**Charter Schools' Access to Title I and IDEA, Part B Funds**

**in the State of Arizona**

# 

**FINAL AUDIT REPORT**

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height="2.911111111111111in"}

**ED-OIG/A09-D0033**

**August 2004**

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Our mission is to promote the efficiency, U.S. Department of Education

effectiveness, and integrity of the Office of Inspector General

Department's programs and operations Sacramento, California

[Notice]{.underline}

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.

In accordance with 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
under the Act.

###  {#section-1 .unnumbered}

###  {#section-2 .unnumbered}

### August 24, 2004 {#august-24-2004 .unnumbered}

#### Tom Horne

Superintendent of Public Instruction

Arizona Department of Education

1535 West Jefferson Street

Phoenix, Arizona 85007

Dear Superintendent Horne:

Enclosed is our final audit report, Control Number ED-OIG/A09-D0033,
entitled *Charter Schools' Access to Title I and IDEA, Part B Funds in
the State of Arizona*. This report incorporates the comments you
provided in response to the draft report. 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 officials, who will consider them before taking
final Departmental action on this audit---

Troy R. Justesen, Ed.D.

Acting Deputy Assistant Secretary

Office of Special Education and Rehabilitative Services

Nina Rees

Deputy Under Secretary

Office of Innovation and Improvement

Raymond J. Simon

Assistant Secretary

Office of Elementary and Secondary Education

Their mailing address is: U.S. Department of Education, 400 Maryland
Avenue, S.W., Washington, DC 20202-7100. 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/

##  GLORIA PILOTTI

> Regional Inspector General for Audit

Enclosure

electronic cc: Vicki Salazar, Associate Superintendent of Finance, ADE

Margaret Garcia-Dugan, Associate Superintendent of Academic Achievement,
ADE

Lillie Sly, Associate Superintendent of Educational Services and
Resources, ADE

+-----------------------------------------------------------------------+
| ## TABLE OF CONTENTS                                                  |
+-----------------------------------------------------------------------+

####### 

####### Page

[**EXECUTIVE SUMMARY 1**](#executive-summary)

[**BACKGROUND 3**](#background)

[**AUDIT RESULTS 4**](#audit-results)

> [**FINDING NO. 1 -- ADE Should Enhance Information Provided to
> Charter\
> School LEAs About the ESEA § 5206 Requirements for\
> New or Expanding Charter School LEAs
> 4**](#finding-no.-1-ade-should-enhance-information-provided-to-charter-school-leas-about-the-esea-5206-requirements-for-new-or-expanding-charter-school-leas)

[**Recommendation 9**](#recommendation)

[**ADE Comments 9**](#ade-comments)

[**OIG Response 9**](#oig-response)

> [**FINDING NO. 2 -- ADE Needs to Allocate the Proportionate Amount of\
> IDEA, Part B Funds to New Charter School LEAs
> 10**](#finding-no.-2-ade-needs-to-allocate-the-proportionate-amount-of-idea-part-b-funds-to-new-charter-school-leas)

[**Recommendations 12**](#recommendations)

[**ADE Comments 12**](#ade-comments-1)

[**OIG Response 12**](#oig-response-1)

> [**FINDING NO. 3 -- ADE Needs to Strengthen Procedures to Ensure That\
> Charter School LEAs Receive Timely Access to Title I\
> and IDEA, Part B Funds
> 13**](#finding-no.-3-ade-needs-to-strengthen-procedures-to-ensure-that-charter-school-leas-receive-timely-access-to-title-i-and-idea-part-b-funds)

[**Recommendation 16**](#recommendation-1)

[**ADE Comments 16**](#ade-comments-2)

[**OIG Response 16**](#oig-response-2)

[**OTHER MATTERS 17**](#other-matters)

[**OBJECTIVES, SCOPE, AND METHODOLOGY
19**](#objectives-scope-and-methodology)

[**STATEMENT ON MANAGEMENT CONTROLS
22**](#statement-on-management-controls)

[**ATTACHMENT 1 -- ADE COMMENTS ON THE DRAFT REPORT
23**](#ade-comments-on-the-draft-report)

+-----------------------------------------------------------------------+
| ## EXECUTIVE SUMMARY                                                  |
+-----------------------------------------------------------------------+

The Arizona Department of Education (ADE) had systems in place to
allocate Elementary and Secondary Education Act of 1965 (ESEA), Title I,
Part A (Title I) and Individuals with Disabilities Education Act (IDEA),
Part B funds to eligible charter school LEAs, including new or expanding
charter school LEAs.[^1] However, we found that---

-   ADE did not provide sufficient information to charter school LEAs on
    the requirement to provide written notification of their opening or
    expansion dates within 120 days and the definition of "significant
    expansion of enrollment."

-   ADE under allocated IDEA, Part B funds to three new charter school
    LEAs because ADE improperly applied the statutory funding formula.

-   ADE did not have adequate procedures to ensure new or expanding
    charter school LEAs, including those LEAs that were on
    nontraditional calendars, had timely access to their Title I and
    IDEA, Part B funds.

We recommend that the Assistant Secretary for Special Education and
Rehabilitative Services (OSERS), in collaboration with the Assistant
Secretary for Elementary and Secondary Education (OESE) and the Deputy
Under Secretary for Innovation and Improvement (OII), require ADE to
provide information to charter school LEAs on the notification
requirements for a charter school LEA that is new or has significantly
expanded enrollment. We further recommend that OSERS require ADE to
determine the amount of IDEA, Part B funds that were under allocated to
new charter school LEAs and provide that amount to them; and to correct
its procedures to ensure that new charter school LEAs receive their full
allocations. We also recommend that OSERS, in collaboration with OESE,
require ADE to modify its procedures to ensure new or expanding charter
school LEAs receive timely access to their Title I and IDEA, Part B
funds.

The OTHERS MATTERS section of the report provides information on ADE's
procedures for allocating IDEA, Part B funds to existing charter school
LEAs. We found that ADE's application of the IDEA funding formula did
not include a base payment in the Part B allocations to 136 existing
charter schools LEAs. In their first year of operation, these charter
school LEAs did not submit data identifying enrolled students with
disabilities. OSERS has not issued guidance that specifically addresses
how the requirements for allocating Part B funds to LEAs apply to this
situation. The OTHER MATTERS section also provides information related
to a prior OIG report that concluded ADE violated Federal laws by
providing Title I and IDEA,\
Part B funds directly to private, for-profit charter school LEAs, which
received \$1,129,006 during the period October 1, 2000, through
September 30, 2001. We found that ADE allocated \$1,218,892 in Title I
and IDEA, Part B funds to private, for-profit charter school LEAs for
school year 2001-2002.

In its comments on the draft report, ADE concurred with the findings,
but did not fully address the recommendations. ADE's comments on the
draft report are summarized at the end of each finding and included in
their entirety as ATTACHMENT 1.

