BILL ANALYSIS                                                                                                                                                                                                    



                                                                  AB 1531
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          Date of Hearing:   April 9, 2014

                           ASSEMBLY COMMITTEE ON EDUCATION
                                Joan Buchanan, Chair
                  AB 1531 (Chau) - As Introduced:  January 21, 2014
           
          SUBJECT  :   Charter schools: operating as or by a nonprofit  
          public benefit corporation.

           SUMMARY  : Requires charter schools operated as a nonprofit to  
          nominate, in the charter petition, twice the number of people  
          needed for their board of directors; and, requires the  
          chartering authority to appoint a majority of the members of the  
          board of directors for such charter schools from the nomination  
          list.   Specifically  this bill  :

          1)Requires that an authority that grants a charter school be  
            entitled to a single representative on the board of directors  
            of the nonprofit public benefit corporation.

          2)Requires, for a charter school that elects to operate as a  
            nonprofit public benefit corporation, and that submits a  
            charter petition, charter renewal, or material revision  
            application on or after January 1, 2015, all of the following  
            apply:

             a)   The initial chartering authority shall appoint a  
               majority of the members of the board of directors of the  
               nonprofit public benefit corporation from persons publicly  
               nominated in the charter petition, charter renewal, or  
               material revision application. The number of persons  
               nominated shall be twice the total number of members that  
               comprise the board of directors. The majority calculation  
               required shall not include the representative appointed by  
               the chartering authority.

             b)   The initial chartering authority, during the term of the  
               charter, shall ensure that a majority of the members of the  
               board of directors of the nonprofit public benefit  
               corporation are members appointed by the chartering  
               authority. In the event that a member appointed no longer  
               serves on the board of directors, for reasons including,  
               but not limited to, death, disability, removal, or  
               resignation, the initial chartering authority shall appoint  
               a new member from persons nominated by the nonprofit public  








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               benefit corporation at the time the vacancy occurs, and by  
               submitting a material revision application.

             c)   Nothing in this provision limits or supersedes the  
               ability of a charter school to either use an election  
               process or other community involvement process to select  
               nominees for the board of directors of the nonprofit public  
               benefit corporation for consideration by the initial  
               chartering authority or to nominate persons for positions  
               on the board of directors of the nonprofit public benefit  
               corporation by using specified eligibility criteria. It  
               shall be the policy of the state to encourage and to  
               promote parental, educator, and community participation in  
               the governance of a charter school.

             d)   A member of the board of directors of the nonprofit  
               public benefit corporation is subject to removal from his  
               or her board position pursuant to Article 3 (commencing  
               with Section 3060) of Chapter 7 of Division 4 of Title 1 of  
               the Government Code and as otherwise provided by law.

          3)Specifies that a charter petition shall contain a reasonably  
            comprehensive description of, if the charter school elects to  
            operate as, or be operated by, a nonprofit public benefit  
            corporation, the names and background information for all  
            persons whom the petitioner nominates to serve on the board of  
            directors of that nonprofit public benefit corporation.

           FISCAL EFFECT  :   Unknown
           

            EXISTING LAW:  



          1)Authorizes charter schools to elect to operate as, or be  
            operated by, a nonprofit public benefit corporation, formed  
            and organized pursuant to the Nonprofit Public Benefit  
            Corporation Law.  Specifies the governing board of a school  
            district that grants a charter for the establishment of a  
            charter school shall be entitled to a single representative on  
            the board of directors of the nonprofit public benefit  
            corporation.  Specifies an authority that grants a charter to  
            a charter school to be operated by, or as, a nonprofit public  
            benefit corporation is not liable for the debts or obligations  








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            of the charter school, or for claims arising from the  
            performance of acts, errors, or omissions by the charter  
            school, if the authority has complied with all oversight  
            responsibilities required by law, including, but not limited  
            to, those required by Section 47604.32 and subdivision (m) of  
            Section 47605. (Education Code 47604)



