- T H E T E X A S E D U C AT I O N A G E N C Y-

SPECIAL INVESTIGATION
REPORT OF FINDINGS
PERTAINING TO:
ECTOR COUNTY ISD (INV2024-05-260)
MIDLAND ISD (INV2024-05-261)
AUSTIN ISD (INV2024-05-262)

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 Table of Contents

I. Executive Summary .................................................................................................... 3

II. Background Information ............................................................................................. 4

A. Origin of Complaint ................................................................................................ 4

B. Specific Allegations ................................................................................................ 5
1. Allegation Category One .................................................................................... 5
2. Allegation Category Two .................................................................................... 6
3. Allegation Category Three .................................................................................. 6
4. Allegation Category Four ................................................................................... 7
C. Applicable Legal Standards .................................................................................... 7
1. Legal Authority for TEA Investigations ............................................................. 7
2. Legal Authority for School Operator Partnerships ............................................. 7
III. Investigation Methodology ....................................................................................... 10

IV. Analysis .................................................................................................................... 12

A. Allegation Category One ...................................................................................... 12

1. Findings of Fact ................................................................................................ 12
2. Legal Analysis .................................................................................................. 18
B. Allegation Category Two ...................................................................................... 20
1. Findings of Fact ................................................................................................ 20
2. Legal Analysis .................................................................................................. 23
C. Allegation Category Three .................................................................................... 24
1. Findings of Fact ................................................................................................ 24
2. Legal Analysis .................................................................................................. 25
D. Allegation Category Four ..................................................................................... 26
1. Findings of Fact ................................................................................................ 26
2. Legal Analysis .................................................................................................. 27
V. Conclusion ................................................................................................................ 29

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I. Executive Summary

On May 14, 2024, The Texas Education Agency (TEA or agency) became aware of

statements contained in a media report that alleged state funds were being inappropriately diverted

from public school students in Texas via partnerships between three Texas school districts and a

nonprofit school operator named Third Future Schools – Texas. These three school districts are

Austin ISD, Ector County ISD, and Midland ISD and shall be referred to throughout this report by

name or as the “Partnering Districts.” The terms of these partnerships were memorialized in

contracts or “partnership agreements” between the Partnering Districts and Third Future Schools

– Texas. In these partnership agreements, the Partnering Districts agreed to provide funding to

Third Future Schools – Texas in exchange for the nonprofit operating a specific district campus in

each Partnering District as a Subchapter C charter school.

After becoming aware of the allegations contained in the media report, the Commissioner

of Education, via his designee the Associate Commissioner of Compliance and Investigations,1

issued a special investigation notice to each Partnering District.2 3 4 TEA’s Special Investigations

Unit (SIU) initiated a special investigation (SI) immediately thereafter. The investigation process

and evidence gathered are described in the Investigation Methodology section of this Report.

After analyzing the evidence gathered during the SI (including interviews, financial

records, and associated documentation received from Midland ISD, Ector County ISD, Austin ISD

and Third Future Schools – Texas), TEA concludes that the Partnering Districts and their operating

partner, Third Future Schools – Texas, have not violated any applicable Texas laws. Based on the

evidence obtained and analyzed during the investigation, there is no merit to the allegations

1
Exhibit 1 – Designation of Authority Letter
2
Exhibit 2 – Ector County ISD Notice of Special Investigation #INV2024-05-260
3
Exhibit 3 – Midland ISD Notice of Special Investigation #INV2024-05-261
4
Exhibit 4 – Austin ISD Notice of Special Investigation #INV2024-05-262

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contained in the media reports that state funds were being inappropriately diverted from public

school students in Texas via partnerships between the Partnering Districts and Third Future

Schools – Texas. This concludes TEA’s investigation. The complaints are hereby closed and no

further action will be taken by TEA at this time.

II. Background Information

A. Origin of Complaint

On May 14, 2024, Spectrum News aired a video segment entitled, “Disappearing Dollars:

Texas public schools are missing millions” with an accompanying print piece on their website.5

The article stated that its reporter identified “millions of Texas public school tax dollars being

diverted out of state” arising from partnerships between the Partnering Districts and Third Future

Schools – Texas for Third Future Schools – Texas to operate underperforming district campuses.

As support, the article references snapshots of public audits, the address listed on checks issued by

Ector County ISD to Third Future Schools – Texas, quotations from meetings of the board of

directors of an affiliated Colorado nonprofit named Third Future Schools (TFS), and other

statements made by representatives of TFS. TEA processed the allegations in the report through

the agency’s complaint intake process, and the agency subsequently received additional

complaints from a Texas legislator6 and other individuals based on the allegations in the Spectrum

News report, which were also processed and added to the complaint file for review.

On July 16, 2024, the Texas Observer published an article entitled, “Mike Miles Moved

Texas School Funds to Colorado Through a Possible Shell Corporation Without a Paper Trail.”7

This article implies that all funds transferred by the Partnering Districts to Third Future Schools –

5
Exhibit 5 – Spectrum News Article
6
Exhibit 6 – Representative’s Letter
7
Exhibit 7 – Texas Observer Article

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Texas, a total described in the article as being “at least $49 million in Texas public school funds,”

may have been inappropriately transferred out of state. Additionally, beyond the transfer of funds,

the article alleges that Third Future Schools – Texas might be a “shell corporation,” existing only

to move funds to TFS, the affiliated Colorado nonprofit. As with the allegations in the Spectrum

News report, TEA processed the allegations in this article through the agency’s complaint intake

process and incorporated the new allegations into the SI.

