the community

Reflections from the Ninth Decade

Follow the Money: There’s No Business Like the Ed. Business . . . This document is copyrighted by the American Psychological Association or one of its allied publishers. This article is intended solely for the personal use of the individual user and is not to be disseminated broadly.

Murray Levine and Adeline G. Levine University at Buffalo, State University of New York

Tax breaks, loans, tax-exempt bonds, profits, limited risks, return on investment. To understand school reform today, it might help to be an accountant.1

T

he debate about charter schools and public schools has been conducted on an ideological level. However, the ideological argument obscures the ongoing transfer of public funds to private use, the creation of business and investment opportunities, and the effects of the private enterprise model on education. In the current two-part article, we discuss charter schools and finances. Part 1 concerns charter schools and management organizations. Part 2 focuses on charter schools as business investments. Throughout we link the information to effects on education.

Charters and Management Organizations All schools, whether private or public, traditional public or charter, have to be concerned with more than education per se. To function, they must deal with the business side of the schooling enterprise. Schools have payrolls to meet, including benefits. Schools must recruit and train

1

Diane Ravitch, Endless Saga of Charter School Scandals (2013, Jan. 29), http://dianeravitch.net.

replacements when personnel turn over. Schools must maintain accounting and education records and prepare budget projections. They purchase supplies and may contract for services. They have facilities that may be leased, owned, or constructed and must be maintained. The schools may be involved in real estate transactions. They may borrow money or float bond issues. They need legal counsel about the myriad of laws that affect the business and educational sides of the operation. In addition, there is a political side that may involve relationships with a variety of government agencies and officials, including legislators. These activities are routinized within the bureaucracies of traditional public school systems, which are responsible to local and state laws and regulation. In many districts even the school budgets are subject to direct approval by voters. Although public schools are not free of waste, fraud, and abuse, public school officials are accountable to the public. When charter schools are organized, they do not have such bureaucratic structures in place. Charter schools are basically private businesses using public money. Most charter schools are operated by nonprofit boards whose members have an educational vision and have attained a

charter, but they may lack the expertise essential to carry out the business side. Charter school boards can contract with other organizations to provide that expertise. In addition, many charter schools are established by entrepreneurial organizations or as part of a chain of schools; these bring their own management expertise. The charter school story is incomplete without an appreciation of the complex context in which different missions and different cultures interact. There may be an inherent conflict between the business and the educational sides of the charter school mission. Beyond the routine business side, charter schools may be vehicles for profitable financial investments. It is telling that when Forbes published an article by Addison Wiggin about a conference for sophisticated investors on “private equity investing in forprofit education companies,” the article was titled, “Charter school gravy train runs express to fat city.”

Statistical Overview By 2012–2013, charter schools enrolled 2,280,000 students or almost 5% of the public school population. Two years earlier, in 2010 –2011,

Murray Levine, Department of Psychology, University at Buffalo, State University of New York; and Adeline G. Levine, Department of Sociology, University at Buffalo, State University of New York. Correspondence concerning this article should be addressed to Murray Levine or Adeline G. Levine, 18 Saint Andrew’s Walk, Buffalo, NY 14222. E-mail: [email protected] or [email protected] American Journal of Orthopsychiatry 2014, Vol. 84, No. 4, 377–386

© 2014 American Orthopsychiatric Association http://dx.doi.org/10.1037/h0099848

the community charters enrolled 1,805,000 students, almost 4% of the public school population. In 2012–2013, 68% of the 6,004 charter schools were freestanding, nonprofit organizations each

pendent charter school boards to provide management services. There is a developing literature on the impact of type of organization on measures of academic achievement.

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A management contract with a profit-making EMO does not affect the charter’s nonprofit eligibility to receive public funds operated by its own board. In many cases the individual boards who held the charters negotiated contracts for management services. The organizations providing the management services can be either nonprofit-making charter management organizations (CMOs) or profit-making educational management organizations (EMOs). A management contract with a profitmaking EMO does not affect the charter’s nonprofit eligibility to receive public funds. In addition to free standing charter schools, in 2010 –2011 about 343,000 students were in chains operated by nonprofit-making and about 350,000 students were in chains operated by profit-making organizations. About 4.5% of all charter students are in virtual charters, which provide education off-site by computers. The proportion of all students in charter schools varies widely by community. In New Orleans, about 84% of all public school students are in charter schools, and many modest size and large communities have market shares ranging from about 25% to 50%. The term CMO (nonprofit) may also refer to a network of three or more schools run by a central management that holds the charters and operates the schools either directly or in a sort of franchising operation. The CMO provides centralized services and receives a fee from each charter school’s education budget. An EMO (for-profit) may refer to organizations that contract with a number of inde-

