Proposed §100.1051. Audit by Commissioner; Records in the Possession of a Management Company.

Comment. TCTA recommends moving §100.1051 to §100.1029, entitled "Agency Audits, Monitoring, and Investigations."

Agency Response. The agency disagrees with the comment. The subject matter of proposed §100.1051 could have been organized under different divisions. The agency has chosen to organize the section under Division 3, the division in the subchapter where many of the provisions relating to financial audits, are organized.

Division 4. Property of Open-Enrollment Charter Schools.

Proposed §100.1063. Use of Public Property by a Charter Holder.

Comment. ACE and HCJJCS commented that the term "impede" in proposed §100.1063(c)(2)(B) is vague and ambiguous.

Agency Response. The agency disagrees with the comment. Proposed §100.1063(c)(2)(B) is taken from a 1997 Ethics Advisory Opinion issued in response to a state agency asking whether it could allow its employees to use electronic mail and Internet connections acquired and maintained with state funds for personal purposes. The agency also asked whether it could allow its employees to use cellular phones acquired and maintained with state funds for personal purposes, so long as the employees reimburse the agency for any costs incurred. The Texas Ethics Commission opined, "[I]n adopting policies about use of state equipment, agencies should make sure that any permissible personal use does not result in direct costs paid by the state and does not impede agency functions." Ethics Advisory Opinion No. 372 (August 8, 1997).

The Ethics Commission has developed a body of administrative decisions interpreting and applying Penal Code, §39.02, to the use or misuse of public property by public officials. These decisions are binding on school district officials, and should inform the commissioner's application of TEC, §12.107 and §12.128, to charter holders.

Comment. ACE and HCJJCS objected to applying §100.1063(c) to property that is merely "maintained" by the charter holder using state funds.

Agency Response. The agency disagrees with the comment. Section 100.1063(c), and similar provisions concerning property "acquired" using state funds, apply with equal force to property that is either "improved" or "maintained" using state funds. This is done to permit a charter holder to use state funds to improve and/or maintain its private property with state funds, so long as the private property is used for charter school purposes in compliance with these rules.

Section 100.1063, §100.1011(8) and (11), and similar provisions are intended to subject private property that is maintained with state funds to the use restrictions imposed by §100.1063(c) and the accounting regime imposed by §100.1063(f). However, they are not intended to imply that §100.1067 (relating to Possession and Control of the Public Property of a Former Charter Holder) will subject private property that is merely maintained with state funds to recovery by the state. Rather, the state may recover formerly private property only if (and to the extent that) the value of the property has been enhanced by "additions" or "betterments" to such property.

The proposed rules presented no amendment to §100.1067, and therefore no clarification or other change to that section may be made in response to this comment. However, the subject is treated in Section 1.2.4.4, "Accounting for Maintenance, Additions and Betterments," in the December 2001 version 8.1 of the Financial Accountability System Resource Guide. This section is referenced in Section 1.2.4, "Fixed Assets," of the charter school supplement to the Resource Guide and provides: "Maintenance costs are those outlays which are necessary to keep an asset in its intended operating condition but which do not materially increase the value or physical properties of the asset. Maintenance costs should be charged to appropriate expenditure accounts and not capitalized as fixed assets."

The Resource Guide governs the way a certified public accountant must record private property that has been maintained with state funds on the property exhibit to a charter holder's audited financial statement. Under §100.1067, the property exhibit determines whether, and to what extent, such property is subject to recovery by the state.

Generally, public funds simply may not be used to maintain private property. Proposed §100.1063(f) provides a mechanism for tracking the state's contribution to the cost of maintaining private property that is used by a charter holder for public purposes. However, nothing requires a charter holder to use state funds to maintain its private property. By using private funds to maintain its private property, a charter holder can avoid having to account for using state funds for this purpose. However, a charter holder that elects to use its private property for charter school purposes, and elects to maintain such property with state funds, must comply with the accounting and use restrictions imposed by §100.1063.

Comment. ACE and HCJJCS suggested that the proposed revision to §100.1063(a) should be clarified by adding an additional statement to the effect that, while an "interest in real estate" may be public property, ownership of that property remains with the charter holder as provided in subsection (d) of that section.

Agency Response. The agency disagrees with the comment. The suggested language introduces an ambiguity in §100.1063 as proposed, and unduly complicates the section. Proposed subsection (d) clearly states that "[p]ublic property is owned by the charter holder, regardless of the funds used to acquire it."

Under the rule as proposed, the charter holder retains all title to the property, exercises complete control over the property, and is entitled to all use and benefit from the property. Notwithstanding its clear title to the property, the charter holder keeps this property in trust for the benefit of the students of the charter school, and bears the responsibility for using the property consistent with subsection (c). Finally, at the end of the charter school's life, the charter holder must surrender all the property it holds in trust back to the state. This is because the property held in trust can only be used for charter school purposes, but such purposes no longer exist. Only when this property is surrendered to the state does the state take title and become the "owner" of the property.

