The 2001 Special Session of the Legislature, in Special Session Laws 2001, Chapter 10, Article 13, Section 1, mandated an interim study by the Legislative Commission on Pensions and Retirement of the appropriate mechanism for the recovery of unpaid member and employer public retirement plan contributions from charter schools that have ceased operations.

Specifically, the 2001 legislation provided the following:

The Commission staff expects that Commission consideration of this mandated interim topic will require three Commission meetings to complete. This meeting, the initial meeting to consider the topic, will review the current status of public pension plan coverage for charter school employees, the extent of unpaid retirement plan contributions from currently closed charter schools, and the magnitude of the current charter school retirement plan contribution stream, which defines the potential for future defaults. The second Commission meeting is expected to identify and review the available remedies for unpaid charter school retirement plan contributions and the available remedies for unpaid charter school retirement plan contributions and the available mechanisms for recovering previously unpaid closed charter school retirement plan contributions. The third Commission meeting will formulate the Commission’s recommendation on the appropriate mechanism for recovering unpaid retirement contributions from closed charter schools and any other relevant potential legislation related to retirement coverage for charter schools.

This Commission staff issue memorandum is the initial issue memorandum on the mandated interim topic. The Commission staff issue memorandum will provide background information on charter schools in Minnesota, will provide background information on public retirement coverage for charter school employees, will summarize the closed charter schools and the current open charter schools, will summarize the amount of currently unpaid public retirement plan closed charter school member and employer contributions, and will summarize the magnitude of ongoing public retirement plan open charter school contributions.

(Note: The materiel presented here is adapted from materials available from the Minnesota House Research Department, the Minnesota Department of Children, Families and Learning, and the U.S. Department of Education)

1. Origin of Charter Schools.

Charter schools are nonsectarian public schools of choice that operate with freedom from many of the regulations that apply to traditional public schools. The "charter" establishing each school is a performance contract detailing the school’s mission, program, goals, students served, methods of assessment, and ways to measure success. The length of time for which charters are granted varies, depending on state law. At the end of the term, the entity granting the charter may renew the school’s contract. Charter schools are accountable to their sponsor to produce positive academic results and adhere to the charter contract. The basic concept of charter schools is that they exercise increased autonomy in return for this accountability.

The charter school movement has roots in a number of other reform ideas, from alternative schools, to site-based management, to magnet schools, to public school choice, to school privatization, and to community-parental empowerment. The term "charter" may have originated in the 1970’s when New England educator Ray Budde suggested that small groups of teachers be given contracts or "charters" by their local school boards to explore new approaches. Albert Shanker, the former present of the American Federation of Teachers (AFT), then publicized the idea, suggesting that local boards could charter an entire school with union and teacher approval. In the late 1980’s, Philadelphia started a number of schools-within-schools and called them "charters." Some of these schools were schools of choice. The idea was further refined in Minnesota and is based on the achievement of three basic values: opportunity, choice, and responsibility for results.

In 1991, Minnesota became the first state in the nation to authorize charter schools (first called outcome-based schools). The law, Minnesota Statutes, Sections 124D.10 and 124D.11, permits teachers, parents and other community members to form and operate independent charter schools. To promote innovation, charter schools are exempt from many statutes and rules governing school districts but are held accountable for results. A Minnesota charter school is a public school and is part of the state’s public education system.

California followed suit by authorizing charter schools in 1992. By 1995, 19 states had enacted laws that allowed for the creation of charter schools, and by 1999 that number increased to 36 states, Puerto Rico, and the District of Columbia. The Center for Educational Reform’s 1998-1999 National Charter School Directory reports that 1,205 charter schools served every grade from pre-K to adult. Of these, 58 percent were elementary schools, 20 percent were secondary schools, and 22 percent included grades at both levels. Arizona leads the nation in the number of charter schools, with nearly 350 schools currently in operation, followed by California (234), Michigan (over 175), Texas (over 150), and Florida (112). As of April 2001, the Department of Children, Families and Learning reported that there are 63 operating charter schools in Minnesota. In the 1999-2000 school year, approximately 6500 students attended charter schools, with 66 percent in elementary grades and with 34 percent in secondary grades.

