Organizational Review of the Telesis Center for Learning, Inc. Draft Report

Transcription

1 5/31/2016 Results of Financial and Organizational Review of the Telesis Center for Learning, Inc. Draft Report PRESENTED TO: Telesis Center for Learning Administration and Board of Directors 2598 Starlite Lane Lake Havasu City, Arizona SUBMITTED BY: G&G Consulting Group, LLC 2696 S Colorado Blvd, Suite 450 Denver, CO 80222

2 May 31, 2016 Board of Directors Telesis Center for Learning, Inc Starlite Lane Lake Havasu City, Arizona Dr. Sandra K. Breece Superintendent 2598 Starlite Lane Lake Havasu City, Arizona Dear Ladies and Gentlemen: As requested by the Telesis Center for Learning, Inc. Board of Directors, in accordance with the bond covenants for the municipal debt issued on December 1, 2013, G&G Consulting Group, LLC presents its report entitled Results of the Financial and Organizational Review of Telesis Center for Learning, Inc. We appreciate the support provided by the Administration, Staff, and Board of Directors of Telesis as well as ASPIRE. Tha k ou fo the oppo tu it to o k ith all of ou a d please do t hesitate to all ith a questions or if you need additional assistance. Sincerely, Jason T. Guerrero Owner/Partner Enclosures S. Colorado Blvd., Suite 450, Denver, CO Phone: Fax:

3 CONTENTS I. EXECUTIVE SUMMARY... 1 I.A. OVERVIEW OF REPORT... 1 I.B. HISTORY OF TELESIS CENTER FOR LEARNING, INC I.C. SUMMARY OF KEY FINDINGS... 1 II. ARIZONA CHARTER SCHOOLS... 2 III. REVIEW SCOPE AND METHODOLOGY... 2 IV. FINDINGS AND RECOMMENDATIONS... 3 IV.A. FINANCIAL HEALTH... 3 IV.B. FINANCIAL POLICIES AND PROCEDURES IV.C. INTERNAL FINANCIAL CONTROLS IV.D. BUDGETING PRACTICES IV.E. OPERATIONAL PRACTICES IV.F. GOVERNANCE IV.G. AUDIT FINDINGS V. SUMMARY Appendix A Appendix B Appendix C Appendix D.32 Appendix E.34 Appendix F.37 Page i

4 Statement of Cash Flow Audited 2014 Audited 2015 Projected 2016 Projected 2017 Projected 2018 CASH FLOWS FROM OPERATING ACTIVITIES Changes in net assets (444,330) (550,248) (291,724) (20,647) 83,365 Adjustments to reconcile changes in net assets to cash provided/(used) by operating activities Depreciation and amortization 331, , , , ,710 (Increase)/Decrease in operating assets: Accounts receivable (31,339) (15,112) 65, Refundable deposits - 1, Prepaid expenses - 2, Capitalized Loan Costs Accumulated Amortization Other operating assets Increase/(Decrease) in operating liabilities Accounts payable and accrued expenses 27,882 (32,521) Accrued payroll 56,289 69,702 (135,763) - - Due to governmental agencies Due to students (7,988) 3,190 (7,691) - - Unearned revenue (38,595) (1,798) (4,501) - - NET CASH PROVIDED/(USED) BY OPERATING ACTIVITIES (106,296) (120,472) 25, , ,075 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (1,593,919) (282,232) NET CASH PROVIDED/(USED) BY INVESTING ACTIVITIES (1,593,919) (282,232) CASH FLOWS FROM FINANCING ACTIVITIES Restricted cash held by trustee (278,312) 236,176 - (158,677) (200,813) Repair and replacement fund (91,667) (25,000) Proceeds from notes and loans payable 1,986,850 75, , Repayments on notes and capital leases payable (82,443) (41,908) (263,764) (36,930) (10,507) NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES 1,626, ,268 (113,764) (287,273) (236,319) Net Changes in Cash (74,120) (133,436) (87,937) 91, ,756 Cash at beginning of year 398, , , , ,256 Cash at end of year 324, , , , ,012 Appendix C Appendix D Appendix E Appendix F Appendix F... Error! Bookmark not defined.8 Page ii

