House Education Committee

Dave Yost, Auditor of State

House Bill 2
March 4, 2015
Chairman Hayes, Vice Chair Brenner, Ranking Member Fedor, and members of the
committee, thank you for the opportunity to testify on this important legislation. Id
like to begin by recognizing that you are elected to set policy on this matter, and I
am not. I am here today to support your work, and to offer my teams thinking on
what we have seen during the past four years of work.
Yours is a somber and burdensome duty.
Im going to focus on my teams area of expertise: accountability, finance and
governance. There are many other important factors , especially on education itself
that you will consider in your debate. I will not presume to offer any thinking on
them.
By way of background, my office audits every single charter school in Ohio. Since
2001, we have issued findings for recovery in 309 audits of community schools, with
$27 million in findings for recovery, and $9 million alone during my time in office.
Since I took office, a total of 22 people associated with charter schools board
members, vendors, employees have been convicted of criminal wrongdoing, and
more are waiting for their day in court.
For purposes of my testimony, I hope to focus on three broad areas I mentioned
accountability, finance, and governance -- and offer an outline of possible solutions
to issues we have identified. My office is forwarding a separate document that will
go into a bit more detail, and offer several technical suggestions as well. My hope is
to leave sufficient time today to discuss the matters on your mind, rather than to
drone on about every jot and tittle.
Accountability: The 105 Hour Rule
Under existing law, a charter school must withdraw a student who misses more
than 105 unexcused consecutive hours of school. That amounts to nearly a month.

If the student misses 104 hours, then shows up for a single day, the student gets a
new 105-hour clock. The school is not required to withdraw the student and they
continue to receive funding as if the student hadnt missed a day of school.
That means that it is possible for a student to show up for as few as 10 days of
school and receive funding for an entire year.
During our unannounced attendance audit last fall, several interviews suggested
that this does occur. We are unable, based on what we know now, to say how
widespread the practice is but we do know that it is a vulnerability in the system
as currently designed. It is a vulnerability that could be exploited, and should be
addressed.
A simple, and rational way to do this, is to revamp the 105-hour rule for truant
community school students to be more in line with the States truancy statute used for
traditional schools.
As defined in Ohio Rev. Code 2152.02(D), "Chronic truant" means any child of
compulsory school age who is absent without legitimate excuse for absence from the
public school the child is supposed to attend for seven or more consecutive school days,
ten or more school days in one school month, or fifteen or more school days in a school
year.
A different rule for dropout recovery schools might be appropriate, given the special
characteristics of that population. However, it cant be the intention of the General
Assembly to spend an entire years worth of funding to attain 10 days of education.
Accountability: Blended Learning
Blended learning is a combination of traditional classroom instruction and
alternative learning opportunities frequently computer-based, but sometimes
other sort of activities, including internships or work experiences.
Blended learning is a wonderful approach, particularly among students who may
have difficulty learning in a traditional environment. However, as currently
structured, it lacks sufficient accountability measures.
The State of Ohio measures an academic year for community schools as 920 hours of
instruction. This is easy enough to calculate in a traditional classroom, or even an
internship --- count the hours. But how do we value, or weight, the time spent
online?
One of the great benefits of online instruction is it is self-paced. The student can
breeze through the material that the student understands, and can slow down for
the parts that are harder for the student. But the benefit is also a weakness: you

simply cant count hours online as one-for-one equivalents with classroom

instruction.
Ohio allows a teacher to certify that a particular computer module is worth a certain
amount of learning. Im certain the vast majority of teachers are honest and
trustworthy in their judgments. But there is nothing at all to prevent a certification
that learning Mary Had a Little Lamb is worth five hours.
The upshot of this problem is that my office cannot tell you whether blended
learning schools are meeting the 920 hours of required instruction. Like so much
else in the Department of Education, it is taken on faith, on an honor system.
This is less of a problem where a school has sufficient scale to at least segregate
curriculum development and approval, whether by the size of its operation and or
because of its management company.
Ohio should better distinguish between the legal definitions of blended learning and
internet-based schools. Further, the valuation of online components should have
some independent review and approval. This could be accomplished through ODE,
through the sponsors by contract, or by ODE certification of independent
contractors and their methodologies.
In addition, because blended learning is more difficult to supervise, you may wish to
consider limiting such programs to only highly ranked sponsors.
Accountability: Treasurer Liability
A community school treasurer should have a fiduciary duty to the schools board.
Youve taken a step in this direction in the draft of HB2, which requires the fiscal
officer to be under contract with the governing authority of the school.
In the event that a school fails, and the board disbands or is otherwise unavailable,
there should be a method to enforce that fiduciary duty if violated. We suggest a
statutory provision allowing a sponsor to stand in the shoes of the school board as
plaintiff if the school board is otherwise unable to maintain an action for recovery.
Finance: Counting Students
The State funds students based on attendance, and as my offices work has amply
demonstrated over the past several years, the honor system used in Ohio is open
to abuse.
During interviews, we have discovered that schools will often generate a new SSID
for a student when they have difficulty finding that students previously assigned
SSID. In 2012-13, we discovered multiple SSIDs for the same student, which wreaks
havoc on efforts to track student transfers between schools.