          2)Requires charter school petitions to include a reasonably  
            comprehensive description of the manner by which staff members  
            of the charter schools will be covered by the State Teachers'  
            Retirement System (CalSTRS), the Public Employees' Retirement  
            System (CalPERS), or federal social security. (EC 47605  
            (b)(5)(K))


          3)Specifies that if a charter school chooses to make the CalSTRS  
            Plan available, all employees of the charter school who  
            perform creditable service shall be entitled to have that  
            service covered under the plan's Defined Benefit Program or  
            Cash Balance Benefit Program, and all provisions of Part 13  
            (commencing with Section 22000) and Part 14 (commencing with  
            Section 26000) shall apply in the same manner as the  
            provisions apply to other public schools in the school  
            district that granted the charter.  If a charter school offers  
            its employees coverage by CalSTRS or the CalPERS, or both, the  
            charter school shall inform all applicants for positions  
            within that charter school of the retirement system options  
            for employees of the charter school.  The information shall  
            specifically include whether the charter school makes  
            available to employees coverage under CalSTRS, the CalPERS, or  
            both systems, and that accepting employment in the charter  
            school may exclude the applicant from further coverage in the  
            applicant's current retirement system, depending on the  
            retirement options offered by the charter of the charter  
            school. (EC 47611)


           COMMENTS  :   This bill requires governing bodies of charter  
          schools operated as nonprofit corporations to be appointed by  
          the chartering authority.  Specifically, the bill requires a  
          majority of the members of these governing bodies to be  
          appointed.  Charter schools are required to nominate twice the  
          number of members necessary in their charter petition and the  








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          chartering authority shall appoint members to the charter school  
          body from the list of nominated members provided in the  
          petition.  This bill is in response to recent Internal Revenue  
          System (IRS) proposed regulations and subsequent response by  
          California State Teachers Retirement System/California Public  
          Employees Retirement System (CalSTRS/CalPERS) to potentially  
          exclude charter schools from the retirement system because  
          nonprofit charter schools do not meet the "tests" which qualify  
          the school as a governmental entity.  One such test is whether  
          the governing body is elected or appointed by elected officials.  
           This bill seeks to correct the exclusion of charter schools  
          from CalSTRS/CalPERS by requiring nonprofit charter schools to  
          have a majority of their governing body members appointed by the  
          chartering authority, which is generally an elected board.

          According to the author, "Charter school employees deserve to  
          participate in CalSTRS and CalPERS. The US Internal Revenue  
          Service (IRS) is clarifying the definition of "governmental  
          plans" which are eligible for the special tax rules. CalSTRS and  
          CalPERS are governmental plans that are impacted by this  
          rulemaking. Under the IRS proposed regulations, all individuals  
          who benefit from one of these state retirement systems would  
          have to be employed by a governmental entity, such as the state,  
          an elected school board, or the federal government.  
          Additionally, no private interests may benefit from these tax  
          rules extended only to employees of the government.  This is why  
          AB 1531 requires that all public schools, including charter  
          schools, are governed by boards that are either elected by the  
          public or appointed by public officials who are accountable to  
          the electorate. Currently, existing law provides no specific  
          requirement for charter school governing boards to be controlled  
          by a state or political subdivision. This charter school  
          exemption allows the IRS rulemaking to threaten charter school  
          employees' eligibility in a governmental plan, such as CalPERS  
          or CalSTRS."

           CalSTRS Response to IRS  :  In response to advance notice of  
          proposed rulemaking by the IRS, CalSTRS issued a 2012 report  
          asking a critical question: "What happens if a charter school  
          does not meet the test for its employees to participate in a  
          governmental plan?" The report indicated that the proposed  
          regulations will include multiple facts and circumstances to  
          determine whether an entity is an agency or an instrumentality  
          of a state or political subdivision and thus eligible to have  
          its employees participate in a governmental plan, including but  