Services Provided by Management Organizations Management organizations may engage in a wide range of services: Curriculum development, and the acquisition of instructional materials, supplies and equipment; all extracurricular activities; hiring, firing and professional development of personnel; maintenance of the school facilities, including transportation and food; all school “business” opportunities and finances and “any other function necessary or expedient for the administration of the school.”2

Charter school boards may become dependent on their management organizations for expertise and for the resources the management organization may command. The management organizations may lend money to charters for startup costs, assist charters in floating tax-exempt bond issues to finance construction, and assist them to obtain mortgages with the income from state reimbursement for education as the guaranty that the charter won’t default. Many management organizations operate amicably with charter boards. However, some boards have difficulty asserting their authority because of the relative imbalance in power and resources between the independent boards and the management organiza-

2

Julia Davis, Contracts, Control, and Charter Schools: The Success of Charter Schools Depends on Stronger Nonprofit Board Oversight to Preserve Independence and Prevent Domination by For-Profit Management Companies, BYU EDUC. L. J. 22 (2011). 378

tions they hire. In some cases, the profit-making management organization has created the nonprofit board that holds the charter, making it very difficult to elicit information about the nonprofit board’s activities. The management organizations may control school-related financial records, leaving the boards of directors in the dark about how money is being spent. A management organization may own most of the school’s property and may employ the staff, undercutting the board’s authority. The management organization may argue that it has a proprietary interest in the charter and is more a partner with the board than its agent. This can make it difficult to fire a management organization.

Are Charter Schools Public Schools or Private Actors? The degree to which charter schools are public or private organizations has been subject to litigation. The outcome of specific litigation is based on existing state charter laws. In one case, the founders of a California charter school were convicted of misappropriating more than $200,000 in public money. The California Charter Schools Association filed an amicus brief arguing unsuccessfully that the couple should not be found guilty of a criminal offense because as private actors they were not using public money, even though the school’s funds came from the state. In another case, a California Court of Appeal upheld a trial court’s summary judgment against a student plaintiff in a sexual harassment action brought under state law on the grounds that the charter school is not a public entity, so the law didn’t apply. Some courts that have accepted the private actor argument have limited the authority of public officials to audit charters. In New York State charter schools are supposed to have independent auditors, but a New York state trial judge held that the state comptroller could not audit charter schools, because they are not units of

the community the state. One court in Ohio did hold that the management organization is an agent of the charter board, that the board received public funds, and is therefore accountable to the public for

of children with special needs to a free, appropriate public education may not be fully honored by charter schools. By selectively screening out students with special needs and sending them back to the

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When it is to their advantage, charter schools argue that, as private actors, many state laws do not apply to them the funds. The issue of charter schools as private or public entities is important because their status affects many details of the way charters conduct their business. Charters lay claim to reimbursement as public schools, as shown by the advocacy organization title: National Alliance for Public Charter Schools (emphasis added). However, when it is to their advantage, charter schools argue through their lawyers and managers that, as private actors, many state laws do not apply to them. Thus, they claim they do not have to be transparent about their finances. Depending on state law, as private entities, charters may not be required to have open meetings nor to be responsive to freedom of information requests for documentation of their decisions, including those about their use of public funds. The public may have no right to information about the salaries or contracts of teachers, administrators, or other employees. If charter schools are private actors, not units of government, private sector labor laws less favorable to unions apply, affecting how unions may organize charter schools. (About 12.3% of charter schools are unionized, including some operated by teachers unions.) If the employers are not “state actors,” charter school teachers may have fewer federal civil rights protections than other public sector employees. School disciplinary codes may be less formal, and parents and students may not have the due process rights they have in public schools when it comes to dismissal or suspension. Laws protecting the rights

public schools, some charter schools effectively shift the cost of caring for them to the public school budget.

Accountability Issues Charter schools operated by nonprofits have boards of directors that are self-appointed and have no direct accountability to elected officials. A charter school is responsible to its authorizing agency, which has the power to authorize or revoke a charter when the charter comes up for its periodic review. The authorizing agency may be a public entity or a private entity, but the boards of directors of authorizing agencies are not directly accountable to the public as is an elected school board. While the de facto power of the charter school managers is subject to the control of the authorizing agency, the authorizing agency may be weak, with few resources to investigate and affirm each school’s performance. The agency may have a limited will to police charter school practices. The legal scenario may be complicated further if a nonprofit charter holder contracts with a for-profit CMO that is a private entity. Despite such weakness in oversight, since their inception, about 1,030 charter schools or about 15% have closed, because their charters were not renewed. About 42% of those schools were closed for financial reasons, 24% for mismanagement, and another 18% because of failure to meet academic goals. When a charter school fails, the children usually return to a traditional 379

public school, having had what may have been a futile year of education.

