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What happens when the state shuts down a charter school for running out of cash?

It’s a question that no one in Hawaii had given much thought to until recently, but the answer could leave taxpayers on the hook for hundreds of thousands of dollars.

Hawaii State Public Charter School Commission staff members have spent the last month combing through records and sorting assets at Halau Lokahi Public Charter School in Kalihi, which closed its doors for good at the end of May after the state revoked its charter.

Unlike most states, where charter schools are registered as private companies or nonprofit corporations, charters in Hawaii are state agencies. That means the state may be responsible for debts if the school closes.

“Does this charter school owe you money?” Charter School Commission staff began asking Halau Lokahi contractors — even going so far as placing an ad in the newspaper giving debtors an opportunity to come forward.

Hawaii’s first-ever charter revocation is also proving to be a learning moment for the commission, which was created three years ago to provide better oversight to the state’s 33 charter schools.

The troubles at Halau Lokahi already led to one legislative change this year, but more requests could be in the pipeline.

“This has been a painful experience for everyone,” said Tom Hutton, executive director of the commission. “It has made very real for our charter schools that we are in a new era, where closure is really a possibility. And that is very scary for schools that are not flush with money and working hard and doing great things.”

First Closure in the State

One of the first charters to open in Hawaii, Halau Lokahi was beloved by many parents, but struggled financially in recent years.

When the commission began reviewing the school’s finances, it came across roughly $100,000 in questionable expenditures that it referred to the Attorney General’s office.

The charter school’s director and two employees were eventually arrested, but are not facing charges.

But the issues of possible misappropriations weren’t enough to have caused the school’s financial problems alone, Hutton said.

“The bigger issue was living beyond their means,” Hutton said.

Rent for the school facilities reached $33,000 a month — far beyond what the school could have maintained. At one point in the last school year, the charter was unable to make payroll.

“Unfortunately, facilities are a challenge for charter schools,” Hutton said. “That being said, even people who knew the realities were warning them that was an awful lot.”

In 2014, the Charter Schools Commission agreed to let Halau Lokahi continue running on the condition that it replace its board of directors and school leadership and find a way to balance its budget.

This year, the school attempted several times to come up with a new fiscal plan, but each fell short of passing muster with the commission.

The school’s last-ditch effort was a plan to bring in a for-profit charter school company from the mainland to deliver curriculum online.

“We were vetting this plan days before the semester started and just couldn’t recommend that a school change its instructional model a few days before the semester,” Hutton said.

Finally, the commission began the process of revoking the school’s charter and working with parents to try and transfer students to other schools. By the end of May, the school had around 45 students remaining.

Although one other charter school had closed because of financial problems, this was the first charter in the Hawaii to be shut down by the state.

“Our law never contemplated a situation where the school had burned through all its money and stayed open,” Hutton said.

Some Tough Lessons Learned

After Halau Lokahi’s last day of school, commission staff started the arduous process of closing and cleaning the campus.

The first issue was locating student records and making sure everyone was assisted in transferring to a new school.

Multiple student files were missing information, Hutton said. The lesson for the commission? Spot-checking student records may need to become a routine part of charter school oversight.

After that, the most pressing challenge was figuring out how much debt taxpayers may be on the hook for.

The biggest debt is back rent. The school’s bookkeeper was possibly owed a little money. There was an outstanding Xerox lease that the commission is trying to find someone to take over.

As of June 15, no one had responded to the newspaper announcement.

The debts are still being finalized, but could run from $200,000 to $400,000.

Then commission staff started organizing the school property, taking down posters and decorations from the walls, and preparing to sell off any assets to offset the debt. It reached out to other schools and nonprofits, and then posted an ad on Craigslist looking for private buyers.

Some furniture and old computers brought in about $6,000. The school had already sold off its vans before the commission initiated closure, and at least one of those is currently listed for parts on Craigslist by an auto recycling company.

What the commission couldn’t sell, it plans to give away to other charters and schools in the complex area.

Moving Forward

When the Charter School Commission is finished with the closure process it may have to go to the Legislature next year to ask for an appropriations bill to pay off whatever debts remain for the school.

This year lawmakers already made a change to the state’s charter school law to expedite the process for closing a school when there are issues of financial mismanagement.

“For example if a school isn’t making payroll,” Rep. Roy Takumi said. “That’s now a ‘don’t pass go,’ the school is over, situation.”

The charter revocation process has long been a concern for the Legislature, Takumi said. It’s typically been far easier to open a charter in Hawaii than to close one.

“In hindsight it’s clear to us that we gave this school the benefit of the doubt for too long.”

“The revocation rate across the country is up to 10 percent of charters,” Takumi said. “This was not the first school that was on the radar for revocation but (in the past) the Attorney General said there was nothing for how to revoke a charter.”

Some changes have been made over the years to the charter school statute to address that, Takumi said.

Another result from the closure may be a slightly tougher Charter Schools Commission.

“In hindsight it’s clear to us that we gave this school the benefit of the doubt for too long,” Hutton said.

Hutton said the commission may talk with charter schools to garner input and then go to the Legislature to possibly change the charter funding schedule.

Right now the state gives charter schools funding flexibility by “front loading” payments and giving the schools 60 percent of their per-pupil allotment in July and another 30 percent in December. That means schools get 90 percent of their funding before the end of the first semester — which could be a problem if the charter is having trouble staying on budget.

“Is there a way where schools can still have flexibility they need but things are spaced out a little better?” Hutton said.

Hutton also said that while it’s unlikely the state will change the charter process to convert the schools into private, nonprofit corporations, there may be ways to better insulate taxpayers from charter school debts.

“This really has been a very huge administrative challenge for our system, and that has come at the expense frankly of some of the other systemic changes we had wanted to be further along on by now,” Hutton said.