+-----------------------------------------------------------------------+
| ## BACKGROUND                                                         |
+-----------------------------------------------------------------------+

The ESEA, Title I, Part A provides financial assistance to improve the
teaching and learning of low-achieving children in high-poverty schools.
The IDEA, Part B § 611 provides grants to states for special education
and related services for children with disabilities. Section 5206 of the
ESEA, as amended by the No Child Left Behind Act of 2001 (NCLB),
requires the Department and states to take measures to ensure every
charter school receives the Federal formula funds, including Title I and
IDEA, Part B funds, for which it is eligible no later than five months
after the school first opens or expands enrollment.[^2]

The Arizona State Legislature enacted the State charter school law in
1994. The State law provides that the Arizona State Board of Education,
the Arizona State Board for Charter Schools, or a local school district
can authorize a charter school.[^3] (For purposes of this report, we use
"State authorizer" to mean either Board.) Under State statute, a charter
school can be structured as a nonprofit or for-profit entity, and can
operate one or more charter schools. In addition, the charter school
that holds the charter (charter holder) must have a governing board,
which is similar to a school district governing board and is statutorily
authorized to make policy decisions for the charter school. Under this
requirement, a charter holder that operates multiple charter schools
would have one governing board.

For purposes of the ESEA and IDEA, ADE considers the charter holder to
be an LEA (charter school LEA) and allocates Title I and IDEA, Part B
funds to the charter school LEA rather than to individual charter school
sites.[^4] Like school district LEAs, charter school LEAs are
responsible for improving their students' achievement under Title I, and
for providing a free, appropriate public education for their enrolled
students with disabilities under the IDEA.

In school year 2003-2004, a total of 362 charter school LEAs were
operating a total of\
495 charter school sites. Over 90 percent of the charters were
authorized by a State authorizer. A total of 43 new charter school LEAs
were operating in school year 2001-2002.[^5] For that school year, ADE
allocated a total of about \$132 million in Title I funds to 507 LEAs,
including about \$6 million to 206 charter school LEAs. ADE also
allocated about \$85 million in IDEA, Part B funds to 501 LEAs,
including about \$3 million to 266 charter school LEAs.

+-----------------------------------------------------------------------+
| ## AUDIT RESULTS                                                      |
+-----------------------------------------------------------------------+

The purpose of the audit was to examine charter schools' access to
Federal funds in the State of Arizona. Specifically, we determined
whether ADE (1) provided new or expanding charter school LEAs with
timely and meaningful information about the Title I and IDEA, Part B
funding for which these LEAs might have been eligible, and (2) had
management controls that ensured charter school LEAs, including new or
expanding charter school LEAs, were allocated the proportionate amount
of Title I and IDEA, Part B funds for which these LEAs were eligible.
Our review covered school year 2001-2002.

We concluded that ADE should enhance information provided to charter
school LEAs about the ESEA § 5206 requirements for new or expanding
charter school LEAs; allocate the proportionate amount of IDEA, Part B
funds to new charter school LEAs; and strengthen procedures to ensure
that new or expanding charter school LEAs receive timely access to their
Title I and IDEA, Part B funds. We concluded that ADE had appropriate
procedures for allocating a proportionate share of Title I funds to
charter school LEAs, including new or expanding LEAs. However, we were
unable to verify the data used in calculating allocation amounts for new
charter school LEAs. The OBJECTIVES, SCOPE, AND METHODOGY section of the
report further explains the limitation on our review.

+-----------------------------------------------------------------------+
| ## FINDING NO. 1 --                                                   |
| ADE Should Enhance Information Provided to Charter School LEAs About  |
| the ESEA § 5206 Requirements for New or Expanding Charter School LEAs |
+-----------------------------------------------------------------------+

ADE provided information to new and existing charter school LEAs about
accessing Title I and IDEA, Part B funds. However, ADE needs to provide
additional information to charter school LEAs on (1) the requirement
that they provide written notification of their opening and expansion
dates, and (2) the definition of "significant expansion of enrollment."
While Federal statute and regulations place the responsibility on
charter school LEAs to provide written notice of the date they are
scheduled to open or significantly expand enrollment, most of the 21
charter school LEA administrators we interviewed were unaware of ADE's
notification requirements.

**New or Expanding Charter School LEAs Must Provide Written Notice to
Trigger ESEA § 5206 Requirements**

To trigger the ESEA § 5206 requirements, a new or expanding charter
school LEA must provide written notification of its opening or expansion
date. The implementing regulations at\
34 C.F.R. Part 76 address the requirement for written notice, the
definition of "significant expansion of enrollment," and the requirement
for the State educational agency (SEA), after receiving a notice, to
provide timely and meaningful information about Federal programs. The
regulations state---

> At least 120 days before the date a charter school LEA is scheduled to
> open or significantly expand its enrollment, the charter school LEA or
> its authorized public chartering agency must provide its SEA with
> written notification of that date.
>
> 34 C.F.R. § 76.788(a)
>
> *Significant expansion of enrollment* means a substantial increase in
> the number of students attending a charter school due to a significant
> event that is unlikely to occur on a regular basis, such as the
> addition of one or more grades or educational programs in major
> curriculum areas. The term also includes any other expansion of
> enrollment that the SEA determines to be significant.
>
> 34 C.F.R. § 76.787
>
> Upon receiving notice . . . of the date a charter school LEA is
> scheduled to open or significantly expand its enrollment, an SEA must
> provide the charter school LEA with timely and meaningful information
> about each covered program in which the charter school LEA may be
> eligible to participate . . . .
>
> 34 C.F.R. § 76.789(a)

The Department provided nonregulatory guidance entitled, *How Does a
State or Local Educational Agency Allocate Funds to Charter Schools that
Are Opening for the First Time or Significantly Expanding their
Enrollment?*, issued December 2000. In that guidance, the Department
defined "meaningful information" to include the steps a charter school
needs to take to access Federal funds.

> A State or LEA provides . . . meaningful information to a charter
> school when it provides the charter school with the information the
> charter school reasonably needs to know to make an informed decision
> about whether to apply to participate in a particular covered program
> and the steps the charter school needs to take to do so.

While the regulation at 34 C.F.R. § 76.789(a) does not require the SEA
to provide information until a new or expanding charter school has
provided notice, the nonregulatory guidance above addresses the need for
the charter school to be able to make an informed decision about
participating in a covered Federal program. We found, however, that a
charter school cannot make such a decision without first receiving
information on how and when to provide notice of its opening or
expansion, and how to recognize that expansion has occurred.

ADE Did Not Provide Sufficient

Information to Charter School LEAs

ADE did not provide sufficient information or guidance to charter school
LEAs on written notices of their opening or expansion, or on the
definition of "significant expansion of enrollment,"[^6] for purposes of
allocating Title I and IDEA, Part B funds to charter school LEAs.

According to ADE Title I and special education program administrators,
several resources were available for charter school LEAs to obtain
information and assistance on ADE notification requirements, the
definition of expansion, and other steps for accessing Title I and IDEA,
Part B funds for school year 2001-2002. These resources included an ADE
charter school liaison (whose position no longer existed at the time of
our review); the individual ADE program offices; training provided at
ADE-sponsored and charter school association conferences and workshops;
and the websites of ADE, charter authorizers, and a charter school
association. Our review of the ADE and Arizona State Board for Charter
Schools websites found information of only a general nature and no
information on ADE notification requirements, the definition of
expansion, or the specific steps a new or expanding charter school LEA
needed to take to access Title I or IDEA, Part B funding. Our
conclusions regarding the information provided by the program offices
and training provided at conferences and workshops are presented in the
following paragraphs.