B. Specific Allegations

The assertions referenced in these media reports, as well as individually directed

complaints that the agency received in the time after publication of these media reports on the

same subject, covered a broad number of topics that, for purposes of this Report, have been

categorized into four categories tied to specific legal standards. Because many of the statements in

the articles referenced did not explicitly state a legal violation, instead making broad inferences,

SIU has included references to the complaint sources to ensure that this report is comprehensive

and includes all possible allegations that may be drawn from these publications.

1. Allegation Category One

The first general category of allegations asserts that, while operating in partnership with

the Partnering Districts, Third Future Schools – Texas violated Texas law by misusing state funds.

The statutory provision implicated in this allegation is Tex. Educ. Code § 12.107, which requires

that state funds be held in trust for the students of the charter school and that state funds cannot be

used to support unrelated operations or activities. Within this category, the specific allegations

analyzed by the SIU include:

 The Spectrum News article quoted a recording in which it alleged “a

TFS official confirmed Colorado charter school deficits were being offset, in part,
by money coming from their charter schools in Texas.”

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  The Spectrum News article referenced two checks and asserted that they were
Texas public school funds sent to a Colorado charter school.

 The Texas Observer article referenced the Spectrum News article and stated that
the article raised questions about the transfer of “at least 49 million in Texas public
school funds to the Colorado nonprofit.”

2. Allegation Category Two

The second general category of allegations asserts that, while operating in partnership with

the Partnership Districts, Third Future Schools – Texas failed to disclose financial information

required by Tex. Educ. Code § 12.111(a)(15). Specifically, it is alleged that the transactions and

relationship between Third Future Schools – Texas and TFS should have been disclosed to the

Agency and Partnering Districts prior to forming the partnership. Within this category, the specific

allegations analyzed by the SIU include:

 The Texas Observer article stated, “experts told the Observer that disclosure of pre-
existing business deals for administrative expenses are generally required under
state law and rules applied to Texas charter schools.”

 The Texas Observer article stated, “While charter schools are allowed to enter into
contracts with charter management organizations out of state for professional
services, they still have to comply with financial accountability laws that require
them to record and disclose to the state each financial transaction with any external
organization. “

3. Allegation Category Three

The third general category of allegations asserts that Partnering Districts failed to ensure

that Third Future Schools – Texas maintained the state funds received from Partnering Districts in

a depository account, as defined and required by Tex. Educ. Code § 12.107. Within this category,

the specific allegation analyzed by the SIU is as follows:

 The Texas Observer article stated that “a bank depository certificate obtained by
the Observer shows that Third Future Schools-Texas didn’t open a bank account
until March 2021,” indicating that the school was operating without a bank account
for funds.

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 4. Allegation Category Four

The fourth general category of allegations asserts that, while serving as an operating partner

with Partnering Districts, Third Future Schools – Texas and the board of Third Future Schools –

Texas failed to oversee the nonprofit’s finances as required by state and federal law. Within this

category, the specific allegations analyzed by the SIU include:

 The Texas Observer stated, “It was another board, the Third Future Schools’
corporate board, that authorized three Colorado-based administrative leaders,
including Miles, to be the signatories for Third Future Schools-Texas bank
account.”

C. Applicable Legal Standards

1. Legal Authority for TEA Investigations

Texas law grants the Commissioner of Education the authority to authorize special

investigations into alleged violations of the Texas Education Code, as set forth Tex. Educ. Code

§ 39.003. These investigations are governed by procedures adopted by the agency under Tex.

Educ. Code § 39.004, which can be found on the agency’s website.8 Except as subject to

exceptions identified in the Texas Education Code, investigations into conduct relating to other

state and federal laws may be reserved to other agencies; where allegations involved in this

investigation relate to any such laws, this report notes these limitations.

2. Legal Authority for School Operator Partnerships

The partnership between the Partnering Districts and Third Future Schools – Texas is

governed by multiple statutes. In 1995, the Texas Legislature developed a legal framework that

allowed for the establishment of charter schools. This framework created multiple types of charter

schools, each governed today by separate subsections of Chapter 12 of the Texas Education Code.

8
Exhibit 8 – TEA SIU Procedures

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Additional types of charter schools have been added to that chapter via distinct subchapters over

the years.

The most common type of charter schools are open-enrollment charter schools, established

via Subchapter D of Chapter 12 of the Texas Education Code, which are “authorized” – or granted

a charter and allowed to operate – by the Commissioner of Education. A charter school authorized

by the Commissioner of Education under Subchapter D is subject to the requirements of that

Subchapter.

Subchapter C of Chapter 12, however, provides school districts (as opposed to the

Commissioner of Education) the ability to authorize a charter for one or more of the district’s own

campuses. To operate a charter authorized under Subchapter C, the school district may enter into

a school operator partnership with an eligible entity, as defined by Tex. Educ. Code § 12.101(a).

The campuses operated by Third Future Schools – Texas via the school operator partnerships with

the Partnering Districts are all Subchapter C charter schools. Thus, Subchapter C of Chapter 12 of

the Texas Education Code is the primary applicable governing statute for the operation of these

campuses.

