Better to light one candle than to curse the darkness

by Pat Drago and Sue Legg

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This is not an easy walk into the woods, but you need to know where the funding for charter schools comes from and where it goes. It is your money.

There is a lot money to be made and lost with charter schools, and it is public tax dollars. As usual, independent schools tend to lose it, and large charter management chains come out on top.  This is not always to the children’s benefit.  How does this happen? We looked at the audits and found huge disparities in facility and fee expenditures. This meant that instructional parts of the budgets were reduced accordingly.

We wanted to know how these facilities were financed. If State funds were creating opportunities to make real estate venture capitalists wealthy, we wanted to know how this worked. Unfortunately, public dollars that go to private companies are hard to see. The lack of transparency for their financial records provides only vague outlines. We did find some clues by looking at how facilities are financed.

We wondered what other states were doing to ensure that state money was allocated for instruction and not for profit making ventures. We found some answers. As always, different approaches have their share of unintended consequences. As we groped in the darkness, there was a glimmer of light. The brave among you are invited to go down this path with us.

CHARTER SCHOOL FACILITIES – A BRIEF STUDY:

 Charter schools are known as public schools with a difference. They are privately owned and operated. Traditional public schools and charters typically receive the same per student funding from the state, but there are sharp contrasts in where the money goes. In most states, charters allocate state money in their budgets for leases and construction costs. If they borrow money, they may pay high interest rates because their risk of closure is high. Thus, charters may spend less on instructional needs in order to pay facility costs. District schools are able to assess a limited amount of millage for school construction and can float tax exempt bonds.

The Center for Education Reform reported that the number one reason that approximately 20% of all charter schools close is due to financial deficiencies. . Most of these are small, independently run charters. Large charter chains, even for-profit ones, thrive. A major difference is their access to funding for facilities, and in some cases, the ability to locate where there is a stable source of revenue—higher achieving students.

Even though charter management companies make money, they complain that facility funding is not equitable. Charters generally do not receive a share of locally generated facility funds. The question of whether it is appropriate to use tax dollars to fund privately owned buildings is at issue. Without proper controls and supervision, there is no guarantee that the public interest is being served. This is a conundrum, and states vary in their approaches to resolve it. Any approach has consequences, and we consider those below.

FACILITY OPTIONS. States have four general strategies for providing facilities to charters. First, they may convert public schools as they have in Chicago, Nashville and Houston. Second, districts may be required to share space in public schools. Third, states may allocate per pupil lease payments for charters. Fourth, charters may receive funding through tax exempt and/or low interest bonds. Fifth, charters may get access to state capital outlay money usually reserved for public school maintenance.

In Florida, charters receive capital outlay funds and are eligible for bonds. Governor Scott’s budget includes $100 million for over 600 charters and $167 million for over 4,000 district schools. Most districts do not share school improvement funds raised from local referenda. Charters in Florida, on the other hand, are exempt from most district school facility requirements. Anticipated cost savings are not realized. Instead, real estate firms have become integral parts of charter management firms. Costs for charters are high, and studies have shown that as the number of charters increases, school districts cannot offset their lost revenue with savings.

Other states have chosen to share public school buildings in order to reduce costs. This approach took two forms: co-location and conversion schools.