The simple solution is to follow the example of every other state in the Union, save
one, and allow ODE to know the identity of the student behind those numbers. We
are one of only two states that hamstring our Department of Education like this. It
will increase the accuracy of our data, prevent funding errors and make sure that
children dont fall through the cracks.
The cry of privacy is misplaced. The Department of Taxation knows all about our
finances, even our social security numbers. The Department of Jobs and Family
Services knows who gets child care subsidies and food stamps. The Department of
Health protects the identity of tens of thousands of AIDS tests.
You want government to run like a business? What business could run without
knowing the identity of its customers? Put privacy protections in place. Enforce
them with criminal penalties. But for the love of God, give these people the basic
tools they need to do their jobs!
Finance: Facilities
I support the Governors initiative to make some dollars available for community
schools to acquire facilities. It wont be enough, though.
Currently, because of short investment horizons, facilities are often funded by frontloaded leases that use a high proportion of revenue in early years to retire the debt
over a short amortization. Then, if the school fails, the realty company, often
controlled by the management company, owns the building.
It is worth recognizing the interest the state has in that building but for the state
funding, the building would not have been acquired. Education of our children
ought not be a back-door means to acquire real estate. You may wish to consider
enacting a provision of law that would operate to place a lien on a community school
building representing the proportional risk actually assumed by the State an
interest that could be released at a certain milestone of time or money. That way, a
successful school gains the proper fruits of its work, but a school that fails early does
not reap a windfall from a piece of property that was financed by a front-loaded
lease.
Finance: Reporting
Currently, community schools report their finances on an enterprise model. That
was an appropriate approach under the professional standards in place at the time
community schools began in Ohio.
However, the standards have evolved since then. Under current professional
guidance, community schools ought to change their accounting and reporting model
to the government model. This is the same model traditional public schools must

use. I am asking the General Assembly to require community schools to use the
same accounting model that traditional public schools do. A phase-in period of a
year would be appropriate to allow necessary modifications.
It is important to understand that an accounting model is simply the way an entitys
finances are presented. A change in an accounting model does not require a change
in the business model its like writing an instruction manual in a different language.
The operation is the same.
This is valuable for several reasons. But among the most important, it allows for
more apt comparisons between educational sectors.
A more important change involves the 20 percent footnote. A common model for
financing community schools is that the community school board acts as little more
than a pass-through for state money to get to the management company, which then
hires the teachers, buys the books, etc.
In this model, virtually all the money is spent by a private company and is out of
sight of the public. Ohios only window into this activity is a narrow footnote
prepared by the management company, audited by its CPA firm, and given to the
community school for inclusion in its financial statements.
My staff is distributing a handout to you that shows what the information in this
footnote looks like. We are proposing that the information in this footnote be
expanded to include the level of information currently reported under USAS by
traditional public schools. You are also receiving a handout that would show this
expanded information.
This compromise protects the agility, privacy and trade secrets of a private company
while still providing substantially more information about how public money is
spent.
Governance
When everyone is responsible, no one is responsible. Ohios fragmented system of
oversight -- spread among ODE, governing boards and sponsors is further
complicated by other players who have duties delegated by contract, including
management companies and sponsor contractors who serve as de facto authorizers.
In particular, ODEs role should be explicit. Is it a sponsor, a coach, a regulator, a
funder, a licenser? In part, ODEs muddled role in community schools is a byproduct of its muddled role in education in general.
At a minimum, ODE should not act as a sponsor. Under HB 555, ODE is to evaluate
the effectiveness of sponsors how can it evaluate itself?

I would like to offer a few observations related to governance:

I support the new conflict of interest rules and contracting limitations

contained in HB2. In addition, the General Assembly should consider phasing
out the authority of a local school district to sponsor its own conversion
school. A sponsors duty is to oversee, and if necessary, to close a school.
Where a local school district is sharing services with its conversion school
and therefore shifting a portion of its fixed operation costs to the conversion
school it has a financial incentive not to take quick action to close a problem
conversion school. I am not aware of any instance where this has happened;
I am merely pointing out the existence of the conflict of interest.
Currently, ODE has a new responsibility under HB 555 to rank sponsors.
However, the statute gives little guidance to ODE on how to accomplish it.
The General Assembly should give thought to establishing its objectives and
set out the goals it hopes the rankings will encourage. This is an important
step in sharpening the role of the sponsors. ODE also needs statutory
authority to require sponsors to provide the information the Department will
need for the rankings.
The General Assembly should consider creating incentives for highperforming sponsors. These incentives could include halving the frequency
of evaluations after consecutive top rankings; allowing some lines of business
to be available only to highly ranked sponsors; or creating financial penalties
or bonuses for those at the very top or bottom of the rankings. For example.
A school with 100 students could expect foundation money of about
$580,000, and the sponsors 3% fee would be $17,400. An additional onepercent for an exemplary sponsor would be $5800. Although there might
need to be a cap on such a bonus, the money involved is not an outrageous
sum for an organization we are asking to provide the primary oversight.

This is not an exhaustive list of necessary reforms. Many, of course are well outside
my offices expertise. I am here today, not as an expert that understands all things,
but as a student whose duties have provided a very close view of certain parts of a
complex and malfunctioning system.
With that in mind, I would be happy to answer any questions you may have.