In 2017, the Texas Legislature passed Senate Bill (SB) 1882, creating Tex. Educ. Code

§ 11.174, which, in relevant part to this investigation, gives school districts an alternative to state

intervention if they use a school operator partnership under Subchapter C of Chapter 12 to address

underperforming campuses in their district.9 This law requires the school district to grant specific

authorities to an operating partner, including full autonomy over campus operations and the

campus budget. In return, the district receives additional time for the operating partner to

turnaround the campus before state intervention would be invoked. Among other statutory benefits

9
Exhibit 9 – SB 1882 - Bill Text

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of these partnerships under SB 1882, the district receives an additional state funding entitlement,

subject to the provisions of Tex. Educ. Code § 48.252, for the partnership campus.10 The operating

partner must be authorized by the school district as a Subchapter C charter holder to operate a

Subchapter C charter school within the district. These Subchapter C charter schools are governed

by other state laws only as such laws have explicitly been made applicable in statute.11

Additionally, administrative rules provide supplemental guidance and requirements for the

approval of the benefits granted in Tex. Educ. Code § 11.174.12

In addition, Tex. Educ. Code § 11.174 sets forth requirements for all such school operator

partnerships. Specifically, the statute and its associated rules require that any school district

entering into a school operator partnership enter into a contract with the operating partner that

outlines the terms and conditions under which the operator runs the schools, including the funding

structure for any payments to be made by the district to the operator.

Under Texas law, TEA does not have direct authority over those contracts or the terms

contained therein, as they are entered into between a school district and its chosen third-party

operator. However, TEA does review the contracts to ensure they meet the mandatory legal

requirements specified in Tex. Educ. Code § 11.174 and 19 Tex. Admin. Code § 97.1075-1079 in

order for the agency to confer the statutory benefits that come along with entering into such a

partnership.13 Furthermore, while TEA has authority to issue sanctions against a district campus

operated by an entity granted a charter under Subchapter C by a school district, TEA lacks

authority to issue sanctions against the entity operating the campus. Instead, under the Texas

Education Code generally, and Tex. Educ. Code, Chapters 39 and 39A, in particular, TEA has

10
See Tex. Educ. Code § 48.252.
11
See Tex. Educ. Code § 12.055.
12
See 19 Tex. Admin. Code § 97.1075-1079.
13
See 19 Tex. Admin. Code § 97.1075.

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general regulatory authority over the school district that granted the Subchapter C charter, which

in turn has authority under Subchapter C over the operator of the campus, to ensure that both the

school district and the operator follow Texas law. For this reason, TEA’s investigation notices

were issued to the Partnering Districts, not to Third Future Schools – Texas.

The allegations that form the basis of the SI appear to mistakenly attempt to impose legal

requirements that apply to open-enrollment charter schools under Subchapter D of Chapter 12 of

the Tex. Educ. Code—and specifically Subchapter D requirements for how open-enrollment

charter schools spend specific state funding—to the Subchapter C charter school operated under

the authority of local school districts. With regard to the use of state funding, different laws apply

to Subchapter C and Subchapter D schools. Subchapter D schools receive most state funds through

a state funding allocation established in Tex. Educ. Code § 12.106 where funds are paid directly

from TEA to the Subchapter D charter holder, whereas Subchapter C charter schools receive

funding from a school district via their partnership arrangement and do not receive funding directly

from the state. Thus, the use of funds provided by a partnering district to a Subchapter C charter

school are governed by the contractual arrangement between the partnering district and operating

partner, and are not subject to the financial requirements of Subchapter D.

III. Investigation Methodology

In accordance with division procedures, TEA’s Special Investigation Unit (SIU) initiated

an investigation into the processed complaints after a Notice of Special Investigation was sent to

the Partnering Districts. SIU investigators reviewed the documentation submitted with the

complaints and determined that additional information was needed. Investigators submitted three

sets of requests for production of documents to Midland ISD and Ector County ISD, two sets of

requests for production of documents to Austin ISD. TFS and Third Future Schools – Texas also

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provided a response to requests for documents, as well as follow-up requests for documents and

clarification, in order to provide SIU with information necessary to conduct the investigation. The

documents that SIU obtained and analyzed during the investigation include, but were not limited

to, records outlining district authorization processes, partnership agreements between the

Partnering Districts and Third Future Schools – Texas, bylaws and board policies for TFS and

Third Future Schools – Texas, board meeting minutes, and school district actions to ensure

compliance with the agreements. The records that SIU reviewed to verify financial structures and

transactions include, but are not limited to campus budgets, financial audits for the Partnering

Districts, Third Future Schools – Texas, and TFS, bank statements and signatory records from

Third Future Schools – Texas, samplings of accounting ledgers and journal entries that provided

justifications for transfers and payments from the bank accounts of Third Future Schools – Texas,

information related to deposits to the Third Future Schools – Texas accounts, ledger entries

showing detailed payments to shared services, such as health insurance providers, and federal grant

funding information provided by the United States Department of Education. SIU investigators

also conducted interviews with individuals at the Partnering Districts, TFS, and Third Future

Schools – Texas, including administrators knowledgeable about the financial affairs of the district

and partner, board members, and employees. SIU also consulted with internal TEA divisions with

expertise relevant to the investigation, including but not limited to the TEA divisions of Charter

School Authorizing, Financial Compliance, and Grant Compliance and Administration.

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IV. Analysis

A. Allegation Category One

1. Findings of Fact

The first general category of allegations asserts that, while operating in partnership with

the Partnering Districts, Third Future Schools – Texas violated Texas law by misusing state funds.

The statutory provision implicated in this allegation is Tex. Educ. Code § 12.107, which requires

that state funds be held in trust for the students of the charter school and that state funds cannot be

used to support unrelated operations or activities. Specifically, it is alleged that Third Future

Schools – Texas, during its partnership with the Partnering Districts, improperly sent state funds

intended for the students enrolled at the campuses in the Partnering Districts to its out-of-state

affiliate, TFS. The agency finds that this allegation is not substantiated by evidence and that no

associated legal violations were committed by the Partnering Districts or Third Future Schools –

Texas.

