How Newark Charter School Cooked Their Books To Break The Law In Delaware

Newark Charter School found a way to overtly break Delaware charter school laws and they are using parents and students to do it.

Yesterday, an anonymous source informed Mike Matthews that Newark Charter School’s student body activity funds are legit.  Be that as it may, they aren’t reporting the revenue generated from these activities.  Instead, they are putting at as an expense on their monthly budget.  They aren’t reporting this revenue anywhere.  But they are showing the expense on their monthly budget.  How much are they getting overall?  That is unknown, but I was able to find out they are using student body activity revenue to pay for items they should not be according to Delaware law.

Newark Charter School does not post a 990 IRS tax form on their website.  They are exempt from even filing this return.  Why?  Because way back during the Bill Clinton years, they had elected officials on their founding board.  Granted, none of those elected officials are there anymore.  No one has ever questioned NCS at a state level about this before and they just assume it is alright.  Even though the IRS issued very specific guidance to charter schools about this type of exemption.  But of course Newark Charter School takes advantage of this ambiguity.  Until the IRS determines they are not exempt, they will continue to not file tax returns.  Even though they should and the reasons for them not doing so are the most ridiculous thing I’ve ever heard.  On IRS 990 tax forms, non-profit corporations are required to show any revenue they receive.  They don’t have to pay taxes at all, but they are required to show their numbers.

There are a multitude of reasons why Newark Charter School would not want to file an IRS tax return.  They are the only Delaware charter school specifically exempt from this.  Academy of Dover had their corporation status rescinded by the IRS some years ago, but the Delaware Dept. of Education turned a blind eye to this glaring fact during the school’s formal review last year which was in part over financial viability.  Eventually, Academy of Dover was able to restore this status and are now filing their 990 forms on their website.  But Newark Charter School took advantage of the bogus loopholes in this IRS regulation and have had a field day with it ever since.

This was my biggest issue with any changes to House Bill 186, the original charter school audit bill.  My sense was that anything even associated with charter school audit legislation would only be tainted by Senator David Sokola.  This would somehow benefit Newark Charter School and keep their finances in the dark.  Anyone can make a budget and show numbers on it, but a true audit and an IRS return would show a lot of information.  They would have to report the revenue they receive from students or their parents for field trips and student body activities.  But they aren’t.  No one can see this information.  If they get such a huge amount of money from these activities, they should be fully transparent and post their revenue stream on their website.  But they don’t.

On their monthly budget sheets they are required by state law to post on their website each month, they list student body activities as part of their operating budget.  Operating funds are part of state and local funded expenses.  If they have students pay for field trips and they write a big fat check to, say, the Bermuda Institute, and put that as an expense in their budget, that means they are getting these funds from the state and local funds.  Granted, their budgeted amount for student body activities in FY2016 was $300,000 as shown in the below pictures.  But their budget forms the picture of how much money they will need to operate as a school.  This is the spine of any charter school or district’s operations.

Newark Charter School 7/2015 Monthly Budget: Revenue

In the above picture, we see the school’s projected revenue for FY2016 as of July, 2015.

Newark Charter School 7/2015 Budget: Expenses

Above, we see their projected expenses. Note the Student Body Activities amount of $300,000.

Newark Charter School 6/2016 Budget: Revenue

By June of 2016, their revenues looked completely different.

Newark Charter School 6/2016 Budget: Expenses

Their expenses, especially Student Body Activities went up as well, mushrooming to over $445,000. This was $145,000 over what they budgeted for this category.  As if it was almost planned…

This brings us back to the current situation at the Delaware Auditor of Accounts office.  As I wrote earlier this week, there is some shady business going on there.  Kathleen Davies had my tip about NCS and Academy of Dover’s lack of IRS 990 forms and I believe it was an active investigation.  I know this because I received a call from John Fluharty about it in March, two months before Davies was put on “leave”.  He wouldn’t call to get information if it was not active.  If that office was leaning towards NCS needing to put up their 990 tax forms, invariably the inspection would lean towards “Why aren’t they putting up this information?” which could further lead towards a full investigation of their finances.

