LOS ANGELES — California charter school chain Magnolia Public Schools will rekindle its growth plans after settling a lawsuit against the Los Angeles Unified School District, which had tried to shut down Magnolia's schools there.
The charter operator, which has $6 million in debt, is now working closely with underwriter RBC Capital Markets for a market return to price bonds to support its plans, said Caprice Young, the education turnaround expert Magnolia hired as chief executive officer in January.
Magnolia wants to be able to grow enrollment in each of its schools from 200 to 450 or 750, which Young said is a much sounder financial model.
Magnolia, a network of 11 public charter schools in Los Angeles, San Diego, Santa Clara and Orange counties, provides a college preparatory educational program emphasizing science, technology, engineering and math.
Its Los Angeles schools triggered the charter operator's legal battle with the massive Los Angeles Unified School District, the nation's second largest with more than 660,000 students.
"About a year ago, it was clear that Magnolia was getting really beat up," Young said.
Magnolia had received conditional approval for two of its charter schools in Los Angeles.
"Then the school district took the very drastic step of not renewing their charters on the last Friday in June - and had them closed as of July 1," Young said.
The schools LAUSD moved to close are in Northridge in the San Fernando Valley and the Palms neighborhood on L.A.'s Westside. In November, LAUSD tried to close a third school located on a LAUSD campus in Bell.
"In all three cases, the courts sided with us to keep the schools open," Young said.
The settlement document between LAUSD and the charter operator allows Magnolia to transfer money between schools, which LAUSD had challenged as a practice, she said.
"It is really important, because our ability to grow is based on our ability to loan money to schools when they are in the early stage and have them repay loans to the larger organization when they grow," she said.
In the settlement, Magnolia agreed to sever ties with a non-profit that had provided educational services to the district at its LA schools, the Accord Institute for Education Research.
The charter school chain brought in a seasoned chief financial officer and contracted its back office work to Ed Tech, a respected back-office charter school provider, Young said.
In the settlement, Magnolia also agreed to restructure its governing board, hire a new auditor, and agreed to fiscal oversight by Fiscal Crisis & Management Assistance Team, an organization created by the state's Education Code to provide fiscal advice, management assistance and training to school organizations that need it.
The settlement agreement also notes Magnolia's hiring of Young's new management team.
The conflict between LAUSD and Magnolia led to a state audit of the charter operator, formally requested by state Assemblyman Adrin Nazarian, D-Van Nuys, in July 2014 and approved by the Joint Legislative Audit Committee.
The audit was released earlier this month. Magnolia officials trumpeted the result as a vindication, though the auditor's language was more nuanced.
The California state auditor concluded there was no misappropriation of state funds, though it found Magnolia's "financial controls still need to be strengthened."
Magnolia's new leadership says it is already implementing the auditor's recommendations.
"We started to implement changes to strengthen and improve our processes while the audit was taking place to reinforce our ongoing commitment to high educational outcomes," Young said.
She said Magnolia's woes are a microcosm of what happened in California during the recession.
The state, because of budget problems, began deferring scheduled payments to schools starting in 2008, delaying them as much as six months, she said.
Charter schools lacked the access to public markets traditional school districts enjoyed to issue short-term notes while they awaited funding from the state.
Magnolia's inter-school loans were appropriate and necessary given the state's deferral of $10 million in funding to Magnolia, Young said.
The auditor found that it was legal for the foundation to temporarily loan state apportionment funds between schools, so long as the loan does not adversely affect the public school purposes of the charter school that loans the funds.
The state auditor found that LAUSD acted prematurely when it moved to close three of Magnolia's Los Angeles-area schools based on a preliminary audit conducted by the school district's Office of the Inspector General.
The auditing team had just completed the field work and the document was in draft form.
"The school district took the step based on preliminary information that was inaccurate," Young said.
LAUSD "acknowledges the actions on the part of the new leadership of Magnolia Public Schools to address the substantive concerns that the district raised in fulfillment of its oversight responsibilities," said Shannon Haber, an LAUSD spokeswoman.
"The District will follow through on its stated responses to the auditor's recommendations as part of our ongoing commitment to high quality charter school authorizing, as well as monitor Magnolia's implementation of its action steps," Haber said. "As noted in the audit, the District and Magnolia Public Schools were able to reach a settlement that allows both parties to move forward together in the best interest of students and in protection of taxpayers' trust."
The report notes that Magnolia is a high-performing network of schools that generally outperforms other neighborhood schools.
Magnolia sued in Los Angeles Superior Court in July 2014 to keep the schools open.
LAUSD didn't release the inspector general's report until October, which didn't give the charter school the opportunity to see the facts and findings or refute them prior to the release of the report, Young said.
"All of the charter schools that were not renewed are serving very high poverty students," Young said. "I was outraged; and when they asked if I would help. I said, 'yes."
The auditor said Magnolia's expenditures to hire skilled math and science teachers from abroad were "lawful and appropriate."
However, in the LAUSD settlement, Magnolia agreed to cease spending money on immigration fees for employees, other than renewal fees for those already hired, and to consult with LAUSD before embarking on any new foreign recruitment program.
Young said Magnolia has made significant improvements to the key areas of fiscal controls, compliance and accountability since it put in place her new management team.
Magnolia also implemented expenditure controls as well as payroll controls, training and oversight that were previously lacking.
The charter school operator also said it has instituted a new, transparent fiscal structure to ensure accurate accounting of revenues and expenditures in schools as part of a larger effort to strengthen its financial operations.
In addition, the board created a finance committee and an audit committee to involve all stakeholders in the accountability and oversight of Magnolia's finances.
"We are confident the progress we have made and our continuing commitment to improving financial, reporting and other internal controls will be apparent when the California State Auditor reviews our efforts moving forward," Young said. "Our goal is to be recognized as a model charter school leader in California and to continue to provide a high-quality, STEM-focused public education to our students."
Young said the audit is "really vindication of the work that Magnolia has done."
"It shows that when LAUSD was announced in the press that Magnolia was insolvent that it really wasn't true," she said. "This audit shows in July 2014 that Magnolia schools were financially sound."