California to Audit Charter School Network for Alleged Fraud
Six county superintendents say a state audit is necessary “to prevent further waste of public education dollars” by Inspire
A statewide group of county superintendents has requested a sweeping state audit to investigate potential fraud by the Inspire home charter school network.
The superintendents say they have reason to believe Inspire engaged in fiscal malfeasance, conflicts of interest, manipulation of enrollment and revenue and other improper activity.
“The concerns regarding Inspire are pervasive across the state, and require immediate attention to prevent further waste of public education dollars and profiting off state apportionment not used to provide a complete and quality education to the students enrolled in the school,” six county superintendents wrote in a letter last week to the Fiscal Crisis Management and Assistance Team, or FCMAT, the state agency that audits schools for fraud.
The superintendents asked the state team to audit all schools affiliated with or controlled by Inspire, which is based in Duarte. The six superintendents represent the Ventura, Placer, El Dorado, Sutter, Kern and Los Angeles counties.
San Diego County Superintendent Paul Gothold sent the state team a separate letter with his own concerns, adding to the request by the six superintendents. San Diego County has two Inspire schools authorized by the Dehesa School District: Cabrillo Point Academy and Pacific Coast Academy.
The state fiscal team must fulfill audit requests received by county superintendents, and is currently auditing the Sweetwater Union High School District for potential financial fraud.
Some of the superintendents said that they had concerns about individual Inspire schools dating back a couple years. But it wasn’t until they started talking with other superintendents who had encountered Inspire schools that they realized there were larger patterns connecting them, said Kern County Superintendent Mary Barlow.
“That is when we really started seeing patterns develop that concerned us greatly,” she said.
“There is a potential here for fraud on a magnitude that I’ve not seen,” said Barlow, who is a former state fiscal team deputy officer and helped conduct fraud audits in the past.
In a statement Wednesday, Inspire Interim Executive Director Steven Lawrence said Inspire has “a great deal of respect” for the state fiscal team and is prepared to work with them. Inspire had already met with the team two weeks ago to request a review, according to Lawrence.
“As an organization, we are committed to continual improvement of our practices in order to better serve our students and families,” Lawrence said. “We expect the FCMAT experts will ultimately be able to provide additional guidance and direction that will be useful for all of our schools going forward.”
The superintendents’ concerns are still allegations; they must be verified by the state, the ultimate authority in determining whether fraud has occurred.
“Although I may be deeply concerned, without having the proper authority to do the analysis and research, we really can’t draw conclusions,” Barlow said.
El Dorado, Sutter and Kern have Inspire schools authorized in their area. Ventura and Placer say Inspire was operating unauthorized resource centers in their areas.
Los Angeles joined the request because Inspire is headquartered in its area and because four Inspire schools are members of Los Angeles County’s charter special education agency, even though no Inspire school is currently authorized to operate in Los Angeles County.
The six superintendents suggest in their letter that Inspire’s activities are akin to those of the A3 charter school network, said Placer County Superintendent Gayle Garbolino-Mojica and Barlow.
Prosecutors alleged that A3 leaders illegally siphoned $50 million of state education dollars into their own pockets using a network of fraudulent charter schools and manipulating attendance accounting.
Some A3 executives were criminally indicted in May for misappropriation of public funds, conflict of interest and more. All but one of the 11 defendants have pleaded not guilty.
“Inspire’s operations include the same or similar conduct as those of individuals operating charter school management organizations, vendors and charter schools now facing criminal charges,” the six superintendents wrote.
The six superintendents included 13 pages of allegations in their letter, including claims that:
- Inspire has manipulated student enrollment, attendance and revenue among “commonly controlled corporations.” That, in addition to inter-borrowing among Inspire schools and those corporations, “amounts to fiscal malfeasance on the part of Inspire,” the superintendents wrote.
- Inspire appears to provide only a partial educational program and requires parents to provide most of the instruction and curriculum for their children, partly through enrichment funds that Inspire gives parents to buy classes, curriculum, extracurricular activities and more.
- Inspire schools have shown irregularities and misreporting in their attendance accounting.
- Inspire has operated at locations in counties where they had no schools authorized and where they were not legally allowed to operate. The majority of students at multiple Inspire schools live outside the county in which they were authorized.
- Inspire has grown rapidly by seeking authorization from small school districts which lack capacity to provide strong oversight. Inspire schools have grown at rates faster than the enrollment projections originally written in their charters.