5 I. EXECUTIVE SUMMARY I.A. OVERVIEW OF REPORT The Telesis Center for Learning, Inc. (Telesis or school) hired G&G Consulting Group, LLC (G&G) to conduct a Financial and Organizational Review (the Review) for violations of one or more of the bond covenants outlined in their loan with the Industrial Development Authority (IDA) of the Town of Florence. On December 1, 2013 Telesis entered into a loan agreement with the IDA of the Town of Florence, a nonprofit corporation designated as a political subdivision of the State of Arizona, for the proceeds of a $5,355,000 Series 2013 Education Revenue Bonds issued by the Industrial Development Authority of the Town of Florence. The loan proceeds were used to refinance the costs of acquiring, constructing, renovating, improving, and equipping land and buildings located at 2598 Starlite Lane in Lake Havasu City, Arizona, finance the costs of constructing, renovating, improving and equipping additions to the existing facilities, pay capitalized interest on the Series 2013 Bonds, and pay certain issuance expenses related to the Series 2013 Bonds. The agreement includes interest-only payments through January 2019, at which time the school is subject to refinancing risk as the full principal amount comes due. The loan agreement between Telesis and the issuer includes a covenant to maintain a BB or higher ati g o the o ds f o ta da d & Poo s. O No e e, the o ds e e do g aded to a B rating as the result of declining enrollment, weak operations, decline in cash on hand, and short dated debt subject to refinancing risk in 2019 (the debt between the school and the issuer). As such, and pursuant to the loan agreement, Telesis was required to employ an Independent Consultant to review a d a al ze the s hool s ope atio s a d ad i ist atio, i spe t the fa ilities, su it a itte epo t, a d make such recommendations as to the operation and administration of the school in order to restore the Bo ds ati g to BB. I.B. HISTORY OF TELESIS CENTER FOR LEARNING, INC. Designed to provide personalized learning styles that cater to the individual student in a small class setting, a small private middle school (Hands on Learning!) was founded in 1991 by Dr. Sandra K. Breece (Superintendent or Principal). In March 1992 the school incorporated as Telesis Center for Learning, Inc. (Telesis) and in 1993 the IRS granted the organization 501(c)(3) status, which the organization maintains today. In 1998 the school began to serve students under the charter of a neighboring school as it expanded to offer more grade levels. Telesis then applied for and received a charter in 2000, serving students in grades kindergarten through 12 th grade. Telesis is currently made up of two charter schools: Telesis Preparatory, a kindergarten through 8 th grade school, and Telesis Preparatory Academy, a high school. Toda Telesis s issio state e t still efle ts the s hool s fou di g alues: Telesis Ce te fo Lea i g is a kindergarten through twelfth grade school committed to offering curriculum individually designed a d deli e ed to eet he eeds of ea h stude t i eal p epa atio fo lifelo g lea i g. I.C. SUMMARY OF KEY FINDINGS Telesis Center for Learning, Inc. s fi a ial pe formance has been declining over several years largely as the result of enrollment fluctuations without adequate expenditure reductions, including those related to tea hi g staff. Mu h of the s hool s e e ue is ade up of sou es o ti ge t upon not only total enrollment, but student demographics which is appears to be unstable. The s hool s fi a ial poli ies, Page 1

6 procedures, and internal controls are not sufficient to ensure best practice financial operations and management and are often not followed. Operations such as hiring and employment and food services must be reconsidered by the school. Student growth may continue to be problematic given regional enrollment trends suppo ted the it s e o o i li ate a d t a sie t populatio. The s hool s governance structure and practices are not conducive to adequate oversight and the current school board largely lacks the capacity and engagement required to fulfill its fiduciary responsibilities. Given the s hool s u e t path, a bond rating upgrade and refinancing in or before January 2019 may not be possible without significant decreases in spending coupled with adjustments to operations and governance. II. ARIZONA CHARTER SCHOOLS Arizona Charter School legislation was passed in 1994 and the state is now home to more than 623 charter schools serving nearly 15% of all public school students in the state. The majority of Arizona charter schools are authorized by a few authorizers 1. Telesis is authorized by the Arizona State Board for Charter Schools. In Arizona a charter holder is defined as a person that enters into a charter with the Arizona State Board for Charter Schools. "Person" is defined as an individual, partnership, corporation, association, or public or private organization of any kind (A.R.S ). In the case of Telesis, the charter holder is identified as Telesis Center for Learning, Inc. Arizona is one of five U.S. states that require schools, regardless of federal tax-exempt status, to pay sales tax and one of fifteen U.S. states in which teachers are required to participate in social security and may participate in the state retirement system (Arizona State Retirement System). III. REVIEW SCOPE AND METHODOLOGY G&G was contracted by the school to review, analyze, and make recommendations relating to school operations and administration including, but not limited to: a. A e aluatio of the s hool s fi a ial health, fi a ial poli ies a d procedures, and operational practices; b. The ade ua of the s hool s i te al fi a ial o t ols; c. The ade ua of the s hool s udgeti g p a ti es as o pa ed to est p a ti es; d. The s hool s p og ess i add essi g a p io ea audit fi di gs; e. The soundness of the s hool s u e t ea udget assu ptio s a d udget to a tual pe fo a e through December 31, 2015; f. A o plete e ie of the s hool s e e ue sou es, i ludi g a e aluatio of e e ue olle tio from all state and federal sources, private sources, and any private pay program; g. A review of potential student growth based on area enrollment, demographic changes and academic performance in comparison to competing schools; 1 Page 2

7 h. A e ie of the s hool s e pe se st u tu e i o pa iso to s hools of si ila size and program, and best practices, with specific emphasis on per student cost analysis and staffing model; and i. An analysis of the management structure, and school administration member skill. In addition to the topics listed above, G&G reviewed Telesis go e a e structure, roles, and practices. The G&G Consulting Group, LLC review team (G&G review team) collected and reviewed source documentation and generated reports from Telesis, the Arizona Department of Education (ADE), and other sources. The G&G review team also interviewed individuals representing Telesis leadership, staff, Board of Directors, the s hool s usi ess se i es p o ide (ASPIRE), conducted onsite testing, and toured the facilities at Telesis in Lake Havasu City, AZ (March 7 - March 9, 2016). The G&G review team consists of the following individuals: Lori Grant, M.Ed., Owner/Partner, Project CFO Jason Guerrero, MBA, M.Ed., Owner/Partner, Project CFO Ann Kurtz, MBA, Project Director and Project CFO Shannon Grant, Senior Accountant IV. FINDINGS AND RECOMMENDATIONS IV.A. FINANCIAL HEALTH IV.A.1. Current Financial Health Telesis has seen declined financial performance over the last several years, on both an accrual and cash basis, as seen below. Since the school has seen a 191% decrease in net assets and a 65% decrease in cash as of Page 3