  • Co-location. New York City charters share space in public schools. The chartehaver may have one wing and the traditional public school has another. This can result in a thriving partnership, a marriage of convenience or, in some cases, a shotgun wedding with all its associated tensions. If some charters attract large donations from private sources, as is the case in New York City, poorly equipped public schools and well-equipped charters co-exist in the same location.   Co-located schools operating with different rules can be a logistical problem. A shared school facility may have two administrators, two schedules and    competition for common space such as the cafeteria or gymnasium. What seems expedient to policy makers becomes a day to day operating problem to site leaders. The experiment in New York has yet to be replicated elsewhere.
  • Conversion Schools. Some states, like California and New York are required by law to provide facilities to charter schools.  If urban districts have vacant classrooms or contemplate closing schools, offering a vacated school building to a charter can be a simple transaction. The school district retains ownership, but if the charter school fails, and maintenance has been deferred, the district has fiscal responsibility for an old, unusable building. This approach did not work in California. They turned to lease agreements instead.  A spate of controversy ensued, and some states turned to different forms of lease agreements.
  • District Lease Agreements. In 2003, Californians voted for Prop. 39 that mandated districts lease appropriate facilities to charters.  Charter school operators and the Los Angeles School District have been in court for several years over how to allocate space to charters. Charters want more space than public schools want or are able to release. Other states require that vacant space be offered to charter schools under a lease agreement. Tennessee, for example, requires that vacant and under-utilized facilities be offered to charter schools, whether it is partial site or full site availability. Metropolitan Nashville Public Schools (MNPS) has an established lease rate for its available space. Entire schools may be turned into charters. What is interesting here is that the posted lease rate is $5.10 per square foot based on district calculated utility and operational costs, but the state has charters paying $3.00 per square foot. Neither rate provides for the capture of capital costs for deferred maintenance and depreciation, so the district will ultimately absorb substantial costs.
  • Lease Aid. Minnesota does not allow charters to own facilities if public funds are used to purchase them. The state provides lease aid ($1,314 per student) that some consider inadequate. The State also requires a ‘sum certain’ lease amount that does not vary with enrollment. In response, charters have developed affiliated non-profit building companies recognized in statute in 2009. Lease aid payments to these companies may be recovered by the state if the charter closes.  Three other states have passed per pupil allocations for charter facilities: California, D.C. and Utah.
  • Lease Backs. Charter school management companies, which may be for-profit, create subsidiary real estate companies to build or lease facilities for a fee. These are called ‘lease-backs’. There is no restriction on the amount of the payments, and companies also serve as intermediaries for leasing facilities they do not own. While charters in Florida submit annual audits, there is little transparency or oversight of these payments. The audit reports the payment, but the management companies are private and not required to provide detailed information to clarify actual costs.

FUNDING SOURCES. If the State does not provide access to facilities directly, charter operators turn to bank and investment firms, foundations, state capital outlay allocations or bond issues. Interest rates are often high, and the ability to qualify for low interest or tax exempt bonds is limited. Regulations designed to facilitate funding have consequences that may help or harm different sectors of the charter movement.

  • Private Investment Firms. Construction loans from hedge funds or other firms provide an excellent return on investment to the private interests but little protection for the public. Thus, firms could charge high interest rates due to the perceived risk for closure. At the same time, many firms took advantage of a federal tax code provision that enables firms to claim tax credits for seven years if the schools are intended to serve low income areas. Analysts claimed that firms could double their money.   Private foundations and financing organizations and tax credit exempt bond market loans are secured by per pupil funding streams. When charters are successful, interest rates decrease. Ironically, when charters threaten the financial viability of public schools, their bond ratings decline.
  • Federal Tax Exempt Bonds. Federal law has established three tax exempt bond programs for school construction. Qualified School Construction Bonds (QSCBs) are divided into separate pools for charter and public schools. These funds may be used to construct or improve facilities but may not be used for lease payments. ( 6A-2.0030 FS). Federal QZAB bonds are tax exempt, but they are allocated only for school renovation, not construction. Build America Bonds (BAB) cover a wide range of projects including school renovation. Interest rates on these bonds are low. An overview of these bonds is published by the US DOE.
  • State Bond Initiatives. Florida Development Finance Corporation (FDFC). These low interest, tax exempt loans are intended for small manufacturing firms and 501©(3) non profit organizations. Non-profit entities are formed which have contract relationships with for-profit charter management firms. Charter Schools USA, a for-profit firm, has six non-profit governing boards in Florida that oversee its many schools across the state. One of these, Renaissance schools, and perhaps others have qualified for FDFC loans. A helpful review of other states’ policies is located on the U.S. Department of Education website.
  • Capital Outlay. Florida provides some capital outlay funding for charters, the state PECO allocation supplemented in 2011-12 by general revenue funds.  State capital outlay funds which once supported public school maintenance costs now are shared with charters. The amount varies from year to year. In order to qualify, charters must be in operation for three years and have non failing school grades.  In each of the last three years, legislation has been filed but not passed, allocating a portion of any locally authorized capital funding to charter schools without consideration of prior bonding commitments or local capital needs. Florida offers charters tax exempt bonds through the FDFC program that is financed by educational impact fees for new developments. To be eligible, organizations must either be small businesses or 501(3)(c) non profit organizations. The Renaissance charters are organized as nonprofits, but they turn over 95% of their budgets to the for-profit Charter Schools USA with whom they are affiliated. . CONCLUSIONS