The ADE Title I and special education program offices each had their own
processes for charter school LEAs to provide notice of their opening or
expansion.

-   [Title I Program Relied on Informal Process]{.underline}. The Title
    I program relied on an informal process for new charter schools to
    provide notice of their opening, and for existing charter school
    LEAs to recognize that they had significantly expanded and provide
    notice of their expansions. Additionally, the program office did not
    regularly disseminate information to all charter school LEAs on this
    process. ADE Title I program administrators described the charter
    school LEA notification and Title I program information
    dissemination processes to include the following activities.

# 

-   Once the Title I program received notice from a new or expanding
    charter school LEA by telephone, electronic mail, or any other
    written form, the program would send guidance to the charter school
    LEA on data submission requirements and the information needed to
    apply for ESEA-related funds, such as Title I.

-   The Title I program disseminated information on how new or expanding
    charter schools may access Title I funds during sessions on
    Administration and Finance at the various ADE-sponsored and charter
    school association conferences. These conference sessions included
    information on the ESEA § 5206 requirements, including specific
    program notification procedures and the Federal definition of
    expansion.

-   The Title I program provided annual funding notices and instructions
    to all existing LEAs, including charter school LEAs, on the
    consolidated application process for ESEA-related program funds.

> We reviewed the available documents on accessing Title I funds and
> found no information or written procedures on the ADE requirement for
> a new or expanding charter school LEA to notify the program office or
> the definition of expansion. Moreover, attendance at the conferences
> or sessions on Administration and Finance was not mandatory and the
> Title I program had no assurance that charter school LEAs received the
> presented information.

-   [Special Education Program Had Formal Process]{.underline}. The
    special education program had a formal method for disseminating
    information to all charter school LEAs, which provided them the
    means for providing notice of their opening or expansion. However,
    we found that the information provided in an annual memorandum to
    charter school LEAs should be enhanced.

> The special education program annually distributed a Charter School
> Information memorandum to all existing, new, and prospective charter
> school LEAs to provide information to newly opening and significantly
> expanding charter school LEAs on data submission requirements and the
> basis for IDEA funding determinations. A new or existing charter
> school LEA should provide notice of its opening or expansion by
> responding to this memorandum and providing the requested data. The
> memorandum did not include the definition of expansion.
>
> Although not an ADE condition for receipt of IDEA funding, the special
> education program also required all new and prospective charter school
> LEAs to attend ADE training on preparing to deliver special education
> services prior to their opening. This training included information on
> the ESEA § 5206 requirements. However, not all charter school LEAs
> attended the training. Representatives from 4 of the 21 charter school
> LEAs we interviewed told us that no one from their LEAs attended the
> training for various reasons. One new charter school LEA was unaware
> of the training; the training was not offered when one charter school
> LEA opened in 1995; one charter school LEA had no special education
> students enrolled; and one charter school LEA received
> program-specific training from its District authorizer. Additionally,
> one charter school LEA administrator told us that the training focused
> more on special education reporting and processing requirements than
> on accessing funding.
>
> Because some charter school LEAs may not have received the ADE
> program-specific training or had received the training several years
> earlier, the special education program should include the definition
> of "significant expansion of enrollment" in its annual Charter School
> Information memorandum. Such a reminder will help charter school LEAs
> decide whether an expansion warranted a response to the memorandum.

While the Title I process was less formal than the special education
process, neither ADE program office provided annual information to
charter school LEAs on the ADE requirements for written notice at least
120 days prior to their opening or expansion, or the definition of
expansion.

**Charter School LEAs Did Not Adhere to ADE Notification Procedures**

ADE administrators from both programs informed us that no charter school
LEAs had provided notice of an expansion for school year 2001-2002. We
found that charter school LEAs, that appeared to meet the Federal
definition of expansion, did not provide appropriate notice to ADE, and,
as a result, did not have access to additional Title I or IDEA, Part B
funds for which they might have been eligible for school year 2001-2002.

Our interviews with 21 charter school LEAs found that new or expanding
charter school LEAs were unfamiliar with the program offices' procedures
and did not adhere to them. For school year 2001-2002, representatives
from six charter school LEAs told us that their LEAs had met the Federal
definition of expansion. None of the six expanding charter school LEAs
provided notice of their expansion to the Title I or special education
program office. Instead, the six LEAs reported notifying their State
charter authorizer, an ADE unit other than the program offices, or both.
These charter school LEAs were under the impression that they had
provided sufficient notice of their opening or expansion.

Based on our charter school LEA interviews, the following three examples
illustrate the variations in charter school LEA expansions, notification
methods, and lack of familiarity with the definition of expansion.

-   One charter school LEA expanded by adding two grades and increasing
    enrollment by\
    81 percent at its existing charter school site. The LEA provided
    notice through ADE's former charter schools office (a part of ADE's
    Grants Management Unit), which required the LEA to submit
    authorizer-approved forms when the charter was amended for the
    expansion.

-   One charter school LEA expanded by adding a grade and increasing
    enrollment by\
    57 percent at its existing site. The LEA did not notify ADE of this
    expansion because the LEA assumed that the State authorizer's
    approval of the expansion provided sufficient notice to the
    applicable ADE program offices.

-   One charter school LEA expanded one of its two charter school sites
    by adding a grade and increasing enrollment by 47 percent. The LEA
    representative told us that notice of the expansion was not required
    because the expansion was anticipated in the charter.

The ADE Associate Superintendent for Financial Services and an Education
Program Specialist at the Arizona State Board for Charter Schools told
us that neither the ADE Grants Management unit nor the State authorizer
provided notice to the Title I or special education program office when
charter school LEAs were new or expanding. From our interviews with nine
new charter school LEAs, we found that most of these LEAs also were not
aware of the ADE program notification procedures. However, the two
program offices somehow received notice because these new charter school
LEAs received the program memoranda on data submission requirements and,
if data were submitted, the LEAs also received Title I funds, IDEA
funds, or both.

From ADE's perspective, no charter school LEA had expanded in school
year 2001-2002, since the two program offices had not received any
notices of expansion in accordance with their individual program
procedures. Thus, ADE appropriately did not allocate additional Title I
and IDEA, Part B funds to expanding charter school LEAs that did not
provide proper notice to the respective program offices. However, from
our charter school LEA interviews, we found that charter school LEAs
were not aware of the notification procedures and, thus, could not
comply with them. They had mistakenly assumed that a central State
contact, such as the Grants Management unit or State authorizer,
coordinated notification to each program office. Additionally, new
charter school LEAs were also unaware of the notification procedures,
although ADE somehow became aware of these LEAs.