Estimated Number of Charter Schools in Operation as of September 1999, by State (Chart)

2. Intent of and Requirements for a Minnesota Charter School.

Minnesota Statutes, Sections 124D.10 and 124D.11, require that a charter school must meet one or more of the following purposes:

• Improve student learning;
• Increase learning opportunities for students;
• Encourage the use of different and innovative teaching methods;
• Require the measurement of learning outcomes and create different and innovative forms of measuring outcomes;
• Establish new forms of accountability for schools; or
• Create new professional opportunities for teachers, including the opportunity to be responsible for a learning program at the school site.

Under Minnesota law, the organizers of a charter school must obtain a sponsorship from a school board, intermediate district board, education district, eligible private college, community college, technical college, the University of Minnesota or an eligible charitable organization. A sponsor must obtain approval from the Commissioner of the Department of Children, Families and Learning (CFL) to authorize a charter school. If a school board elects not to sponsor a proposed charter school, the applicant may appeal this decision to the CFL Commissioner.

A charter school must be formed either as a cooperative or non-profit corporation. The parents of students enrolled in the school and staff employed at the school elect a Board of Directors in a timely manner after the school begins operation. Licensed teachers employed by the school must constitute a majority of the board unless the CFL Commissioner waives that requirement. The Board determines all aspects of the school’s education program, management and administration. The Board determines what responsibilities are maintained by the Board and what responsibilities are delegated to staff or contracted to service providers. The charter school contract must include explicit pupil performance statements in the form of academic and non-academic goals and an outline of the sponsor evaluation and intervention plan (schedule of visits, services/assistance to be provided or expected, interventions to be administered if the school struggles, and criteria for not renewing the contract after it expires or revoking the contract).

3. Charter School Funding.

Charter school funding from or through the State of Minnesota consists of four components:

1. General Education Revenue. General education revenue is paid to a charter school as though it were a school district.

2. Building Lease Aid. Building lease aid may be granted by the Department of Children, Families and Learning, based on an application from charter schools. Building lease aid funds must be used to lease space for instructional purposes. The amount of building lease aid is now up to 90 percent of approved costs or the number of pupil units served multiplied by $1,500.

3. Charter School Start-up Aid. During the first two years of a charter school’s operation, the charter school is eligible for start-up aid equal to the greater of $50,000 per charter school or the number of pupil units served multiplied by $500.

4. Federal Planning and Start-up Grant Funds. Federal planning and start-up grant funds may be awarded by the Department of Children, Families and Learning, based on an application from charter schools. These funds must be used for planning or startup purposes. Charter schools are eligible to apply for up to three years of federal startup aid from the date of the approval of the charter school by the Department of Children, Families and Learning Commissioner. The aid is currently up to $140,000, $150,000, and $120,000 in each of the three eligible years.

4. Charter School Accountability.

Minnesota law requires that the sponsor of a charter school must monitor the fiscal and student pupil performance of the charter school. If at any time the charter school is not meeting expected outcomes, the sponsor must work with the charter school to implement an improvement plan. The charter school must submit an annual report to the sponsor and to the Department of Children, Families and Learning (CFL), which must include all sponsor and CFL required components. After the term of the contract or during the term, if the charter school is not meeting pupil performance expectations, fails to meet generally accepted standards of fiscal management, or is in violation of the law and the sponsor intervention is not showing results, the charter school sponsor may act to terminate the contract. If the charter school has a history of financial mismanagement or of repeated violations of the law, the Department of Children, Families and Learning may act to terminate the contract.

Minnesota Statutes, Section 124D.10, Subdivision 22, governs the retirement coverage for charter school employees. Minnesota Statutes, Section 124D.10, Subdivision 22, Paragraph (a), requires that teachers in a charter school be members of the Teachers Retirement Association (TRA) or of one of the first class city teacher retirement fund associations (Duluth (DTRFA), Minneapolis (MTRFA), or St. Paul (StPTRFA)). Minnesota Statutes, Section 124D.10, Subdivision 22, Paragraph (b), requires that charter school employees who are not teachers be members of the General Employees Retirement Plan of the Public Employees Retirement Association (PERA-General).

The requirement for charter school teachers to be members of a Minnesota teachers retirement plan was added in 1995 (First Special Session Laws 1995, Chapter 3, Article 9, Section 2, Subdivision 20a). The requirement for non-teaching charter school employees to be members of the Public Employees Retirement Association (PERA) was enacted in 1997 (First Special Session Laws 1997, Chapter 4, Article 5, Section 9). Neither the 1995 or the 1997 provision was considered by or recommended by the Legislative Commission on Pensions and Retirement, but appear to be policy initiatives either of the education community or of the Senate and House Education Committees.

