Agency Response. The agency agrees, in part, with the comment. As used in proposed §100.1153(a) the phrase, "as an employee, an officer, or a member of the governing body of a charter school, or as a member of the governing body of a charter holder" was intended to have the same meaning as the phrase, "as a member of the governing body of a charter holder, as a member of the governing body of a charter school, or as an officer or employee of a charter school." By reordering the words in the phrase, the agency appears to have created confusion. Accordingly, proposed §100.1153(a), (d), and (e)(2) has been modified to replace the phrase, "as an employee, an officer, or a member of the governing body of a charter school, or as a member of the governing body of a charter holder" with the phrase, "as a member of the governing body of a charter holder, as a member of the governing body of a charter school, or as an officer or employee of a charter school."

A charter holder engaged in non-charter activities may have administrators, employees, and contractors who do not perform, and are not charged with performing, any charter school functions. Such staff engaged in purely non-charter activities should be free from the requirements of House Bill 6 relating to the employees and officers of a charter school. Subsection (e)(2) has been modified to add a new subparagraph (2), as follows: "the person does not perform, and is not charged with performing, any charter school functions.

It is important to note that the definition of an "officer of a charter school," as proposed, does include the top administrators of the charter holder, even one with significant non-charter activities. For example, it is impossible for the chief executive officer or chief financial officer of a charter holder to fall outside the definitions provided by proposed §100.1011(18) and (21), respectively (adopted as §100.1011(17) and (20), respectively). Similarly, any employee or contractor of the charter holder who is charged with performing, or does perform, any of the functions listed in proposed §100.1011(19), adopted as §100.1011(18), is a central administration officer. These administrators are at the apex of an organization that has taken on the responsibility of operating a public school using taxpayer funds.

Also, several relevant changes to the proposed rules will be made in response to other comments. Proposed §100.1011(3) will be modified to add a new subparagraph (A) clarifying that the phrase, "employee of a charter school" as used in this subchapter, means a person paid to work at a charter school under the direction and control of an officer of a charter school, regardless of whether the person is on the payroll of the charter holder, a charter school operated by the charter holder, a management company providing management services to the charter holder, or any other person. Proposed §100.1011(1) has been revised to delete the phrase "officer of a charter school." Proposed §100.1011(17), adopted as §100.1011(16), has been revised to clarify that a charter holder employee or independent contractor engaged solely in non-charter activities for the charter holder is not an "officer of a charter school" under these rules.

Proposed §100.1155. Procedures for Prohibiting a Management Contract.

Comment. TASB urged the commissioner to narrow the definition of management contract so that all sorts of consulting contracts are not subject to TEA review. As it is written, TEA would end up reviewing all consulting contracts between an open-enrollment charter school and a management company. TASB expressed concern that TEA may not have enough staff and time to review all such contracts.

Agency Response. The agency disagrees with the comment. In principle, the agency agrees with TASB that proposed §100.1155 may need to narrow the types of contracts that should be submitted for review under that section. The definitions of the phrases, "management services" and "management company," may also need to be refined. However, until the commissioner has had opportunity to review time frames associated with various types of proposed management contracts, it would not be prudent to adopt review criteria that might, in some cases, arbitrarily restrict the agency's deliberative process.

Comment. ATPE recommended revising proposed §100.1155 (c)(2) and (3), to state that the commissioner must approve a management contact prior to any services being delivered to a charter school under that contract rather than allowing management services to begin after 30 days of submitting the contract to TEA if there has been no action within that time period on the part of the commissioner.

Agency Response. The agency disagrees with the comment. The great majority of contracts affected by proposed §100.1155 were executed prior to September 1, 2001; management services are currently being performed under them. If the agency has information on which to base an action under this section, then 30 days is sufficient time to initiate an action. In addition, proposed §100.1155(c)(3) provides that absence of action by the commissioner does not constitute a finding of compliance nor prevent the commissioner from acting at a later time.

Comment. ACE and HCJJCS suggested that if a charter holder is prohibited by law or rule from complying with a contract entered into with a management company prior to September 1, 2001, the charter holder should be fully indemnified by the state for any damages resulting from such noncompliance. The state should provide and pay for defense of the charter holder in the event that a management company pursues any legal recourse as a result of state-required noncompliance with the management contract.

Agency Response. The agency disagrees with the comment. The Texas Constitution provides, "No appropriation for private or individual purposes shall be made, unless authorized by this Constitution." Texas Constitution, Article 16, §6(a). It also provides, "The Legislature shall have no power to make any grant or authorize the making of any grant of public moneys to any individual, association of individuals, municipal or other corporations whatsoever." Texas Constitution, Article 3, §51. These provisions prevent the State of Texas from gratuitously indemnifying private companies for their own conduct.

