Judge hears testimony at Outreach Academy hearing in Austin

May 23, 2011 at 12:23 a.m.

Records showing a decade of mismanagement of federal and state funds were discussed Monday during a hearing to determine the future of Outreach Word Academy.

An Administrative Law Judge heard Monday from witnesses called by the Texas Education Agency in a case the agency brought against Outreach Academy to revoke the charter school's charter status.

The TEA, led by attorney Chris Jones, asserted the school has practiced years of financial mismanagement - including not maintaining a sufficient financial management system, not submitting by deadline proper financial documentation on several occasions, failure to account for the spending of $783,093 in federal grants and repeated refusal to pay federal payroll taxes.

"The agency has given this charter school a lot of written warnings about its failure to comply with the requirements, and those have not been effective," Jones told the courtroom. Based on the warnings, audits and intervening measures, "the agency has taken the position that it's in the best interest of the students for this charter school to end its charter status," Jones said.

The school, represented by Houston attorney Joseph Soliz, said it intended to prove its financial problems are things of the past and have either been corrected or are substantially near being corrected. Mitigating factors contributing to the financial problems should warrant a lesser sanction, Soliz told the court.

The majority of the first-day of questioning was directed toward Elaine Phillips, business manager and human resources manager at Outreach Academy. Along with her husband, Samuel Phillips, she founded the charter school in 2001.

Funding reduced

Financial problems started almost immediately.

After projecting first-year enrollment to reach 144 students, only 66 students enrolled. Funding the school had received for the estimated number of students was reduced to the actual number of students, leaving the school to operate without any funding at the end of the year, Phillips conceded.

By the third quarter of the school's operation, it was unable to make payroll taxes.

The practice of withholding money from employee paychecks for federal tax liabilities and not remitting those payments to the IRS would continue for the entirety of the school's operation.

Intermittently, Phillips, who was in charge of the school's accounting, would make those payments.

"When we had money, I made the payments. When we didn't have money, I couldn't make the payments. All I could do was make the payroll," Phillips said.

Jones called the school's failure to comply with federal tax withholding requirements the most troubling of its offenses because of the IRS's authority to levy the school, which would perhaps shut it down mid-year.

The unpaid taxes would contribute to the $185,322 of total liability the school owes to the IRS, not including penalties and interest, which Phillips conceded would bring the total to more than $200,000.

Financial conservator assigned

The school declared bankruptcy in 2007 after incurring late fees and civil penalties, such as the $17,866 penalty it received in 2002 for failing to pay its employees bi-weekly.

Phillips said the financial conservator TEA assigned to Outreach Academy after the bankruptcy, Donald Egg, would go through the school's bills each month and tell her which to pay and which not to pay. She said Egg never told her to pay the IRS bills.

However, in his testimony, Egg denied ever advising not to pay the IRS. Instead, he said Phillips was never able to provide him a straightforward amount that the school owed the IRS.

In financial documents provided to Egg, Jones asserted Phillips led the conservator to believe the school only owed $52,181 in total to the IRS, which Phillips contributed to confusion between bankruptcy payments and payroll tax payments.

When Egg recommended to the school board that Phillips' business manager position be eliminated to save funds, he said Phillips became increasingly resentful and stopped running new purchases by him.

Egg had ordered suspending funding for anything except for food, medical supplies and fuel. In 2009, the school then paid $19,000 for new portable buildings without his knowledge.

Egg said the school was routinely late meeting his directives to provide financial documents and information. That inability to meet deadlines was brought up time and again during the hearing.

Late audit reports

Late audit reports were part of what led Ragen Hingorani, director of TEA's special monitoring unit, to visit the school in 2007. He called the financial management at the school one of the worst he's seen in his 20 years of auditing.

"The whole budget process was practically non-existent," he said.

Charter schools receive money from the state based on attendance, but federal grants are considered supplemental funding for specific programs, Hingorani said.

A charter school is expected to both insert its budget into a financial management system and use a financial management system that separates the source and spending of state and federal funds.

Outreach Academy did neither, Hignorani found in his visit.

Phillips blamed a subpar financial management software for the school's record-keeping capabilities in the first few years of operation.

Asked for reimbursement

Hignorani also mentioned money Outreach Academy had "drawn down," which is when a school is allowed to withdraw money it has spent and ask for reimbursement. Hignorani said his team was unable to account for about 67 percent of those expenditures.

"In this instance, we saw they were already reimbursed for expenditures, however in the expense report, we found they were not there," he said.

That lack of documentation is what led to the federal government to disallow the $783,093 in grants it gave to the school and request a refund.

On its website Wednesday, Outreach Academy posted a letter to parents encouraging them to not be concerned about the charter status of the school.

"Currently, we are in the process of renewing our charter school status, which is a 10-year requirement. This requires the 'birthing process' to be reviewed by the Texas Education Agency."

However, Jones, denied the hearing being a 10-year review and called the case against Outreach Academy an adverse action.

Lorrine Hernandez, the superintendent, principal and the school's designated spokesperson, declined to comment on the letter.

Concerned parent

Whatever was happening in Austin, at least one parent in Victoria was just concerned about her daughter being able to attend the school next year.

Beverly Garcia's 7-year-old daughter, Hannah, is hoping to start her second year at Outreach next year.

"I believe that Outreach is different from other schools in that they are not just concerned with the book-learning of everyday school, but in the emotional and mental wellness that is also needed to succeed," Garcia wrote in a Facebook message. "They stress the importance of being a good citizen, helping others, having a good moral character, being kind and courteous, showing respect to those around them and helping fellow students when they are in need."

Garcia said she and other parents do what they can to raise money for the school because she believes in how it's shaping her daughter, who regularly comes home speaking basic phrases in Spanish, French, German and Mandarin Chinese.

The hearing is expected to last until Wednesday.

Judge Pratibha Shenoy will make a ruling on the charter status by July 15.



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