The 1995 requirement that charter school teachers be members of a Minnesota teacher retirement plan did not specify the particular teacher retirement plan to provide coverage. The actual allocation of charter school teachers between teacher retirement plans apparently depends upon a non-statutory agreement between the four teacher pension plans, with the teachers employed by any charter school located in the city of Duluth covered by the Duluth Teachers Retirement Fund Association (DTRFA), the teachers employed by any charter school located in the city of Minneapolis covered by the Minneapolis Teachers Retirement Fund Association (MTRFA), the teachers employed by any charter school located in the city of St. Paul covered by the St. Paul Teachers Retirement Fund Association (StPTRFA), and all other charter school teachers covered by the Teachers Retirement Association (TRA).

While the allocation agreement fashioned by the four teacher retirement plans is not illogical, and some interpretation of the 1995 enactment was necessary, proposed legislation on behalf of the four teacher retirement plans should have been sought in 1996 to provide the Legislative Commission on Pensions and Retirement and the Legislature with an opportunity to ratify the policy decision of the four teacher retirement plans.

The issue of unpaid retirement contributions by current closed charter schools and by potential future closed charter schools arose during the 2001 Legislative Session in the form of S.F. 2038 (Pogemiller); H.F. 2215 (Mares).

As recommended by the Legislative Commission on Pensions and Retirement for inclusion in the 2001 Omnibus Pension Bill (S.F. 451 (Pogemiller); H.F. 1462 (Mares)), the unpaid closed charter school retirement plan contributions restoration provision adapted from S.F. 2038; H.F. 2215 (see Attachment A) included the following:

1. State Payment of Closed Charter School Unpaid Contributions.

The State would pay an amount of money to be specified to pay unpaid member and employer contributions from closed charter schools to the Teachers Retirement Association (TRA), the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), the St. Paul Teachers Retirement Fund Association (StPTRFA), and the Public Employees Retirement Association (PERA).

2. State Payment Deducted From Charter School Lease Aid.

The State payment of unpaid closed charter school retirement plan contributions would be deducted from the total amount of available charter school lease aid under Minnesota Statutes, Section 124D.11, Subdivision 4a.

3. State Payment Would Include Interest On Unpaid Contributions.

Interest on unpaid charter school member and employer contributions would be included in the State payments.

4. State Payment of Unpaid Member Contributions Included In Refund.

Any State payment of unpaid charter school member contributions is available for inclusion in a future member refund if a charter school employee terminates and elects not to take a deferred annuity.

5. State Payment Does Not Relieve Charter School Contribution Liability.

The State payment of omitted member and employer contributions does not relieve the charter school sponsor or operator from liability to pay these amounts and obligates the Finance Department to pursue recovery of these State payments, so that a State payment of omitted charter school contribution amounts is not misconstrued by a court in a bankruptcy or other legal proceeding as eliminating any payment obligation by persons or entities associated with a closed charter school.

The closed charter school unpaid retirement plan contributions provision was included in the 2001 Omnibus Retirement Legislation (S.F. 451 (Pogemiller)) as passed by the Minnesota Senate at the conclusion of the 2001 Session, but was not included in the Mares/Krinkie omnibus retirement legislation House Floor amendment to S.F. 2360, the State Department Appropriation Bill. The apparent point of controversy between the Minnesota House of Representatives and the Minnesota Senate was the use of charter school lease aid as the source of the State payment of unpaid closed charter school retirement plan contributions.

1. Information Request and Collection.

In preparation for beginning this mandated interim study project, the Commission staff requested information on closed and open charter schools from the Department of Children, Families and Learning (CFL), the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), the Public Employees Retirement Association (PERA), the St. Paul Teachers Retirement Fund Association (StPTRFA), and the Teachers Retirement Association (TRA).

