Charter School Debt, Assets, and Fund Balances: Implications for Traditional Public School Districts

Ray Budde is credited with creating the charter school concept during the 1970’s. Budde envisioned unique educational laboratories granted charters to develop new and innovative ideas for everything from curriculum to pedagogy to governance. Once these new best practices were finalized, they would be shared with all schools throughout the state. Charter schools are granted more flexibility and autonomy from local board of education regulations and state laws in return for greater accountability to meet their charters’ performance and governance standards.

Charter schools are public schools authorized by either state government (e.g., State Department of Education), traditional public school districts (TPSDs), independent agencies, or colleges and universities depending state’s charter school law. Unlike many states, in New Jersey the state is the sole charter school authorizer. As a result, charter schools function independently from their host district’s board of education under a charter granted by the state (New Jersey Department of Education, 2001). According to the New Jersey Department of Education, as soon as the charter is approved by the Commissioner of Education, the school is governed by a board of trustees authorized by the State Board of Education and the charter school is granted all the necessary powers to execute and implement its charter while held accountable for achieving its charter’s goals.

In New Jersey, a charter school is funded based on its enrollment primarily by the per pupil revenues it receives from its host TPSD’s board of education. According to the New Jersey Department of Education, the host district’s board of education pays the charter school ninety percent of the TPSD’s grade level average per pupil cost-to-educate for each student the charter school enrolls (Bredehoft, 2005). For example, if a charter school enrolled 100 students each in grades one to twelve and the average TPSD per pupil costs-to-educate were $10,000 per elementary student, $12,000 per middle school student, and $14,000 per high school student, the TPSD would pay the charter school $12.78 million for that academic year. Although charter schools cannot charge tuition, they are eligible to receive federal and state funds.

State charter school laws vary concerning the acquisition of and responsibility for debt and ownership and disposition of assets including fund balances. Therefore, the extent to which charter schools can acquire, be held responsible for, or take ownership for debt and the assets acquired with that debt differs from how a typical TPSD uses municipal bonds to finance its capital projects and retains ownership for those assets and the related debt service. Unlike TPSDs, charter schools are not authorized to levy property taxes and can go out of business; therefore, TPSDs typically pay lower interest rates (Nelson, Muir, & Drown, 2000). However, New Jersey charter schools are authorized to maintain positive fund balances enabling charter schools to incur debt at lower interest rates (Nelson, Muir, & Drown, 2000).

New Jersey charter school law allows charter schools to acquire debt; however, the law is silent concerning the entity responsible for charter school debt and debt payment (Nelson, Muir, & Drown, 2000). Although New Jersey’s charter school law stipulates assets purchased with public funds of closed charter schools revert to the host TPSD or state that provided the public funds for acquisition, the definition of ownership is unclear. The lack of clarity results when charter schools lack access to municipal bond markets, authority to guarantee debt repayment, or the ability to “obligate future operating revenue toward the payment of debt for acquiring capital assets,” causing charter schools to find other ways to raise funds for debt payment (Baker & Miron, 2015, p. 29). Among the ways charter schools address this problem is “to establish separate non-profit entities to carry the debt burden” (Baker & Miron, 2015, p. 29). Charter management organizations (CMOs) have access to municipal bond markets, and can take ownership of debt and debt service along with the assets of the charter school managed by the CMO.

Closing a charter school raises major questions concerning charter school asset disposition because New Jersey charter school law is unclear concerning whether the state, host TPSD, or charter school is responsible for charter school debt and debt payment, and asset ownership (Nelson, Muir, & Drown, 2000). If the closed charter school’s debt and asset ownership is held by a separate non-profit entity or CMO, these assets (e.g., school buildings, playing fields, vehicles) do not revert to the host TPSD or state on closure because the debt and assets are not owned by the charter school but by a third party. These assets do not revert to the host TPSD on closure even if formerly owned by the host TPSD.

However, “In the absence of legislation, assets belong to the nonprofit corporation or entity holding the charter, and the laws governing nonprofit corporations guide the issuance of asset disposition” (Nelson, Muir, & Drown, 2000, p. 67). Green and Mead (2004) conclude “Under these laws, the nonprofit’s governing board has the power to dispose of assets once a charter school has closed” (p. 72). Thus, in the event of a charter school’s closure, the charter school’s students would return to the host TPSD as is their right but the assets would not necessarily follow the students. This is a clarion call to work with policymakers to address the state’s charter school law’s need for clarity concerning the acquisition of and responsibility for debt and ownership and disposition of assets in the event of closure.

References

Baker, B. D., & Miron, G. (2015). The business of charter schooling:  Understanding the policies that charter operators use for financial benefit. Boulder, CO:  National Education Policy Center.

Bredehoft, J. M. (2005). New Jersey charter schools:  History and information. New Jersey Community Capital, 1(1), Retrieved from http://www.newjerseycommunitycapital.org.

Green, P. C., & Mead, J. F. (2004). Charter school and the law:  Establishing new legal relationships. Norwood, MA:  Christopher-Gordon Publishers, Inc.

Nelson, F. H., Muir, E. & Drown, R. (2000). Venturesome capital:  State charter school finance systems. Washington, D.C.:  U.S. Department of Education.

New Jersey Department of Education, (2001).  Charter school evaluation report. New Jersey Department of Education. Retrieved from http://www.state.nj.us.

 

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