To better ensure that new or expanding charter schools are provided
access to the Title I and IDEA, Part B funds for which they are
eligible, ADE needs to provide more meaningful information to all
charter school LEAs. A new or expanding charter school LEA needs
sufficient information to know to what entity(s) and by what method(s)
notice should be provided, as well as when its expansion is considered
significant.

#### **Recommendation**

1.  The Assistant Secretary for Special Education and Rehabilitative
    Services, in collaboration with the Assistant Secretary for
    Elementary and Secondary Education and the Deputy Under Secretary
    for Innovation and Improvement, should require ADE to establish or
    modify its written procedures for notifying ADE that a charter
    school LEA is new or has significantly expanded enrollment. The
    procedures should include annual guidance to all charter school LEAs
    on the manner in which notification requirements will be satisfied
    and the definition of "significant expansion of enrollment."

#### **ADE Comments**

ADE concurred with the finding and stated that it has complied with the
recommendation. ADE stated that a new agency publication has been
developed to provide guidance on the NCLB and the Charter School
Expansion Act. The publication is being provided to all charter holders
in Arizona and will be provided to all new charter holders as they come
into existence. The guidance will include reference to IDEA, Part B
funding for charter schools. ADE stated that the definition of
"significant expansion of enrollment" will be provided in the
Exceptional Student Services (the unit responsible for administering the
special education program) section's annual memorandum.

#### **OIG Response**

While providing the new publication to all existing and new charter
school LEAs is a good start, ADE needs to ensure the guidance also
informs charter school LEAs about the manner in which notification
requirements are to be satisfied for the Title I, IDEA, or other Federal
programs covered by the ESEA § 5206. Additionally, charter school LEAs
should receive written guidance on the ADE notification requirements, as
well as the definition of expansion, on an annual basis. A reference to
the new publication could suffice in the programs' annual funding
notices, such as the Title I program's notice and instructions to
existing LEAs, including charter school LEAs, on the consolidated
application process, and the Exceptional Student Services section's
annual memorandum to charter school LEAs.

+-----------------------------------------------------------------------+
| ## FINDING NO. 2 -- ADE Needs to Allocate the                         |
| Proportionate Amount of IDEA, Part B Funds to New Charter School LEAs |
+-----------------------------------------------------------------------+

Under the formula provided in the IDEA for distribution of Part B
funding, the State allocation to each eligible LEA, including charter
school LEAs, is the total of three amounts---the base payment,[^7] the
population payment, and the poverty payment. The implementing
regulations at 34 C.F.R. § 300.712(b) state---

> For each fiscal year for which funds are allocated to States . . .
> each State shall allocate funds under § 300.711 \[Subgrants to LEAs\]
> as follows:
>
> \(1\) *Base payments.* The State first shall award each agency . . .
> the amount that agency would have received . . . for the base year . .
> . if the State had distributed 75 percent of its grant for that year .
> . .
>
> \(2\) *Base payment adjustments.* For any fiscal year after the base
> year fiscal year---

\(i\) If a new LEA is created, the State shall divide the base
allocation . . . for the LEAs that would have been responsible for
serving children with disabilities now being served by the new LEA,
among the new LEA and affected LEAs based on the relative numbers of
children with disabilities . . .

> \(3\) *Allocation of remaining funds.* The State then shall---
>
> \(i\) Allocate 85 percent of any remaining funds to those agencies on
> the basis of the relative numbers of children enrolled in public and
> private elementary and secondary schools within each agency's
> jurisdiction; and
>
> \(ii\) Allocate 15 percent of those remaining funds to those agencies
> in accordance with their relative numbers of children living in
> poverty, as determined by the SEA.

We found that ADE had a system in place to apply the Part B funding
formula. However, ADE did not apply the formula correctly for the three
new charter school LEAs that received IDEA, Part B funds for school year
2001-2002.

ADE Did Not Allocate Population and Poverty Payments to New Charter
School LEAs That Received IDEA, Part B Funds

Federal regulations implementing § 5206 of the ESEA require states to
ensure that eligible new or expanding charter school LEAs that open or
expand on or before November 1 of an academic year receive a
proportionate amount of Federal funds, including Part B of the IDEA. A
State must base a new or expanding charter school LEA's allocation on
actual data. A State cannot deny funding to a new charter school LEA due
to the lack of prior-year data. The regulations state---

> For each eligible charter school LEA that opens or significantly
> expands its enrollment on or before November 1 of an academic year,
> the SEA must implement procedures that ensure that the charter school
> LEA receives the proportionate amount of funds for which the charter
> school LEA is eligible under each covered program.
>
> 34 C.F.R. § 76.792(a)
>
> . . . \[A\]n SEA must determine whether a charter school LEA is
> eligible to receive funds under a covered program based on actual
> enrollment or other eligibility data for the charter school LEA on or
> after the date the charter school LEA opens or significantly expands
> its enrollment.
>
> For the year the charter school LEA opens or significantly expands its
> enrollment, the eligibility determination may not be based on
> enrollment or eligibility data from a prior year, even if the SEA
> makes eligibility determinations for other LEAs under the program
> based on enrollment or eligibility data from a prior year.
>
> 34 C.F.R § 76.791(a) and (b)

For school year 2001-2002, ADE allocations of IDEA, Part B funds to
three new charter school LEAs were comprised of only the base
payment.[^8] The charter school LEAs did not receive the population and
poverty portions of the funding formula.

According to an ADE special education program director, ADE did not
collect or use actual enrollment and poverty data from new charter
school LEAs because it used prior-year data to determine the IDEA, Part
B allocations for all other LEAs, including existing charter school
LEAs. Under ADE's procedures, the new charter school LEAs would not
begin to receive the population payment and poverty payment portions of
the allocation until the second year of operation when prior-year data
became available.

ADE's denial of population and poverty payments to the three new charter
school LEAs in their first year of operation because of the lack of
prior-year data is contrary to the regulations at 34 C.F.R. § § 76.791
and 76.792(a). By providing only the base payments, ADE had under
allocated the IDEA, Part B allocations to the three new charter school
LEAs.[^9]

#### **Recommendations**

The Assistant Secretary for Special Education and Rehabilitative
Services should require ADE to---

1.  Determine the population and poverty portions of the IDEA, Part B
    funding formula that the three new charter school LEAs should have
    received for school year 2001-2002, and make those funds available
    to them.[^10] ADE should also ensure that new charter school LEAs
    that were similarly affected in subsequent years receive their
    population and poverty payments, as appropriate.

2.  Correct its procedures to ensure that new charter school LEAs that
    receive IDEA, Part B funds are provided their full allocations,
    including population and poverty payments based on actual data.

#### **ADE Comments** 

ADE agreed to ask charter schools for the actual population and poverty
data that should be used in calculating portions of new charter school
LEAs' IDEA, Part B allocations.

#### **OIG Response**

ADE's comments did not address Recommendation 2.1. ADE needs to provide
population and poverty payments to the three new charter school LEAs
that were adversely affected for school year 2001-2002, and any
similarly affected charter school LEAs that were new in school years
2002‑2003, 2003-2004, and, if applicable, later school years.