Senator David Sokola has been the Senator for the 8th District since 1995. This district surrounds most of Newark Charter School’s five mile radius.  Sokola helped in the creation of Newark Charter School.  He even joined their board for a stint in the mid 00’s while also an elected Senator, which is perfectly legal in Delaware.  But in his stint as a Delaware Senator, he has essentially served as a buffer between the school and true accountability.  Sokola is a senior-ranking Delaware Senator.  Not only is he the Chair of the Senate Education Committee, but he is also the Senate Chair on the Bond Committee.  If you look at a lot of the legislation about education he writes, every single bill has benefitted Newark Charter School in some way.  I’m sure if you look at some of his non-education legislation, including ones about land usage, those would benefit the school as well.  This isn’t the first time I’ve thought out loud about Senator Sokola.

In my fictional novel I am working on about Kathleen Davies and whodunit, I would put Senator Sokola as the lead suspect in this mystery.  He has the means, the motivation, and the pull to get something like this done.  He is well-connected with the Delaware Charter Schools Network and Rodel.  Since he is also in tandem with many House and Senate Republicans over charter schools, it would stand to reason he would lend his ear to them and get a fire going.  As well, he has a very cozy relationship with the State Board of Education Executive Director Donna Johnson and Delaware Secretary of Education Dr. Steven Godowsky.  As the Chair of the Senate Education Committee, this is to be expected, but he always seems to be able to get support for his bills that do more damage to public education.  His connections with the Delaware Charter School Network go back many years.  He has frequently been involved with the Rodel Foundation sponsored Vision Coalition.  He is a firm believer in standardized testing and teachers being judged by those scores.  He put in very damaging amendments to House Bill 199 a couple months ago based in large part on feedback he received from his beloved Newark Charter School.  He is no friend to traditional school districts.  As the Newark Charter School legislative cheerleader, he can count on votes from his constituents who have students attending that school.  With a student population of over 2,000 students, that is a lot of votes.  In exchange, he allows them to operate with no transparency, accountability, or oversight through his legislative input.

Now some will say Tom Wagner is a staunch Republican and Sokola is a Progressive Democrat!  How could Sokola convince Wagner to do anything?  He didn’t have to.  Somehow, someway, the “whistleblowers” in the Davies complaint to the Office of Management and Budget were told exactly how to get Davies.  This idea had to come from someone with advanced knowledge of the rules and regulations of the Delaware accounting procedures and policies.  We know Newark Charter School knew about what was going on with Davies and her “administrative leave” from the Auditor of Accounts office based on what they put in their June Board meeting notes:

In Delaware politics and education, there is no such thing as a coincidence.  The fact Schlossberg would bring this up a month after Davies was put on leave is very telling in my opinion.  We know the Delaware DOE already knew about all this because one of their employees told me about in late May.  So if that person would tell an education blogger, it would stand to reason many in the state knew as well.  NCS, in their board meeting minutes over the past year, has been very diligent about discussing legislation that could impact charter schools (especially the charter school audit bills).  But to write about how Davies was specifically put on leave, something I wasn’t even aware of until last Saturday when the News Journal came out with their article, would suggest having very intimate knowledge of the case against Davies.  So much so that they wanted to adopt this into their board policies.  The News Journal article never even specified if their information was coming from their “sources” or the Office of Management and Budget.

NCS connection with Sokola would give them instant knowledge of anything going on at a statewide level.  But this has always been my big question about the charter school audit bills: why were they fighting them so hard?  Especially Newark Charter School?  Some answers can actually be found in the oddest of places.  Newark Charter School’s selected auditor for their annual required audits is Barbacane Thornton and Company.  As seen below, they do this work for many Delaware charter schools.

In looking at this list, I see quite a few charter schools who have landed in hot water at the State Auditor of Accounts office: Academy of Dover, Delaware Military Academy, and Providence Creek Academy.  One of their lead accountants, Pam Baker, testified in opposition to Kim William’s third attempt at a charter school audit bill, House Bill 186, in June of 2015:

She said this bill takes away responsibility from the board to select (an) independent auditor and takes away the opportunity for charter schools to do that effectively.

Now why would someone who is hired by many of these schools to do their audits put her neck out there for schools she knew were under investigation?  As well, her statement basically said “they may not be able to hire the firm I work for” which would show a clear conflict of interest in her sworn testimony.  A lobbyist for the Delaware Charter Schools Network even spoke on behalf of the business office of Newark Charter School at this meeting:

Nitin Rao, DCSN, spoke on behalf of the business manager of Newark Charter School in opposition to the bill.

