The Options Public Charter School for at-risk youths is seen in Washington. (Marlon Correa/The Washington Post)

Options Public Charter School is facing a budget shortfall of $1.6 million and critical gaps in leadership following allegations that the school’s former managers diverted millions of dollars to companies they owned, according to a newly unsealed court document.

Options is also in the middle of a “public perception crisis that is having material, adverse effects on the school’s operations,” according to a report filed Oct. 21 by the court-appointed receiver, Josh Kern, who is overseeing Options while authorities investigate the alleged financial diversions.

Kern’s report shows a school in distress: Students have withdrawn, employees have been laid off, and administrators are struggling to deal not only with day-to-day logistics but also with the burden of “multiple ongoing investigations.”

“Options PCS is in a difficult financial and operational situation that requires significant, immediate attention,” Kern wrote.

D.C. Superior Court Judge Craig Iscoe unsealed Kern’s report Tuesday, but he required significant portions of the report to be redacted, including most of its 17 appendices.

The Northeast Washington school, the city’s oldest charter school, serves about 400 at-risk students, in grades six through 12, most of whom have disabilities, are homeless or are in foster care.

A civil complaint

The D.C. attorney general’s office filed a civil complaint Oct. 1 alleging that three former managers at Options took “exorbitant” bonuses and concocted a self-dealing scheme that funneled at least $3 million from the school to two for-profit companies. The suit also alleges that the scheme was carried out with the help of the Options board chairwoman and a senior official of the D.C. Public Charter School Board.

No one has been criminally charged in the case. But investigators have been conducting interviews, and a grand jury was expected to convene last month. Each of the defendants has denied wrongdoing.

Meanwhile, the former managers — who were still running Options from positions at their for-profit management companies — agreed to cut all financial ties to the school, handing over operational responsibility to Kern. Options then lost most of its key leaders, school officials whose responsibilities ranged from finances to extracurricular activities.

Pamela Marple, an attorney for the two management companies, said the allegations and removal of the management companies from the school’s daily operations led to the problems that Kern has reported.

“The report underscores the dangers of shooting first and asking questions later,” Marple said. “The truth is that Options School did not have budget deficiencies or service problems until last month. In fact, the school had millions in cash assets and had achieved reauthorization to operate for 15 more years, but then the school’s management was removed amidst a whirlwind of unsupported and false allegations.”

Kern wrote in his report that simple things at Options, such as ordering paper for teachers, became complicated because contracts with important vendors were held by the management companies, not by the school itself.

“In the first two weeks, my team and I were inundated with general management and crisis management issues,” Kern wrote in the report.

The school’s bleak budget outlook is one of its most pressing problems, and Kern said he had to come up with a “rightsizing plan” to lay off enough employees — the exact number was redacted — to save $800,000.

Social studies teacher Modestine Montgomery said she was notified Friday that she had been laid off with two weeks’ severance pay. She said she did not know what criteria were used to determine who would be fired, and she was frustrated, believing that she was paying the price for someone else’s alleged wrongdoing.

“So much money was taken from the kids — and from me,” Montgomery said. “I feel like so much money was taken from me.”

Montgomery said she is figuring out how to finish her master’s degree in special education — which requires another semester of classroom hours — and how to support herself and her 2-year-old daughter while she maps out her future. It’s a future that is unlikely to include teaching, she said.

“I’m underpaid. I’m undervalued,” she said. “I definitely can’t stay on this path.”

Enrollment shortfall

Part of the shortfall at Options is attributable to lower-than-expected enrollment. The budget for the 2013-14 school year was based on an estimated enrollment of 412 students, but Options had 388 students as of early October. The decrease of 24 students — many of whom would have disabilities and would bring in as much as $28,884 each in additional public dollars — means an estimated loss of about $720,000 to the school.

The school also has lost a $600,000 city grant, withdrawn in the wake of the allegations of self-dealing, and Options has paid the former managers’ companies nearly $1 million for services that must be performed by someone else.

Options’ current budget projected $1.5 million in Medicaid reimbursements for special education services delivered at the school. But those payments “are unlikely to materialize due to the ongoing [redacted] of alleged impropriety in Medicaid billing,” Kern wrote.

The civil complaint does not accuse anyone of Medicaid-billing improprieties, but it does allege a dramatic and disproportionate increase in students identified as having the highest level of disabilities, which presumably could boost Medicaid reimbursements. Each charter school is allowed to classify students based on a range of special education needs, and those with more needs generally bring in more funding for the school.

The D.C. Public Charter School Board has said Options will stay open through the end of the year, but its long-term future is uncertain.

Valerie McGill, the parent of a junior, said she doesn’t know what she’ll do if Options closes in June. “That's my main concern,” McGill said. “Are they going to be open for my daughter to at least graduate?”