8 Graph 1. Telesis Center for Learning, Inc. Year-End Net Assets and Available Cash, through (projected) 800, , , , (200,000.00) projected (400,000.00) (600,000.00) (800,000.00) (1,000,000.00) Year-End Net Assets Available Cash Since the bond proceeds were received, the school has fallen short of projected Debt Service Coverage Ratios each year. Table 1. Forecasted and Actual Debt Service Coverage Ratios, through (projected) projected Forecasted Debt Service Coverage Ratio Actual Debt Service Coverage Ratio (0.02) A number of contributing factors appear to have led to the deteriorating position of the school. Largely, enrollment has fallen short of projections each year by between 7% and 21%. Both the school administration and the Board of Directors have been slow to respond to this gap and the decrease in revenue compared to projections was not accompanied by a corresponding decrease in expenditures. Instead, the school has factored its state equalization twice in the last two years ($75,000 in and $100,000 in ) and has borrowed from the Superintendent this year ($50,000). As of the third quarter of this year, the school has a current ratio of 0.40 and is projecting a cash deficit in April and May When asked about possible solutions for this deficit, the Superintendent responded that the school may engage in a factoring agreement once more. Monthly interest charges on such agreements have been 1.32% on average. The s hool s loa ag ee e t ith IDA i ludes a o e a t that p ohi its additio al i de ted ess a o e $200,000. As of March 31, 2016 current liabilities include $60,000 in notes and loans payable. Therefore, the school is restricted to roughly $140,000 in additional debt, enough to cover the projected deficit. The 2 Private Placement Memorandum dated December 19, 2013 (forecasted) Page 4

9 review team was unable to confirm that all payments have been made in accordance with debt payment schedules since March IV.A.2. Revenue Sources The ajo it of Telesis s e e ues a e e ei ed f o the state of A izo a a d a e tied to e oll e t including state equalization, Classroom Site Fund revenue (A.R.S ), and Instructional Improvement Fund revenue (A.R.S tate sou es ade up % of the s hool s total e e ue i Federal sources include Elementary and Secondary Education Act (ESEA), National School Lunch Program (NSLP), E-Rate Program, and Individuals with Disabilities Education Act (IDEA) revenues and made up 11% of the school s total e e ue i ESEA is largely tied to the number of students enrolled that qualify for free or reduced lunch. Over the past several years Telesis has seen a declining trend in the number of students who qualify for free or reduced lunch, therefore the school risks declines in ESEA funding in future years. Table 2. Telesis Center for Learning, Inc. Free and Reduced Lunch Rates, through Telesis Preparatory n/a 54% 52% Telesis Preparatory Academy 63% 35-39% 35-39% Estimated Weighted Average 63% 50% 49% IDEA revenue is tied to the number of special education students served by the school. Over the past several years Telesis has seen a decline in the number of special education students it serves, therefore the school risks declines in IDEA funding in future years. Table 3. Telesis Center for Learning, Inc. Special Education Average Daily Membership (ADM), through Special Education ADM Total ADM Special Education ADM % 8% 7% 7% Local sources include extracurricular tax credit revenue (A.R.S ), which are tax refundable contributions that fund extracurricular activities. Other local sources include donations and collections from families for before and after care tuition, after school tutoring, and student activities. Local sources ade up % of the s hool s total e e ue i Recommendation IV.A.2.i. The school should institute requirements to budget revenues conservatively and take into consideration potential declines in revenues or student count based on historical trends and demographic data. IV.A.3. Expense Structure On average, Telesis spends more overall per funded pupil, defined as Average Daily Membership (ADM), compared to its peer Mohave County Charter Schools. Appendix D compares spending per ADM across 3 Free and reduced lunch rates published by the Arizona Department of Education 4 SPED28 Student ADM for 40 th day and 100 th day report published by the Arizona Department of Education Page 5

10 six charter schools, including Telesis, over through Compared to its peers, Telesis has spent between 33%-107% more on classroom instruction, between 15%-91% more on classroom supplies, between 16% less and 66% more on administration, between 12%-17% more on student support services, and between 78%-140% on other support services. See Appendix A for more information regarding expense categories. An examination of student to teacher ratios reveals that, on average, Telesis employs more teachers relative to its peers. Table 4. Mohave County Charter 5 Schools Average Daily Membership (ADM) to Year End Teacher Full-Time Equivalent Ratios 6 School Name Grades Served Kingman Academy of Learning K Masada Charter School, Inc. K Mohave Accelerated Elementary School, Inc. K Mohave Accelerated Learning Center Telesis Center for Learning, Inc. K Young Scholars Academy Charter School Corp. K Average Excluding Telesis Center for Learning, Inc Telesis Variance from Average Excluding Telesis Center for Learning, Inc Telesis current ADM to teacher ratio, as of March 2016, is (based on 32.4 teachers). Although Telesis spends more, on average, compared to its peers, the school performs no better. The below table compares the state A-F rating for Telesis Preparatory and Telesis Preparatory Academy to other Mohave County Charter Schools. 5 For comparison purposes, this table excludes one school serving 75 preschool and kindergarten students and one trade school serving 115 high school students. 6 Annual Reports of the Arizona Superintendent of Public Instruction, through (for ADM and Teacher FTE) Page 6

