PUBLIC CHARTER SCHOOLS. Entity Type. This document addresses the following topics related to Tennessee Public Charter Schools. Additional Information:

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1 Jan 2015 PUBLIC CHARTER SCHOOLS STATE OF TENNESSEE COMPTROLLER OF THE TREASURY DEPARTMENT OF AUDIT DIVISION OF LOCAL GOVERNMENT AUDIT Entity Type Fr accunting, financial reprting, and auditing purpses, Tennessee public charter schls are gvernmental entities. Summary f Cnclusin This dcument addresses the fllwing tpics related t Tennessee Public Charter Schls Entity Type Legal Standing Audit Requirements Reprting Requirements Unifrm Chart f Accunts Additinal Infrmatin: Tennessee Department f Educatin Charter Schls Link hls/charter_schls.shtml Paragraph 1.01 f the AICPA Audit and Accunting Guide: State and Lcal Gvernments prvides applicable guidance fr determining if an entity is gvernmental, and states, in part, Public crpratins and bdies crprate and plitic are gvernmental entities. Public crpratins are defined as fllws (fn. 4 f 1.01): Black's Law Dictinary defines a public crpratin as: An artificial persn (fr example, [a] municipality r a gvernmental crpratin) created fr the administratin f public affairs. Unlike a private crpratin it has n prtectin against legislative acts altering r even repealing its charter. Instrumentalities created by [the] state, frmed and wned by it in [the] public interest, supprted in whle r part by public funds, and gverned by managers deriving their authrity frm [the] state. Sharn Realty C. v. Westlake, Ohi Cm. Pl., 188 N.E.2d 318, 323, 25, O.O.2d 322. A public crpratin is an instrumentality f the state, funded and wned in the public interest, supprted by public funds and gverned by thse deriving their authrity frm the state. Yrk Cunty Fair Ass'n v. Suth Carlina Tax Cmmissin, 249 S.C. 337, 154 S.E.2d 361, 362. Additinally, paragraph 1.02 states, in part, the fact that an entity is incrprated as a nt-fr-prfit rganizatin and exempt frm federal incme taxatin under the prvisins f Sectin 501 f the Internal Revenue Cde is nt a criterin in determining whether an entity is gvernmental r nngvernmental fr accunting, financial reprting, and auditing purpses. Tennessee public charter schls meet the abve described characteristics f a public crpratin (i.e., gvernmental entity) as summarized belw: 1

2 Entity Type (cntinued) Created fr the administratin f public affairs The establishment r renewal f a charter schl in Tennessee must be apprved by a Tennessee Lcal Educatin Authrity (LEA) r the Tennessee Achievement Schl District (ASD) and are intended t prvide pprtunities fr imprving public educatin and are apprved nly when the public interest is best served by their peratin. (TCA and 106 and 108(b)) A charter schl is defined as a public schl in TCA (9). Public charter schls are subject t many f the same state laws as LEAs See TCA N prtectin against legislative acts altering r even repealing its charter Charter schl pwers are granted by the legislature and may be altered at any time by the state legislature. (TCA , et seq.) Created by [the] state, frmed and wned by it in [the] public interest, supprted in whle r part by public funds Public charter schls receive an amunt equal t the per student state and lcal funds received by the LEA and all apprpriate allcatins under federal law r regulatin, including, but nt limited t, Title I and ESEA funds. This is the same funding that ther students attending Tennessee public schls receive. (TCA ) Gverned by managers deriving their authrity frm [the] state Thse wh gvern public charter schls in Tennessee, althugh nt appinted r apprved by state r lcal gvernment, nnetheless derive their authrity t gvern frm the laws enacted by the Tennessee state legislature. Sectin (f), TCA, states, A public charter schl shall be gverned and managed by a gverning bdy in a manner agreed t by the spnsr and chartering authrity as prvided in the charter agreement. Other pertinent issues related t their classificatin as a gvernmental entity fr accunting, financial reprting, and auditing purpses: Budgets are required t be prepared in the same frmat required by the state department f educatin fr LEAs. (TCA (l)) Charter schls are required t participate in the grup insurance plans authrized in Title 8, Chapter 27, Part 3, f TCA in the same manner as teachers and ther full-time permanent emplyees f the LEA. There are five states with cmparative charter schl legislatin: Arkansas, Gergia, Missuri, Nrth Carlina, and Virginia. All f these states fllw sme frm f GASB reprting requirements, including regulatry reprting that is based n GASB. 2