For a school that seems to have a great deal of extra revenue after their year-end expenditures each year, this was a head-scratcher.  Like many who felt the same way, I questioned whether the charters opposition stemmed from the cost involved with the legislation or more what these new audits through this legislation would find.

But what Kathleen Davies said at this meeting was the essential problem with the charter school audits in Delaware:

Kathleen Davies, Chief Audit Administrator at AOA, said AOA does not have any firms under contract that conducted any charter school audits. She rebutted that the IRS filing mentioned by Pam Baker is a non-audit service and those fees are not part of the audit work. She said there have been a lot of terms thrown around and the only requirement for charter schools, with regard to oversight, is GAP compliant financial statements. She said there are currently seven investigations on charter schools underway because of mismanagement of funds. She said fraud and abuse were never brought to anyone’s attention for these seven schools. She said AOA has subpoena power and a firm, under AOA contract, can be used to address the issues found. She said those seven charter schools got a “clean bill of health” with no findings and no body to identify issues. She said this bill would change that.

Notice Davies brought up IRS filings.  As we all know, Newark Charter School doesn’t even have to file with the IRS because of their “special” exemptions.  IRS filings require all sources of revenue.  Which brings us back to Student Body Activities.

If student body activity expenses are an item in the school operating budget, they are counting on this money from the state and local funds.  But the issue comes in when these student body activities are pre-planned field trips and events that students or parents pay for prior to the actual event.  I can certainly buy the notion that teachers or the school would have to pay for many of these events ahead of time.  And as Head of School Greg Meece is the only person in the school who has a state procurement card, teachers or the school would have to pay out of pocket ahead of time for these activities.  But to spend $445,000 in student body activities for a school population of over 2,100 students, there would be a bucket load of revenue coming in from field trip money.  This is the revenue we are not able to see.  At all.  Anywhere.  Trust me, I looked.  All over the place.  There is nothing on Delaware Online Checkbook showing any such revenue.  If this revenue was put back into the school, we would see it as negative amounts in their expenses.  But they don’t exist through the state accounting system.  Therefore, they are only showing the expenses of student body activities and not the income that comes back as revenue to offset those costs.

Without knowing exactly where they put that revenue, I can safely guess where they put the entire $449,575.29 they reported as “student body activity” on Delaware Online Checkbook.  They used that revenue to pay for the remaining amounts on two capital building projects they contracted with one company to perform.

In the fall of 2014,  Newark Charter School started talking about building a Performing Arts Center and a STEM Laboratory Suite.  Since these are capital projects, not minor capital improvements, they would not be able to get funding from the state as dictated by the Delaware charter school law.

So even though Newark Charter School received $273,447 from the General Assembly for FY2016 for minor capital improvements, they could not use it for projects of this magnitude and scope.  Since the Performing Arts Center would be an entirely new addition to the school and the STEM labs would require structural change to the building, these two projects did not qualify for minor capital funding.  So how much capital funding would they need to obtain for this project?  Quite a bit according to their application for the Delaware Charter School Performance fund in the Spring of 2015.

As part of Delaware charter school law, NCS had to submit a minor modification request for these projects.  They did so, and it was approved by then Secretary of Education Mark Murphy according to their December 2014 board minutes:

But in their application for the minor modification, Meece either greatly underestimated the costs for the project or later added more bells and whistles to the whole thing.  Because the original projected amount was $853,088.  At no point in time did NCS resubmit a new minor modification based on the financial difference between the original amount and the projected amount, a difference of $636,061.  But the section of the application where it asked about financial impact on the school was very enlightening:

Greg Meece and Joanne Schlossberg, their Business Manager, knew they would have to get a lot of money for this project and began working the foundation circuit.  They were able to obtain funding from the Longwood Foundation ($500,000), the Welfare Foundation ($125,000), and the Calder Foundation ($79,000).  They applied for $400,000 in the Charter School Performance Fund (even though the maximum amount any Delaware charter school could win was $250,000 that year).  They received the maximum amount of $250,000.  Even though they were able to generate a lot of funding in a very short time, they were still short from the budgeted amount.   By $535,149.00.  Since construction was already underway by this point, the school had to raise the remaining  funds for the projects or  use funds from their reserves.

