The Business of Charter Schools

money-40603_1280Too many charter schools are money making machines at the expense of students and tax payers.  The money designated for children and teachers ends up in the pockets of others.  The National Education Policy Center explains how this works.  This is all about money.

REVENUE SOURCES:  Where do charters get money and how is it manipulated?

  1.  State revenue for charters may be supplemented by external fund raising, manipulating formulas that define how state money is allocated, charging  fees for some activities, and requiring in kind payments e.g. parent volunteer hours.  Some charters even charge fees for student discipline infractions.
  2. How funds are allocated to charters may provide opportunities to game the system.  For example, in some states, charters receive the average cost of educating all children with disabilities, but they enroll only children with minor, inexpensive to support, disabilities.  Gaming enrollment numbers for all can occur when charters fill initial enrollment quotas and then are able to retain their funding when these children who ‘do not fit’ are eased out.  State head count procedures for enrollment differ.

REVENUE PRIORITIES:  How do charters prioritize expenses?

Making money may just mean cutting costs.  Charters typically do that by serving only children with low cost or no disabilities, and cutting staff and teacher costs.  In order to pay for management contracts and fees, the money must come from somewhere.  NEPC documents differences in spending priorities by charter management companies in Texas.  For example,

  1. Texas KIPP charters rely on external revenue enhancement of state funding.  It has the highest pre student funding at $10,280 minimum, but it has the lowest percentage of funding for instruction.  KIPP has high administrative costs in comparison to Harmony charter schools, but Harmony has higher facility costs.
  2. All charter in the Texas report have more than double the teacher attrition rate of public schools.  At least one-third of charter teachers leave every year.
  3. NEPC argues that reliance on young, inexperienced teachers is a business strategy to keep staff costs low in order to use money for other purposes.

FACILITY FINANCING:  Where does the money come from and who owns the buildings?

Traditional public schools raise money for facilities through levying property taxes approved by the voters.  Tax exempt municipal bonds which have relatively low interest rates are created to cover the facility costs.  Individual investors purchase bonds and receive tax credits.  States may also have capital funds to contribute to school facility construction.

Charter schools are privately owned and have higher risk.  Since they do not have authority to levy taxes, they must find alternative funding for facilities that comes out of operating expenses and/or have a supplemental funding stream from the state.

  • Charter non-profit boards may lease facilities from management companies or create revenue bonds.  These bonds typically have higher risk ratings and result in higher costs and interest rates than do municipal bonds.   Long term bond debt payment deadlines  If you examine bond payment schedules, bond maturity rates rise significantly by 2030 and exponentially by 2040.  Florida charter audit show balloon payments near the end of bond term limits.  Yet, how the revenue is to be obtained is obscure especially given that the state funding grows very little if at all.
  • Real estate investment trusts are often set up to fund charter school facilities.  These are for-profit entities often closely associated with the education management firm that operates charter schools.  These agreements cover rent, insurance, maintenance, and taxes.  The leases are long term and bump up payments over time.  Shareholders receive dividends.
  • When traditional public schools are turned into charters through a bond or lease/acquisition arrangement, the public may be paying twice for the same facility.  Yet, when these facilities are transferred to charters, the public pays the cost but no longer owns the buildings.  Moreover, the public subsidizes the substantial fees and interest, and the federal government is supporting the entire process.  (p.34)
  • Charters also have access to capital funding through private foundations and urban renewal projects.
  • Social Impact Bonds  These are government ‘bonds‘ that promise payment for successful solutions to social problems.  Private investors raise money to implement promising solutions.  If they are successful, the federal government pays a return on the investment.

As the number of charters increase in given localities, the bond rating for traditional public schools may decrease.  As traditional public schools lose enrollment and close, their risk level increases.  This phenomenon is already occurring in large cities like Chicago and states like Michigan  that are expanding charter schools.  Shareholders purchase properties to lease to schools.

NEPC offers specific recommendations to protect the public interest:

  1. The definition of ‘public charter school’ needs to include the same transparency in operations as any traditional public school.
  2. District and other local government authorities should serve as centralized managers of both traditional and charter facilities.  States may clarify methods to obtain fair market rates for lease, maintenance and operations of facilities.  Co-location in public facilities may be the best guarantor of removing predator leasing agents.
  3. Authorizers should be required to review contracts with EMOs and other outside firms especially those for leases and management services.
  4. Financial reporting should be expanded to cover expenses of EMOs.
  5. Public records laws should include charter meetings, contracts, and employee charges or fees.
  6. States should tighten laws to ensure independence between charter schools, governing boards, and management companies.
  7. States should revise funding formulas to cover relevant costs for differing services for different student needs.
  8. Charter boards should require at least two competitive bids for EMOs and maintain ability to dismiss EMO.  Budget should provide for an external evaluation, and school grades should be published.

Over and over again, we have published stories about facilities funding problems in Florida charter schools.  They are largely ignored. Yet, this is where the money goes. Do a search in the blog on FACILITIES.  Read the articles again.  Write articles to the press about them.  Help us hone our message. Florida can do better.




Posted in Charter School Management, Facilities, Public Education.

One Comment

  1. Another aspect of this is called the new market tax credit. Here’s a description of how it works; In Forbes magazine, 2013, by Allison Wiggin.

    “About the only thing charters do well is limit the influence of teachers’ unions. And fatten their investors’ portfolios.

    In part, it’s the tax code that makes charter schools so lucrative: Under the federal “New Markets Tax Credit” program that became law toward the end of the Clinton presidency, firms that invest in charters and other projects located in “underserved” areas can collect a generous tax credit — up to 39% — to offset their costs.

    So attractive is the math, according to a 2010 article by Juan Gonzalez in the New York Daily News, “that a lender who uses it can almost double his money in seven years.”

    These tax credits are still around in 2015 and have lured Hedge Fund managers from Wall Street into the business of developing Charters. The result can be something like a Nevada Charter where 40% of their revenue was going for building rent. And of course the tax payers and students paid the price for this on many levels.

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