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          not limited to whether: 
          1)The entity's governing board or body is controlled by a state  
            or political subdivision. 
          2)The members of the entity's governing board or body are  
            publicly nominated or elected. 
          3)A state or political subdivision has fiscal responsibility for  
            the general debts and other liabilities of the entity,  
            including the responsibility for funding the entity's employee  
            benefits plans. 
          4)The entity's employees are treated in the same manner as  
            employees of the state or political subdivision for purposes  
            other than providing employee benefits. 
          5)The entity is designated the authority to exercise sovereign  
            powers, which generally means the power of taxation, eminent  
            domain or police power.
          CalSTRS determined that "most California public charter schools  
          likely would not pass these main tests, primarily because the  
          presence of a nonprofit operator introduces a layer of oversight  
          and management separate from that of the school district which  
          eventually leads to ineligibility under these tests."  According  
          to CalSTRS, the agency does not have plans to change eligibility  
          until the final rulemaking has occurred at the federal level. 
          
          According to the author, "The IRS has not yet concluded their  
          rulemaking process. However, the 2012 report indicates that  
          CalSTRS has been monitoring the development of the IRS proposal  
          and concluded that public charter schools in California operated  
          by or as non-profit organizations probably would not be  
          considered agencies or instrumentalities of the state or a  
          political subdivision.  These new rules would compel CalSTRS to  
          prohibit the participation of charter schools in its benefit  
          program, so that the CalSTRS would not lose their governmental  
          plan status under IRS section 414(d). AB 1531 will ensure that  
          charter schools operate with integrity and transparency to the  
          public to ensure that their employees are not deemed ineligible  
          to participate in governmental pension plans by the IRS, and  
          also to assure the public about its fiduciary responsibility.   
          Charter school employees are part of the public education system  
          and should be treated equitably by receiving the protections and  
          benefit plans afforded to all public educational employees,  
          including participation in CalSTRS. Unless we take immediate  
          action, the retirement benefits of these employees is in  
          jeopardy." 
          
           CalPERS Application Changes  :  In response to advance notice of  








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          proposed rulemaking by the IRS, CalPERS changed their  
          application process in May 2013. They issued a letter explaining  
          the change which states, "Although the Proposed Regulations are  
          not final, and could be revised during the official regulatory  
          process, in order to mitigate potential risks to the CalPERS  
          Plans, its members and employers, CalPERS has decided to  
          incorporate the Proposed Regulations into our existing  
          eligibility review process." Several modifications were made to  
          the CalPERS applicant questionnaire and eligibility criteria,  
          which resulted in new questions to those who seek participation,  
          including but not limited to: 
          1)Please indicate whether the members of the Employer's  
            governing board or body are Elected or Appointed? If  
            appointed, who has the power to appoint members of the  
            Employer's governing board or body? 
          2)Does any person or entity have the power to remove members of  
            the Employer's Governing board or body? 
          3)Is the Employer treated as a governmental entity for any other  
            purposes? Please describe in detail. Examples: Is the Employer  
            subject to open meeting laws (such as the Brown Act), the  
            California Public Records Act or similar laws? Are the  
            Employer's employees subject to the California Political  
            Reform Act? Please provide a copy of the Employer's current  
            Conflict of Interest Code. Has any State or federal court or  
            administrative agency made a formal written determination that  
            the Employer is a governmental entity for any purpose?
          According to CalPERS, AB 1531 may result in some nonprofit  
          charter schools becoming eligible for CalPERS, but it is not a  
          guarantee since each school is evaluated separately based on  
          many factors.

          According to the author, "In June of 2013, one month after  
          changing their application process, CalPERS denied employees of  
          a California charter school, the Dehesa Charter School, the  
          opportunity to participate in the state pension plan. This was  
          the first time CalPERS has denied participation to any charter  
          school, but not the last.  AB 1531 will ensure that charter  
          schools operate with integrity and transparency to the public to  
          ensure that their employees are not deemed ineligible to  
          participate in governmental pension plans by the IRS, and also  
          assure the public about its fiduciary responsibility.  Charter  
          school employees are part of the public education system and  
          should be treated equitably by receiving the protections and  
          benefit plans afforded to all public educational employees.  
          Unless we take immediate action, charter school employees whose  








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          school is operated as or by a non-profit organization will  
          continue to be denied participation in CalPERS." 