TFS is a Colorado nonprofit entity that currently operates 11 charter schools across three

states. TFS refers to its operations in each state as a “program” and collectively as the “TFS

Network Programs.” TFS has two boards of trustees.14 The primary TFS board is established as

the controlling board in the organizational bylaws. The bylaws require the establishment of a

subsidiary advisory board to focus specifically on the Colorado program. Both boards of trustees

are organized within the same nonprofit entity, and they share tax-exempt status under § 501(c)(3)

of the Internal Revenue Code.15

14
Exhibit 10 – Third Future Schools Bylaws
15
Exhibit 11 – Third Future Schools IRS Letter

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 Third Future Schools – Texas is a separate nonprofit entity that was established in Texas.16

The organizational bylaws of Third Future Schools – Texas designate TFS as the sole member of

Third Future Schools – Texas.17 As a distinct organization, Third Future Schools – Texas has a

separate board and there is no crossover voting membership between the boards of TFS and Third

Future Schools – Texas.

Third Future Schools – Texas has entered into partnerships with several Texas school

districts to operate campuses as provided by Tex. Educ. Code § 11.174 and Subchapter C of

Chapter 12 of the Texas Education Code, including Austin ISD18, Ector County ISD19, and

Midland ISD20. Third Future Schools – Texas entered into its first partnership on March 25, 2020,

with Midland ISD to operate a Midland ISD elementary school as a Subchapter C charter school

for the 2020-2021 school year.21

The Third Future Schools – Texas board oversees the school operator partnerships within

Texas, Third Future Schools – Texas employs the campus staff at the partnership campuses, and

Third Future Schools – Texas has an agreement with TFS to pay TFS for providing the centralized

support and administrative services necessary for the operation of the partnership campuses. These

supports include, but are not limited to, payroll, accounting, human resources, centralized

leadership services, and professional development.

Third Future Schools – Texas maintains its own bank account and has always maintained

bank accounts separate from TFS.22 The investigation compared transfers of funds from the

Partnering Districts to Third Future Schools – Texas, and the documents reviewed indicate

16
Exhibit 12 – Third Future Schools – Texas IRS Letter
17
Exhibit 13 – Third Future Schools – Texas Bylaws
18
Exhibit 14 – Third Future Schools – Texas Operating Partner Agreement (Austin ISD)
19
Exhibit 15 – Third Future Schools – Texas Operating Partner Agreement (Ector County ISD)
20
Exhibit 16 – Third Future Schools – Texas Operating Partner Agreement (Midland ISD)
21
See Exhibit 16 – Third Future Schools – Texas Operating Partner Agreement (Midland ISD)
22
Exhibit 17 – Third Future Schools – Texas Depository Certificate (2020)

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matching deposits in the Third Future Schools – Texas bank accounts. The investigation

confirmed that the Partnering Districts did not deposit money into TFS’ bank account.

The allegations in this category focus on the transfer of funds in and out of Third Future

Schools – Texas’ bank accounts. The Spectrum News report specifically highlighted that the

Colorado address to which the checks from Ector County ISD, as payor, to Third Future Schools

– Texas, as payee, were addressed was the address of TFS’ central office. However, the

investigation determined that the checks were sent to TFS’ Colorado address because TFS provides

accounting services for Third Future School – Texas, a service that includes depositing Third

Future Schools – Texas’ checks. The investigation verified the process for check deposits into the

Third Future Schools – Texas bank account and confirmed that the Third Future Schools – Texas
23
deposit records matched the payments sent to it by the Partnering Districts. No evidence

gathered during the investigation indicates that any funds from the Partnering Districts were

deposited into the bank accounts of TFS, other TFS Network Programs, or any other entity.

Separately, some funds were sent from the Partnering Districts to the bank account of Third

Future Schools – Texas via direct deposit. Examples of such transactions include, but are not

limited to, monthly payments outlined in the partnership agreement and reimbursement of

allowable costs incurred related to various state and federal grant awards. The investigation

verified that such direct deposits were deposited directly into the Third Future Schools – Texas

bank account and did not flow through a TFS account.

As described above, Third Future Schools – Texas receives many services from TFS. In

exchange for these services, Third Future Schools – Texas pays TFS an agreed “administrative

fee”. Each partnership agreement with the Partnering Districts contains contractual terms that

23
Exhibit 18 – Sampled Third Future Schools – Texas Bank Records

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permit Third Future Schools – Texas to “contract for any services it deems beneficial in operation

of the [s]chool,” a provision that does not violate any Texas law. The administrative fee to obtain

such services is budgeted within each partnering campuses’ budget. Each partnership agreement

that Third Future Schools – Texas entered into with the Partnering Districts attached a copy of an

estimated budget that included a line item for administrative services, and Third Future Schools –

Texas provides updated copies of yearly campus budgets to the Partnership Districts. Additionally,

the budgets are approved24 by Third Future Schools – Texas’ board of trustees during an annual

budget review that is required under administrative rule25 and Third Future Schools – Texas’

bylaws.26 As permitted by the partnership agreements, Third Future Schools – Texas used a portion

of the administrative fee to cover the expenses for services described above.