In the draft report, we had included a section in the finding disclosing
that ADE did not allocate base payments to the majority of existing
charter school LEAs that received IDEA, Part B funds in school year
2001-2002. Based on comments received on the draft report, we removed
the section from the finding and reported the information related to
this condition in the OTHER MATTERS section of the report.

+-----------------------------------------------------------------------+
| ## FIND                                                               |
| ING NO. 3 -- ADE Needs to Strengthen Procedures to Ensure That Charte |
| r School LEAs Receive Timely Access to Title I and IDEA, Part B Funds |
+-----------------------------------------------------------------------+

For school year 2001-2002, ADE awarded Title I funds to 29 new charter
school LEAs and IDEA, Part B funds to 3 new charter school LEAs. As we
noted in Finding No. 1, ADE's program offices did not identify any
expanding charter school LEAs in that school year.

Federal regulations implementing § 5206 of the ESEA prescribe the
timeframe in which states must provide eligible new or expanding charter
school LEAs with access to Federal funds. The regulations at 34 C.F.R. §
76.793(a) state---

> For each eligible charter school LEA that opens or significantly
> expands its enrollment on or before November 1 of an academic year,
> the SEA must allocate funds to the charter school LEA within five
> months of the date the charter school LEA opens or significantly
> expands its enrollment . . .

In the preamble to the 1999 final regulations, which implemented the
regulations at 34 C.F.R. § § 76.792(a) and 76.793(a), the Secretary
responded to a comment on the five-month timeframe, stating---

> \[W\]hen awarding subgrants under the covered programs, SEAs . . . are
> generally required only to ensure that the appropriate amount of grant
> funds are made available for draw down by the subgrant recipient---in
> this case, the charter school \[LEA\]. The subgrant recipient, in
> turn, draws down funds on an as needed basis.
>
> 64 FR 71970

ADE Did Not Have Adequate Procedures to Ensure New or Expanding Charter
School LEAs Had Timely Access to Title I and IDEA, Part B Funds

ADE had procedures for allocating Title I and IDEA, Part B funds to new
or expanding charter school LEAs. However, these procedures did not
ensure that such charter school LEAs received timely access to the
funds. For both the Title I and IDEA, Part B programs, ADE used actual
data to compute new charter school LEAs' allocations for school year
2001-2002. ADE Title I and special education program administrators told
us that, under their respective program procedures, a new charter school
LEA that submitted the requested data and completed its application in a
timely manner should have had access to their Title I and IDEA, Part B
funds by February 2002. As designed for a traditional year, funds
disbursed in February would have provided charter school LEAs access
within five months of a September 2001 opening. According to the program
administrators, the allocation procedures would have been the same for
expanding charter school LEAs. We found that these procedures did not
provide new or expanding charter school LEAs with access to the funds in
February, as illustrated in the table below.

ADE also did not modify its procedures to accommodate charter school
LEAs that opened or expanded before September. The ADE program
administrators told us that most public schools, including charter
school sites, began the school year in September. However, 11 of the 15
new or expanding charter school LEAs we interviewed reported July or
August opening or expansion dates. To receive Title I or IDEA, Part B
funds within five months of their opening or expansion, the 11 charter
school LEAs should have had access to their funds in December 2001 and
January 2002, respectively.

The following table outlines the dates for the two allocation processes
for school year\
2001-2002.

+------------------------------+-------------------+------------------+
| **Allocation Process         | **Title I Funds** | **IDEA, Part B   |
| Procedure**                  |                   | Funds**          |
+------------------------------+-------------------+------------------+
| a.  ADE sent data request to | October 2001      | September 2001   |
|     new charter school LEAs  |                   |                  |
+------------------------------+-------------------+------------------+
| b.  Data were due from new   | 30 days after     | Any time before  |
|     charter school LEAs      |                   | end of school    |
|                              | 40^th^ day of     | year ^a^         |
|                              | school            |                  |
+------------------------------+-------------------+------------------+
| c.  ADE informed new charter | January to June   | February 2002^b^ |
|     school LEAs of           | 2002              |                  |
|     allocation amounts       |                   |                  |
+------------------------------+-------------------+------------------+
| d.  Applications were due    | March to May 2002 | Any time before  |
|     from new charter school  |                   | end of school    |
|     LEAs                     |                   | year ^a^         |
+------------------------------+-------------------+------------------+
| e.  New charter school LEAs  | February to May   | December 2001 to |
|     submitted applications   | 2002              | February 2002    |
+------------------------------+-------------------+------------------+
| f.  ADE approved             | February to June  | February 2002    |
|     applications and         | 2002              | ^b^              |
|     disbursements            |                   |                  |
+------------------------------+-------------------+------------------+
| g.  New charter school LEAs  | April to June     | March 2002       |
|     had access to funds      | 2002              |                  |
+------------------------------+-------------------+------------------+
| ^a^ IDEA, Part B data and    |                   |                  |
| application submissions from |                   |                  |
| charter school LEAs were due |                   |                  |
| at the same time.            |                   |                  |
|                              |                   |                  |
| ^b^ ADE approved the         |                   |                  |
| applications and informed    |                   |                  |
| charter school LEAs of their |                   |                  |
| IDEA, Part B allocation      |                   |                  |
| amounts at about the same    |                   |                  |
| time.                        |                   |                  |
+------------------------------+-------------------+------------------+

As shown in the table (Procedure G), the earliest that any of the new
charter school LEAs could access their Title I funds was April 2002. Ten
of the 29 charter school LEAs could not access their Title I funds until
June 2002. The IDEA, Part B funds were available in March 2002. We found
that delays in providing charter school LEAs access to the Title I and
IDEA, Part B funds were partly due to some LEAs' untimely data
submissions and applications. However, we also found that the program
procedures did not provide adequate assurance that new or expanding
charter school LEAs could gain access to the funds within five months of
their opening or expansion.

-   [Title I Procedures Did Not Allow Timely Access]{.underline}. Under
    the Title I allocation procedures, ADE instructed new charter school
    LEAs to submit their application by March 2002 at the earliest
    (Procedure D in the table). The March due date was already more than
    five months after any opening date between July and September 2001.
    Since the procedures required the use of actual enrollment and
    poverty data to compute the allocations, for a charter school LEA
    that opened or expanded in September 2001, that data would become
    available in late October and due to ADE in November. As a result,
    according to Title I program administrators, the earliest that ADE
    could inform the new charter school LEAs of their allocations was in
    January 2002 (Procedure C in the table). Additionally, once the
    Title I program approved a disbursement in February, the charter
    school LEA did not have access to those funds until April
    (Procedures F and G in the table).

> The Title I program did not collect or maintain data on charter school
> LEAs' opening or expansion dates. Thus, ADE could not, and did not,
> monitor its compliance with the regulatory requirement to provide new
> or expanding charter schools access to Title I funds within five
> months of their opening or expansion.

-   [Special Education Procedures Could Have Allowed Timely
    Access]{.underline}. Under the IDEA, Part B allocation procedures,
    ADE did not require new or expanding charter school LEAs to submit
    required data or applications within a specified timeframe
    (Procedures B and D in the table) to ensure that the LEAs could
    access their funds within five months of their opening or expansion.
    Special education program administrators told us that charter school
    LEAs could complete their submissions any time during the school
    year and the LEAs would still receive the funds. Once the
    disbursements were approved in February, the new charter school LEAs
    received access to the funds in the following month (Procedures F
    and G in the table).

