Sugar Creek Charter Sch. et al., v. Charlotte-Mecklenburg Schools, 188 N.C. App. 454, (Feb. 5, 2008), rev. denied, 2008 N.C. LEXIS 1203 (Aug. 26, 2008).  
 
A group of Charlotte-area charter schools ("the Schools") sued the Charlotte-Mecklenburg Schools (CMS) on May 25, 2005 to recover certain funds not included by CMS in its per-pupil allotments to the Schools. The court ruled, essentially, in favor of the Schools because CMS had improperly calculated its initial disbursements to those schools by not taking into consideration "special funds" that it had budgeted for pre-kindergarten and high school projects. Because these special funds had been deposited in the CMS Local Current Expense Fund (LCEF), the court ruled that under state finance statutes, the special fund moneys in the LCEF must also be counted and distributed on a per-pupil basis; i.e., CMS did not have the right to subtract these special funds from the total amount by which it calculated per-pupil disbursements.  In addition, the Court ruled that funds owed were subject to a three-year statute of limitations, beginning at the end of the fiscal year three years previously. The court determined that the amount to be calculated should include all funds paid and owed over that entire fiscal year.  Also, CMS had calculated the original disbursements to the Schools on a monthly basis, based on required monthly attendance reports submitted by the Schools. This was in contrast to the way in which CMS funded its own schools; that amount was based on beginning-year attendance reports, not on monthly reports.  Because attendance dropped over the course of the year for both CMS and the Schools, the Schools' funding allotment decreased accordingly, whereas the CMS schools' allotment did not because it was based on the early-year numbers. The court ruled that this disparity was improper and that CMS must calculate the amount consistently among the CMS schools and the charter schools. 

 
Sugar Creek Charter Sch. et al., v. Charlotte-Mecklenburg Schools, 673 S.E.2d 667; (Feb. 17, 2009); rev. denied, 363 N.C. 663 (Nov. 5, 2009).
 
In a subsequent lawsuit filed on April 17, 2007, charter schools ("the Schools") from the Sugar Creek I case sued CMS for additional funds they claimed were also due. The court held that CMS (and all LEAs) must disburse to all recipient charter schools a per-pupil allotment that is calculated based on all moneys contained in the LEA's Local Current Expense Fund (LCEF). The court first rejected the CMS argument that the North Carolina Board of Education (BOE) has sole authority and jurisdiction to decide the dispute; the court ruled, instead, that the Schools could litigate in the courts. The court then ruled that the Schools were entitled to additional funding totaling almost $1.3 million based on several improper CMS calculation methods. For example, when CMS calculated the total LCEF amount from which it determined per pupil funding for the Schools, it did not include funds from other sources such as fund balances carried over from one fiscal year to another, hurricane relief funds, donations for other specific programs, and certain tax reimbursements.  In other words, all of these moneys, because they were deposited by CMS in the LCEF, had not been properly counted and shared with the Schools in their distributions.

Key Charter School Funding Laws, Interpretations and Rulings

Local school systems must maintain at least three separate funds:
(1) the State Public School Fund, (2) the Local Current Expense Fund ["LCEF"], and (3) the Capital Outlay Fund.
 
"In addition, other funds may be required to account for trust funds, federal grants restricted as to use, and special programs. Each local school administrative unit shall maintain those funds shown in the uniform budget format that are applicable to its operations."   [Sugar Creek I]

The local current expense fund [LCEF] of local boards of education includes:
 
"[M]oneys made available to the local school administrative unit by the board of county commissioners, supplemental taxes levied by or on behalf of the local school administrative unit ... State money disbursed directly to the local school administrative unit, and other moneys made available or accruing to the local school administrative unit for the current operating expenses of the public school system." [Sugar Creek II, citing prior caselaw]

If a student attends a charter school, the local school administrative unit in which the child resides shall transfer to the charter school an amount equal to the per pupil local current expense appropriation to the local school administrative unit for the fiscal year.
 
The "Court [has] held that the phrase "local current expense appropriation" ... [in] § 115C-238.29H(b) is synonymous with the phrase "local current expense fund" in the School Budget and Fiscal Control Act, N.C. Gen. Stat. § 115C-426(e). Thus, the Charter Schools are entitled to an amount equal to the per pupil amount of all money contained in the local current expense fund." [Sugar Creek II, citing prior caselaw.]
 
"It is clear to this Court that the General Assembly intended that charter school children have access to the same level of funding as children attending the regular public schools of this State. The language of § 115C-238.29H(b) is 'unambiguous, direct, imperative and mandatory.' ....We hold that §115C-238.29H(b) creates an implied cause of action in favor of Plaintiffs when they allege violation of the mandatory provisions of this statute. [Sugar Creek II]
 

