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Chalkbeat
In a damning audit, Indiana calls on two virtual schools to repay $85 million in misspent state funds
By Stephanie Wang
February 12, 2020
A special investigation by state auditors found that officials from two
Indiana virtual charter schools misspent more than $85 million in state
funding by inflating enrollment and funneling millions to a tangled web
of related companies.
In what has become one of the nation’s largest virtual charter school
scandals, Indiana Virtual School and Indiana Virtual Pathways Academy
officials showed “substantial disregard” for following the rules and
may have “focused on maximizing profits and revenues by exploiting
perceived vulnerabilities” in local oversight and state funding
processes, the report said.
The state auditors’ scathing report, released Wednesday, follows a
series of Chalkbeat investigations revealing financial conflicts of
interest at Indiana Virtual School and Indiana Virtual Pathways Academy
and their dismally low academic results. The two virtual charter
schools shut down last summer after allegations of enrollment fraud
first emerged.
The state report seeks repayment for more than $85 million in public
dollars inappropriately spent on companies connected to school
officials. In the past three years, the two schools sent 83% of their
total funding to related companies, the report found.
According to the report, the misspent funds include more than $68
million that the schools improperly collected from the state — far more
than initially reported — by recording inactive students more than
14,000 times over eight years.
In some cases, those were people who merely requested information
through the schools’ website or students who had moved out-of-state —
and in one instance, a student who had died.
“Taxpayers are literally paying tens, if not hundreds of millions of
dollars to a school for students who aren’t even there,” said Todd
Ziebarth, senior vice president for state advocacy and support for the
National Alliance for Public Charter Schools.
Virtual school officials have denied wrongdoing, but they have offered
little explanation for the discrepancies and deflected blame. After
Indiana Virtual School and Indiana Virtual Pathways Academy closed,
board members said they were no longer responsible for the schools,
despite these institutions owing millions to the state, being under
investigation, and still needing to transfer student records.
But the Board of Accounts report outlines a ledger of who was
responsible for each instance when enrollment was misreported or a
check was improperly cut — and how much each misappropriation was worth.
The report places blame on virtual school administrators, including
Superintendent Percy Clark and administrative director Phillip Holden,
for signing off on inflated enrollment counts. It puts responsibility
on officials for writing checks to related parties or without proper
invoices. Those officials include founder Thomas Stoughton and Merle
Bright, who owned or was part of a dozen companies that contracted with
the schools.
Bright had access to the schools’ bank accounts and could approve
payments despite never holding a position at the schools that would
have justified that authority, the report noted — and he signed checks
for more than $6.8 million to companies he was associated with.
Chalkbeat could not reach Bright, Clark, or Stoughton for comment. An attorney for Holden declined to comment.
The problems at Indiana Virtual School prompted state lawmakers to take
steps recently to cut virtual school funding and tighten regulations on
how virtual schools count active students. But some worry that
lawmakers didn’t go far enough to ensure that public money is being
well spent on virtual schools.
For charter school supporters, virtual schools have presented a
particular quandary: how to improve school quality and oversight, while
also preserving what they see as a critical school option. But for
charter school critics, the Indiana Virtual School scandal embodies
their worst fears — that private organizations can profit off public
dollars meant to educate students.
The State Board of Accounts sent its report to local and federal law
enforcement agencies “due to the potential violations of federal and
state law.” Federal authorities have already been investigating Indiana
Virtual School and Indiana Virtual Pathways Academy. No charges have
been filed.
It’s particularly difficult to verify enrollment — and continued
engagement — at full-time online schools, where teachers don’t
necessarily see students in their classroom every day. But since public
schools in Indiana receive state money for each student they enroll,
that also opens the door to potential abuse of how virtual schools
report enrollment.
The investigation found the school officials “enrolled students that
had not expressed any intention to enroll.” School officials were aware
that many of the students on their rolls were inactive, the report
said: Every two weeks, teachers received a report of “active” students
in their classes, which included just a few of the students registered.
The messy accounting by Indiana Virtual School and Indiana Pathways
Academy detailed in the report shows what can happen when financial
conflicts of interest meet limited oversight.
Out of nearly $100 million paid to the schools’ largest vendors, almost
every expense raised some type of red flag. The schools hardly ever
received details about what they were paying for — sometimes shelling
out money for duplicative services — and the school boards “had no
meaningful oversight,” the report said.
The schools paid vendors to recruit 93 teachers and to run 765
background checks on teachers — at a time when the two schools had 54
teachers combined, the state report said. The schools spent money on
consulting services for a 401(k) provider, despite not offering or
contributing to a 401(k) plan. They hired a political lobbying firm,
even though 501(c)(3) nonprofits are limited in their ability to lobby.
In addition to calling for reimbursement for inappropriately collected
and misspent funds, the report also holds school officials and vendors
responsible for another expenditure — the cost of the state’s special
investigation.
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