Costs A few states limit profit-making organizations from operating charters directly. Under the Individuals with Disabilities Education Act (IDEA), the federal government bars forprofits from receiving federal funds directly. However, state and federal strictures are readily bypassed: There are no legal limits when the boards of nonprofit charter schools hire forprofit charter management organizations. When independent nonprofit boards turn to management organizations, the help may be financially costly. In general, the for-profits charge between 10% and 20% of a school’s annual revenue. In 2010, nonprofit CMOs charged about 7% of the funds the New York City schools received per pupil; for-profit EMOs charged an average of 17%. In New York City, the annual management fee per pupil ranged from $1,384 to $2,841. In 2012, a CMO sought an increase from $1,350 to $2,000 for each New York City student, to cover management and services provided to Eva Moskowitz’s Success Academy schools. In Ohio, White Hat Management charged the charter schools between 95% and 96% of the state’s reimbursement for education. One Florida for-profit charter school spent 42% of its revenue on management fees and leases and only 44% on instruction. By contrast, that local county’s schools spent 86% of revenue on instruction. Some have questioned whether all the services promised for the management fees are actually forthcoming. “As federal and state governments pour billions of dollars into charter schools, boards across the country have increasingly turned to companies such as White Hat . . . Yet the results have been decidedly mixed, with increasing complaints that some companies have put

the community profit ahead of education and have often become unaccountable to the school boards that are supposed to represent the interests of the community and children.”3

CEO received over $500,000 at one point. Two administrators at one school each received in excess of $200,000 and were hiring relatives at six-figure salaries. Nepotistic arrangements in charter

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Because charter school teachers turn over at a faster rate than public school teachers, there are high startup and recruiting costs for charter schools Salaries and Benefits It is difficult to obtain public records about salaries and benefits for executive level personnel of management organizations. There are, however, many examples of outsized salaries; in addition, fees for consultation may conceal a CEO’s total salary. As a point of reference for the following examples, the superintendent of a large city supervising 50 or more schools may receive $250,000. The chancellor of the New York City school system receives $212,614, as did her predecessor. New York City. Eva Moskowitz, CEO of the Success Charter Network in New York City, received a salary of $371,000 while supervising seven schools. As the number of schools in her chain grew to 20 plus, so did her paycheck. She is now said to earn $485,000 a year. In the same city, the chief executive of a group of two charter schools earned $499,000 and the head of a single well-regarded New York City charter school earned $338,000. Florida. In Florida, the principal of a failed charter school received a payout of more than $500,000 in fulfillment of her contract terms. She had received a salary of $305,000, triple that of the customary salary for a principal in that school district. Philadelphia. As documented from renewal applications, one charter school

3

Sharona Coutts, For-Profit Schools: Charter Schools Outsource Education to Management Firms With Mixed Results. PROPUBLICA (2011), http://www.propublica.org/topic/for-profit-schools

schools that enhance a family’s income have been reported in other cities as well as Philadelphia. In Chicago, UNO is a politically favored charter chain. An investigation revealed that funds appropriated for building new charter schools were funneled to family members in multimillion dollar contracts. When this particular ploy was exposed by a newspaper, the governor of Illinois froze the remaining funds, and the UNO was under investigation for a possible violation of federal securities laws. Subsequently, the $250,000-ayear CEO resigned as did two of the three family members he had on the payroll. His top aide also resigned after a news report that UNO had given $8.5 million of state grant money to companies owned by two of the chief aide’s brothers. An indication of the widespread problem of nepotism in charter schools was revealed by a simple Google search using the terms nepotism and charter schools. Examples turned up in many states: Arizona, California, Florida, Hawaii, Illinois, Minnesota, New Mexico, New York City, Ohio, South Carolina, and Texas. In some instances, the Googled item referred to new legislation or regulation to control nepotism specifically addressing charter schools. On the assumption that legislation is a solution to a recognized problem, it remains to be seen how effective such legal controls will be. Teachers’ Salaries. Personnel costs are a large part of any education budget. Both charter schools and public schools 380