From the CFL Department, the following information was requested:

1. Closed Charter Schools
1. Name of each previously closed charter school
2. Address of each previously closed charter school
3. Establishment date for each previously closed charter school
4. Closure date for each previously closed charter school
5. Sponsor for each previously closed charter school
6. Student enrollment during closure year
7. Financial condition of the charter school at closure
8. Number of teachers during closure year
9. Teacher pension plan covering teachers during closure year
10. Average teacher salary during closure year
11. Number of support staff during closure year
12. Pension plan covering charter school support staff during closure year
13. Average support staff salary during closure year

2. Current Charter Schools

1. Name of each charter school
2. Address of each charter school
3. Establishment date for each charter school
4. Sponsor for each charter school
5. Student enrollment for the most recent school year
6. Financial condition of the charter school at the end of the most recent school year
7. Number of teachers employed by each charter school during the most recent school year
8. Teacher pension plan covering teachers of each charter school during the most recent school year
9. Average teacher salary during the most recent school year
10. Number of support staff of each charter school during the most recent school year
11. Pension plan covering charter school support staff during the most recent school year
12. Average support staff salary of each charter school during the most recent school year

From the four teacher retirement plans (DTRFA, MTRFA, StPTRFA, and TRA) and from PERA, the following information was requested:

1. Closed Charter Schools

1. Name of each previously closed charter school that was a TRA employing unit
2. Duration of each previously closed charter school as a TRA employing unit
3. Number of TRA members who were employed by each previously closed charter school during the period of TRA coverage
4. Average annual teacher salary for each previously closed charter school covered by TRA during the closure year
5. Amount of any unpaid employer contributions from each previously closed charter school covered by TRA and the initial contribution default date
6. Amount of any unpaid member contributions from each previously closed charter school covered by TRA and the initial contribution default date

2. Current Charter Schools

1. Name of each charter school that is a TRA employing unit
2. Date on which each charter school became a TRA employing unit
3. For the 1999-2000 school year and for the 2000-2001 school year, the number of TRA members who were employed by each charter school
4. Average annual teacher salary for each charter school covered by TRA during the 1999-2000 school year and the 2000-2001 school year

The Department of Children, Families and Learning and the five retirement plans all responded to the request of the Commission staff on behalf of the Commission and provided the requested information, as follows:

2. Identification of Closed Minnesota Charter Schools.

In combination, the five retirement plans and the Department of Children, Families and Learning have identified 16 closed Minnesota charter schools, although no respondent identified all 16 charter schools. Table 1 on the following page sets forth the various Minnesota charter schools that have been identified as closed by one or more respondents to the Commission staff information request.

There are six charter schools which raise questions about their appropriate classification, which are:

1. the Fort Snelling Academy;
2. the Learning Adventures Middle School;
3. the Martin Hughes School;
4. the Peak’s Charter School, Duluth;
5. the Peaks Charter School, Faribault; and
6. the Peak’s Charter School, Pillager.

Although the Department of Children, Families and Learning and the Minneapolis Teachers Retirement Fund Association (MTRFA) identified the Fort Snelling Academy as a closed charter school, both MTRFA and the Public Employees Retirement Association (PERA) identify it as an open charter school. Although CFL identified the Learning Adventures Middle School as a closed charter school, both the PERA and the St. Paul Teachers Retirement Fund Association (StPTRFA) identified it as an open charter school. Although the Teachers Retirement Association (TRA) identified the Martin Hughes Charter School as a closed charter school, TRA also identified it as an open charter school, as did CFL and PERA. Also, although TRA identified the Peak’s Charter School, Duluth, as a closed charter school, CFL, the Duluth Teachers Retirement Fund Association (DTRFA), and PERA identified it as an open charter school. Additionally, although both CFL and PERA identified the Peak’s Charter School, Faribault, and the Peak’s Charter School, Pillager, as closed charter schools, TRA identified these two as open charter schools.

3. Identification of Open Minnesota Charter Schools.

The five retirement plans and the Department of Children, Families and Learning have identified 68 open Minnesota charter schools, although, again, no respondent identified all 68 schools. Table 2, following Table 1, sets forth the various Minnesota charter schools that have been identified as open by one or more respondents to the Commission staff information request.

There are five charter schools which raise questions about their appropriate classification as an open charter school because they were reported by one or more of the retirement plans, but were not identified by the Department of Children, Families and Learning (CFL). These charter schools are:

1. the Fort Snelling Academy;
2. the Learning Adventures Middle School;
3. the Peak’s Charter School-Faribault;
4. the Peak’s Charter School-Pillager; and
5. the Strategies for Success Charter.