Is there equity in funding of facilities for charter schools? The answer is no, and the reason lies in the transient nature of charter school operation and ownership. Policy makers have balked, and reasonably so, at establishing capital funding on a par with district owned and operated public schools. Privately owned charter schools operate at an arms length relationship defined by contract often without adequate oversight. In the event of closure or termination any capital investment may or may not be recaptured. Even if these charter facilities were returned, they may not be meet facilities criteria for public schools.

Reports of mismanagement and and excessive profits have been reported nationwide. The Integrity in Education publication: Charter School Vulnerabilities to Waste, Fraud, and Abuse  and the Annenberg Foundation report: Public Accountability for Charter Schools.

categorize these problems and offer solutions. The Miami Herald addressed similar issues in: How Some States Rein in Charter Schools

Some of these regulations are listed below:

  • Board members must file financial disclosure statements in Pennsylvania and Massachusetts
  • Authorizers must approve board members in New York, Michigan, and Massachusetts. Florida requires just criminal background checks
  • New York, Tennessee, and New Mexico ban for profit management firms.
  • Minnesota does not allow private ownership of facilities, but does allow ownership by an associated real estate company.  Lease amounts are controlled by the State.
  • The National Alliance for Charter Schools recommends boards operate independently of management companies.
  • For-profit educational management firms are not allowed in D.C., New Mexico, New York, Rhode Island, Tennessee, and Washington. Massachusetts has strict rules that discourage for-profits.
  • Purchasing and lease guidelines are mandatory in many states.
  • Strong authorizing rules can focus charters where they are needed. In Florida, Governor Scott proposed charters only be authorized in areas where a public school is failing. The League of Women Voters recommended that charters fill an unmet need.

In the years to come, these issues may continue to be just outside of many policy debates, and both charter schools and public schools will suffer the consequences. If we recognize the pitfalls and insist on reasonable regulations, we can make it possible to provide responsible choices that are more about high quality education and less about exploitation. There is hope. Two bills have been filed in New Mexico, and we will post them tomorrow.

Additional References

Innovations in Education: Making Charter Facilities More Affordable http://www2.ed.gov/admins/comm/choice/charterfacilities/report_pg14.html

Summaries of State Charter Schools Facilities Laws http://www.charterschoolcenter.org/resource/summaries-state-charter-school-facility-laws

Increased IRS scrutiny of charter schools operated by for profit companies http://www.lrrlaw.com/increased-irs-scrutiny-of-charter-schools-operated-by-for-profit-management-companies-06-18-2012/

http://floridacharterschools.org/schools/taps/Manual_for_Financial_Reporting_09.pdf

National Charter School Resource Center Charter School Bond Issuance: A Complete History. http://www.charterschoolcenter.org/resource/charter-school-bond-issuance-complete-history-volume-2. Nov. 2012

Posted in Charter School Management, Facilities, Florida, Funding, Minnesota, New Jersey, New Mexico, New York, Reform, Tennessee, Texas, Uncategorized, Washington D.C., Washington State.

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