11 Table 5. Mohave County Charter 7 Schools Letter Grades 8 School Name Grades Served A-F Letter Grade Kingman Academy of Learning K-12 A Masada Charter School, Inc. K-8 A Mohave Accelerated Elementary School, Inc. K-5 B Mohave Accelerated Learning Center 6-12 B Telesis Preparatory K-8 C Telesis Preparatory Academy 9-12 B Young Scholars Academy Charter School Corp. K-8 B Recommendation IV.A.3.i. In order to meet or exceed all financial metrics that would allow the school to most easily refinance its debt obligation in 2019, Telesis must reduce overall expenditures, compared to the Forecasted Financial Statements Based on Current Operations and Planned changes (see Appendix B), by $1,535,000 across and (or $767,000 each year). It is recommended that the school reduce overall expenditures by a minimum of $495,000 across and ($247,500 each year) in order to meet all but one financial metric. Recommendation IV.A.3.ii. It is recommended that at least a large majority of the above decrease in expenditures is made up of a reduction in staffing. Decreasing teaching staff by 5 positions results in the recommended minimum expense reduction. Doi g so i gs the s hool s ADM to tea he atio to in and in , still well below the peer average of Decreasing teaching staff by 15.5 positions results in the necessary expense reduction to meet all financial metrics. However, doing so would bring the school above the ADM to teacher peer average to in and in IV.A.4. Current Year Budget to Actual Performance as of December 31, 2015 Appendix A presents Telesis Center for Learning, Inc unaudited activity as of December 31, agai st the s hool s budget. As of the second quarter, the school had received only 43% of projected revenue and spent 54% of projected expenditures. Overall, revenue is down due to a shortfall in enrollment and expenditures are up because of purchases made early in the year (and are not necessarily expected to continue at the same pace), overspending, and additional expenditures in line with additional revenue. Significant variances (less than 48% and greater than 52%) are described below. 1. State Equalization Assistance (42%): The school is funded through December based on June esti ates, Jul esti ates, a d epte e head ou t a d the s hool s a tual enrollment is less tha the stude ts i luded i the s hool s budget assumptions. 2. Local sources (161%): Collections from students for activities have exceeded the s hool s a ual budget assumption by over $85, State Sources (38%): The s hool s a tual e oll e t is less tha the stude ts i luded i the s hool s budget assumptions. 7 For comparison purposes, this table excludes one school serving 75 preschool and kindergarten students and one trade school serving 115 high school students. 8 Page 7

12 4. Federal sources (27%): Projected revenue at year-end is expected to come in less than budgeted, in part because of a decrease in enrollment. Additionally, this variance is likely due to the timing of federal revenue receipts. 5. Purchased professional services (78%): The school had spent 78% of its purchased professional se i es udget as of De e e hi h i ludes the ajo it of the s hool s externally provided professional development (Capturing Kids Hearts and Edupoint Educational Systems), contracted teaching (special education) and student support services (therapy services through TherapySource). Additionally, the school had spent 74% of its maintenance services budget. 6. Purchased property services (28%): The school had spent 133% of its cleaning services budget but spent a minimal amount of the rentals budget and 36% of the remaining budget. 7. Other purchased services (69%): It appears that the school may have not budgeted for travel expenses. As of December 2015, the school had spent over $6,000 on travel (to an Arizona Charter School event and professional development) and is forecasting to spend over $8,000. This category also includes technology services which are expected to be frontloaded in the year. 8. Supplies (65%): As of December 2015, the school had purchased nearly $30,000 more than budgeted in books, periodicals, and instructional aides. Technology and software supplies exceeded the annual budget as well but only by roughly $600. The school is on target with food e pe ditu es fo the s hool s food se i e p og am. 9. Other expenses and losses (261%): Year-to date (December) other expenses and losses includes $4,250 in interest on factoring agreements and credit cards, and over $80,000 more than annually budgeted for student activities. IV.A.5. Forecast Based on Current Operations, through Appendix B presents forecasted financial statements through based on the school s current operations and planned changes. The following major assumptions were used in developing the forecast. 1. Enrollment grows slowly based on average annual attrition and growth by grade level. See section IV.E.5. Potential Student Growth, below, for more information. 2. State equalization revenue grows by 2.74% each year, which is the current four-year average growth. 3. Telesis offers free and reduced lunch to only those students who qualify under the National School Lu h P og a. The e ai i g stude ts a e ha ged a fee e ual to the s hool s osts ot o e ed by the National School Lunch Program revenue, resulting a net zero cost to the school. 4. Other local revenue remains flat on a per ADM basis. 5. Classroom growth fund revenue grows by 1.5% per student in , based on communication received by the school from the Arizona Department of Education, and then remains flat in the following year. 6. Federal revenue decreases by 5% ea h ea ased o the s hool s ha gi g de og aphi s a d the uncertainty of federal revenue. 7. Current staffing, as of March 2016, remains constant over the next two years. This assumes that the receptionist position continues to be filled by a volunteer and that the Director of Finance, Facilities, and Food Services is not replaced. Page 8