- Above all the Inspire schools is a nonprofit corporation, Inspire District Office, that is “profiteering from the rapid expansion of these charters,” superintendents said. Inspire District Office collects 15 percent of Inspire schools’ revenue and is led by the same person who helped open Inspire schools, yet it keeps its finances secret and claims to be exempt from public records law.
- Superintendents said there are inter-related party transactions and conflicts of interest among Inspire’s executive officers and directors.
In his own letter sent to the state fiscal team last week, San Diego County Superintendent Gothold listed concerns about the Inspire network and San Diego County’s two Inspire schools, Cabrillo Point Academy and Pacific Coast Academy.
Gothold said he has concerns that:
- The two schools’ attendance data are contradictory and potentially invalid. Both schools reported student attendance rates that were higher than 100 percent, multiple years in a row. At one point, Cabrillo Point’s attendance rate was 155 percent. Gothold said he has no verification that the school’s attendance grew that fast.
- The schools borrowed large amounts of cash several times throughout the year at interest rates of up to 37 percent. Meanwhile the schools lent cash, as much as $5 million in one year, to other entities. The schools have not been paying back their loan balances by the end of the fiscal year, as required by state law. “It is unclear how the charter school is able to operate,” Gothold wrote about Cabrillo Point.
- Cabrillo Point received a $105,000 loan from Inspire Founder and CEO Herbert “Nick” Nichols at a 10 percent interest rate.
- The schools’ financial reporting is unstable, with “wild fluctuations” in their finances from year to year and negative ending fund balances as large as $2.7 million, according to previous audit reports.
- There are potential conflicts of interest among Inspire schools, other corporations, foundations and other entities that are affiliated with Nichols, including Inspire District Office and an Ohio-based Inspire school.
Several allegations in the superintendents’ letters echo findings in an August investigation by The San Diego Union-Tribune about Inspire.
That investigation found that the Inspire network has quickly expanded to an estimated 35,000-plus students and at least a dozen schools in its five years of existence, while relying on heavy cash borrowing. It has posted below-average test scores and graduated few students who qualify for admission to public colleges and universities.
A state school finance agency estimated that Inspire would receive about $285 million in state funds this school year alone for all the students it is claiming in its attendance records.
Inspire officials say their schools are run independently of each other, but there are several similarities connecting them, including that their school boards were once controlled by a central Inspire corporation and Nichols filed paperwork to open all the Inspire schools and affiliated corporations.
Inspire has generated controversy even among other home-based charter schools for what it has allowed families to buy with school-provided enrichment funds.
Inspire provides families $2,600 or more a year so they can purchase classes, curriculum, extracurricular activities, supplies, field trips and more.
Inspire had allowed parents to buy—for their children and themselves—Disneyland annual passes, dinner theater tickets and more using state funds, raising questions among other charter school leaders about whether Inspire has been gifting public funds.
Inspire has since restricted what parents can buy with enrichment funds.
Last month the California Charter Schools Association, which advocates for charter schools, announced that it had expelled Inspire from its membership after discovering questionable organizational practices.
Then Inspire CEO, Nichols, went on an unexplained leave of absence. Inspire told families nine days after the charter school association’s announcement.
Nichols has been collecting a $380,000 annual salary, according to Inspire.
Despite concerns from education leaders across California, many Inspire parents continue to adamantly defend their schools.
Parents have said they enjoy the flexibility of spending enrichment funds, they worry about bullying and safety in brick-and-mortar schools, and many of their children had been failed by traditional public schools.
Inspire has made various changes to its practices after education officials voiced concerns and after The San Diego Union-Tribune’s reporting.
Inspire school board agendas last month show that board members were being briefed on transparency laws, budgets and fiscal policies and procedures. Some schools removed Nichols as an authorized signer from their bank accounts in mid-August, board documents show.
Inspire says it has been trying to improve supports for struggling students and is working to graduate more students who qualify for state university admission. Inspire also said it has closed resource center locations in Ventura County after officials said they were illegal.
Fine said in an email Tuesday that the state has not started reviewing the audit requests. When it reviews the allegations, its next step will be to lay out a scope of work by county and by charter school.
Fine estimates that it may take about a month to do.
Fine estimates his office will assign staff to the job in December and actual work on the audit likely won’t begin before January.
Fine said the state team will treat all the superintendents’ audit requests as one. Auditors will look for common allegations and assign staff accordingly to investigate those allegations across Inspire schools.
“This is a big job,” Fine said.