tend to use the public school salary schedule as a point of reference. Entering salaries and highest salary levels for teachers tend to be about the same in charters and public schools. Although the salary schedules seem to be the same, the hourly rate for teachers in charter schools is often less because many work longer hours than public schools teachers do, a factor that may contribute to the high rate of attrition of teachers in charter schools. Some math, science, and other specialty teachers and a few experienced teachers may receive high salaries in some charter schools, but on average charter school teachers earn less than public school teachers. In Ohio, in 2012 the average charter school teacher earned $34,714, whereas the average public school teacher earned $57,310. That differential is larger than the $9,000 reported nationally a few years ago. The difference is partly explained by the fact that charter school teachers tend to be younger and less experienced on average than public school teachers. Because charter school teachers turn over at a faster rate than public school teachers, there are high startup and recruiting costs for charter schools. Many charter school teachers are recruited through Teach for America. Teach for America, an organization with a net worth of about $300 million, receives annual referral fees in public funds from schools of between $2,000 and $5,000 for each teacher hired. Originally dedicated to serving disadvantaged children, Teach for America now places about a third of its recruits in high-performing charter schools. Its founder, Wendy Kopp, justified the policy of placing recruits in such charter schools: Let the recruits see what is possible in high-performing urban schools. It is an open question of how well disadvantaged children are served by a rapid turnover of minimally trained, inexperienced teachers. Other Expenditures: Lobbying and Advertising. Lobbying in the education and the charter school industry is ubiqui-

the community

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tous. A simple Google search using the terms charter schools and lobbying, advertising, expenditures turned up articles about lobbying in 15 states: Arkansas, California, Connecticut, Florida, Georgia,

tional public school would have been allowed to do that. Charter schools limited by their taxexempt status may contribute to state or regional procharter associations, who

Will an educational vision prevail over financial, political, religious, or other interests of management organizations and business investors in charter schools? Illinois, Louisiana, Massachusetts, Michigan, New Jersey, New York, Ohio, Pennsylvania, Wisconsin, and Texas. Procharter groups sometimes defend their expenditures on elections by pointing to the activities of teachers’ unions who, they claim, have dominated local school board elections. Union opponents routinely characterize unions as “powerful.” A Google search using the terms teachers unions and lobbying, advertising, expenditures turned up a large number of articles, but in fewer states, perhaps because many states do not have strong teachers’ unions. (National unions claim to represent the interests of teachers who are not in states with strong teachers’ unions.) Teachers’ unions have raised record amounts of money in the last few years and are heavily engaged in lobbying efforts. However, teachers’ unions use funds raised from their memberships, whereas lobbying by charters directly or indirectly may include funds the charters receive for instruction. Many states have limitations on lobbying expenditures by public agencies. The restrictions do not apply to teachers unions. If charter schools or the managing organizations are also private entities, then the state limitations would not apply. During a controversy in New York City about new charter schools, at least one charter school leader declared a school holiday and transported children to Albany to lobby against restraints on charter schools. No tradi-

then conduct the lobbying. Other advocacy organizations, including those funded by foundations favoring charter schools, are actively engaged in education battles. These lobbyists make large contributions to the campaign war chests of elected politicians. According to campaign finance records, Governor Andrew Cuomo’s reelection campaign has received hundreds of thousands of dollars from charter school supporters. Recently, charter school proponents unleashed a $5 million media blitz to undermine newly elected New York City mayor Bill de Blasio when he followed through on his campaign promise to limit charter schools. A prominent charter school supporter who had donated $50,000 to Governor Cuomo’s election campaign was quoted as saying, “Anytime I am with the governor, I talk to him about charter schools . . . He gets it.”4 The governor supported a bill that was likely written by procharter school lobbyists limiting mayoral control over charters in New York City. In effect, the bill gave the charter schools everything they wanted to promote the growth of charter schools, but only in that city, to the consternation of charter school operators in the rest of the state. The bill also allows charter schools to operate pre-K programs. (The population of preschool children under 5 grew by 4 Javier Hernandez & Susanne Craig, Cuomo Puts his Weight Behind Charter School Protections. N. Y. TIMES, April 3, 2014, p. A19.

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5.3% between 2000 and 2010. The growth accounts in part for the political battles in New York City and elsewhere to meet the demand for more pre-K facilities, aside from their value for child development and achievement.) To attract parents and children, perhaps to build a waiting list, some charter schools have advertising budgets for billboards, radio and TV spots, and print media ads, to bring their schools to the attention of prospective students. There is limited information about the exact expenditures for advertising and lobbying. The NYC Success Charter network alone reportedly spent $900,000 in 2012 for lobbying and advertising. We do not know what proportion of the advertising and lobbying funds come from money charter schools receive for educational purposes. Profit and Surplus. Because charter management organizations are private, they don’t necessarily reveal a balance sheet enabling a determination of profitability, or to what degree a charter school under management accumulates a surplus. There is a distinction between a surplus that may be plowed back into the school whether for the benefit of students or for high executive salaries and a profit that accrues to investors. In the absence of transparency, the taxpayer, and sometimes charter school board members, do not know how public money is spent. Assuming the lack of transparency to be a widespread problem, the Pennsylvania Coalition of Charter Schools proposed reforms to be adopted by charter schools. The reforms included making available to the public information about charter schools’ budgets, expenses, salaries and benefits, fiscal records, and annual audits.