13 8. Compensation increases by an average of 1.5% 9 each year to keep pace with inflation. 9. The costs associated with one of the s hool s u e t professional development programs (Capturing Kids Hearts) are eliminated in future years, as planned by the school. 10. Telesis pays the full amount of all short-term loan agreements in as scheduled. 11. The school fulfills the required debt service reserve fund and repair and replacement fund by June 30, As seen below, if the school were to operate as it has and plans to, the school will not be positioned well to increase its bond rating and refinance its debt obligation in or before January The school is e pe ted to fall sho t of its e oll e t ta get a d also total a gi %, u est i ted da s ash o hand, unrestricted cash to debt (%), and unreserved net assets as a percentage of operating expenses (%) targets that indicate financial health. Table 6. Financial Metrics for Telesis Center for Learning, Inc. Forecasted Financial Statements Based on Current Operations and Planned Changes, through Projected 2016 Projected 2017 Projected 2018 TARGET Enrollment over (under) 500 (64) (61) (55) 0+ EBIDA margin (%) 13.41% 19.32% 20.67% 16.5%+ Total margin (%) -7.71% -0.51% 2.01% 5%+ Annual debt service coverage MADS coverage MADS as a percentage of state aid (%) 13.56% 13.09% 12.58% <18 MADS debt burden (%) 10.61% 9.95% 9.68% <15.5 Unrestricted days' cash on hand (3) Unrestricted cash to debt (%) -0.62% 1.08% 5.19% 11.75%+ Unreserved net assets as a percentage of operating expenses (%) % % % 19.5%+ IV.A.6. Authorizer Financial Evaluation The Arizona State Board for Charter Schools annually evaluates the financial performance of each of its authorized ha te s hools. As see i the i age elo, take f o the autho ize s e site, the s hool is failing to meet the majority of metrics evaluated as of June 30, Page 9

14 Graphic 1. Telesis Center for Learning, Inc. Financial Performance Dashboard 10 IV.B. FINANCIAL POLICIES AND PROCEDURES Telesis fi a ial poli ies a d p o edu es that were provided to the G&G review team do not include an adoption date and the board minutes that were available for review do not mention adoption of the financial policies and procedures within the last two years. Furthermore, according to interviews conducted, the financial policies and procedures are referenced infrequently, if ever, by staff with financial function responsibilities. The Superintendent is currently working with ASPIRE, a financial consulting company, to make updates. The G&G e ie tea tested the s hool s p a ti es agai st its current documented financial policies and procedures and identified a number of inconsistencies. Recommendation IV.B.1.i. The Telesis Board of Directors should review and adopt financial policies and procedures that are in line with best practices and generally accepted accounting principles. Recommendation IV.B.1.ii. Telesis administration and staff should be trained on the financial policies and procedures. Staff compliance with and performance against the adopted financial policies and procedures should be reviewed during an annual performance evaluation process. As they are among the highest risk areas, the team focused on purchasing, cash disbursements, and payment authorization. The s hool s pu hasi g poli. e ui es that the P i ipal approves all purchases. Purchase requisitions, authorizing the purchase of items greater than $100, must be signed by the Principal for submission with the related invoice for payment. Of 41 randomly selected cash transactions between July 1, 2015 and March 8, 2016, 18 (44%) were missing evidence of approval and Page 10

15 (32%) were missing purchase requisitions (note that a number of these transactions were reoccurring payments but no distinction is ade i the s hool s fi a ial poli ies a d p o edu es fo su h pu hases). Recommendation IV.B.1.iii. Telesis staff should e t ai ed o the e ui e e ts of the s hool s pu hasi g policy (409.1) and adhere to the policy requirements of purchase requisitions and prior approval. The s hool s bank check policy (411.02) requires that the Principal and Board Treasurer co-sign checks in excess of $5,000 for all non-recurring items. Of the 41 randomly selected transactions, 12 were payments over $5,000. None of these payments were duly signed. In fact, the Superintendent was the only authorized check signer until March 8, 2016, at which time Gary Powers, a board member, also became an authorized check signer. Recommendation IV.B.1.iv. The Superintendent should familiarize herself with the board policies and make sure that she is adhering to all policies and procedures that are outlined. Recommendation IV.B.1.v. The Telesis financial policies and procedures should include a requirement to annually review check signers. The s hool s Autho izatio of Pa e t Poli (411.01) requires that all invoices be coded with by budget line item. Of the 41 transactions, coding was evident on only 3 (7%) disbursements. IV.C. INTERNAL FINANCIAL CONTROLS Afte e ie i g the s hool s internal controls ( ot add essed the s hool s fi a ial poli ies a d procedures) against best practices, additional inconsistencies were identified. For example, the school maintains a petty cash bank of $300.00; both documentation and reconciliations of this account are handled by the same Accounts Payable Administrative Assistant which violates the commonly held segregation of duties principle. Additionally, there does t appear to be controls or a process in place to ensure that vendors and employees are distinguished properly. The G&G review team identified two payments made to vendors that might properly be categorized as employees. The school maintains eight credit cards, all of which are either in the Superintendent s o the s hool s name. Written procedures to limit the number or balances of credit cards, designate authorized users, and complete reconciliations did not exist at the time of the review. Based on interviews with staff, the G&G review team learned that the current procedure requires completed purchase requisitions in advance of a purchase. Once purchases are completed, both receipts and requisitions are to be attached to the credit card statement. The G&G review team reviewed the supporting documentation for four randomly selected months for the Visa credit card account, two randomly selected months for the Chase MasterCard, and one randomly selected month for the Home Depot account. The findings of this review follow. Page 11