In June of FY2015, the board’s treasurer stated the school was $668,000 favorable for revenue “due to the annual fund and pledges from the capital campaign”.  The school received the Longwood Foundation grant in June of 2015.  In July of FY2016, the treasurer stated the school was not $1,283,000 favorable in state revenue due to the grant funds received from the Longwood Foundation and the Welfare Foundation in FY2015.  As well as the other grants they received in June of 2015, they received the $79,000 grant from the Calder Foundation and $250,000 from the charter school performance fund in July of 2015.  At their September 2015 board meeting, it was announced the funds received from the Longwood and Welfare Foundations were received in FY2015 so they could not put this as revenue in FY2016 even though they budgeted these funds for FY2016.  This caused their revenue to be unfavorable in the amount of $961,000.  But they were going to amend their budget to make this happen.  While a lot of these revenue figures are all over the map, it is important to look at the $668,000 talked about in June of 2015.  If the school already had pledged amounts coming from the Longwood and Welfare Foundations totaling $625,000.00, it would stand to reason their remaining “favorable revenue” came from their annual fund.  Which leaves $43,000 they had remaining from their FY2015 annual fund which they committed towards this project.  This reduced their shortage for the two projects to $449,149.00.

Earlier this week, I posted an article about Student Body Activity funds and questioned why Newark Charter School is showing such a high amount for this.  Based on this article, I showed how a FOIA received by a Delaware citizen showed NCS as spending $445,000 in student body activities as of 7/2/16.  As of 8/2/16, that amount increased to $449,557.29.  Now if you notice the projected amount for the STEM Laboratory Suite in the above picture, that amount is for $449,588.  Almost the exact same amount as the expenditures for their student body activity.  If this fund is meant for just student body activities, they should not be going towards capital costs, such as the creation of a STEM Laboratory and a Fine & Performing Arts Center.  Delaware law is very specific about this and the business manager and Greg Meece are well aware of these laws.

How much did these two projects actually cost Newark Charter School? $1,512,599.08.  They contracted with Daystar Sills, a construction company in Delaware.  The difference between the projected amount in their charter school performance fund application and the actual amount was $23,540.08.

If you add up the following figures:

$43,000 from their FY2015 Annual Fund

$500,000 from Longwood Foundation

$125,000 from Welfare Foundation

$79,000 from Calder Foundation

$250,000 from Charter School Performance Fund

The total amount is $997,000.  Which leaves them very short of the eventual $1,512,599.08 those projects were going to cost.  We know, as of  their November 2014 board minutes, the school received $64,000 from an auction they had.  This was their 11th annual auction.

They had their next auction in November of 2015, but at their November 2015 board meeting, Greg Meece did not give an amount of how much they generated.

By not publicly mentioning how much they received in their FY2016 auction, they could leave this open for future use as they saw fit.  Since there was never a capital fund amount given, we would have to assume it was close to the amountselaw they received in prior years.

Since they are so short on this capital project, and we don’t know where the money is coming from to pay for the rest, watch what happens when we add this to the $997,000:

$449,575.29 from FY2016 Student Body Activity expenses

We now get a grand total of $1,446,575.29.  They are still short $66,023.79.  We can safely guess where those funds came from based on their FY2015 Audit with Barbacane Thornton & Company:

Note how NCS received $77,226 in pledged monetary support in FY2014 and $67,812 in FY2015.  It would stand to reason they used their FY2016 pledge amount to supplement the rest of this bill from Daystar Sills.  The school could never use extra local reserve funds because those funds could only be used for operating expenses or minor capital improvements based on Delaware charter school law.  They could not be used for capital building projects.  Meece knew this, and Mark Murphy should have.  The fact that Meece applied for a minor modification for this huge project and didn’t know the true estimate of the costs, didn’t have the capital funding when he applied for it, and operated on the assumption that Mark Murphy would just take it at face value that the school could always fall back on local appropriation reserves speaks volumes about the arrogance behind Newark Charter School.  Meece and Schlossberg, in my opinion, knew exactly what they were doing with all of this.  They knew the project would be short and planned ahead of time.

In June of 2015, they budgeted $300,000 for student body activity.  This would have been a very good guess on the amount they would need to pay towards the final bill for this project.  Because at that time, they somehow thought they could get $400,000 from the charter school performance fund.  This turned out to be a huge error on their part because they had to somehow find a way to get another roughly $150,000 when they only got $250,000 from the performance fund.  This is how their Student Body Activity expense amount went from a budgeted $300,000 to a little bit shy of $450,000.  They actually planned for this amount, in my humble opinion, based on how the project was turning out.  Once they realized their error with the performance fund, they got to work.

