Audit: Failed Kinston charter school mismanaged taxpayer funds

"We plan to seek legislation this year to strengthen our authority in situations where a charter school is on probation for financial difficulties," Cobey said in a prepared statement. "This would allow us to quickly cease expenditures if necessary."

There are nearly 150 charter schools statewide and 11 more are set to open in August. They are public schools operated by a nonprofit board of directors with much greater financial and academic flexibility than traditional schools.

The Kinston school opened in 2004 to serve kindergarten through eighth-grade children in Greene, Lenoir and Pitt counties. By the time it closed, nearly all of its 189 students qualified for free or reduced-price lunches. Just 5 percent of students were proficient in math and 18 percent read at grade level after the 2012-13 school year.

Financial shortfalls would have closed the school in 2007 if five of the school's eight board members hadn't taken personal loans to keep it operating, school CEO and principal Ozie Hall told auditors. Hall's wife Demyra, who chaired the school's board, was one of the three directors who didn't borrow to keep the school afloat, auditors said.

By July 2013, the school had been cited for financial deficiencies multiple times over six years but still received $666,818 in taxpayer funds as an initial installment for the upcoming academic year, the report said.

Some of the money went to pay off two loans totaling $230,000 borrowed in the preceding two months to keep the doors open. They carried interest rates of up to 515 percent, auditors said. Hall told auditors the loans were the only ones available because of the school's precarious finances.

Because charter school boards manage their own money and operations, they aren't required to inform state school officials when they take on additional debt, the report said.

School leaders also predicted almost twice as many students would enroll for the 2013-14 year than actually did, the report said. That inflated estimate meant the Kinston charter school received $300,000 more than it was due and spent it before the state Department of Public Instruction could recognize and recover the overpayment, the report said.

Demyra Hall, a former criminal defense lawyer, and their daughter, Khadijah, were paid $92,000 in the school's final year though they were "unqualified" because they lacked any education experience, auditors said.

Ozie and Demyra Hall where paid $11,000 for unused vacation time less than a month before the school closed while other employees were owed $370,000, the report said. The school was delinquent on employee health insurance and retirement plan payments, DPI school business administration director Alexis Schauss said.

Ozie Hall said his wife removed herself from the school's board decision to make the payments, which they were owed because they'd spent years working instead of taking time off.

"I had not had vacation in more than four years," Hall said. "I was entitled to it."

Still, state auditors said, "the report questions whether it was prudent and ethical to receive those payments when the school did not meet all of its payroll obligations for other employees."

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Emery Dalesio can be reached at http://twitter.com/emerydalesio.