3 Entity Type (cntinued) The authrity fr charter schls t levy taxes r issue bnds is limited by state statute. (TCA ) The pwer fr charter schls t (1) sue and be sued, (2) cntract fr services, (3) buy, sell r lease prperty, (4) brrw funds, and/r (5) pledge its assets as security is prvided by state statute. (TCA ) Emplyees and teachers f charter schls participate in the Tennessee Cnslidated Retirement System (TCRS). (TCA ) The chartering authrity retains respnsibility fr TCRS cntributins shuld the charter schl fail t make payments. Recrds f public charter schls are pen fr public inspectin. (TCA ) Schls are subject t the same statutry web site infrmatin requirements as LEAs (i.e., ntice f public meetings, agendas, plicies, and names f the gverning bard). (TCA ) Meetings f the gverning bdy are deemed public business and are subject t public meeting requirements utlined in Title 8, Chapter 44, Part 1 f TCA. (TCA (h) and ) The gverning bdy f a charter schl has the same limits f liability as lcal schl systems and are required t prvide insurance in accrdance with TCA fr any liability expsure. Cnflicts f interest are subject t the public cntracts statutes at TCA and (TCA (g)) Surety bnd requirements fr charter schl fficials are the same as fr public fficers, as prescribed by TCA (TCA (n)) Tuitin limitatins are defined by state statute. (TCA and (k)) Schls must reprt n a fiscal year end f June 30. (TCA (l)) Charter schls are subject t a chartering authrity and chartering agreement as utlined in TCA , et seq. Apprval t perate under a charter agreement may be revked r denied renewal by the chartering authrity. (TCA ) Student enrllment is regulated by state statute. (TCA ) 3

4 Entity Type (cntinued) All cntracts fr gds in excess f ten thusand dllars ($10,000) are required t be bid and apprved by the gverning bdy f each public charter schl. (TCA (e)) TCA (a) states that, All funds received by a charter schl shall be spent accrding t the budget submitted r as therwise revised by the public charter schl gverning bdy, subject t the requirements f state and federal law. Legal Standing The GASB Cdificatin f Gvernmental Accunting and Financial Reprting Standards, Sectin , prvides guidance in determining the legal status f a gvernmental entity: Determining Separate Legal Standing.114 An rganizatin has separate legal standing if it is created as a bdy crprate r a bdy crprate and plitic, r if it therwise pssesses the crprate pwers that wuld distinguish it as being legally separate frm the primary gvernment. Generally, crprate pwers give an rganizatin the capacity t have a name; the right t sue and be sued in its wn name withut recurse t a state r lcal gvernmental unit; and the right t buy, sell, lease, and mrtgage prperty in its wn name. The crprate pwers granted t a separate rganizatin are enumerated in its crprate charter r in the legislatin authrizing its creatin. A special-purpse gvernment (r any ther rganizatin) that is nt legally separate shuld be cnsidered, fr financial reprting purpses, part f the primary gvernment that hlds the crprate pwers. [GASBS 14, 15] Tennessee charter schls are cnsidered t be legally separate in accrdance with the abve guidance because TCA prvides, in part, that the gverning bdy f a charter schl may: sue and be sued, buy, sell r lease prperty, and brrw funds as needed. Legal Organizatin f Individual Charter Schls There is n requirement that each public charter schl perating frm the authrity f an apprved charter agreement establish legal separateness by the creatin f a separate legal charter with the Tennessee Secretary f State s Office. In practice, the legal structure r frm varies. Sme public charter schls are structured t be part f the same legal entity (i.e., the spnsr rganizatin r the Charter Management Organizatin). Others are legally frmed with separate charters fr each schl. The legal rganizatin and frm are at the ptin f the gverning bdy. As explained abve, because f the pwers granted by state statute, charter schls and Charter Management Organizatins are in substance legally separate entities, regardless f their legal frm. 4