> The special education program annually requested new or expanding
> charter school LEAs to report their opening or expansion dates.
> However, ADE did not use this information to monitor its compliance
> with the requirement to provide new or expanding charter schools
> timely access to their IDEA, Part B funds.

In conclusion, ADE needs to ensure that new or expanding charter school
LEAs have timely access to the Title I and IDEA, Part B funds. The
allocation procedures should enable ADE to be aware of charter school
LEA opening and expansion dates, and to accommodate those new or
expanding charter school LEAs that are on non-traditional calendars. In
establishing procedural timeframes, the Title I and special education
programs should also factor in the time needed for other ADE units to
process and disburse the funds.

If ADE cannot sufficiently condense its current timeframes, it could use
an alternative approach provided by the regulations implementing § 5206
of the ESEA. Instead of basing the Title I or IDEA, Part B allocations
solely on actual data, the regulations at 34 C.F.R. § § 76.796(a) and
76.797(a) permit a state to initially allocate funds based on projected
data and to later adjust the allocation when actual data become
available. This approach could enable a state to more readily provide
new or expanding charter schools with timely access to the funds.

#### **Recommendation**

1.  The Assistant Secretary for Special Education and Rehabilitative
    Services, in collaboration with the Assistant Secretary for
    Elementary and Secondary Education, should require ADE to modify its
    procedures, as needed, to make certain that eligible new or
    expanding charter school LEAs receive access to their Title I and
    IDEA, Part B funds within five months of their opening or expansion
    dates, provided that the charter school LEAs have met ADE's
    requirements for written notice at least 120 days prior to their
    opening or expansion. The procedures should also ensure that
    eligible new or expanding charter school LEAs, which are not on a
    traditional calendar, receive timely access to the Title I and IDEA,
    Part B funds for which they are eligible.

#### **ADE Comments**

ADE concurred with this finding. ADE stated that it has had a standard
operating procedure for allocations, called the "Cycle II" process, for
notifying new charter schools of their ability to submit information
used to generate allocations and for developing funding information for
charter schools that might indicate a significant expansion. ADE advised
that its Academic Achievement Division (the unit responsible for
administering the Title I program) will revise the procedure to provide
immediate funding to new charter schools and charter schools that have
been determined to have significant expansion.

#### **OIG Response**

The corrective action described addresses the recommendation regarding
the Title I program. ADE did not comment on procedures to ensure that
new or expanding charter school LEAs receive timely access to IDEA, Part
B funds. During the exit briefing, ADE commented that charter school
LEAs bear the responsibility for submitting their applications timely in
order to receive funds timely. We agree that the charter school LEA
bears this responsibility. However, ADE should ensure that it informs
new or expanding charter school LEAs of the dates by which the necessary
data and applications must be submitted in order to receive funds within
five months of their opening or expansion.

+-----------------------------------------------------------------------+
| ## OTHER MATTERS                                                      |
+-----------------------------------------------------------------------+

**[IDEA, Part B Allocations to Existing Charter School
LEAs]{.underline}.** Of the 263 existing charter school LEAs that were
allocated IDEA, Part B funds for school year 2001-2002, we found that
ADE did not include a base payment for 136 existing charter school LEAs.
Instead, these charter school LEAs received allocations comprised of
only population and poverty payments.[^11] An ADE special education
program director told us that, in the first year the charter school LEAs
opened, they did not submit data identifying the students with
disabilities enrolled at the charter school LEAs or, for purposes of
making base payment adjustments, data identifying the students' school
district, charter school, or state of origin. These charter school LEAs
may have either failed to provide the requested data or had no students
with disabilities enrolled at that time. The\
136 charter school LEAs did not receive any IDEA, Part B allocations in
their first year of operation. In subsequent years, the ADE special
education program office became aware that students with disabilities
were enrolled at the 136 charter school LEAs when they reported special
education student data, as well as enrollment and poverty data, to ADE
through other reporting mechanisms. ADE used these data to calculate the
IDEA, Part B allocations, which were based only on the population and
poverty portions of the funding formula. In its comments, ADE stated its
position that the IDEA, Part B allocations for the 136 charter school
LEAs were calculated correctly.

The Department's Office of Special Education and Rehabilitative Services
has not issued guidance on whether a state is required to make a Part B
subgrant to a charter school LEA in its first year of operation that has
no students with disabilities enrolled at the time the subgrant is made,
or whether such an LEA is entitled to a base payment in the subsequent
years if it does enroll students with disabilities. Additionally,
neither § 611(g)(1) and (2) of the IDEA and its implementing regulations
at 34 C.F.R. § § 300.711 and 300.712, nor the regulations and
nonregulatory guidance implementing the ESEA § 5206, address this
situation.

**[Allocation of Title I and IDEA, Part B Funds to Private, For-Profit
Charter School LEAs]{.underline}.** The OIG audit report issued November
6, 2003, entitled *Audit of 20 Arizona Charter Schools\' Uses of U.S.
Department of Education Funds for the Period October 1, 2000, through\
September 30, 2001* (Control Number ED-OIG/A05-D0008), reported that ADE
violated Federal laws when it provided \$1,129,006 in Title I and IDEA,
Part B funds directly to private, for-profit charter school LEAs during
the period October 1, 2000, to September 30, 2001. Under Arizona State
law, charter school LEAs may be private or public entities. However,
under applicable Federal laws and regulations, only public entities may
receive Title I and IDEA funds. ADE's response, in which it disagreed
with the audit conclusion, was included in the report.

In the prior report, the OIG recommended that the Assistant Secretary
for Elementary and Secondary Education and the Assistant Secretary for
Special Education and Rehabilitative Services instruct ADE to determine
the total amount of Title I and IDEA funds that it provided to private,
for-profit charter school LEAs during the period October 1, 2001,
through June 30, 2003, and refund that amount to the U.S. Department of
Education. Our audit found that ADE had allocated the following amounts
to private, for-profit charter school LEAs for school year 2001-2002,
which would have been available for disbursement during the period
October 1, 2001, through September 30, 2002.

  --------------------- ----------------- -------------------------------
  **Program**           **Amount**        **Number of For-Profit Charter
                                          School LEAs That Were Allocated
                                          Federal Funds**

  Title I               \$ 789,695        22

  IDEA, Part B          429,197           34

  **Total**             **\$1,218,892**   
  --------------------- ----------------- -------------------------------

We encourage the Assistant Secretaries and ADE to consider these amounts
when resolving the recommendations in the prior audit report.

+-----------------------------------------------------------------------+
| ## OBJECTIVES, SCOPE, AND METHODOLOGY                                 |
+-----------------------------------------------------------------------+

Our audit objectives were to determine whether ADE (1) provided new or
expanding charter school LEAs with timely and meaningful information
about the ESEA Title I program and IDEA, Part B funding for which these
LEAs might have been eligible and (2) had management controls that
ensured charter school LEAs, including new or expanding LEAs, were
allocated the proportionate amount of Title I and IDEA, Part B funds for
which these LEAs were eligible. Our review covered the Title I and IDEA,
Part B allocations for school year 2001-2002.