As noted in an earlier response to another comment, contracts for management services are specifically authorized after September 1, 2001. Prior to House Bill 6, such contracts were loosely analogized to TEC, §11.157 (Contracts for Educational Services), which provides that the board of trustees of a school district may contract with a public or private entity for that entity to provide educational services for the district. But nothing in TEC, §11.157, and nothing in TEC, Chapter 12, Subchapter D, authorized a charter holder to obligate state funds beyond the biennium in which the contract was executed.

In their contracts obligating appropriated funds, state agencies and school districts routinely include language stating that monies due under the contract beyond the biennium shall be contingent upon Legislative authority for such expenditures. School districts, in contracting for educational services pursuant to TEC, §11.157, have no power to bind a future Legislature through their contracts. See Texas Constitution, Article 8, §6 ("No money shall be drawn from the Treasury but in pursuance of specific appropriations made by law; nor shall any appropriation of money be made for a longer term than two years."). A charter holder has no greater power to do so.

TEC, §12.106, authorizes the commissioner to fund a public school student in attendance at a charter school. House Bill 6 amended TEC, §12.106, to significantly alter the formula for such funding. Some charter holders will be entitled to fewer funds as a result, some more. The 77th Legislature might have repealed TEC, §12.106, entirely. In fact, 77th Legislature might have repealed all of TEC, Chapter 12. Indeed, such a bill might conceivably be filed in the 78th Legislature, due to begin in January 2003. Nor is an intervening act by the Legislature the only reason a charter school might close. The open-enrollment charter might be revoked under TEC, §12.116, or the school may close for countless other reasons. In each of these situations, a charter holder might have promised to pay amounts that it can no longer pay.

A publicly funded entity can never make, because it cannot keep, an unqualified promise to pay a vendor beyond a specific biennium. It is the responsibility of the charter holder, not the State of Texas, to inform itself concerning the contingencies that might impact its ability to meets its contractual obligations, and to draft its contracts accordingly.

Proposed §100.1157. Loan from Management Company Prohibited.

Comment. The law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P., Attorneys and Counselors at Law, commented on behalf of its client, Charter Schools USA, as follows. Proposed §100.1157(e) permits a contract for management services and a debt instrument to continue in effect if made before September 1, 2001, yet prevents repayment of the loan with state funds. This violates long-standing Texas law that prevents the retroactive application of a statute from impairing vested contract rights. TEC, §12.124, does not include any provision restricting the use of state funds for the payment of loans in existence prior to September 1, 2001, and does not purport to be directly or indirectly retroactive. TEC, §12.124, clearly is intended to have only prospective effect. In each instance, TEC, §12.124, provides the charter school "may not accept" certain loans or "may not enter" certain contracts.

Agency Response. The agency disagrees with the comment. House Bill 6 clearly contemplates- in fact carefully provides for- the manner in which its provisions must be applied to charter holders in existence on its effective date. TEC, §12.1071 (Effect of Accepting State Funding), provides at subsection (a) that a charter holder who accepts state funds after the effective date of a provision of TEC, Chapter 12, Subchapter D agrees to be subject to it, regardless of the date the charter was granted. TEC, §12.1071(b), provides that these charter holders agree to accept all liability for funds accepted before September 1, 2001, but specifies that the statute does not create a liability for charter holder conduct occurring before September 1, 2001.

Taken together, these provisions demonstrate not only the clear intention of the Legislature to apply the public school reforms embodied in House Bill 6 to existing charter holders, but thoughtful consideration of the reasons why legislation is generally applied prospectively. In fact, TEC, §12.1071, was inadvertently omitted from H.B. 6 as it passed out of the house-senate conference committee. Because this provision was key to the intent of the bill, its authors passed a separate bill (H.C.R. 332) to correct H.B. 6 by inserting §12.1071 as it currently reads. The agency cannot set aside, via rulemaking, the Legislature's deliberate decision on this question.

The legislative history of House Bill 6 makes clear that its many provisions regulating the relationship between non-profit charter holders and their for-profit management companies are key to the financial reforms in the bill. The following passage is from the House Public Education Committee's Interim Report to the 77th Legislature:

"Public schools outside the charter context can and do contract for a variety of services from the private sector. But the testimony heard by the committee suggests several fact patterns- unique to charters- that carry a high risk that the independence of the charitable organization responsible for operating the public school may be compromised.

The legislature should consider measures to insure that the non-profit charter holder maintains enough autonomy to sever its relationship with its management company, or to sue its management company, when such decisions are in the best interest of the charter school. . .

For example, a number of management companies have loaned substantial amounts of money to the charter school with which they do business, or have made commitments to make such loans if needed. Capital financing is one of the most critical problems facing a new charter school in its start-up phase. Thus, a management company's offer of capital financing can be a very strong inducement to a new charter. Further, the existence of a lender-debtor relationship inherently weakens the autonomy of the debtor, unless the debtor remains current on all obligations. The experience of charter school loans, however, is that these charitable organizations can fall significantly behind on payments of principal, if not interest and principal. In this situation, the lender may chose to refrain from accelerating the debt payments or exercising its other rights as a creditor; but the lender does so at its discretion. Once in this position, the debtor/charter school has clearly lost any semblance of autonomy over the creditor/management company."

