The Philadelphia School District's first audits of charter schools up for renewal in 2004 found problems at all seven, including conflicts of interest at a charter founded by the wife of State Rep. John Perzel, the powerful Northeast Republican who was then speaker of the House.
To win renewal, the school dropped family members from the nonprofit that owns the school's building.
Seven months later in 2005, the School Reform Commission ended the audits rather than risk offending charter-friendly legislators such as Perzel, whom the district needed to provide more state funding, said sources with knowledge of the decision.
But now, some - including a former district auditor - say the reduced scrutiny led to abuses such as the recent allegations of financial mismanagement, nepotism and conflicts of interest at the Philadelphia Academy Charter. A federal criminal probe is under way there.
And, though in December the commission approved more oversight of charters, it did not restore district audits that would ensure a thorough review of how the schools spend public money.
"These things could have been corrected, and this waste of money going out the window could have been stopped," said John McLemore, a certified public accountant who lost his district auditor job after the 2004 charter audits.
Even though the audits uncovered fiscal problems that saved the district money, they were "pushed aside," said McLemore, who last year settled a discrimination and wrongful-termination lawsuit against the district in U.S. District Court. McLemore said the message he got from supervisors was clear: "You're not supposed to do your job. You're supposed to look the other way."
A spokesman for Perzel said Friday that the state representative made no effort to stop the audits. Marty O'Rourke said that though Perzel believes charters give parents educational choice, he favors "as much scrutiny as possible."
Charter schools have grown dramatically in number since 1997 when the Pennsylvania legislature passed the charter school law. They now total 126, including 11 cyber schools that offer instruction online.
In Philadelphia, charter school growth has been explosive, jumping from four in 1997-98 to 61 now and putting Philadelphia among the nation's top-10 charter school cities. Charters cost the district $279 million this school year.
With a combined enrollment of more than 30,000 students, Philadelphia's charter school community would be the second-largest school district in the state, having slipped past Pittsburgh's total of 28,265 students this year.
Oversight has always been complicated because charters were designed to be independent with the flexibility to try innovative educational approaches, but they also are publicly funded. The law gives districts the responsibility to monitor charters they approve.
By the time Paul Vallas arrived as the district's chief executive officer in summer 2002, the city had 46 charters.
Vallas said he supported charters but wanted to ensure that they were successful. He established more rigorous review for new charters and those seeking renewals.
During the 2003-04 school year district auditors were assigned to examine the finances of all seven charters up for renewal, including New Foundations Charter.
The elementary school in the city's Holmesburg section was founded in 2000 by Sheryl S. Perzel, who was president of the charter's board.
District auditors criticized the school's accounting methods, financial practices, and family relationships between the school's board and the nonprofit that owns the school's property. The charter pays rent to the nonprofit.
Auditors pointed out that two of Sheryl Perzel's sisters and her brother sold a parcel of land to the nonprofit for the school. The brother was president of the nonprofit.
Though the charter disputed many of the audit's findings, the board adopted a conflict-of-interest policy barring family ties between the school and the nonprofit. Members of the nonprofit board with links to the charter resigned, including Sheryl Perzel's brother and a nephew.
The state ethics board later found that Sheryl Perzel had violated the state ethics act for the conflicts. She paid a $2,000 fine under a consent agreement.
She said last week that she resigned from the New Foundations board in spring 2005 because of health problems and had only limited dealings with the school. "I come to graduation as the founder and wave," she said.
She said she had not known the district had stopped auditing charter schools after New Foundations was audited.
The school's audit language was unusually harsh, Vallas said at the time, and he was upset that a draft was leaked to the media. "Perzel never called us on behalf of the charter," Vallas said last week. "That's not his style."
McLemore, the former auditor, said he could not comment on what happened to him after the controversy erupted over the New Foundations audit because of the terms of his court settlement.
But in his lawsuit, McLemore claimed he was ordered to change his audit results after the school complained. He refused. After he claimed racial discrimination, his superiors tried to force him to resign, he said. He was terminated in September 2005.
In its court filings, the school district denied the allegations and said McLemore's position was eliminated.
The fallout from the district's charter audits of 2004 had a swift impact on its approach to charters.
At the same May 19, 2004, meeting at which the Reform Commission extended New Foundations' charter for five years, the commission awarded a $50,000 contract to a nonprofit founded by a longtime charter proponent to develop a new charter policy.
Located in Center City, the nonprofit, Charter School Resource Center, was founded by Robert O'Donnell, a former Democratic state representative from Philadelphia and a former speaker of the House. A lawyer, O'Donnell represented Philadelphia Academy until mid-April. He has also represented other charters.
In February 2005, the commission adopted O'Donnell's recommended policy that, among other things, encouraged prospective charters to settle in underserved neighborhoods and banned district audits during renewals unless there were "known or suspected problems."
Former commission member Daniel F. Whelan, a charter advocate, championed the relaxed policy, saying it offered greater independence to charter schools.
Sandra Dungee Glenn, now commission chairwoman, voted against the 2005 policy, which she recently described as making district oversight "too loose in some areas."
A policy supporter, Commissioner James Gallagher disputed that the change had anything to do with the political fallout from the New Foundations audit. "That is not my recollection of the dynamic," he said.
Gallagher said he favored the pullback because he believed the district was exceeding its authority and creating unnecessary burdens for charter operators. By law, he said, charters must include their own audits in the annual reports they file with the state.
"I kept saying, 'Let's read the law and hold them to the law,' " Gallagher said.
Vallas said last week he that opposed the changes because "they tied our hands." He described them as "less about politics and more about philosophy. There were members of the board who were strong charter advocates . . .. They were fearful that more accountability meant more micromanagement."
The message relayed in the administration building in those days was "lay off charters," district sources said.
More recently, the district's view of charter oversight has shifted as the commission membership has changed. The three appointed by former Gov. Mark Schweiker, a Republican, were charter-friendly: Chairman James Nevels, Whelan and Gallagher. Dungee Glenn and Martin Bednarek, who were appointed by former Mayor John F. Street, were more cautious.
Whelan, who favored a hands-off approach to charters, left the commission in January 2007, followed by Nevels in September. Gov. Rendell replaced them with Denise McGregor Armbrister and Heidi Ramirez and promoted Dungee Glenn as chair.
Under her leadership, the commission approved a more comprehensive policy in December that provides increased charter scrutiny but not district audits.
But questions remain about whether the district can carry it out. Two weeks ago the charter office urged the commission to hold off approving any more charters. One of the reasons was the district's difficulty monitoring the schools already operating.
A week later, the commission voted to allow eight new charters to open in 2009 - if the district can afford them. The commission did not address the oversight issue.
Dungee Glenn defended the new policy for spelling out that the district will closely monitor the charters' own audits. And, for the first time, all charters seeking renewal must now adopt conflict-of-interest policies.
Dungee Glenn said Philadelphia and districts nationally have been learning over time how best to oversee charters.
"We are trying to figure out the right balance between charters being independent school entities, which they are, but operating with an appropriate level of oversight as public schools . . . within a school district."
Helen Gym, president of Parents United for Public Education, whose husband is on the board of Folk Arts Cultural Treasures Charter near Chinatown, said the district should audit schools seeking renewal although she believes the financial wrongdoing at Philadelphia Academy is the exception.