To address these objectives, we interviewed ADE officials and staff
responsible for implementing the Title I and IDEA, Part B programs in
Arizona. We also interviewed ADE officials from the Grants Management
Unit and staff from the Arizona State Board for Charter Schools. We
evaluated the information that ADE provided to charter school LEAs about
accessing Title I and IDEA, Part B funds to determine whether the
information was timely and meaningful. In addition, we assessed ADE's
procedures to determine whether management controls ensured that charter
school LEAs received the proportionate amount of Title I and IDEA, Part
B funds for which these LEAs were eligible.

We interviewed administrators from a total of 21 charter school LEAs
about their experiences in accessing Title I and IDEA, Part B funds,
including the timeliness and meaningfulness of provided information.
From the universe of 214 non-profit charter school LEAs, we judgmentally
selected 21 charter school LEAs that met the criteria shown in the
following table.

+-------------------------------+-------------------+------------------+
| **Charter** **School LEA      |                   |                  |
| Sample Selection**            |                   |                  |
+-------------------------------+-------------------+------------------+
| **Selection Criteria**        | **Number of       |                  |
|                               | Charter School    |                  |
|                               | LEAs**            |                  |
+-------------------------------+-------------------+------------------+
|                               | **Met Selection   | **Selected for   |
|                               | Criteria^a^**     | Interview**      |
+-------------------------------+-------------------+------------------+
| **State-Authorized and        |                   |                  |
| Operating a Single Charter    |                   |                  |
| School Site (153)**           |                   |                  |
+-------------------------------+-------------------+------------------+
| New LEA -- Received both      | 2                 | 2                |
| Title I and IDEA, Part B      |                   |                  |
| funds                         |                   |                  |
+-------------------------------+-------------------+------------------+
| New LEA -- Received a Title I | 15                | 2 ^b^            |
| allocation, but not an IDEA,  |                   |                  |
| Part B allocation             |                   |                  |
+-------------------------------+-------------------+------------------+
| New LEA -- Did not receive a  | 14                | 2 ^b^            |
| Title I or IDEA, Part B       |                   |                  |
| allocation                    |                   |                  |
+-------------------------------+-------------------+------------------+
| Expanding LEA -- Increased    | 7                 | 2 ^b^            |
| grade span and enrollment by  |                   |                  |
| at least 30 percent           |                   |                  |
+-------------------------------+-------------------+------------------+
| **State-Authorized and        |                   |                  |
| Operating Multiple Charter    |                   |                  |
| School Sites (41)**           |                   |                  |
+-------------------------------+-------------------+------------------+
| New LEA -- Opened more than   | 2                 | 2                |
| one charter school site       |                   |                  |
+-------------------------------+-------------------+------------------+
| Expanding LEA -- Added at     | 5                 | 5                |
| least one new charter school  |                   |                  |
| site                          |                   |                  |
+-------------------------------+-------------------+------------------+
| Expanding LEA -- Increased    | 2                 | 2                |
| grade span and enrollment by  |                   |                  |
| at least 30 percent           |                   |                  |
+-------------------------------+-------------------+------------------+
| **District-Authorized (20)**  |                   |                  |
+-------------------------------+-------------------+------------------+
| Did not receive a Title I     | 4                 | 4                |
| allocation, IDEA, Part B      |                   |                  |
| allocation, or both           |                   |                  |
+-------------------------------+-------------------+------------------+
| > **Total (214)**             | **51**            | **21**           |
+-------------------------------+-------------------+------------------+
| ^a^ The number of charter     |                   |                  |
| school LEAs that met each     |                   |                  |
| selection criteria was based  |                   |                  |
| on available ADE data. During |                   |                  |
| the interviews with charter   |                   |                  |
| school LEA representatives,   |                   |                  |
| we determined the LEAs'       |                   |                  |
| actual status.                |                   |                  |
|                               |                   |                  |
| ^b^ We randomly selected the  |                   |                  |
| two charter school LEAs.      |                   |                  |
+-------------------------------+-------------------+------------------+

We assessed the reliability of computer-generated data at ADE and
concluded that the data were sufficiently reliable to use in meeting our
audit objective. Specifically, for school year\
2001-2002 allocations---

-   [Title I]{.underline}. We assessed the two databases that ADE used
    to determine eligibility and allocations for existing LEAs and newly
    created LEAs, respectively, both of which included charter school
    LEAs. We reviewed the formulas used in both databases. For the
    database that ADE used for newly created LEAs, we also verified the
    reporting and payment of allocations to new charter school LEAs.
    However, we were unable to verify that all data were entered in the
    database accurately because ADE staff had misplaced the source
    documents. For two new charter school LEAs, ADE staff had previously
    provided us with copies of source documents and we verified that the
    data were accurately entered in the database for the two LEAs.
    However, due to our limited testing, we have no assurance that the
    data for other new charter school LEAs were accurately entered in
    the database.

-   [IDEA, Part B]{.underline}. We assessed the database that ADE used
    to compute IDEA, Part B allocations for existing LEAs, including
    charter school LEAs, by reviewing the formulas. For new charter
    school LEAs, we assessed the reasonableness of the allocation
    amounts and verified the reporting and payment of the allocations to
    the charter school LEAs.

We performed our fieldwork at ADE offices in Phoenix, Arizona, from
September 2003 to\
May 2004. We held an exit briefing with ADE officials on May 11, 2004.
Our audit was performed in accordance with generally accepted government
auditing standards appropriate to the scope of the review described.

+-----------------------------------------------------------------------+
| ## STATEMENT ON MANAGEMENT CONTROLS                                   |
+-----------------------------------------------------------------------+

We assessed the system of management controls, policies, procedures, and
practices applicable to ADE's processes for allocating Title I and IDEA,
Part B funds to charter school LEAs. We performed our assessment to
determine whether the processes used by ADE provided a reasonable level
of assurance that charter school LEAs received needed information and
were allocated the proportionate amount of Title I and IDEA, Part B
funds for which these LEAs were eligible.

For the purpose of this report, we assessed and classified significant
controls into the following categories---

-   Dissemination of information

-   Allocation of Title I and IDEA, Part B funds

Because of inherent limitations, a study and evaluation made for the
limited purpose described above would not necessarily disclose all
material weaknesses in the management controls. However, we identified
ADE management control weaknesses that adversely affected charter school
LEAs' receipt of information and Federal funds. ADE's weaknesses
included the lack of information on the definition of "significant
expansion of enrollment" and written notice requirements; incorrect
procedures for allocating IDEA, Part B funds to new charter school LEAs;
and inadequate procedures to ensure timely access to Title I and IDEA,
Part B funds. These weaknesses and their effects are fully discussed in
the AUDIT RESULTS section of this report.