See Interim Report to the 77th Legislature, House Public Education Committee (November 29, 2000) (Charge 1), pp. 11-13 (cited by the House Research Organization's official analysis of House Bill 6, pp. 1-2). This passage concerns charter school management company loans; but the Interim Report is filled with detailed findings on the need for regulation of ties between charter schools and their management companies- the subject of proposed §100.1153- and the need for the agency to protect charter schools from management company overreaching- proposed as §100.1155. Still other findings deal with the need for access to charter records by students, parents, charter schools, regulators, the media, and the public. See §§100.1051, 100.1159, and 100.1203. Each of these sections is potentially impacted by the arguments of the commenter, since they supersede private agreements made between the charter holder and its management company. None of the reforms urged by the Interim Report, and passed by House Bill 6, can be applied to existing charter holders if they must yield to these private agreements.

The agency agrees that Texas Constitution, Article I, §16, is implicated where a statute takes away or impairs a vested right. But TEC, §12.124, does not impair a lender's right to collect a debt; nor does it impair a contractor's right to enforce a contract for services rendered. It simply seeks to prevent- going forward- a charter school management company from continuing in this capacity while at the same time retaining its leverage as a lender. It was the finding of the House Public Education Committee that such leverage jeopardizes the independence of the charter holder; and the Legislature determined not to fund such dual-capacity arrangements after September 1, 2001.

The Legislature clearly has the authority to make this determination, notwithstanding the private contracts in existence on September 1, 2001. These contracts do not control over the Legislature when setting public education policy. The commenter cites two cases, from 1934 and 1935 respectively, and a 1994 Texas Attorney General Opinion; but fails to cite the controlling case issued by the Texas Supreme Court in 1996, Barshop v. Medina County Underground Water Conservation Dist; 925 S.W.2d 618 (Tex. 1996). In Barshop. the Court refused to invalidate the Edwards Aquifer Act of 1993 under article I, section 16 of the Texas Constitution on the grounds that it was a valid exercise of the police power necessary to safeguard the public safety and welfare.

Further, impairment of contracts analysis only applies where the Act of the Legislature impairs a vested right. As noted earlier, TEC, §12.124, does not impair the right to collect on an invoice or a debt. Proposed §100.1157 does not even prohibit the dual-capacity relationship that is forbidden by TEC, §12.124. The only "right" that is taken away by proposed §100.1157 is the right to have the public fund a private agreement that is contrary to TEC, §12.124, past the date set by TEC, §12.1071.

As noted in an earlier response to another comment, charter school management contracts received specific statutory authority for the first time in House Bill 6. Prior to September 1, 2001, such contracts were loosely analogized to TEC, §11.157. But there was never any conceivable authority for a charter holder to obligate state funds beyond a current biennium. Thus, a management contract that extends beyond the biennium in which it is signed, and that does not permit the charter holder to withdraw from the agreement in response to an Act of a succeeding Legislature, may be void under Texas Constitution, Article 8, §6. Such a contract, executed contrary to public policy, is certainly no reason to limit the reach of TEC, §12.124, or to ignore the policy of TEC, §12.1071.

Comment. The law firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P., Attorneys and Counselors at Law, commented on behalf of its client, Charter Schools USA, as follows. Without conceding that House Bill 6 may affect loans from management companies to charter schools in place prior to September 1, 2001, Charter Schools USA suggests that a management company should be permitted to guarantee or co-sign a loan entered into before September 1, 2001, under which a charter school managed by the management company is the payor. Acting as a co-signor or guarantor of such a loan does not place the management company in a position to exert influence over the conduct of the charter school in a manner prohibited by TEC, §12.124. For instance, as a guarantor or co-signor, the management company would not be able to accelerate the note, negotiate for forbearance, or take other actions as a creditor. Under these circumstances, the interests of the charter school and the management company will be aligned. The proposed exception would permit a pre-existing loan from a management company to its client charter school to be refinanced, with the management company in the position of a cosigner or guarantor, instead of lender, and would include all renewals and extensions of such notes.

Agency Response. The agency agrees, in part, with the comment. As set forth in response to the earlier comment, the agency cannot adopt a rule that would fund charter holders that continue with the sort of dual-capacity relationship forbidden by TEC, §12.124, past the date set by TEC, §12.1071. Section 100.1157(e), as proposed, allows such a relationship to continue, if necessary to comply with the terms of pre-existing written contracts, but withholds funding under TEC, §12.106. If, however, a pre-existing loan can be refinanced so as to be of less concern to the policies behind TEC, §12.124, then funding might be permitted beyond the date set by TEC, §12.1071.