Editor’s Note: This story has been updated to reference the report as a study, rather than an audit, a distinction the State Auditor’s office wanted to make clear.

While charter school leaders are pushing back against what they say is too much oversight by the Hawaii State Public Charter School Commission, a state report released Tuesday criticizes the commission for just the opposite.

The study by the Hawaii Office of the Auditor, which delves into the financial collapse and closure of Halau Lokahi Charter School, faults the commission for not being aggressive enough in monitoring charter school finances and compliance with state regulations.

It also identifies possible financial problems at several other schools.

Halau Lokahi was the first charter in Hawaii to be shut down by the state.

Halau Lokahi was the first charter in Hawaii to be shut down by the state.

Halau Lokahi

The study did not find any schools in immediate financial danger, but did find “potential risk” that needs monitoring.

The findings come at a time when the commission already is getting pushback from charter schools over reporting requirements and what some charter school leaders view as unnecessary red tape.

According to the study, charter schools had more than 50 compliance tasks in the last school year that involved providing reports or information to the commission.

“However, the commission staff’s inconsistent enforcement of some but not all compliance requirements does not fulfill the commission’s statutory responsibilities,” the report states.

The commission was created in 2012, when lawmakers made significant changes to the state charter school law in an effort to improve oversight and accountability.

The study also criticized the commission for relying on self-reporting by schools and not doing enough independent verification on issues like employee background checks and appointments to school governing boards.

Tom Hutton, the commission’s executive director, said the study offers a lot of constructive criticism. He attributed some of the issues it raised to how new the commission was when Halau Lokahi started showing signs of trouble. He also said the commission faces a challenging political climate.

“We are getting criticized here about being regulatory overkill, and on this side for not being regulatory enough,” Hutton said. “That’s the path we navigate. That’s what authorizers do.”

Halau Lokahi assets before a recent post-closure sale.

Halau Lokahi assets before a recent post-closure sale.

Hawaii Public Charter Schools Commission

Problems at Halau Lokahi

Halau Lokahi Public Charter School in Kalihi closed its doors for good at the end of May after the state revoked its charter.

One of the first charters to open in Hawaii, Halau Lokahi was beloved by many parents, but struggled financially in recent years.

When the commission began reviewing the school’s finances, it came across roughly $100,000 in questionable expenditures that it referred to the Attorney General’s office.

But the possible misappropriations weren’t enough to cause the school’s financial problems on their own, Hutton said. The bigger issue was that the school was living beyond its means.

Rent for the school facilities reached $33,000 a month — far beyond what the school could maintain. At one point in the last school year, the charter was unable to make payroll.

The reports the commission received from Halau Lokahi were detailed enough to show early signs of trouble, according to the repot; but the commission wasn’t aggressive enough in its intervention efforts.

The study also found that “human error and inexperience among commission staff contributed to their inability to recognize and interpret the available information early enough to possibly help avert the school’s financial collapse.”

Hutton contends that the commission recognized the problem, but gave too much leeway to the school to address it.

“We were getting assurances from the school that they were on top of it,” Hutton said. “It was one of our oldest schools. They said ‘We’ve lived through enrollment fluctuations before. We will adjust to that.’ Our issue was we gave them the benefit of the doubt, not that we didn’t see the issue.”

Current Problems

Auditors examined records at multiple schools as part of the study process, and identified several potential problems.

Ka Waihona Public Charter School in Waianae obtained a $300,000 line of credit from a bank “without proper authority” and “for purposes not allowable by law.” The commission also failed to follow up with the school to see what cash flow problems it was having that made a line of credit necessary. The school owed $200,000 as of June and had paid roughly $6,000 in interest.

Enrollment has been declining for several years at Kualapuu Public Conversion Charter School on Molokai, which could lead to financial instability, the report says.

Enrollment at Kualapuu dropped from 398 students in 2011-12 to 349 in 2013-14. That decrease is reflected in the school’s shrinking cash reserve, which fell from more than $4 million in 2008-2009 to roughly $1.1 million in 2013-14. The school board told auditors it planned to hire outside consultants to help develop a five-year sustainability plan. 

Hawaii Technology Academy, which offers a blend of online and classroom-based learning at multiple sites throughout Hawaii, is burdened by lingering debts from a 2008 contract it entered into with K12 Classroom LLC, a for-profit online education company. 

In  2013-14, HTA paid K12 $4.5 million — a significant chunk of the school’s operating budget. The school signed an agreement last year to make monthly $20,000 payments to K12 until 2019 to pay off the $1.1 million it owes the company. Because charter schools in Hawaii are government entities, if the school defaults on its debt for any reason,  taxpayers could be responsible for paying it off.

In addition to financial monitoring, the study noted that eight out of 10 randomly surveyed charter schools failed to post governing-board meeting minutes — despite being required by law to do so.

Moving forward, the auditor’s office suggests that the commission review its school contracts to improve clarity, that it more consistently enforces compliance with the contracts, and that it work to create additional ways for verifying that schools are meeting requirements such as conducting employee background checks.

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