Comment. ACE and HCJJCS suggested that the proposed revision to §100.1063(a) should be expanded to clarify that the state maintains no security interest whatsoever in property owned by a charter holder.

Agency Response. The agency disagrees with the comment. The suggested language introduces an ambiguity in §100.1063 as proposed, and unduly complicates Division 4 of the rules. Existing §100.1069(d), (relating to Rights and Duties Not Affected) provides: "Nothing in this subchapter affects a security interest in or lien on property established by a creditor in compliance with law if the security interest or lien arose in connection with the sale or lease of the property to the charter holder. . ." Existing §100.1069, adopted to be effective November 6, 2001, is not currently proposed for revision.

Comment. ACE and HCJJCS suggested that the proposed revision to §100.1063(a) should be expanded to clarify that a lien on behalf of the state may be imposed only by judicial process in the event that the state becomes a creditor of the charter holder.

Agency Response. The agency disagrees with the comment. The suggested language introduces an ambiguity in §100.1063 as proposed, and unduly complicates Division 4 of the rules. Existing §100.1067(d) specifies the circumstances under which the commissioner may use legal process to take possession or assume control over the public property held by a charter holder. Existing §100.1067, adopted to be effective November 6, 2001, is not currently proposed for revision.

Comment. TCTA supported the clarification in §100.1063(c) that public property can only be used to operate kindergarten up through grade 12 programs to avoid situations in which charters want to use public property for ancillary programs not intended by TEC, §12.102, such as daycare programs.

Agency Response. No response required.

Comment. ACE and HCJJCS suggested that the proposed revisions to §100.1063 should be clarified by describing the manner in which the state will determine the compensation owed it by a former charter holder.

Agency Response. The agency disagrees with the comment. The property exhibit required by §100.1063(f) is described in the charter school supplement to the Financial Accountability System Resource Guide, as revised in December 2001. The Resource Guide governs the way a certified public accountant must record property acquired, improved, or maintained partly using state funds and partly using other funds on the property exhibit. Under §100.1067, the property exhibit determines whether, and to what extent, such property is subject to recovery by the state. The proposed rules presented no amendment to §100.1067 or to the Resource Guide, and therefore no clarification or other change to §100.1067 or to the Resource Guide may be made in response to this comment. Adding the suggested language to §100.1063 would not clarify the rules, but would create ambiguity.

Comment. ACE and HCJJCS suggested that the proposed revisions to §100.1063 should be clarified with a statement indicating whether the commissioner will provide a sample form for use in preparing the exhibit referenced in subsection (f)(1).

Agency Response. The agency disagrees with the comment. The property exhibit required by §100.1063(f) is not only described in the charter school supplement to the Resource Guide (as noted in response to the comment above), but a sample form is attached to the charter school supplement. See Resource Guide Section 1.2.4.10 ("Fixed Asset Exhibit"). The pending rules propose no amendment to the Resource Guide, and therefore no clarification or other change to the Resource Guide charter supplement may be made in response to this comment. Adding the suggested language to §100.1063 would not clarify the rules, but would create ambiguity.

Comment. ACE and HCJJCS suggested that the proposed revision to §100.1063(a) should be clarified by adding an additional statement to the effect that nothing in §100.1063 creates a state interest in property acquired, improved, or maintained with non-public funds except to the extent public funds are also used in the acquisition or improvement of the property.

Agency Response. The agency disagrees with the comment. (For further response, see the response to the comment listed earlier, "ACE objected to applying §100.1063(c) to property that is merely 'maintained' by the charter holder using state funds.")

Comment. ACE and HCJJCS suggested that §100.1063(c)(3), and/or other appropriate sections, should be clarified with the addition of the following sentence: "Nothing in this section prohibits a charter holder from leasing property owned by a charter holder to another party provided that the proceeds of the lease are applied to the purpose of implementing a program that is described in the open-enrollment charter."

Agency Response. The agency disagrees with the comment. A charter holder may not use state funds for the purpose of acquiring real property as an investment. A charter holder must invest state funds in accordance with Government Code, §§2256.009-2256.016, as required by proposed §100.1045, unless alternative requirements for investing state funds have been approved by the State Board of Education under proposed §100.103 (relating to Optional Open-Enrollment Charter Provisions for Contracting and Purchasing), and the open-enrollment charter has been amended by the commissioner to adopt the approved procedures.

Comment. ACE and HCJJCS suggested that §100.1063(c)(3), and/or other appropriate sections, should be clarified by adding a statement to the effect that nothing in this section prevents a contractor of the charter holder from using public property owned by the charter holder for the purpose of providing goods or services to the charter school under the contract, if such use of charter school property is an express contract term, factored into the price of the goods or services provided under the contract, and the contract is duly authorized by the governing body of the charter holder under §100.1063(c).

