> **UNITED STATES DEPARTMENT OF EDUCATION**

OFFICE OF INSPECTOR GENERAL

Audit Services

New York Audit Region

> September 25, 2007

# Control Number

### ED-OIG/A02H0001

Honorable Rafael Aragunde-Torres

Secretary

Puerto Rico Department of Education

P.O. Box 190759

San Juan, Puerto Rico 00919-0759

Dear Secretary Aragunde-Torres:

This **Final Audit Report**, entitled *Puerto Rico Department of
Education's Use of Charter Schools Program Funds*, presents the results
of our audit. Our objective was to determine whether the Puerto Rico
Department of Education (PRDE) (1) was authorized by State law to
establish charter schools and (2) used Charter Schools Program funds to
operate charter schools.

BACKGROUND

The Charter Schools Program (CSP) was authorized under Title X, Part C
of the Elementary and Secondary Education Act of 1965 (ESEA), as amended
by the Improving America's School Act (IASA) of 1994. The program was
amended in October 1998 by the Charter School Expansion Act of 1998, and
in January 2001 by the No Child Left Behind Act of 2001 (NCLB).

The CSP is intended to enhance parent and student choices among public
schools to assist in promoting comprehensive educational reform and give
more students the opportunity to learn to meet challenging standards.
Grants are for periods of not more than three years.

In 1995 and 1999, PRDE submitted CSP grant applications to the U.S.
Department of Education (Department). The Department awarded PRDE two
CSP grants, one in 1996 for \$4,337,950, and one in 1999 for
\$5,875,000. The IASA was the Federal law in effect at the time PRDE
submitted both CSP grant applications to the Department. Puerto Rico Law
18 of June 16, 1993[^1] was the State law in existence at that time. The
law was repealed by Law 149 of June 30, 1999.[^2]

AUDIT RESULTS

# PRDE was authorized by State law to establish charter schools under a CSP grant awarded in 1996. In addition, PRDE properly used these CSP grant funds to operate the authorized charter schools. However, PRDE improperly used \$5,015,367[^3] in CSP grant funds awarded in 1999 to operate unauthorized charter schools. 

In its comments to the draft report, PRDE did not concur with our
finding and recommendation 1.1. The comments are summarized after the
recommendations section of this report. The full text of PRDE's comments
on the draft report is included as an Attachment to the report.

# FINDING -- **PRDE Improperly Used** \$5,015,367 in Charter Schools Funds to Operate Unauthorized Charter Schools. 

##  {#section .Style1}

PRDE was not authorized by State law to operate charter schools under a
CSP grant awarded in 1999. On June 30, 1999, one month after PRDE
submitted its CSP grant application to the Department, Puerto Rico
repealed Law 18, the State law that had enabled PRDE to establish
charter schools. The new State law (Law 149) did not include certain
provisions required under the IASA to make PRDE eligible to participate
in the CSP. As a result, PRDE improperly used \$5,015,367 under the CSP
grant awarded in 1999. A high-level PRDE official agreed that Law 149
reduced significantly the level of autonomy that the community schools
had under Law 18 and made PRDE ineligible to receive CSP funds. The
official also stated that the PRDE administration in office at the time
the law changed did not recognize this and continued to draw down funds
to operate the charter schools.

Pursuant to § 10306(1)(A) of the IASA, charter schools must operate in
accordance with an enabling State statute and are exempt from
significant State or local rules that inhibit the flexible operation and
management of public schools. Puerto Rico Law 149 limits the flexible
operation and management of the community schools in Puerto Rico, as set
forth in Article 1.02 of the law, which states:

> This law does not foresee that each school be a separate universe,
> without connection with the others and outside the jurisdiction of the
> Department.[^4] On the contrary, all the schools are part of the
> Public Educational System of Puerto Rico; and are under the
> jurisdiction of the Secretary. . . .
>
> . . . \[No\] disposition of this Law reduces the authority that the
> Constitution grants the Secretary to direct the public education in
> Puerto Rico. Even when some of the administrative functions are
> transferred from the central level of the Department to the community
> schools, they should follow the normative order that the Secretary
> establishes for the Public Educational System.

In addition, according to § 10306(1)(B) of the IASA, a charter school is
to be created by a developer[^5] as a public school, or adapted by a
developer from an existing public school. Puerto Rico Law 149 does not
include a provision for having a developer create a community school, as
the Federal law requires. Rather, schools are conferred the community
school status through a constituent letter from the PRDE Secretary.