The status confusion with respect to the Fort Snelling Academy, the Peak’s Charter School-Faribault, and the Peak’s Charter School-Pillager was indicated above in the Closed Charter School section. The St. Paul Teachers Retirement Fund Association (StPTRFA) identified the Learning Adventures Middle School as an open charter school, while CFL did not. The Public Employees Retirement Association (PERA) indicated that the Strategies For Success School is an open charter school, with eligibility for PERA coverage pending, but CFL did not identify it as an open charter school.

The five affected Minnesota retirement plans, the Duluth Teachers Retirement Fund Association (DTRFA), the Minneapolis Teachers Retirement Fund Association (MTRFA), the St. Paul Teachers Retirement Fund Association (StPTRFA), the Teachers Retirement Association (TRA), and the Public Employees Retirement Association (PERA) report that there are $219,860.94 in unpaid retirement contributions owed by closed charter schools, plus interest at 8.5 percent per annum compounded since the date due. That principal unpaid retirement plan contribution amount is allocated as follows:

The reported unpaid member and employer contributions, without interest, have a minimal (StPTRFA) or deminimis (all other plans) impact on the total support of the affected retirement plans, as follows:

Detail on the unpaid contribution amounts is set forth in Attachment C (MTRFA), Attachment D (StPTRFA), Attachment E (TRA), and Attachment F (PERA).

The figures reported on unpaid contributions from closed charter schools are complicated by the confusion on the status of closed charter schools and may be understated in that one closed charter school (Learning Adventures Middle School) had no reported teacher retirement plan contribution activity and that three closed charter schools (Dakota Open School, Prairie Island Charter School, and Strategies For Success Charter School) had no reported PERA contribution activity. Since public retirement coverage is mandated by Minnesota Statutes, Section 124D.10, Subdivision 22, for all charter school teachers and charter school support personnel, one of the teacher retirement plans and PERA should have had contribution activity for each charter school prior to its closure. The affected closed charter school personnel may attempt to receive Minnesota public retirement plan service credit in the future for service with a closed charter school under the applicable retirement plan’s omitted contribution provision, making the recovery of contributions more pertinent.

Magnitude of Ongoing Public Retirement Plan Open Charter School Contributions.

While the amount of unpaid member and employer contributions from charter schools that have been closed as of this date is relatively small ($0.22 million unpaid contributions out of $741.4 million in total contributions of the five affected pension plans), there is the potential for charter schools in the future to close and leave unpaid member and employer contributions. To gauge the outside limit of that potential for future contribution defaults by charter schools in the future, the following sets forth a comparison of the magnitude of charter school contributions to contributions related to all participating employers for the 1999-2000 school year:

Detailed contribution information on current open charter schools is set forth in Attachment G (DTRFA), Attachment H (MTRFA), Attachment I (StPTRFA), Attachment J (TRA), and Attachment K (PERA). Information on charter school revenue for the 1999-2000 school year is contained in Attachment L. Information on charter school expenditures for the 1999-2000 school year is contained in Attachment M.

As with the information on closed charter schools, this information understates the magnitude of open charter school contributions because the mandatory retirement coverage provisions of Minnesota Statutes, Section 124D.10, Subdivision 22, have not been met with full compliance. Four open charter schools appear to have no coverage by a Minnesota teacher retirement plan (Academia Cesar Chavaz Charter School, Excell Academy, Pillager Area Charter School, and Strategies For Success Charter School). Additionally, 13 open charter schools appears to have no coverage by the Public Employees Retirement Association (the Bluffview Montessori School, the Cedar-Riverside Community School, the Duluth Edison Academies, the El Colegio Charter School, the Free to Face Academy, the Hanska Community School, the Lafayette Public Charter School, the Nerstrand Charter School, the Minnesota New Country School, the River Bend Academy, the Studio Academy, and the Yankton Country School).

This Commission staff issue memorandum is intended to provide the members of the Legislative Commission on Pensions and Retirement with relevant background information on the phenomenon of charter schools, with background information on the public retirement coverage mandate for charter school employees, summary information on reported closed charter schools and open charter schools, summary information on currently unpaid public retirement plan closed charter school member and employer contributions, and summary information on the magnitude of the ongoing stream of public retirement plan open charter school contributions.

A forthcoming Commission staff issue memorandum on the mandated interim study will attempt to assist future Commission deliberations on the topic by identifying and discussing the policy considerations related to various potential mechanisms for recovering unpaid charter school retirement plan contributions and any other modifications that may prevent future public pension plan contribution defaults by charter schools.