Who’s in Charge of Education in Charter Schools? Case law has affirmed that boards may delegate considerable administrative authority to charter management organizations as long as the contract states that the nonprofit board maintains ultimate control. This leaves open the

the community question of who is actually providing and overseeing the education of children in charter schools and whether an educational vision will prevail over the financial, political, religious, or other

fessionals to take U.S. positions primarily in science, math, and technology. More than 2,500 such visas were granted since 2007 for visitors to Gulen-inspired charter schools in the United States, particularly

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Charter schools have a steady, recession-proof source of income in the per capita funds the state gives them to educate children interests of both the management organizations and the business investors. Take as an example charter schools influenced by the Gulen movement. Fethullah Gulen is a highly influential Turkish political and religious leader and “esteemed teacher” with an Islamist following estimated to be as high as 5 million. Gulen followers are not radical Islamists. Graduates of his schools in Turkey were welcomed into elite Turkish society. He was also involved in banking, publishing, construction, government regulation, and the Turkish police. He is said to have established more than a thousand schools in 120 countries. In Turkey, his movement controls eight universities, dozens of private secondary schools, and 350 “crammers” that prepare children for university admission exams. He fled Turkey for the United States in 2000, when he was on trial for essentially a political offense. Although he now lives in rural Pennsylvania cultivating an “image of a frugal sage ailing gently in the hills,”5 he has inspired a chain of about 146 charter schools operating in 26 states with about $500 million in annual revenue. Gulen himself has no direct or official link or role in these schools. The movement first came to public attention when the U.S. consul in Istanbul noticed that applicants for H1-B visas for the United States were vague about the purpose of their visits. H1-B visas are granted for 3 years to permit foreign pro-

5 Christopher De Bellaigue, Turkey Goes Out of Control, LXI NY Rev. of Books. 18 –22 (2014).

to one in Philadelphia founded by the Gulen movement. Gulen-inspired schools emphasize science and technology, and many of the successful visa applicants are science and math teachers trained in Gulen-related universities in Turkey. They are granted visas on the assumption that people trained in these specialties are not readily available in the United States. Children in Gulen-inspired schools are said to test very well and to participate in science fairs sponsored by the schools. The students in Gulen-inspired schools in the United States are American, but there are allegations that many of the Turkish-trained teachers have limited English skills. The schools hire American teachers for the elementary grades. There are allegations that the Turkish teachers who are generally not certified are paid more than American teachers, but they may be required by contract to return a portion of their salaries to Hizmet (Muslim charity.) Although Gulen-inspired schools apparently do not include religious elements in the curriculum, these schools have a mission to promote and create a sympathetic outlook for Turkish culture and for Gulen politics in Turkey. The organizers, board members, and administrators of Gulen-inspired schools are usually people with Turkish ethnic backgrounds. In addition to allegations about discriminatory employment practices, these schools are alleged to be engaged in self-dealing or in restricting contracts to people of Turkish background. There are few specifics in these allegations, but a 2012 audit by the Los 382

Angeles School District Inspector General described a number of financial and record keeping irregularities in three schools that are part of a 12-school chain operated by an allegedly Guleninspired foundation. Their findings included a charge of close control by a board that excluded general participation by parents and community members, poor documentation of employment practices including qualifications of staff, poor documentation of enrollment, inadequate disclosure of related party transactions (self-dealing), and generally inadequate accounting and financial control procedures. Although the report did not include a recommendation for corrective action, it concluded that the inadequacies increased the risk of waste, fraud, and abuse. Although there are similar allegations about other Gulen-inspired schools, critics have not posted similar credible independent reviews along with the allegations.

Charters as Business Investments Wall Street hedge fund managers have raised a multimillion dollar “war chest” to promote charter schools while trumpeting the deficiencies of public schools. They lobby for favorable charter legislation and contribute funds to lawmakers. In general, both Wall Street and foreign investors— banks and investment firms—find charter schools attractive for a variety of investment vehicles: stocks, real estate, bonds. And while earning good returns, investors can also earn tax credits.