16 Table 7. Credit Card Testing Results Chase Visa Card ending 3046 Statement Dates Chase MasterCard ending 5726 Total Purchases Missing Receipts (#/%) Missing Requisitions (#/%) Approvals on Requisitions 6/28/15-7/27/ /3% 1/3% 30 of 30 7/28/15-8/27/ /6% 2/6% 33 of 33 9/28/15-10/27/ /0% 0/0% 43 of 43 10/28/15-11/27/ /0% 1/3% 29 of 29 Statement Dates Home Depot Card ending 5716 Total Purchases Missing Receipts (#/%) Missing Requisitions (#/%) Approvals on Requisitions 9/18/15-10/17/ /14% 11/79% 3 of 3 11/18/15-12/17/ /16% 11/58% 8 of 8 Statement Dates Total Purchases Missing Receipts (#/%) Missing Requisitions (#/%) Approvals on Requisitions 10/4/ /0% 0/0%* 3 of 3 *A single requisition was approved at the beginning of the year for a yearly maintenance supply expense budget not to exceed $10,000. After purchases are completed and the statement is received, the Accounts Payable Administrative Assista t oth o pletes edit a d data e t i to the s hool s fi a ial soft a e a d o pletes monthly reconciliations, again, a violation of the segregation of duties principle. The credit cards were being used, at the time of the review, to substantially to underwrite the expenses of the school, bypassing the check writing and authorization process and allowing the school to spend more money than might be available. At the time of the on-site review, roughly $50,000 was due on the credit cards. As of March 31, 2016 the total credit card balance was $60,839. Recommendation IV.C.1.i. The school should develop, document, and seek board approval for a plan to pay off and cancel credit cards within 12 months. Meantime, new credit card purchases should be limited to purchases categorized as emergencies by the board and must be approved by the board in advance. Recommendation IV.C.1.ii. The petty cash fund should be closed immediately and all purchases should adhe e to the s hool s financial policies and procedures. IV.D. BUDGETING PRACTICES The school has historically had a Budget Committee in place, comprised of Telesis staff (the Director of Finance, Facilities and Food Services, the Accounting and Payroll Administrative Assistant, the Accounting and Grants Administrative Assistant) that reportedly receives input from at least one board member. However, since the termination of the Director of Finance, Facilities, and Food Service, the Budget Page 12

17 Committee developing the budget includes additional staff members (the IT Coordinator and Athletics Director, for example) as well as one board member. Additionally, the school has contracted an outside firm to provide financial services, including the preparation of the proposed, adopted, and revised budgets. After the budget has been adopted by the Boa d of Di e to s it is ot e te ed i to the s hool s a ou ti g software, which is not best practice. Ho e e, the s hool s o t a ted fi a ial se i es p o ide does provide regular reports that compare year-to-date activity against the annual board-approved budget. Recommendation IV.D.i. The annual budget should be entered into the accounting software upon board adoption to allow for more regular and accurate budget to actual comparisons and budget availability analysis. It is not clear what involvement the Budget Committee currently has in monitoring spending against the budget after adoption, including making recommendations for changes during the year as enrollment is solidified and estimated revenue changes. Historically, the Director of Finance, Facilities, and Food Services reviewed budget requests and made recommendations to the Superintendent. However, such recommendations may not have been in consultation with the contracted financial services provider and i the s hool s est i te est. Fo example, the Director of Finance, Facilities, and Food Services recommended to school leadership and the Board of Directors that the school finance a vehicle to be used for staff travel out of Lake Havasu for meetings and professional development opportunities. According to the Director, this option would be less expensive compared to reimbursing staff for mileage. The G&G review team conducted an analysis to determine the cost benefit of the financed vehicle for the period July 1, 2015 through February 29, Principal and interest payments on the vehicle during this period totaled $4,374. In reviewing the mileage log for the period, 79% of the trips were for out of city travel (4,918 miles), the remaining trips were for local travel, including daily travel to and from the Superintendent s eside e. Rei u se e t at the IR ate 11 for all out of town trips would have equaled $2,655. The school would have saved nearly 40%, without considering the additional cost of gas, insurance, maintenance and repairs, under the reimbursement method. Recommendation IV.D.ii. The Board of Directors should form a finance committee to participate with staff in budget conversations and to provide oversight and monitoring of large purchases. Recommendation IV.D.iii. The bo dholde s ep ese tati e i est e t a age of the o ds a d the t ustee should ha e eado l a ess to the s hool s a ou ti g soft a e. IV.D.1. Current Year Budget Assumptions I luded i Appe di A is a o pa iso of the s hool s Budget with a year-end projection. The s hool s revenue assumptions are reasonable with the exception of the enrollment projection. The school budgeted at 451 ADM and actual ADM came in at 15 students less, leading to an overall negative budget to forecasted actual variance in both state and federal funding. However, the school under projected collections from students, which includes after school tutoring and school activities, leaving the school with a projected positive variance in revenue overall Page 13

18 On the expense side, it is clear that the school did not budget sufficiently for benefits, purchased professional services, and other expenses and losses (see section IV.A.4. Current Year Budget to Actual Performance as of December 31, 2015, above, for additional details). Overall, it is expected that the school will fall short of the budgeted change in net assets by 12%. IV.E. OPERATIONAL PRACTICES IV.E.1. Staffing Below is the organizational structure and staffing as March Graphic Organizational Chart *Note that the Di e to of Food e i es, Fa ilities, a d Fi a e as te i ated sho tl efo e G&G s isit to the s hool. The current administrative and office team (blue) is made up of 7 full-time equivalents (FTE), including 5 employees titled Administrative Assistant, and one volunteer; operations staff (green) is made up for 4 FTE; instructional staff (orange) is made up of 38 FTE; and support staff (yellow) is made up of 3 FTE. At the time of the 2013 bond issuance, the student to teacher ratio was projected at 14:1 and student to staff ratio was projected at 11:1. The current student to teacher ratio is just under 14:1 and the current student to staff ratio, excluding the recently terminated director, is just over 9:1. Instructional and instructional support staff make up 79% of total staffing whereas administrative, office, and operational staff make up 21%. Page 14