5 Audit Requirements PUBLIC CHARTER SCHOOLS In accrdance with TCA , public charter schls shall have an annual audit f its accunts and recrds, including internal schl activity and cafeteria funds. The audits shall meet minimum audit standards and regulatins prescribed by the Cmptrller f the Treasury. All audits shall be cnducted in accrdance with Gvernment Auditing Standards. A unifrm cntract t audit accunts shuld be executed annually utilizing the Cmptrller s nline Cntract and Reprt System (CARS), accessible at Audits f Multiple Schls Operated by a Charter Management Organizatin (CMO) A Charter Management Organizatin (CMO) is defined as a nnprfit entity that perates multiple charter schls at least ne (1) f which is in Tennessee (TCA (4)). A CMO has ne f tw ptins regarding the annual audit fr the charter schls they gvern: (1) A separate audit fr each individual charter schl. (2) A single r cmbined audit fr all schls. TCA (b)(3) authrizes a CMO t have a single audit fr all charter schls perated in Tennessee by the CMO. Cntracting fr the Audit Special Cnsideratins fr CMOs Separate Audits fr Each Schl When cntracting fr the annual audits f the different schls perated by the CMO, separate audit cntracts shuld be executed in the name f each individual schl. One Audit Reprt fr All Schls Operated by the CMO When cntracting fr a cmbined annual audit fr all schls perated by the CMO, the audit cntract shuld be executed in the name f the CMO. Hwever, in accrdance with TCA (b)(3), the audit scpe shall encmpass the financial activities f the Tennessee public charter schls perated by the CMO, but nt the activities f the CMO itself. Reprting Requirements As explained abve, Tennessee public charter schls meet the definitin f a gvernment fr accunting, financial reprting, and auditing purpses. Fr GASB reprting purpses, Tennessee public charter schls are defined as a special purpse gvernment. The peratins f public charter schls are very similar t the peratins f a Lcal Educatin Agency (i.e., cunty and municipal bards f educatin). Under GASB standards, charter schl peratins meet the criteria fr being reprted as gvernmental funds. 5

6 Reprting Requirements (cntinued) Additinal Reprting Requirements fr Charter Management Organizatins (CMOs) that Chse t Have One Audit f All Schls Operated by the CMO As explained abve, a CMO has the ptin f having (1) a separate annual audit fr each charter schl they gvern r (2) a single r cmbined audit fr all schls. CMOs that have a cmbined audit shuld include the fllwing. Title Page The title page f the financial reprt shuld include the name f the CMO as well as the name f each Tennessee public charter schl perated by the CMO. Fr example: Annual Financial Reprt Tennessee Public Charter Schls Operated By ABC Public Charter Schls Schl A Schl B Schl C Financial Statements The financial reprt shuld include gvernment-wide financial statements and gvernmental fund financial statements fr the charter schls perated by the CMO. Individual schls are nt required t be reprted separately (i.e., in separate funds) in the basic financial statements. When schls are cmbined and reprted tgether, reprting by individual schl shuld be included as supplemental infrmatin as described herein. (If each schl is reprted as a separate special revenue fund, the supplemental infrmatin described belw is nt required.) Other Supplementary Infrmatin TCA (b)(3) authrizes a single audit f multiple schls prvided that such audit includes all infrmatin under this sectin fr each schl. Accrdingly, the annual audit reprt shall include supplemental financial infrmatin in accrdance with the fllwing: a) Required Schedules: i. Schedule f Assets, Liabilities and Fund Balance(s) ii. Schedule f Revenues, Expenditures and Changes in Fund Balance(s) b) The schedules shall be cnsistent with GASB reprting requirements fr gvernmental fund financial statements. 6

7 Reprting Requirements (cntinued) c) Separate schedules shall be included fr each schl that is perating frm a distinct charter agreement. d) The schedules shall be presented as Other Supplemental Infrmatin (OSI). e) An pinin n whether the schedules are fairly stated in all material respects in relatin t the basic financial statements taken as a whle is required. Internal Schl Funds The reprting fr internal schls funds, including mney raised by student club accunts, is addressed in Sectin 7 f the Tennessee Internal Schl Unifrm Accunting Plicy Manual, accessible at: Unifrm Chart f Accunts TCA (m) requires public charter schls t maintain their accunts and recrds in accrdance with generally accepted accunting principles and in cnfrmance with the unifrm chart f accunts and accunting requirements prescribed by the Cmptrller f the Treasury. Charter schls shuld utilize the Cunty Unifrm Chart f Accunts, accessible frm the Divisin f Lcal Gvernment s website. Because the peratins f charter schls are similar t a lcal educatin agency (i.e., bard f educatin), the Cunty Unifrm Chart f Accunts prvides the necessary accunt structure and classificatins fr the charter schls t maintain their accunts in cmpliance with applicable GASB reprting standards. 7