Stocks Buying and selling stock is relatively straightforward, especially if the stock is listed on an exchange. We will assume that the typical investor in stocks is primarily interested in an industry’s management and prospects for growth, not in the industry’s product, in the case of charter schools, not in the education of children. A stock’s

the community investment value depends on the stock’s earnings and growth potential. Charter school stock is a desirable investment, because the charters have a steady, recession-proof source of in-

schools, laid off teachers, and sold off buildings. Charter school growth has contributed to the decline in the public school population and to the stress on public

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Charter management must show lenders they have a surplus or a profit, which comes from the public money they receive to educate children

come in the per capita funds the state gives them to educate children. K12, which is listed on the New York Stock Exchange, was considered a good investment. K12 started with online programs for homeschoolers and progressed into the very profitable “virtual charter” arena where education is provided online and offsite. K12’s stock fell sharply after a New York Times story questioned the effectiveness of the schools’ education programs. K12’s CEO responded by saying the story was biased, inaccurate, and incomplete. K12 has now rebranded part of its operation under the name “Fuel Education.” A K12 executive denies that the new division has anything to do with the criticism and is designed to facilitate sales of its various services, in addition to online education.

Real Estate To some extent, population is destiny for school real estate. Whereas the total U.S. population grew 9.7% from 2000 to 2010, the school age population (5 to 17) grew by only 1.6% in that decade. The population from ages 5 to 9 actually declined by 1%, whereas the population aged 10 to 14 grew by only 0.7%. Public schools built for a larger population now have an excess of seats overall, even though some school buildings might be overcrowded and others underused. Across the country, public school officials (and parochial school authorities), struggling with tight budgets, have closed underpopulated

school budgets. The number of charter schools has grown by about 40% in the last half dozen years. Because individual charter schools need space, they provide business and investment opportunities. A 2011–2012 survey of charter school leaders shows that more than half found their current facilities inadequate to support expected growth over the next 5 years. Fewer than 6% of the schools were in their own fully paid-up spaces. About one quarter occupied facilities owned by for-profit entities whether related or unrelated to the school. Another quarter were in facilities owned by not-for-profits whether related or unrelated to the school. Almost 40% say they are paying rent at market rate, and another 12% say they pay subsidized rent. Charters sometimes rent space from their for-profit charter management companies, and sometimes the rates are exorbitant. The for-profit CMO National Heritage Academy leased space from the Catholic church at a rate it refused to disclose. It then rented it to charter school Brooklyn Dreams at $46.99 per square foot. The going rate in New York city for leased space in Catholic schools is between $14.25 and $25.50 per square foot. National Heritage had a similar deal with Brooklyn Scholars, another charter school. We cannot determine from these figures how many of the real estate transactions involve so-called “self-dealing.” A variant of rental is colocation. With the number of charter schools 383

growing, ecological principles would predict the succession of charter schools to allegedly underutilized public school spaces. About a third of charters are colocated, meaning that a charter shares space in the same building with a traditional public school, often for a nominal $1 a year rental. Although some colocated schools manage to coexist harmoniously, colocating is not an optimal solution and is opposed by many parents and educators. There are frequent conflicts about the use of space: Whose space gets renovated? What happens to music and art programs if their rooms are taken over for charter students? Who goes to lunch, when, and where? Who uses the auditorium, the library, the cafeteria, the gym, the faculty lounge, and when? Who uses which bathrooms? Which principal decides?

Borrowing Money To fulfill the desire for their own space, charter schools must borrow money to build or renovate facilities. In the 2011–2012 survey, a little over one quarter of charter schools were paying on a current loan or a bond. To borrow money, the schools must be creditworthy. Often that means management must show lenders they have a surplus or a profit, which comes from the public money they receive to educate children. If creditworthy, a charter school may take out a mortgage at market interest rates with the funds for education backing the loan. The mortgage is amortized by funds allocated in the school budget for that purpose. The interest on the mortgage goes to the mortgage holding investor.

