters showed a total in the fall of 2021 of $254 million. By the spring of 2023, that had grown to $618 million.
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Cyber charters also benefited from federal relief funds for COVID. PA Leadership also applied for and received a Paycheck Protection Program (PPP) loan (that was later forgiven) that the audit called “questionable.”
Both revenues and expenditures grew during the pandemic enrollment explosion. But while 2021 saw an increase of expenditures of roughly $200 million, revenue grew by $300 million of taxpayer money. Over the four years and five charters covered by the audit, Pennsylvania taxpayers handed over $3 billion dollars; roughly 1 in 5 of those dollars was simply parked in the bank. The audit found that four of the schools had unassigned fund balances far in excess of what would be considered reasonable.
What Was the Rest Used for?
The money not parked in the bank was not being used exclusively for educating students.
During the audit period, CCA spent $196 million on acquisition and construction of 21 buildings, an approach that is “unique” among cyber charter companies. The audit notes that CCA is free to make this kind of investment, but it also notes that the “distinguishing factor” for cyber charters is that cyber charters “must provide all curriculum and instruction without the need for students to be present at a physical facility.” It’s also worth noting that while CCA says one purpose of its many field offices is to make it easier for families to have students take the PSSA exams, CCA has the lowest participation rate for testing in the state.
The audit also finds the same sort of spending by CCA that has been highlighted in a report from Education Voters PA, noting almost $22 million on marketing alone. The audit also found CCA spending $646,641 on lobbying. The audit notes that advertising and lobbying “are common and permissible,” it suggests that “CCA should carefully consider the nature and amounts of these expenditures.” After all, this is all paid for with taxpayer dollars.
The audit also notes that expenses for fuel stipends given to staff ($2.4 million) without regard to how much driving they actually had to do, owning their own fleet of vehicles ($1.3 million), throwing a family fun fest, and staff bonuses ($22 million) were unusual.
Since CCA has parked so much of its money in buildings rather than bank accounts, it is alone among the cyber charters in having an undesignated fund balance that falls within the suggested guidelines (no more than enough money to cover operation for two months).
PA Leadership and PA Cyber both parked more than a year’s worth of operating expenses in their fund balance. Insight had almost a year’s worth in the bank.
Reach faced a unique challenge in that during the audit period, it severed ties with the management company that was operating the school for them. This ultimately required them to bring many services in-house even as they were paying off the end of the contract with their management company, their expenses ran high.
During the audit period, Reach also paid out staff bonuses and distributed approximately $4.3 million in grocery store coupons and Target gift cards for families.
All of this paid with dollars taxpayers paid to support their local schools.
The Auditor General’s Recommendation
The audit notes, repeatedly, that every one of the questionable uses of taxpayer dollars is completely legal. What does the office recommend?
We are recommending the Governor form a task force within the next six months that includes the Pennsylvania Department of Education, cyber charter schools, school districts, parents, stakeholders and the General Assembly. This task force would have a deadline of nine months to develop a new funding formula that is equitable, reasonable and sustainable. Next, we’re recommending the General Assembly should enact this plan into a bill within six months of receiving it and send it to the Governor for his signature.
This seems unnecessarily timid. The overpayment of Pennsylvania’s cyber charters has been criticized numerous times. Governor Wolf pushed for it during his time in office. In the 2023-24 session, HB1422, a bill calling for cyber charter reform, passed in the House with bipartisan support. More than 450 of Pennsylvania’s 500 school boards have passed resolutions calling for cyber charter reform.
Susan Spicka, executive director of Education Voters PA, commented:
Pennsylvanians cannot afford to wait any longer for state lawmakers to take action to protect their constituents’ tax dollars from being removed from their local schools and packed into cyber charter asset hoards and bank accounts or wasted on parties, advertising, gift cards, and other things that are unrelated to educating students.
And yet, in a recent article in The Derrick (Venango County), Cranberry Superintendent Bill Vonada reported on a meeting with State Senator Scott Hutchinson
“The Senator was open and listened. We got our point across that we need a fair funding formula for cyber companies.
“One of the most concerning things to me was the statement he made that there was no urgency in Harrisburg to have any change this year,” Vonada said. “That shocked me.”
The Charter Response
The audit includes responses from each of the five districts. There are no surprises here.
CCA argues that the current funding formula “represents the General Assembly’s thoughtful, purposeful, and well-reasoned approach,” which gives a lot of credit to the General Assembly of 2002, who passed cyber charter legislation that has not been significantly changed since. CCA also tried to get ahead of the auditor general by releasing news on February 10 announcing a clean independent audit.
Insight pointed to advertising as a “necessity,” a point echoed by other charters and raising the question of how problematic it is to create a system in which taxpayers must finance marketing aimed at taxpayers.
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PA Cyber disputes the claim that the current funding is not “fair and equitable,” arguing that “our families” have the right to “the same public school funding as their peers” in public schools. This argument might carry more weight if courts had not found that Pennsylvania public school students do not get the same public school funding as their peers in other public schools.
All of the audited schools offer some version of the argument that nothing found by the audit is outside the law. That’s the point. Pennsylvania’s cyber charter law, now in its third decade, is long overdue for changes and improvements. Pennsylvania taxpayers deserve to have their tax dollars directed to the education of students and not to the bank accounts or real estate empires of cyber charter companies.
It is clear that Pennsylvania cyber charter costs can be reined in without major financial damage to the charters themselves. At the same time, analysis of HB 1422 found that public school districts would get back $455 million. At least one lawmaker has already stepped up to indicate he has a reform bill in the works. We’ll have to wait to see if Harrisburg is finally going to address the cyber charter funding issue, or id those schools will just keep banking taxpayer dollars.
