In a damning audit, Indiana calls on two virtual schools to repay $85 million in misspent state funds

A special investigation by state auditors found that officials from two Indiana virtual charter schools misspent more than $85 million in state funding by inflating enrollment and funneling millions to a tangled web of related companies.

In what has become one of the nation’s largest virtual charter school scandals, Indiana Virtual School and Indiana Virtual Pathways Academy officials showed “substantial disregard” for following the rules and may have “focused on maximizing profits and revenues by exploiting perceived vulnerabilities” in local oversight and state funding processes, the report said.

The state auditors’ scathing report, released Wednesday, follows a series of Chalkbeat investigations revealing financial conflicts of interest at Indiana Virtual School and Indiana Virtual Pathways Academy and their dismally low academic results. The two virtual charter schools shut down last summer after allegations of enrollment fraud first emerged.

The state report seeks repayment for more than $85 million in public dollars inappropriately spent on companies connected to school officials. In the past three years, the two schools sent 83% of their total funding to related companies, the report found.

According to the report, the misspent funds include more than $68 million that the schools improperly collected from the state — far more than initially reported — by recording inactive students more than 14,000 times over eight years.

In some cases, those were people who merely requested information through the schools’ website or students who had moved out-of-state — and in one instance, a student who had died.

“Taxpayers are literally paying tens, if not hundreds of millions of dollars to a school for students who aren’t even there,” said Todd Ziebarth, senior vice president for state advocacy and support for the National Alliance for Public Charter Schools.

Virtual school officials have denied wrongdoing, but they have offered little explanation for the discrepancies and deflected blame. After Indiana Virtual School and Indiana Virtual Pathways Academy closed, board members said they were no longer responsible for the schools, despite these institutions owing millions to the state, being under investigation, and still needing to transfer student records.

But the Board of Accounts report outlines a ledger of who was responsible for each instance when enrollment was misreported or a check was improperly cut — and how much each misappropriation was worth.

The report places blame on virtual school administrators, including Superintendent Percy Clark and administrative director Phillip Holden, for signing off on inflated enrollment counts. It puts responsibility on officials for writing checks to related parties or without proper invoices. Those officials include founder Thomas Stoughton and Merle Bright, who owned or was part of a dozen companies that contracted with the schools.

Bright had access to the schools’ bank accounts and could approve payments despite never holding a position at the schools that would have justified that authority, the report noted — and he signed checks for more than $6.8 million to companies he was associated with.

Chalkbeat could not reach Bright, Clark, or Stoughton for comment. An attorney for Holden declined to comment.

The problems at Indiana Virtual School prompted state lawmakers to take steps recently to cut virtual school funding and tighten regulations on how virtual schools count active students. But some worry that lawmakers didn’t go far enough to ensure that public money is being well spent on virtual schools.

For charter school supporters, virtual schools have presented a particular quandary: how to improve school quality and oversight, while also preserving what they see as a critical school option. But for charter school critics, the Indiana Virtual School scandal embodies their worst fears — that private organizations can profit off public dollars meant to educate students.

The State Board of Accounts sent its report to local and federal law enforcement agencies “due to the potential violations of federal and state law.” Federal authorities have already been investigating Indiana Virtual School and Indiana Virtual Pathways Academy. No charges have been filed.

It’s particularly difficult to verify enrollment — and continued engagement — at full-time online schools, where teachers don’t necessarily see students in their classroom every day. But since public schools in Indiana receive state money for each student they enroll, that also opens the door to potential abuse of how virtual schools report enrollment.

The investigation found the school officials “enrolled students that had not expressed any intention to enroll.” School officials were aware that many of the students on their rolls were inactive, the report said: Every two weeks, teachers received a report of “active” students in their classes, which included just a few of the students registered.

The messy accounting by Indiana Virtual School and Indiana Pathways Academy detailed in the report shows what can happen when financial conflicts of interest meet limited oversight.

Out of nearly $100 million paid to the schools’ largest vendors, almost every expense raised some type of red flag. The schools hardly ever received details about what they were paying for — sometimes shelling out money for duplicative services — and the school boards “had no meaningful oversight,” the report said.

The schools paid vendors to recruit 93 teachers and to run 765 background checks on teachers — at a time when the two schools had 54 teachers combined, the state report said. The schools spent money on consulting services for a 401(k) provider, despite not offering or contributing to a 401(k) plan. They hired a political lobbying firm, even though 501(c)(3) nonprofits are limited in their ability to lobby.

In addition to calling for reimbursement for inappropriately collected and misspent funds, the report also holds school officials and vendors responsible for another expenditure — the cost of the state’s special investigation.