Bonds Even though charters do not have taxing power, as an enterprise with a public purpose, nonprofits may borrow money by means of tax exempt bond issues. Usually, for-profit organizations may not issue tax-exempt bonds. The law is easily evaded because the non-

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the community profit board that holds the charter can do so. One Florida charter chain sold $100 million in bonds using that device. Management organizations and other financiers often assist charter schools to borrow. About 10% of charters, especially those with a median enrollment of about 700 students, are involved in the bond market. In 2010, 10 underwriting firms accounted for 80% of all charter bond issues. As of 2010, $6.44 billion worth of bonds had been offered by the small number of investment bankers who earned over $486.4 million in these transactions. Borrowers still owe $5.41 billion; the default rate is low, at 3% or 4%, depending on the measure. The cost of borrowing money through bonds includes the initial costs of floating an issue, but more important is the interest to be paid over a number of years. The amount of interest depends on the current and prospective net assets of the borrower and the anticipated risk of default. The greater the net assets, and the lower the risk of default, the better the investment grade of the bonds. The better the investment grade, the lower the interest rate, reducing the total cost of borrowing. Median net assets in the borrowing schools ranged from about $500,000 to $1.2 million. Because they pay at a lower interest rate for higher investment grade bonds, the borrowing costs are cheaper for schools with higher net assets. With the exception of funds coming from foundation grants, a school’s assets accumulate as a surplus from the public money received for educating students. The debt burden on the borrowing charter schools is defined by the percent of its budget the payments require. Typically the burden varies from 11.4% to 14.2% of budgets, depending on the investment grade of the bonds. Less than 15% is considered good, but public money is transferred from education to profit for bondholders.

Effects on Education When a bond issue comes on the market, an offering document accompanies it. The information in the formal offering document has legal implications for liability if the enterprise fails. The document must spell out the strengths of the investment and provide an accurate statement of the prospects and foreseeable risks. The offering document is used both by investors to decide whether to buy the bond and by rating agencies such as Standard and Poor or Fitch’s to rate the bond for risk. The offering documents often include information about multiple years of school performance on mandated standardized state achievement test scores and data on waiting lists. Data are also included on the performance of comparable traditional public schools in the district or state. The test scores and waiting list information comprise a fundamental credit factor in the evaluation of the investment. They are used to assess prospects for charter renewal and thus a continuation of the school’s income. Charter school income no longer seems secure when regulators shut down some charters. About 15% of all charters have been closed because of financial difficulties, mismanagement including misbehavior, and failure to meet student performance levels. An advocacy organization for charter schools wants poorly performing charters to be closed automatically. That would have the dual effect of improving the charter school sector’s reputation for creditworthiness and incidentally result in improved average test performance for charter schools. Charter school executives understand that it is crucial for schools to be deemed credit-worthy. “Until you get

6 Stephanie Simon, U.S. Charter Schools: Investment Magnet for Visa—Needy Foreigners? Cash-Starved Charter Schools Meet Cash-Flush Chinese, Pakistani, and Other Foreigners Looking for U.S. Investments That Will Get Them a Visa. REUTERS CHRISTIAN SCIENCE PUBLISHING SOCIETY. (Jan. 31, 2013).

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Questions for Self-Assessment 1. Why do some charter school boards have difficulty asserting authority with their school management organizations? 2. How does the status of charter schools as either public or private organizations affect the way charters conduct business? 3. What is self-dealing, and what is its role in the operation of charter schools? 4. What is the relationship between creditworthiness of charter schools and pressure to “teach to the test?”

that renewal that says you are doing good things,” typically after 5 years in operation, “banks won’t even talk to you,” said Hank Stopinski, principal of Health Sciences Charter School in Buffalo.6 Given this financial context, the use of academic achievement test scores to determine creditworthiness is a powerful source of pressure to teach to the test to maintain scores. The prospects for further growth in this market are also considered by investors. Charter schools in general, especially smaller independent schools, face some difficulty in raising capital. Despite that, a Wall Street Journal financial commentator scolded the bond market for overstating the risk of lending to charter schools. He said the difficulties in charter borrowing were a significant barrier to their growth. “Charter schools” he said, “are high-performing assets with strong repayment histories. They are good for families. They are good for communities. And they are good for Wall Street.”7

7

Michael Rubinger, Bond Markets Get an ‘F’ for Charter School Funding: MarketWatch, THE WALL STREET JOURNAL, July 18, 2013, http:// www.marketwatch.com/story/bond-market-gets-an-ffor-charter-scool-funding-2013-07-18/print?guid⫽04 A30CA0-EE$&-11E2-922F-00218040CF6

the community

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Tax Credits An investor may qualify for a New Market Investment Tax Credit, if the enterprise receiving the capital investment is located in an area with a 20% or higher poverty rate, and the investment has potential to create jobs. Charter schools meet the definition for New Market investments. The money has to be put into an equity investment, such as stocks or loans; the investor retains ownership in the investment and can take profits from it. In addition to the profit derived from the investment itself—interest on a loan, dividends from a stock—the investor receives a dollar for dollar tax credit up to a statutory limit. A tax credit is worth more than a tax deduction. The deduction is taken against taxable income and reduces income tax by the taxpayer’s marginal rate. A tax credit is deducted from whatever amount of income tax a taxpayer owes. In addition, tax credits may be bought, sold, or traded if the taxpayer doesn’t need to use the tax credit to reduce taxes that year. The tax credit adds up to 39% of the investment over 7 years, in addition to whatever money the investment earns for the investor. Obviously the investor has an interest in having the school’s charter renewed to guarantee the flow of income. Again, academic performance can translate into dollars for qualifying charter school investors.