To use a shell student body activity account to pay for Capital projects is an obvious violation of Delaware state law.  To never report the revenue they received from parents and students should be a violation of state law.  To use parents and students money to disguise illegal activity is fraud, pure and simple.  Because I am not a judge or a jury, I cannot say with 100% certainty this is exactly what Newark Charter School did.  If I were writing a fictional novel, either as part of the Kathleen Davies whodunit or a new one on Newark Charter School, because no criminal charges or official allegations of wrongdoing have been laid out by any type of legal authority in the State of Delaware, I would say there is most likely a strong connection to this activity going on at Newark Charter School and Kathleen Davies eventually being put on leave.  I believe NCS knew there was an investigation going on with their IRS 990 forms.  I believe they knew their exemption was a glass house that would eventually have many stones thrown at it.  While I don’t think it was a case of Senator David Sokola going to Tom Wagner and saying “You have to stop this audit inspection cause my buddies at Newark Charter School could get in trouble”, I do believe the goal was to slam the character of Kathleen Davies.  By doing so, it would undermine the audit inspections she already completed (the September 30th Enrollment Count inspection and the Millville Fire Department audits which were either pulled or redone).  As well, it would cast a doubt on audits already underway.  I believe the right amount of pressure was put on Tom Wagner by the Office of Management and Budget to get Davies put on leave.  Aside from the false accusations of Davies abusing the travel reimbursement accounts by not using the state procurement card, there had to be a confrontation to push Wagner towards that decision.  The accusations by itself wouldn’t be enough.  There had to be that one final straw.

The Delaware Department of Education wanted the September 30th Enrollment Count done.  When the report came out, they disagreed with Davies recommendations in the report.  They complained to Wagner.  This I do know.  What happened next, I can only surmise.  Wagner wanted Davies to change the report.  Davies said no.  Boom.

Once Davies was gone, Wagner could kill the petty cash audit which would have shown charter schools abusing the petty cash policies in the state.  He did that and instead sent letters to all the charter schools that violated the petty cash policy with no ability for the public to see those letters.  He pulled the September 30th audit.  He took out Davies letter at the end of the Millville Fire Department inspection report.  We don’t know what is happening with the Newark Charter School IRS 990 Form Audit Inspection.   I have to assume we will never see it.  Unless someone gives a very good reason why the school would strongly benefit from not filing such a tax return.  Someone would have to show how they hide things financially so they can get what they want.  Then Tom Wagner’s office would have to act fast and get into that school and investigate ALL of their finances, from top to bottom.  He would want to subpoena all of their bank deposits.  He would have to turn the information over to the Delaware Attorney General’s office and in an ideal world, that office would act on that information.  If any federal funds were found to be abused in the findings of this investigation, the FBI would have to get involved.  Since this school has been around fifteen years with no IRS tax filings, I would assume the FBI would be very interested in how much revenue this Delaware corporation has received and would want to account for every single penny going in or out of the school.  If the FBI didn’t have anything to go on, I would have to imagine the State of Delaware would based on the information they would get out of their investigation.  Not to mention the very shady and scummy enrollment practices this school has had over the years in their attempts to have perfect high-stakes test-takers.  In their isolated and non-transparent world with a five-mile radius around the flagpole at their high school, some of which goes into a neighboring state, but determines what students can or can’t go to their elite wannabe private school.  Where parents can afford to pay for extravagant field trips because they don’t have to use those funds for a private school because this school is so perfect.  In an ideal world, we wouldn’t have this.  But this isn’t an ideal world.  This is Delaware.

I have no doubt Newark Charter School is not alone in Delaware with these kinds of financial games.  I think it has happened quite a bit, and not just in charter schools.  I think it has happened in our districts as well.  Maybe not the same chess move NCS pulled on this one, but other moves designed to give an advantage of some sort.  We’ve seen it before and we will see it again.  Until someone turns the board over and makes new rules for the game.  That is what needs to happen in Delaware.  This is my mission and others have this vision as well.  We keep waiting for someone in power to step up and do the right thing.   All we hear is silence.

To see the full FY2015 audit for Newark Charter School, please see the below report:

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