## 

## 

## 

## 

## 

## ATTACHMENT 1

## 

## 

## ADE COMMENTS ON THE DRAFT REPORT

![](media/image4.png){width="0.8in" height="0.7534722222222222in"}

State of Arizona

Department of Education

Tom Horne

Superintendent of

Public Instruction

July 6, 2004

Gloria Pilotti

Regional Inspector General for Audit

U.S. Department of Education

Office of the Inspector General

501 I Street, Suite 9-200

Sacramento, California 95814

Dear Inspector Pilotti:

This letter is in response to your draft audit report, Control Number
ED-OIG/A09-D0033, requesting comments to your recent audit of charter
schools' access to Title I and IDEA, Part B funds in the State of
Arizona.

FINDING NO. 1 - ADE Should Enhance Information Provided to Charter
School LEAs About the ESEA § 5206 Requirements for New or Expanding
Charter School LEAs

The Arizona Department of Education concurs with this finding.

The Arizona Department of Education has developed a new publication
called [Federal No Child Left Behind Act Information for Arizona Charter
Schools]{.underline}.

This publication, which provides specific guidance to Charter Schools
about the Charter School Expansion Act as Amended by the No Child Left
Behind Act of 2001, is being provided to all charter holders in Arizona
and will be provided to all new charter holders as they come into
existence. In addition to providing information about the Charter School
Expansion Act, the publication provides a phone number for charter
schools to call if they have questions concerning applicability.

In addition to providing a definition of "significant expansion of
enrollment" in the ESS annual memorandum, reference to IDEA, Part B
funding for Charter Schools will be added to the ADE's new publication,
[Federal No child Left Behind Act Information for Arizona Charter
Schools]{.underline}.

By providing the publication noted above the ADE has complied with
recommendation 1.1 of the audit report.

FINDING NO. 2 - ADE Needs to Allocate the Proportionate Amount of IDEA,
Part B Funds to Charter School LEAs

*\[[ED-OIG Note]{.underline}: The first three paragraphs of this section
relate to a condition that was moved to the OTHER MATTERS section of the
report.**\]*

The Arizona Department of Education/Exceptional Student Service section
(ADE/ESS) disagrees with this finding based upon a review of the "final
regulations", the Nonregulatory Guidance, 34 CFR Part 76, Subpart H,
[How does a State or local education agency allocate funds to Charter
Schools that are opening for the first time or significantly expanding
their enrollment]{.underline} and 34 CFR 300.712. The ADE/ESS section
was unable to find any requirement that would lead us to believe that we
incorrectly calculated the IDEA, Part B allocation amounts for 136
Charter School LEA's by omitting the base payment.

In accordance with the Nonregulatory Guidance document, question number
5, "the final regulations apply only to eligible Charter Schools that
open [for the first time or significantly expand their enrollment during
the academic year for which funds are allocated]{.underline}. [During
years in which an eligible Charter School is neither opening for the
first time nor significantly expanding its enrollment, the SEA is under
no obligation to follow the final regulations when allocating funds and
should provide funds to the Charter School on the same basis as it
provides funds to other eligible LEA's,]{.underline} 34CFR 76.786(c).
Questions 74 through 85 also provides information supporting our
position.

The final regulations give States "unfettered" discretion to determine
expansion of enrollment in a Charter School to be "significant" within
the meaning of the final regulations. [This authority does not extend to
LEA's]{.underline}. The expansion of a Charter School's special
education enrollment does not, by itself, justify a significant
expansion of enrollment.

Charter Schools will be asked for actual enrollment and poverty (low
income) numbers. The poverty numbers are based on family information not
just student information.

FINDING NO. 3 - ADE Needs to Strengthen Procedures to Ensure That
Charter School LEAs Receive Timely Access to Title I and IDEA, Part B
Funds

The Arizona Department of Education concurs with this finding.

The ADE has had in place as part of its standard operating procedure for
allocations a

process for notifying new charter schools of their ability to submit
information used to generate allocations. Additionally, this process
called "Cycle II" was used to develop funding information for Charter
schools that might indicate a significant expansion.

Recognizing that the audit finding is asking for a more aggressive
approach to funding "new charter" schools and the "significant
expansion" of existing schools, the ADE, Academic Achievement Division
is developing a revised procedure that calls for immediate funding of
new charter schools and charter schools that have been determined to
have significant expansion.

Once the procedure has been finalized it will be forwarded to the GAO
for review and comment.

If you have any questions, please call Vicki Salazar, Associate
Superintendent of Finance at (602) 364-0132.

Sincerely,

/s/

Tom Horne

Superintendent of Public Instruction

Arizona Department of Education

1535 West Jefferson Street

Phoenix, Arizona 85007

c: Vicki Salazar

Margaret Garcia-Dugan

Lillie Sly

[^1]: For purposes of this report, an "expanding" charter school LEA is
    one that has significantly expanded enrollment in accordance with
    the Federal definition at 34 C.F.R. § 76.787, which we describe in
    the AUDIT RESULTS section of this report. An "LEA" is a local
    educational agency. The term "charter school LEA" as used in this
    report means the charter school that holds the charter. The
    BACKGROUND section of the report provides additional information on
    the creation and responsibilities of charter school LEAs.

[^2]: The ESEA § 5206 was originally enacted by the Charter School
    Expansion Act of 1998.

[^3]: The two State Boards merged into the Arizona State Board for
    Charter Schools in school year\
    2003-2004.

[^4]: For purposes of this report, a "charter school LEA" is the charter
    school entity that holds the charter, and a "charter school site" is
    one that is operated by the charter school LEA.

[^5]: ADE Title I and special education program administrators told us
    that no charter school LEAs in Arizona have expanded, which we
    address in the AUDIT RESULTS section.

[^6]: According to ADE Title I and special education program
    administrators, ADE uses the definition of expansion specified in 34
    C.F.R. § 76.787, and has not further defined the term.

[^7]: Each LEA receives a base allocation consisting of the amount of
    IDEA, Part B funds that the LEA would have received in fiscal year
    1999 had the SEA distributed 75 percent of its funds to LEAs. This
    amount is based on the numbers of children with disabilities
    receiving special education and related services as of December 1,
    1998, or, at the State's discretion, the last Friday in October
    1998.

[^8]: To establish the base payments, ADE asked the new charter school
    LEAs to submit actual data identifying the enrolled students with
    disabilities and, for purposes of making base payment adjustments,
    their school district, charter school, or state of origin. ADE
    appropriately used these data to determine the base payments.

[^9]: We could not determine the amount of additional IDEA, Part B funds
    the three charter school LEAs should have received for their
    population and poverty payments because the ADE special education
    program office had not collected the necessary enrollment and
    poverty data.

[^10]: One of the three new charter school LEAs was a private,
    for-profit entity. The OTHER MATTERS section of the report presents
    information from a previous OIG report concerning the
    appropriateness of providing Title I and IDEA, Part B funds directly
    to private, for-profit entities.

[^11]: The IDEA funding formula for distributing Part B funds requires
    states to allocate to each eligible LEA, including charter school
    LEAs, the total of three amounts---a base payment, a population
    payment, and a poverty payment---as described in the AUDIT RESULTS
    section of the report.