Funds are also transferred from the Third Future Schools – Texas bank account to a TFS

bank account as a part of this administrative fee to pay for other shared services provided by TFS

to Third Future Schools – Texas, including insurance costs, curriculum and assessment platforms,

and pre-paid debit cards for use by campus staff.27 These shared services are provided to all TFS

Network Programs, and the costs of the shared services are paid out of TFS’ bank account. All

TFS Network Programs, including Third Future Schools – Texas, then reimburse TFS for a pro

rata portion of the total costs incurred by TFS based on a per pupil percentage of total TFS Network

enrollment. This process was confirmed through evidence gathered as part of the investigation,

including the review of pertinent ledger notes.28

24
Exhibit 19 – Third Future Schools – Texas Board Meeting Minutes, June 23, 2022
25
See 19 Tex. Admin. Code § 97.1075(c)(2)(E)
26
See Exhibit 13 – Third Future Schools – Texas Bylaws
27
Exhibit 20 – Evidence of Sampled Financial Transactions
28
See Exhibit 20 – Evidence of Sampled Financial Transactions

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 Outside of shared services provided to Third Future Schools – Texas, the investigation

identified two additional types of transfers from Third Future Schools – Texas’ bank account to

TFS’ bank account. First, in the event Partnering Districts did not provide timely transfers of funds

owed through the partnership agreements to Third Future Schools – Texas, TFS would make a

temporary payment of philanthropic funds to Third Future Schools – Texas. Once the payments

from the Partnering District were received, Third Future Schools – Texas would reimburse TFS

for the philanthropic funds. The investigation reviewed a sampling of such payments and

confirmed that appropriate reimbursements were made. Second, while providing accounting

services for Third Future Schools – Texas, TFS employees occasionally made accounting errors

in the normal course of business or billed expenses from the incorrect accounts. When this

occurred, funds would be transferred between the impacted bank accounts to remedy the error.

The investigation also reviewed a sampling of these payments and confirmed that errors were

appropriately remedied.

Under Texas law, TEA does not have authority over what TFS does with the funds it is

paid by Third Future Schools – Texas for administrative fees or shared services, just as the agency

cannot broadly require any other school district vendor to identify how they expend their funds

once the vendor has been paid for services provided. As a vendor of Third Future Schools – Texas,

TFS may use the funds that they are paid as they see fit, once those funds have been transferred

for goods or services rendered.

The Spectrum News article used a screenshot of one portion of a Third Future Schools –

Texas financial audit to suggest their administrative expenses were excessive and that such

expenses were attributable to TFS. This investigation concludes that the expenses identified in the

Third Future Schools – Texas audit were attributable to expenses incurred by Third Future Schools

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– Texas and largely were not attributable to the cost of services from TFS. The investigation further

concludes that the payment of administrative expenses by Third Future Schools – Texas does not

violate Texas law.

Elsewhere in the audit29 referenced by the Spectrum News report, the following breakdown

of administrative expenses is provided:

In addition to the audit, the investigation also reviewed the budgeted versus actual expenses

for each campus operated by Third Future Schools – Texas in the Partnership Districts from 2020

forward.30 31 Investigators verified that the “admin salaries & benefits” category was comprised of

campus administrative staff such as the principals, assistant principals, counselors, nurses, office

managers, and clerks and did not include funding for the salaries of TFS staff.32 33
Each of the

partnership agreements signed with Third Future Schools – Texas also included a withholding

provision permitting the Partnering District to withhold a portion of the overall funding allocation

29
Exhibit 21 – Third Future Schools – Texas Annual Audit, 2023
30
Exhibit 22 – Third Future Schools – Texas Budgeted Expenses 2020-2023 (ECISD and MISD)
31
Exhibit 23 – Third Future Schools – Texas Budgeted Expenses 2022-2024 (Austin ISD)
32
See Exhibit 22 – Third Future Schools – Texas Budgeted Expenses 2020-2023 (ECISD and MISD)
33
See Exhibit 23 – Third Future Schools – Texas Budgeted Expenses 2022-2024 (Austin ISD)

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for administrative supports provided by the Partnering Districts; these withholdings are included

in the overall administrative services referenced by the Spectrum News article. This amount varied

by agreement. In Midland ISD, the agreement provided that the Partnering District would withhold

15 percent of funds for district administrative support, but the amount was renegotiated to six

percent in 2023. In Ector County ISD, the Partnering District withheld a “minimum of $940 per

year per enrolled student”. In Austin ISD, the Partnering District withheld 10 percent. Finally,

these administrative expenses also include services purchased from the Partnering Districts. For

example, in Midland ISD, Third Future Schools – Texas purchased services from the district that

included custodial, transportation, copiers, and special education supports.34 While the

administrative fee for the TFS services is also counted in this administrative expenses category, it

is a fraction of the expenses and has always been capped at ten percent of the total funds released

to the campus by the Partnering District.35 Additionally, investigators found TFS reduced or

suspended the required payment of the administrative fee when the Third Future Schools – Texas

campuses were struggling to make the payment; this occurred on multiple occasions.

2. Legal Analysis

School operator partnerships under Tex. Educ. Code § 11.174, like the agreements between

Third Future Schools – Texas and the Partnering Districts, are governed by Subchapter C of

Chapter 12 of the Texas Education Code. Subchapter D of Chapter 12, in contrast, governs open-

enrollment charter schools authorized by the Commissioner of Education. As described below,

there are many important legal differences between charter schools authorized under Subchapter

C and those authorized under Subchapter D. The news reports that form the basis of Allegation

Category One, however, attempt to mistakenly impose Subchapter D legal requirements on the

34
Exhibit 24 - Menu of Services Midland ISD SY2020-2021
35
See Exhibit 22 – Third Future Schools – Texas Budgeted Expenses 2020-2023 (ECISD and MISD)

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Subchapter C charter schools in question. For example, the allegations made in the Texas Observer

and Spectrum News articles reference language from provisions under Subchapter D and invoke

administrative rules that implement Subchapter D requirements.