Foreign Investors A provision (EB-5) of the 1990 Federal Immigration Law is designed to attract foreign capital into the United States. In the first 9 months of 2012, the federal government approved 3,000 petitions from foreigners under this provision. The law allows foreign investors to obtain EB-5 visas admitting them to the United States and green cards for themselves and their immediate families. They must invest $1 million in an American enterprise, or $500,000 if the enterprise is in a rural or high unemployment area. The green card means

Suggestions for Further Reading Balboni, E., & Berry, W. (2012). Charter school bond issuance: A complete history. Volume 2. Retrieved from http://www.lisc.org/effc/bondhistoryv2 Full analysis of the market for charter school bonds, their risks, and marketing. Consoletti, A. (2011). The state of charter schools. Retrieved from www.edreform.com/the-state-ofcharter-schools/ This is a procharter school site supporting radical change in the public school system. Davis, J. L. (2011). Contracts, control, and charter schools: The success of charter schools depends on stronger nonprofit board oversight to preserve independence and prevent domination by for-profit management companies. Brigham Young University Education and Law Journal, 1, 1–28. Excellent legal analysis of the relationship between management organizations and charter boards. Fabricant, M., & Fine, M. (2012). Charter schools and the corporate makeover of public education. What’s at stake? New York, NY: Teachers College Press. Excellent job of describing the opportunities for legal, quasilegal, and illegal business activities in relation to charter schools. See especially Chapter 4. Hernandez, J. C., & Craig, S. (2014, April 3). Cuomo puts his weight behind charter school protections. The New York Times, p. A19. Excellent example of investigative journalism reporting political intervention by New York governor in New York City charter school controversy. National Alliance for Public Charter Schools. (2014). Retrieved from http://dashboard.publiccharters .org/dashboard/home Basic source for statistical data about charter schools. This source is in support of charter schools. Ravitch, D. (2013). Reign of error. The hoax of the privatization movement and the danger to America’s public schools. New York, NY: Knopf. The author, a former leader of the education reform movement, now leads the charge against contemporary education reform. This is the best summation of the fallacies and failure of the education reform movement. Simon, S. (2012, August 16). Has Teach for America betrayed its mission? Reuters. Retrieved from http://www.reuters.com/article/2012/08/16/us-usa-education-teachforamerica-idUSBRE87F05O 20120816 Brief history and review of current TFA activities and relationship to charters.

the person is a permanent resident with all the advantages of American citizenship except the right to vote. Charter schools qualify as investments under the EB-5 provision. As a consequence, foreign investors are a new source of capital for charter schools Examples include making buildings suitable for use as schools or providing capital to expand an existing chain of schools. One investment fund connects international investors to charter school business enterprises; investment counselors in China have described charters as “nearly fool-proof investments.” Buffalo principal Stopinski noted that, without foreign investment, his charter school would not have been able to renovate its school building. 385

Coda Over the last few years, we have written several articles about the current threats to public education, a topic particularly appropriate for this journal’s readers. The American Orthopsychiatric Association was established in the 1920s to address social problems affecting children. In keeping with the association’s traditions, it is our intent to direct attention to major changes today in our country’s primary institution for socialization. The changes are likely to have reverberating effects on children, families, and society. From its inception in the mid1800s, public education was designed to create a common experience for all Americans. The free common schools were expected to integrate diverse peo-

the community ple into the society, familiarize them with the culture, and teach the responsibilities of citizens in a democratic society. For most people in our diverse society, the free public school succeeded in achieving those goals. The United States’ free public school system has long been the envy of a great

part of the world. It has never been a static institution; reform efforts began with its establishment. Today, however, under the rubric “reform,” major actors— government, private foundations, wealthy individuals—focus on transferring resources from the public to the private sector, thus diminishing the

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Keywords: education reform; charter schools; school accountability; education lobbying

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public school system. Now, when knowledge is rapidly becoming the most important driver of the global economy, diminishing our public school system will help to destroy our middle and working classes and make us a two-class nation with other consequences as yet unforeseen.

Follow the money: There's no business like the ed. business

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