Finally, § 10301(a)(1) of the IASA promotes enhancement of parent and
student choices among public schools. Puerto Rico Law 149 provides that
almost all schools qualify as community schools. Providing for almost
all public schools to become community schools was also inconsistent
with the intent of the IASA.

The improper use of unauthorized Charter Schools grant funds adversely
affected the funding of other eligible Charter Schools programs.

# Recommendations 

We recommend that the Assistant Deputy Secretary for the Office of
Innovation and Improvement require PRDE to:

1.  Return to the Department \$5,015,367 in CSP funds it was not
    authorized to receive;

2.  Ensure that it continuously monitors changes in State and Federal
    laws to determine their effect on PRDE and its authority to receive
    Federal funds.

**PRDE Comments**

PRDE disagreed with our finding and recommendation 1.1. PRDE recognized
that it is our position that a change in Puerto Rico law, specifically
the repeal of Law 18 and the enactment of Law 149, invalidated PRDE's
eligibility to participate in the CSP. However, PRDE disagreed with that
interpretation and stated that it was further investigating the
relationship between Puerto Rico Law 149 and the CSP program. PRDE
alleged that the Department reviewed and approved the CSP applications
PRDE submitted in 1995 and 1999, and that PRDE implemented the CSP
program consistent with those approved applications.

**OIG Reply**

We considered PRDE's response, but did not change our finding and
recommendation 1.1. We maintain our position that PRDE was not
authorized by Law 149 to operate charter schools under the CSP grant
awarded in 1999. As a result, PRDE must return to the Department
\$5,015,367 in CSP funds it was not authorized to receive.

OBJECTIVE, SCOPE, AND METHODOLOGY

The objective of our audit was to determine whether PRDE (1) was
authorized by State law to establish charter schools and (2) used
Charter Schools Program funds to operate charter schools.

To accomplish the audit objective, we reviewed Puerto Rico Law 18 of
June 16, 1993, and Puerto Rico Law 149 of June 30, 1999. We also
reviewed the IASA, the Charter School Expansion Act of 1998, and the CSP
provisions included in the NCLB. In addition, we reviewed the
applications for CSP grants and the annual reports of the operations and
activities of the charter schools PRDE submitted to the Department. We
also reviewed the expenditures associated with both grants and the
amount of CSP funds PRDE drew down under the 1996 and 1999 CSP grants,
as reflected in the Department's Grant Administration and Payment System
(GAPS).

To review the expenditures associated with the 1996 and 1999 grants, we
relied on computer-processed data obtained from PRDE. The data consisted
of excel spreadsheets containing the expenses associated with each
grant, detailed by account. To assess the reliability of the data, we
compared the expenditure data obtained from PRDE, with the expenditure
data that appeared in GAPS. Based on the comparison, we concluded that
the computer-processed data were sufficiently reliable for the purpose
of our audit. We did not review source documents; specifically, we did
not review invoices and cancelled checks.

We performed our fieldwork at PRDE, from October 18, 2006, through
February 22, 2007, the date of our exit conference.

We conducted the audit in accordance with generally accepted government
auditing standards appropriate to the limited scope of the audit
described above.

ADMINISTRATIVE MATTERS

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report, represent the opinions
of the Office of Inspector General. Determinations of corrective action
to be taken will be made by the appropriate Department of Education
officials.

If you have any additional comments or information that you believe may
have a bearing on the resolution of this audit, you should send them
directly to the following Education Department official, who will
consider them before taking final Departmental action on this audit:

> Morgan Brown

Assistant Deputy Secretary/Office of Innovation and Improvement

U.S. Department of Education

400 Maryland Avenue, SW

Washington, DC 20202

It is the policy of the U. S. Department of Education to expedite the
resolution of audits by initiating timely action on the findings and
recommendations contained therein. Therefore, receipt of your comments
within 30 days would be appreciated.

In accordance with the Freedom of Information Act (5 U.S.C. §552),
reports issued by the Office of Inspector General are available to
members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

Sincerely,

/s/

Daniel P. Schultz

Regional Inspector General for Audit

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[^1]: Law 18 was known as the "Community Schools Development Act."

[^2]: Law 149 was known as the "Organic Law of the Puerto Rico Public
    Department of Education." The law was created to establish Puerto
    Rico's public policy for education.

[^3]: This was the amount of Charter Schools Program funds PRDE drew
    down.

[^4]: The "Department" refers to PRDE.

[^5]: The IASA defines "developer" as an individual or group of
    individuals (including a public or private nonprofit organization),
    which may include teachers, administrators and other school staff,
    parents, or other members of the local community in which a charter
    school project will be carried out.