Agency Response. The agency agrees with the comment. Proposed 100.1063(c) has been modified to add a paragraph (6) providing that nothing in §100.1063 prevents a contractor of the charter holder from using public property owned by the charter holder for the purpose of providing goods or services to the charter school under the contract, if such use of charter school property is an express contract term, factored into the price of the goods or services provided under the contract, and the contract is duly authorized by the governing body of the charter holder under §100.1063(c).

Comment. ACE suggested that §100.1063(c)(3), and/or other appropriate sections, should include a statement providing that if a charter holder owns a facility that is used for the operation of the charter school described in its open-enrollment charter, it may pay itself state funds equal to or lower than the fair market value of the use of that facility, without thereby creating a state interest in ownership of the facility itself. Alternatively, the rule may require that the facility must be used for the purposes of the charter school for a prescribed minimum period of time in order to avoid the accrual of a state interest in the facility if the charter school ceases to operate.

Agency Response. The agency disagrees with the comment. The suggested language cannot be added to §100.1063 because this would suggest that the right to use the charter holder's facility- which is clearly paid for with state funds- is not "public property" within the meaning of §100.1063. Clearly, the right to occupy and use the charter holder's facility is "public property" for purposes of §100.1063 because it is bought and paid for with state funds. Whether the facility itself would be subject to recovery by the state is determined by the rules governing the property exhibit required by §100.1063(f).

Under §100.1067, the property exhibit determines whether, and to what extent, the facility in this hypothetical situation would be subject to recovery by the state. The property exhibit is described in the charter school supplement to the Financial Accountability System Resource Guide, as revised in December 2001. The Resource Guide will determine how a certified public accountant must record the facility in this hypothetical situation on the property exhibit. The proposed rules present no amendment to §100.1067 or to the Resource Guide, and therefore no clarification or other change to §100.1067 or to the Resource Guide may be made in response to this comment.

Comment. ACE suggested that §100.1063(c)(3), and/or other appropriate sections, should include a statement providing that if a charter holder is acquiring a facility that is used for the operation of the charter school described in its open-enrollment charter, it may pay the mortgage on that facility with public funds without thereby creating a state interest in the facility. Alternatively, the rule may require that the facility must be used for the purposes of the charter school for a prescribed minimum period of time in order to avoid the accrual of a state interest in the facility if the charter school ceases to operate.

Agency Response. The agency disagrees with the comment. The suggested language cannot be added to §100.1063 because this would suggest that the right to use the charter holder's facility- which is clearly paid for with state funds- is not "public property" within the meaning of §100.1063. Clearly, the right to occupy and use the charter holder's facility is "public property" for purposes of §100.1063 because it is bought and paid for with state funds. Whether the facility itself would be subject to recovery by the state is determined by the rules governing the property exhibit required by §100.1063(f).

Under §100.1067, the property exhibit determines whether, and to what extent, the facility in this hypothetical situation would be subject to recovery by the state. The property exhibit is described in the charter school supplement to the Financial Accountability System Resource Guide, as revised in December 2001. The Resource Guide will determine how a certified public accountant must record the facility in this hypothetical situation on the property exhibit. The proposed rules presented no amendment to §100.1067 or to the Resource Guide, and therefore no clarification or other change to §100.1067 or to the Resource Guide may be made in response to this comment.

Comment. ACE and HCJJCS suggested that the proposed revisions to §100.1063 should be clarified with a statement to the effect that the public property of a charter holder used for the operation of a charter school is subject to the municipal zoning ordinances governing public schools operated by independent school districts in the same manner and to the same extent that public schools operated by independent school districts are subject to such ordinances.

Agency Response. The agency disagrees with the comment. TEC, §12.103(a), states only that a charter school is subject to "municipal zoning ordinances governing public schools." The commissioner declines to adopt a rule governing the manner in which a municipality might interpret or apply TEC, §12.103(a), to charter schools operating within its jurisdiction.

Proposed §100.1071. Real Property Held in Trust.

Comment. ACE and HCJJCS asked for clarification of the term, "true owner."

Agency Response. The agency disagrees with the comment. Government Code, §2252.092 (Identification of Trust Property Required), uses the term "true owner." Because the term, "true owner" is a statutory one, providing a definition in these rules would not provide clarity but would create ambiguity as to the manner in which a court would interpret the term "true owner" as it applies to a charter holder under House Bill 6.

Comment. ACE and HCJJCS asked whether the provision in §100.1071(b)(3) making a conveyance in violation of §100.1071 void is inconsistent with Government Code, Chapter 2252, Subchapter D.

Agency Response. The agency disagrees with the comment. Government Code, §2252.093, (Noncompliance Creates Void Conveyance) provides that a conveyance of property subject to Chapter 2252, Subchapter D, is void if a covered entity fails to comply with that statute. This potential consequence is set forth in the rule simply to insure that charter holders are alerted to it.

Proposed §100.1073. Improvements to Real Property.