19 IV.E.2. Hiring and Employment The G&G review team conducted interviews with the Superintendent, Board of Directors, and administrative staff regarding hiring and employment. All parties disclosed that all hiring decisions are at the ultimate discretion of the Superintendent. A review of hiring practices over the prior three years indicated that non-teaching positions have not been advertised. Instead, the Superintendent has hired her son as the IT Technician/Director and her daughter-in-law as an Administrative Assistant. These hiring de isio a ha e iolated the s hool s o fli t of i te est poli, detailed in Appendix C. Additionally, as evidenced by a review of available staff evaluation documentation, staff performance evaluations of both the IT Technician/Director and the Administrative Assistant are completed by Superintendent. Recommendation IV.E.2.i. The Board of Directors should create a personnel subcommittee charged with confirming any proposed candidate for employment that is also related directly or by marriage to the Superintendent and annually evaluating the Superintendent and any of her family members. IV.E.3. Food Service At the time of review, the school participated in the National School Lunch Program. The program reimburses schools for students who qualify for free or reduced lunch status based on household income. The school was also offering free lunch to those students who qualified for reduced lunch and for students who did not qualify for free and reduced lunch. According to data on the Arizona Department of Edu atio s e site, oughl % of Telesis stude ts ualif fo f ee o edu ed lu h, do f o % last year and 63% the previous year 12. Offering free lunch is, according to The Superintendent, among the school s o e value propositions. However, as of February 2016 the free lunch program had resulted in a loss of $124,311 and importantly, no surrounding school offers free lunch for all students. As such, the school administration and board plan to align the s hool s lu h offe i gs to efle t those of su ou di g s hools beginning in Recommendation IV.E.3.i. The school lunch program should operate at $0 net cost to the school. Meal prices should be calculated to cover the operating costs of the lunch program and free and reduced lunch should only be offered to qualifying students. IV.E.4. Student Count and Retention As seen in the table below, Telesis has served fewer students than projected at the time of the 2013 bond issuance Page 15

20 Graph 2. Telesis Center for Learning, Inc. Projected and Actual Average Daily Membership (ADM), through Projected ADM Actual ADM According to school administration, enrollment and retention varies partly because of Lake Ha asu Cit s relatively migrant population. Families often move to the area only to find the job market more difficult than anticipated. The unemployment rate in Lake Havasu City is 8.1% compared to the US average of 6.3%, and recent job growth is only listed at 0.43% compared to an overall US predicted growth rate of 1.18% 14. The migrant population was among the reasons provided by the school to help explain the gap between projected and actual enrollment in In August 2015, 487 students were registered for When school began, 80 students were missing and staff quickly enrolled 40 additional students. Looking ahead to , Telesis administration anticipates meeting an enrollment target of 500 students. The school reports that 90% of students currently enrolled in are expected to return based on feedback from families. A o di g to the s hool s egist a, the waitlist as of March 8, 2016 totaled 77 students. 13 Private Placement Memorandum dated December 19, 2013 (projected ADM) and ADMS 45-2 Attending Summary Count Reports published by the Arizona Department of Education (actual ADM) 14 Page 16

21 Table Waitlist as of March 8, 2016 Grade # of Students K Total 77 The school had not yet enrolled these students either because there is not a space for them in current classrooms or the family of the student has more than one child to enroll and they hold off taking a space until all children can be accommodated. According to the school, as of April the total number of students on the waitlist had dropped to 64 and the total number of returning students totaled 403. Note that in August 2013 the school had a waitlist of 70 students but actual ADM came in at 438 FTE in Recommendation IV.E.4.i. Telesis should annually purge the waitlist and require active participation by the stude ts parents and guardians to annually re-waitlist. Such a method will add validity to the list for planning and budgeting purposes. IV.E.5. Potential Student Growth Flu tuatio s i Lake Ha asu U ified hool Dist i t s a d Ha asu P epa ato A ade s the othe ha te s hool i Lake Ha asu Cit e oll e t a e o siste t ith the it s a ia le g o th a d ig ato population. As demonstrated in the table below, Telesis, the district, and Havasu Preparatory have not been able to establish enrollment trends over the last four years. Page 17

22 Graph 3. Lake Havasu City Average Daily Membership (ADM), through Telesis Center for Learning, Inc. Havasu Preparatory Academy Lake Havasu School District (1/10 ADM) A comparison to schools within a four-mile radius of Telesis Preparatory and Telesis Preparatory Academy reveal that all competing schools have received a higher letter grade from the Arizona Department of Education compared to Telesis Preparatory and that Lake Havasu High School has received the same letter grade compared to Telesis Preparatory Academy. Table 9. Telesis Center for Learning, Inc. Letter Grades Compared to Competing Schools 16 School Name Type Grades Served Distance Away (miles) A-F Letter Grade Telesis Preparatory Charter K C Telesis Preparatory Academy Charter B Smoketree Elementary School District K B Lake Havasu High School District B Starline Elementary School District K A Havasupai Elementary School District K A Jamaica Elementary School District K A Thunderbolt Middle School District B Bethany Christian School Private K n/a Nautilus Elementary School District K A Our Savior Lutheran School Private PK n/a Havasu Preparatory Academy Charter K A Oro Grande Elementary School District K B Calvary Christian Academy Private PK n/a 15 ADMS 45-2 Attending Summary Count Reports published by the Arizona Department of Education (for private schools); (for distances); and (for A-F Letter Grades) Page 18

