The state is drawing a hard line: Public education funds that flow to a private company are public.
Founders of the state’s largest online charter school are fighting to shield those funds. Their company has refused to comply with subpoenas from the State Auditor and Inspector.
The showdown is headed to court and could have major ramifications for Epic Charter Schools and its for-profit management company, Epic Youth Services, both of which have drawn controversy since inception a decade ago.
At the heart of the issue is something Epic calls the “learning fund.” It’s a major draw for students and families and has helped propel Epic’s stunning enrollment growth.
Here’s how it works: Epic makes at least $1,000 available to each student annually in the student’s learning fund. Dollars are deducted for their choice of curriculum and for a plethora of other items of their choice, such as laptops and iPads, science kits and craft supplies, soccer club fees, horseback riding lessons, gymnastics and summer camps.
Parents don’t receive the money directly but instead request a purchase from Epic. Epic transfers the money to Epic Youth Services, according to the court filing, which then pays the vendors directly. There are more than 1,400 private learning-fund vendors.
The school makes periodic transfers of state funding into a checking account specifically for learning fund purchases. The school transfers into a separate checking account 10% of its total revenue to Epic Youth Services for a management fee.
Epic was founded by David Chaney and Ben Harris; the two men also own Epic Youth Services LLC. Chaney and Harris have split at least $10 million in profits from Epic Youth Services between 2013 and 2018, according to the OSBI, which is investigating Chaney and Harris on allegations of embezzlement and racketeering.
Chaney and Harris have denied wrongdoing, and no charges have been filed. Through an attorney, they responded to the auditor’s court motion with a written statement.
“The state Auditor’s legal position – that private businesses are subject to state audit – should concern every business owner in Oklahoma. Epic Youth Services has offered to voluntarily allow the auditor to review records appropriate to their request, but we have received no response prior to this court filing. We will vigorously fight for the protection that has historically been provided to private businesses like Epic Youth Services.”
They added they have provided documents, some of which were not public records, and explanations to assist the auditor “voluntarily” and to be “helpful and transparent.”
In its court filing, the auditor says it worked with Epic Youth Services for five months in attempts to come to a compromise to obtain the records associated with public dollars while maintaining the company’s privacy and proprietary information.
“EYS was unwilling to disclose the records in the manner necessary for the State Auditor to accurately reconcile the revenue and expenditures associated with the Learning Fund accounts,” the filing states.
Requests and Subpoenas
Epic Charter Schools has experienced rapid, jaw-dropping growth, from just over 1,700 students its first year, 2011, to nearly 30,000 this year. Only Oklahoma City and Tulsa Public Schools enroll more students.
Virtual schools in Oklahoma are funded like traditional schools, through a weighted per student formula. As Epic’s student numbers have grown, so has the amount of public state funding allocated to its schools – a combined $118 million last school year.
As Epic’s share of students and funding swelled, the agencies and boards responsible for oversight remained fairly hands off. Legislative attempts to improve oversight have been incremental. But last summer, a criminal inquiry by the Oklahoma State Bureau of Investigation picked up steam, with two search warrants filed five weeks apart. Then Gov. Kevin Stitt requested an investigative audit of the school and its related companies.
As auditors began diving in, they hit a brick wall. That wall is Epic Youth Services.
Auditors first attempted to obtain financial and other records through public records requests. In September, they issued a subpoena for an organizational chart of Epic Youth Services, a list of employees and contact information, learning fund revenue received and spent since July 2015, and a vendor list.
A second subpoena on Nov. 6 called for credit card statements and QuickBooks data on learning fund purchases, and bank statements, for a five-year period beginning July 2014, as well as an explanation of Epic’s $250 technology fee.
In a third subpoena, delivered Feb. 25, Epic was given 24 hours to comply. Auditors specified again some records previously sought and added that they wanted access to all Epic Charter Schools email accounts, vendor contracts, documents and software used to administer the learning fund. In addition, the subpoena seeks documents related to an $85 service fee charged to student learning fund accounts and records of learning fund expenditures.
When that was rebuffed, the Attorney General’s Office filed a court motion on the auditor’s behalf, asking a judge to force the release of the records.
State Auditor Cindy Byrd said her office needs a complete picture of an entity’s finances to do their job, and they haven’t received it from Epic. She also said what they are asking for is typical for this type of audit.
“We don’t want anything to be withheld from the taxpayers,” Byrd said.
Learning Fund Was Early Issue
Questions about the legality of the learning fund arose in Epic’s second year when its original sponsor – Graham-Dustin school district— brought concerns to its attorney, Laura Holmes, of The Center for Education Law.
Holmes and Graham-Dustin’s superintendent, Dusty Chancey, in 2012 met with Epic co-founders Harris and Chaney (then superintendent); Bobby Stem, former Epic school board member and now a lobbyist for Epic Youth Services; Josh Brock, chief financial officer, and Brad Clark, then a private attorney representing Epic and now lead attorney for the state Education Department.
Holmes told Epic their learning fund arrangement violated the state constitution and were considered “gifts” to private individuals, according to an OSBI search warrant affidavit. She cited an attorney general’s opinion.
When it was suggested the private management company, Epic Youth Services, pay the extracurricular activities from its management fee, Holmes agreed, the affidavit says.
But that’s not what happened.
Three months later, Chaney opened a checking account for the learning fund, titled “EYS Learning Fund,” making himself and Brock authorized signers, according to a second written affidavit by the OSBI agent. Brock transferred $1.2 million in state-appropriated funds to the account in the 2012-13 school year, increasing the amount each year. That account was used to pay the hundreds of private vendors.
Meanwhile, revenue from the 10% management fee that the school paid Epic Youth Services went to a separate account, “EYS General Fund,” at the same bank.
The money flowing from Epic to Epic Youth Services’ learning fund account was coded by Brock as “instructional services” in the state cost accounting system– even though instructional services are limited to expenses by a teacher, for a recorded grade and included on a student’s transcript, the affidavit says.
Many of the learning-fund vendors are not certified teachers, which, according to the OSBI agent, made the transactions fraudulent.
Epic and its supporters say the learning fund is a unique way to allow parents to choose how some of their allocated dollars are spent, and pays for students’ supplemental supplies, art, music, athletics and physical education they would have access to in a traditional school.
The OSBI seized a laptop and bank statements from one vendor, OKC Storm, in August. OKC Storm offered basketball, swimming, tennis and track and field and invoiced Epic for players’ fees, uniforms and training.
The OSBI has raised concerns with the lack of oversight of Epic’s vendors and found at least two vendors with felony convictions.
Epic does not perform criminal background checks on vendors, but does require them to provide a signed affidavit that states employees are not registered sex offenders and have not had a felony conviction in the last 10 years.
The state auditor’s motion is scheduled to be heard in Oklahoma County court March 26.