 
"The term 'special program' is not defined by statute. Assuming...that [the CMS pre-K program] is a special program, the Board [of County Commissioners] would have been within its statutory authority to allocate money for the program, separate and apart from money allocated for current operating expenses, capital outlay expenses, or other special programs. However, instead of allocating money to the...special program fund, the County Commissioners allocated the money...to the local current expense fund....Furthermore, CMS was required to set up and maintain a separate special fund for the [special] program, pursuant to N.C. Gen. Stat. § 115C-426(c); this they failed to do. As a result, the [special program] money was requested for the local current expense fund, allocated to the local current expense fund, deposited into the local current expense fund, and deducted from the local current expense fund. Because the Charter Schools were entitled to a pro rata share of all the money in the local current expense fund, CMS was required to apportion this money on a per pupil basis between CMS and the Charter Schools...." [Sugar Creek I]

"[CMS] may amend the budget to transfer money to or from the capital outlay fund to or from any other fund . . . This statute contemplates transferring local appropriations to and from the capital outlay fund, to or from any number of other funds, not just the local current expense fund. Therefore, since '[t]he board of county commissioners may, in its discretion, allocate part or all of its appropriation by purpose, function, or project as defined in the uniform budget format[,]' [under] N.C. Gen. Stat. § 115C-429(b), the Board may allocate its appropriations among the different funds set up by CMS. Thus, contrary to the Charter Schools' contention, not all appropriations from the [State] Board to CMS are included in the current local expense fund and thus subject to apportionment under N.C. Gen. Stat. §115C-238.29H(b)."  [Sugar Creek I]

"Given the erratic payment schedule, the Charter Schools could not have determined whether CMS had paid each of the Charter Schools 'an amount equal to the per pupil local current expense appropriation to [CMS] for the fiscal year' until the end of that fiscal year. Therefore, the Charter Schools could not have determined whether CMS had underfunded the Charter Schools, or the extent of such underfunding, until the end of the 2001-02 fiscal year. As a result, the Charter Schools' cause of action for underfunding did not accrue until after the end of the 2001-02 school year. Since their action accrued less than three years prior to the date they filed their Complaint, the trial court did not err in ruling that the Charter Schools were not barred by the applicable statute of limitations  from pursuing claims arising for funding for the 2001-02 school year." [Sugar Creek I]

Strategic Issues and Considerations

LEAs have disbursed, voluntarily or by court order or threat of litigation, additional "Sugar Creek" funds to their respective charter school recipients.  For example, on February 2, 2010, the Wake County Schools reported on its additional disbursements owed to area charter schools for the last three years.  (See attached listing.)  In addition, LEAs are considering or have already established new funds as alternatives to the LCEF in order to minimize the effect of the Sugar Creek rulings.  In other words, because Sugar Creek II mandates that all funds deposited in the LCEF be equally distributed to charter schools, LEAs are setting up alternative funds for any source of funding that can be legally designated for such other funds.
 
The North Carolina Department of Public Instruction (DPI), in a March 19, 2009 e-mail to LEAs, offered guidance to LEAs for using additional "Funds 7 and 8."  These serve as alternative fund categories to the LCEF.   Fund 7 deals with local use funds from sources such as grants and other revenues.  Fund 8, a newly-established fund by DPI, deals with "other local current expense funds" other than regular county appropriations: for example, revenue from fines and forfeitures, supplemental taxes.   The DPI e-mail states that "Fund 8 is very similar to Fund 2 [the LCEF]."   
 
What is the consequence of these alternative accounting practices?  Clearly, some LEAs will attempt to reduce the total amount of LCEF funds by using accounting practices that rely more heavily on Fund 7 and Fund 8, or other existing fund and financing alternatives.  To the extent such practices are legal, especially the establishment and use of Fund 8, remains to be determined. 

React Now

Time is of the essence due to the three-year statute of limitations and potential legislative and/or regulatory changes that may occur in response to the Sugar Creek rulings.  Move rapidly to assess and request your school's entitlements from source LEAs and engage legal counsel and financial consultants, as necessary, to advise you.  Filing suit soon, may be necessary to preserve your remedies under the three-year statute of limitations.

Request

Make a prompt written request of each respective LEA to provide an accounting of its funding formula for your charter school for this and past years and to disburse additional funds due in light of the Sugar Creek rulings.  Obtain copies of each LEA's final audit reports for at least the past five years.

Review

Perform your own assessment (with necessary legal and financial counsel) of the extent to which LEA disbursements to your school satisfy or fail to satisfy Sugar Creek rulings.

Receive

When you request and receive additional Sugar Creek funds from LEAs, express in writing that your school's receipt of such funds does not waive any additional financial or legal claim your school has for any funds still due.

Respond

If there is doubt about the LEA's funding methodologies, consider making a public records request for all documents (hard and electronic copies) revealing the LEA's deliberations and decisions about its calculation method.  If an LEA refuses or delays providing the information and funding you believe you deserve, consider other practical and legal actions that may be warranted. 

Because of the millions of dollars at issue, charter schools are well served to act collaboratively and collectively to share with and report to one another useful information and to pursue their legal and policy needs.  Those schools that have succeeded, thus far, in obtaining additional funding may be able to offer helpful practical suggestions.  Perhaps a charter school "Sugar Creek Blog" or other communication venue might help.  Whether the Legislature or State Board of Education act, respectively, amend state statutes or regulations, in favor of or against charter school funding, remains to be seen. DPI's Fund 8 guidance is an indication of an effort to protect LEA funds.