           Exclusion of Charter Schools from CalPERS  :  Since CalPERS  
          changed their application process at least 9 charter schools  
          have been denied participation. Those schools include:
          1)Dehesa Charter School, Escondido, CA
          2)Rio Valley Charter School, Lodi, CA
          3)IvyTech Charter School, Moorpark, CA
          4)Synergy Education Foundation, Los Angeles, CA
          5)Alliance College Ready Academy #18, Los Angeles, CA
          6)Alliance Renee & Meyer Luskin Academy, Los Angeles, CA
          7)Advanced Institute for Learning, Fallbrook, CA
          8)Alliance College Ready Academy #14, Los Angeles, CA
          9)Summit Leadership Academy, Hesperia, CA

           National Labor Relations Board  : According to the California  
          Teachers Association, "A 2012 decision by the National Labor  
          Relations Board (NLRB) suggests that charter school employees  
          are private employees, subject to the National Labor Relations  
          Act (NLRA).  AB 1531 seeks to ensure that all of California's  
          charter schools are considered "political subdivisions of the  
          state" subject to the Education Employment Relations Act (EERA)  
          and not the NLRA.  The EERA, and the extensive Public Employment  
          Relations Board (PERB) law that has developed under it, reflects  
          the unique context of California's public schools.  For example,  
          the scope of bargaining under EERA specifically includes issues  
          like teacher evaluation procedures, and sets forth a duty to  
          consult on curriculum and textbooks."

           Appointed Chartering Authorities  :  While the vast majority of  
          school boards, county boards of education are elected bodies,  
          there are a few charter authorizers that are appointed boards  
          instead of elected boards.  These appointed boards include the  
          State Board of Education and the Los Angeles County Board of  
          Education. The committee should consider whether this bill will  
          correct the situation for nonprofit charters authorized by these  
          boards.

           Authorizer Liability  :  The committee should consider whether  
          charter authorizers that authorize nonprofit charter schools and  
          appoint a majority of the charter school's governing body  
          members will be assuming more financial liability if the charter  
          school closes.  Under existing law, it appears that charter  
          authorizers have some protection from liability of nonprofit  








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          charters they authorize, if they perform proper oversight;  
          however, it is unclear whether this bill erodes that protection  
          from liability since the authorizer would be appointing the  
          governing body of the charter school. 

           Arguments in Support  : The California Teachers Association  
          supports the bill and argues, "Many charter schools are publicly  
          funded but privately governed.  This private governance is  
          causing confusion about whether charter school employees are  
          public or private.  This important legislation will ensure that  
          charter school employees will be able to participate in public  
          pension programs and are covered by the state's collective  
          bargaining laws that apply to other public education employees."  


           Arguments in Opposition  :  The California Charter School  
          Association opposes the bill and argues, "A charter school that  
          operates under the de facto control of the school board that  
          authorized it, as envisioned in AB 1531, would no longer be  
          independent.  It would be operated by a governing body that  
          would reflect the interests of the school district's central  
          governing board, not the community from which the charter school  
          sprung.  There is no doubt that this kind of charter board would  
          make decisions that were consistent with the pedagogical,  
          administrative, operational and funding priorities of the school  
          district board.  The distinction between a charter school and a  
          traditional public school would be blurred to the point of  
          non-existence."


           REGISTERED SUPPORT / OPPOSITION  :   

           Support  

          California Teachers Association

           Opposition 
           
          California Charter Schools Association Advocates
          California Parents for Public Virtual Education
          Charter School Capital
          Green Dot Public Schools
          EdVoice
          K-12, Inc.
          SIATech California








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          Analysis Prepared by  :    Chelsea Kelley / ED. / (916) 319-2087