The authorization process and requirements for Subchapter C schools are in direct conflict

with many provisions of Subchapter D, as they originate from a different source and have different

key terms. Specifically, Tex. Educ. Code § 12.107 is a provision in Subchapter D that establishes

the status of specific state funds issued to Subchapter D charter schools. These state funds are

allotted through Tex. Educ. Code § 12.106, the source for most Subchapter D charter school state

funding. Subchapter D charter schools are authorized by the Commissioner of Education and thus

receive their state funding directly from the state. The Commissioner of Education has no authority

over the authorization of the Subchapter C district campus charter schools, the funding structure

between the Partnering District and the operating partner, or how the operating partner implements

its program with those funds. The Commissioner of Education’s only authority relating to such

agreements is to ensure the partnership agreements meet the minimum requirements in Tex. Educ.

Code § 11.174 to be eligible for statutory benefits separate from authorization under Subchapter

C.

Importantly, no Subchapter C charter school receives funding via Tex. Educ. Code

§ 12.106. Therefore, when Tex. Educ. Code § 12.107 states, “[f]unds received under Section

12.106 … by a charter holder”, the subsequent requirements are not applicable to the funds

received by a Subchapter C charter school. Instead, the Subchapter C charter schools in question

were authorized by the Partnering District and thus receive funds in the form of payments from

the Partnering District pursuant to a partnership agreement. The terms of that agreement, approved

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by the Partnering Districts’ board of trustees, control the money the Subchapter C charter school

receives from the district to operate the campus.

Accordingly, the agency finds that the allegations contained in Allegation Category One

are unsubstantiated. The agency concludes that the laws contained within Subchapter C of Chapter

12 of the Tex. Educ. Code apply to the operation by Third Future Schools – Texas of the campuses

in question, and the agency additionally concludes that neither the Partnering Districts nor Third

Future Schools – Texas violated any provisions of Subchapter C through their partnership

agreement. Furthermore, the investigation has not identified any misuse of state funds by Third

Future Schools – Texas and the agency finds no violations of Texas school law.

B. Allegation Category Two

1. Findings of Fact

The second general category of allegations asserts that, while operating with the Partnering

Districts, Third Future Schools – Texas failed to disclose financial information required by Tex.

Educ. Code § 12.111(a)(15). Specifically, it is alleged that the transactions and relationship

between Third Future Schools – Texas and TFS should have been disclosed to the Agency and the

Partnering Districts prior to forming the partnership.

According to TEC § 11.174 and its associated administrative rules, in order to be eligible

to enter into a school operator agreement and receive the statutory benefits that come with a school

operator partnership, a district must adopt a board policy relating to the authorization of Subchapter

C charter schools within the district at district campuses. These local policies, not state law, govern

the information that a prospective partner must share with the school district. State law does not

dictate what information should or should not be exchanged between the district and the operating

partner. TEA does not have authority over a school district’s local authorizing policy, beyond

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establishing specific information that must be present in the policy to align the partnership with

the statute and to qualify the partnership for benefits. Furthermore, the rules and policies by which

a school operator must abide are not governed by state law but are contained in the terms of the

contract between the school district and the operator. In this case, the board of trustees of each

Partnering District adopted a local authorizing policy to govern Subchapter C school operator

partnerships. In accordance with the policy, a binding contract was entered into between Third

Future Schools – Texas and each of the Partnering Districts that governed the obligations of each

party with regard to the operation of the district’s campus. The investigation determined that

neither the local authorizing board policies nor the school operator agreements required Third

Future Schools – Texas to disclose any existing agreement with TFS or intent to purchase services

from TFS (or any other entity), except to the extent that services were being purchased from the

district. Additionally, Subchapter C of Chapter 12 of the Tex. Educ. Code does not require the

disclosure of the information that the news reports assert should have been disclosed.

Even though there was no legal obligation or local policy requirement for them to do so,

the investigation found that Third Future Schools – Texas did provide in each relevant partnership

agreement a proposed or estimated campus budget that identified that Third Future Schools –

Texas intended to purchase administrative services for the campus.36 In Midland ISD’s operating

partner agreement, the estimated budget identified $150,000 budgeted for “purchased services for

admin. support,” just under four percent of the estimated total revenue of the program. In Ector

County ISD’s operating partner agreement, the estimated budget identified $350,000 budgeted for

“purchased services for admin. support,” approximately two and a half percent of the estimated

total revenue of the program. In Austin ISD’s operating partner agreement, the estimated budget

36
See Exhibits 14-16 – Third Future Schools – Texas Operating Partner Agreement(s)

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included a line item for “purchased services for TFS admin. support”. Additionally, in each

subsequent operating year, Third Future Schools – Texas submitted a proposed and approved

budget for Third Future Schools – Texas to each Partnering District.37 This submission always

included a budgeted line item for “Admin – Purchased Services - Network” funds to pay for

centralized services provided by TFS.38

Similarly, in two of the three of the partnerships examined in this investigation, Third

Future Schools – Texas provided its bylaws to the Partnering Districts as part of the application

process. These bylaws clearly show the relationship between Third Future Schools – Texas and

TFS, describing TFS as a sole member of Third Future Schools – Texas. The evidence analyzed

in this investigation shows no effort to hide the relationship between Third Future Schools – Texas

and TFS from the Partnering Districts.