23 Given the unstable enrollment in Lake Havasu City, combined with below average to average performance compared to competing schools, the G&G review team has no reason to believe that Telesis enrollment will grow as projected at the time of the bond issuance. Future ADM through is estimated below. The projections are based on average annual attrition and growth by grade level. Table 10. Telesis Center for Learning, Inc. Actual and Forecasted Average Daily Membership, through Grade Level Actual Actual Actual Actual Forecast Forecast K Total Recommendation IV.E.5.i. Telesis should use a number no greater than current year enrollment when budgeting for subsequent years to assure a conservative revenue projection. To keep a balanced budget, this will require that Telesis maintain expenditures in line with enrollment and only add to the budget when additional funds become available. IV.E.6. Succession Planning According to the written documentation provided by the school, the board-approved succession plan at the time of the G&G review tea s on-site visit included the IT Technician/Director (the Superintendents son), followed by the Administrative Assistance (the Superintendent s daughte -in-law). The administration also provided the G&G review team a succession plan that was pending board approval as of March 9, 2016, hi h lists the s hool s I st u tio al A al sis Di e to efo e the IT Technician/Director and Administrative Assistant. One board member expressed a sense of obligation to keep the school in the family given Dr. Sandra K. B ee e s histo as a fou de. Recommendation IV.E.6.i. The Telesis Board of Directors should take an active role in the school s su essio pla i g by proactively seeking out and approving qualified candidates who possess appropriate qualifications and skill sets to successfully operate a school, including school administration experience. As a quasi-governmental entity the s hool s decisions must be based on what is in the best interest of the school and the families it serves rather than familial relationships. Page 19

24 IV.E.7. Management Structure and School Administrator Skill Based on the G&G e ie tea s o e all assess e t of the s hool, it is lea that the u e t Superintendent does not possess the skills required to ensure proper financial controls are in place, to o ito a d a age the s hool s fi a ial positio, a d to ake de isio s that take into consideration near and long-term financial implications. Recommendation IV.E.7.i. The school should restructure its administration team to include a qualified business manager. This person should possess the skill set to actively participate in managing the finances of the organization, in conjunction with the external business services provider. This might be accomplished by eliminating two of the clerical positions listed as administrative assistants and creating a new, higher level position at the same salary expense. Recommendation IV.E.7.ii. The s hool oa d should e aluate the e te al usi ess se i es u e tl p o ided to dete i e A PIRE s ability to provide full financial services to the school. IV.E.8. Authorizer Organizational Evaluation The Arizona State Board for Charter Schools annually evaluates the operational performance of each of its autho ized ha te s hools. As see i the i age elo, take f o the autho ize s e site, the s hool received an overall rating of Meets Operational Standard in However, two measures were identified as Does Not Meet. Graphic 3. Telesis Center for Learning, Inc. Operational Performance Dashboard Page 20

25 IV.F. GOVERNANCE The Telesis Center for Learning, Inc. Board of Directors is made up of seven members, including the Superintendent. A list of board members as of March 2016 follows. Table 11. Telesis Center for Learning, Inc. Board of Directors as of March 2016 Name Title City, State of Residence Board Member Since Dr. Sandra K. Breece President Lake Havasu City, AZ 2000 Ramesh Anche Director Lake Havasu City, AZ 2011 Adam Boleratzky Director Glendale, AZ 2011 Marion Dietz* Director Lake Havasu City, AZ 2011 Joseph Meli Director Littleton, CO 2011 Glenn McGee Director Payson, AZ 2012 Gary Powers Director Lake Havasu City, AZ 2013 *The G&G review team received indication from school administration shortly prior to the time of review that Marion Dietz had moved and had or planned to resign from the board. No further information has been provided. Note that the school Principal and Superintendent services also serves as the President of the Board. Also, three board members reside outside of Lake Havasu City and that the majority of board members have served for five years. Furthermore, each of the current board members were selected by the Superintendent and five of the six board members self-reported being long-time friends of the Superintendent. IV.F.1. Governing Policy The G&G review team was provided a copy of the Telesis Academy Board Policy Manual, for which the date of adoption is unknown, and Board Bylaws, adopted in September During the course of interviews with several board members it was communicated that board members had possibly seen the polices at some point during their tenure, ut had t e ie ed the e e tl. A summary of the Board Bylaws relevant to this review follows. 1. The number of Directors shall be no less than three and no more than nine, provided that said number may be changed by an amendment to these Bylaws, duly adopted by the Board, subject always to any restrictions of law as to the minimum number of Directors. 2. Each Director shall hold office for a period of three years from the date he or she is elected and qualified, or until his or her prior death, incapacitation, resignation, replacement or removal. Directors may serve multiple consecutive terms without restriction as to the number of terms permitted. 3. The officers of the Board shall comprise a President of the Board, Vice President of the Board, Secretary of the Board and Treasurer of the Board. 4. Any Director who is absent from more than 50 percent of Board meetings within any 12-month period will be removed automatically, unless the Board takes affirmative action to waive this provision and retain such Director. 5. The Board shall adopt a conflict of interest policy (the "Conflicts of Interest Policy") to be followed by the Directors of the Board in executing their duties. In the event no formal Conflicts of Interest Page 21