Additionally, in each of its annual audits, Third Future Schools – Texas identified “Third

Future Schools Network” as a related party on “Note 4 – Related Party Transactions”, terminology

which is defined in Tex. Educ. Code § 12.1166 as, in part, “a charter holder's related organizations,

joint ventures, and jointly governed organizations”.39 40 41

“Third Future Schools Network” is a

term for the combined TFS programs. For example, in 2021 and 2022, the audits identified TFS

as providing professional services to the authorized Third Future Schools – Texas campuses, and,

in 2021, a campus “reimbursed Third Future Schools Network $81,736 for expenses paid on their

behalf.” Also, Third Future Schools – Texas’ 2023 audit identified that the campuses were

“programs of Third Future Schools – Texas and Third Future Schools Network”. Pursuant to a

37
Exhibit 25 – Third Future Schools – Texas Annual Budget Submission
38
Exhibit 26 – FY23 Budget Item Admin Purchased Services Network
39
Exhibit 27 – Third Future Schools – Texas Annual Audit 2021
40
Exhibit 28 – Third Future Schools – Texas Annual Audit 2022
41
See Exhibit 21 – Third Future Schools – Texas Annual Audit 2023,

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requirement in the partnership agreements, these audits were provided to the Partnering Districts.

The audits are also posted on the TFS website.

2. Legal Analysis

The Texas Observer article did not reference a specific legal requirement related to this

category of general allegations, instead stating that “disclosure of pre-existing business deals for

administrative expenses are generally required under state law and rules applied to Texas charter

schools.” The article also states that there was a failure to disclose a “symbiotic relationship”

between Third Future Schools – Texas and TFS.42

As described above, Subchapter C of Chapter 12 of the Texas Education Code governs the

operation of the schools in question. Subchapter C does not contain any mandatory reporting

requirements, whether related to partnerships with charter management organizations, vendors, or

otherwise. While Subchapter D of Chapter 12 does require open-enrollment charters authorized

by the state to provide some information to TEA, the Subchapter C charter schools involved in this

investigation are not subject to Subchapter D requirements. The local board policies related to

charter authorization for each Partnering District also do not require the disclosure of agreements

with vendors, service providers, or any other organization, except that these policies specifically

require the operating partner to disclose, in advance, any service-related agreements it intends to

form with the Partnering District itself.

In conclusion, the agency finds this allegation unsubstantiated, as it appears to reference

provisions in statute and rule that are inapplicable to the type of charter school at issue in this case.

Additionally, the agency also finds that the Partnering Districts were notified or were aware of the

42
Related to this general category of allegations, the Texas Observer article also specifically references federal
990 filings by the TFS and Third Future Schools - Texas. TEA does not have jurisdiction over or authority to
investigate alleged inaccuracies in federal tax reporting.

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association between TFS and Third Future Schools – Texas. The Partnering Districts were also

aware of the intent of Third Future Schools – Texas to purchase administrative services, as it was

consistently identified as a line item on the estimated budgets provided to the Partnering Districts

during the application process as well as annual budgets produced throughout the operation of the

program. The agency concludes that no violations of law occurred related to this category of

allegations.

C. Allegation Category Three

1. Findings of Fact

The third general category of allegations asserts that the Partnering Districts failed to

ensure that Third Future Schools – Texas maintained the state funds received from the Partnering

Districts in a depository account, as defined and required by Tex. Educ. Code § 12.107. The agency

finds that this allegation is unsubstantiated and concludes that no violation of law occurred.

The Spectrum News report alleged that checks issued by the Partnering Districts were sent

directly to Colorado and that these funds were being diverted to support other TFS schools in

Colorado and thus being denied to Texas students. That allegation has been addressed and

dismissed as unsubstantiated in Allegation Category One. However, the Texas Observer article

cited the response by TFS to the Spectrum News report in alleging that the process for depositing

those checks into the Texas bank account was questionable because “a bank depository certificate

obtained by the Observer shows that Third Future Schools-Texas didn’t open a bank account until

March 2021, almost a year after it started receiving Texas tax dollars.”

While the investigation verified that the depository certificate referenced in the Texas

Observer article does show that a specific Third Future Schools – Texas bank account was opened

in March 2021, the article fails to identify that Third Future Schools – Texas opened a bank account

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with the same bank prior to the creation of the account referenced by the Texas Observer.

Investigators reviewed the bank depository certificate for the previously existing account and

confirmed the account was opened in July 2020, the same month that Third Future Schools – Texas

began their first operating partnership in Texas.43 Additionally, investigators confirmed that the

account opened in July 2020 was the operating account for the partnership with Midland ISD,

which was the only partnership that Third Future Schools – Texas had at that time.

2. Legal Analysis

The general allegations categorized in Allegation Category Three are dismissed as

unsubstantiated. First, the statutory provision related to maintaining funds in a depository account,

Tex. Educ. Code § 12.107 is contained in Subchapter D of Chapter 12 of the Texas Education

Code, which does not apply to Subchapter C charter schools. That is so because the pertinent

provision in the statute expressly includes the requirement that “[f]unds received under Section

12.106” must be deposited in a bank “with which the charter holder has entered into a depository

contract”. None of the funds received by Third Future Schools – Texas, as a Subchapter C charter

school, were provided by the state under Chapter 12; instead, all proceeds received by Third Future

Schools – Texas were paid to it by the Partnering District pursuant to the applicable contractual

arrangement. As such, Third Future Schools – Texas must comply with the terms of the partnership

agreement, and Tex. Educ. Code § 12.107 does not apply.

Despite that, however, Third Future Schools – Texas did in fact maintain bank accounts

“with which the charter holder has entered into a depository contract” continuously during the

operation of their campuses in the Partnering District. Therefore, the factual assertions in

Allegation Category Three have also been disproven.

43
See Exhibit 17 – Third Future Schools – Texas Depository Certification (2020)

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 D. Allegation Category Four

1. Findings of Fact

The fourth general category of allegations asserts that, while serving as an operating partner

for the Partnering Districts, Third Future Schools – Texas and the board of Third Future Schools

– Texas failed to oversee the nonprofit’s finances as required by Texas law. Specific allegations

include that the board of Third Future Schools – Texas are not signatories on the entity’s bank

account and that the board of TFS, not Third Future Schools – Texas, authorized signatory access

to the bank account, enabling the transfer of funds. The agency finds that no violations of

applicable Texas law occurred.

TFS is the sole member of Third Future Schools – Texas pursuant to the bylaws of Third

Future Schools – Texas. The bylaws of Third Future Schools – Texas govern the responsibilities

of its sole member. The bylaws can also impose restrictions on the authority of the sole member

and designate exclusive responsibilities to the Third Future Schools – Texas board. For example,

the bylaws expressly reserve for the Third Future Schools – Texas board the authority to approve

the organization’s budget. There are no express restrictions contained in the bylaws related to the

management of depository accounts.

Additionally, an agreement exists between Third Future Schools – Texas and TFS whereby

Third Future Schools – Texas pays TFS for specific services. One of those services includes

accounting. In that capacity, among other tasks, TFS deposits checks for Third Future Schools –

Texas, makes payments on behalf of the Texas entity, and conducts payroll services for Third

Future Schools – Texas. To provide these services, TFS’ Director of Finance is a signatory on the

Texas entity’s bank account.

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 The bank account signatories for Third Future Schools – Texas do not include its board

members. The board members of Third Future Schools – Texas do not issue checks, withdraw

money, or engage in the day-to-day financial operations on behalf of the organization. While the

Texas Observer article asserts this fact and implies that the Texas entity is violating a law, no such

Texas law exists. Similarly, the article asserts that the Texas board was not the board that approved

the Texas account’s signatories; while true, this fact does not create a violation of applicable Texas

law. Lastly, the article states that Mike Miles, founder and former CEO of TFS, remains a

signatory on the Third Future Schools – Texas bank account, despite no longer being employed by

or serving on the board of either organization. The investigation confirmed there is a segregation

of duties, and that multiple Third Future staff members are involved with the process for making

a check-request, reviewing the request, and approving the request. While the investigation

confirmed that Mr. Miles remains a signatory on the Third Future Schools – Texas bank account,

this fact does not constitute a violation of Texas law. Furthermore, the investigation uncovered no

evidence of any wrongdoing by Mr. Miles or anyone else associated with Third Future Schools –

Texas or TFS.

2. Legal Analysis

The fourth general category of allegations asserts that, while serving as an operating partner

for the Partnering Districts, Third Future Schools – Texas and its board failed to oversee the

nonprofit’s finances as required by Texas law. After investigation, the agency has concluded that

no violation of the applicable Texas law or any other applicable rule or policy occurred.

To begin, the Texas Observer article incorrectly states: “Both Texas charter school laws

and federal laws governing nonprofit organizations require a nonprofit board of directors to be in

charge of the organization’s finances.” This is not an accurate statement of the law. The Texas

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Observer article linked to a document from the Internal Revenue Service (IRS) that describes best

practices for nonprofit organizations regarding the authorities of governing bodies. This IRS

document contains guidance for nonprofits, but it does not reference or cite any specific federal

law that requires nonprofit directors be signers on their accounts or be involved in the decision

regarding the authorized signers. In fact, this document states, “tax law generally does not mandate

particular management structures, operational policies, or administrative practices.”

Elsewhere in Subchapter D, Tex. Educ. Code § 12.107 and its associated administrative

rule 19 Tex. Admin. Rule § 100.1063 contain requirements related to depository accounts that

apply to Subchapter D charter schools but do not apply to Third Future Schools – Texas because

it is a Subchapter C charter holder. As discussed in the analysis for Allegation Category One, the

funds referenced in Tex. Educ. Code § 12.107 are specifically issued through Tex. Educ. Code

§ 12.106, which is the funding mechanism by which the state directly funds Subchapter D charter

schools authority by the Commissioner of Education, but it is not the funding mechanism for

Subchapter C charter schools like the school in question, which receives funding through a

contractual agreement with a school district. Similarly, 19 Tex. Admin. Code § 100.1063 is used

to administer the legal requirements of Tex. Educ. Code § 12.107 and cannot be made broadly

applicable to other funds or entities by agency authority alone.

Instead of these statutes, a Subchapter C charter school is bound by the terms of its

partnership agreement with the school district and the local authorizing policy of the school

district. While the agency does not have authority over the terms of these contracts or the local

authorizing policies adopted by school districts, evidence analyzed during the investigation

establishes that neither the partnership agreement at issue or the district’s local authorizing policy

has requirements related to depository accounts.

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 In the absence of an applicable law or policy, either in the operating partnership agreement,

the school district’s charter authorizing policy, or in Subchapter C, there is no applicable

requirement in the agency’s jurisdiction to indicate that the funds issued in the partnership must

be held in an account with sole operating partner control. No evidence was obtained during the

investigation that supports the allegation that funds were being transferred from the account by

TFS signers that were not for expenses approved by the Third Future Schools – Texas board in the

partnership budgets.

V. Conclusion

The allegations regarding the Partnering Districts and their partnership with Third Future

Schools – Texas have been investigated by the agency, and the agency concludes that no violations

of applicable laws have occurred by either the Partnering Districts or Third Future Schools – Texas.

The allegations contained in the media reports described herein and related complaints either

reference requirements that are inapplicable to the partnership or cannot be substantiated, or have

been proven to be false. Accordingly, the agency is concluding its review of these matters and

closing the investigation.

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