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.

 

Charter School Closure: 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.

New Jersey charter school law lacks provisions for advance warning or lead time requiring a charter school to warn its host district of its impending closure unlike corporate bankruptcy provisions. Therefore, a charter school with an enrollment of 1,000 students could announce plans in April to close on June 30 forcing the host district to scramble to find the corresponding additional teachers, aides, classrooms, staff, technology, materials, supplies, and program and service levels by September. For example, a charter school may have enrolled 1,000 of 4,000 host district pupils since its opening leaving the host TPSD with 3,000 students. Once the charter school enrolled about 25 percent of its students, the host TPSD may have laid off teachers, aides, and staff, and sold school facilities because its costs did not decrease proportionately with lost enrollment. Thus, the host district would suddenly have but five months to equip itself to accommodate an additional 33% enrollment increase. Proper facility and personnel decisions and actions require more time.

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.

 

Statewide Voucher (tuition tax credit scholarship) Program: Diverting Funds from failing Traditional Public Schools

A statewide voucher or tuition tax credit scholarship program providing a tuition grant of $10,000 annually to any student attending a failing local public school district, which can be applied to any private religious or independent school, lacks educational equity and does not provide an equal educational opportunity for all students. Asymmetric information would adversely affect voucher users. Not all students have equal knowledge of or access to desirable private religious or independent schools. Private religious or independent schools may not be equitably available within a 20 mile radius. Tax credits disproportionately benefit the affluent and would result in the public subsidizing the voucher program. The voucher program provides an unequal opportunity for students to attend a private or religious school potentially providing a higher quality education. Moreover, state subsidies of religious schools violate the constitutional separation of church and state.

The voucher plan would divert scarce state funds from failing TPSs to private and religious schools. Failing districts are often found in poor urban areas. The failing schools, from which the voucher students would transfer, would lose enrollment based state and federal aid. These failing districts may be poor performing districts because they were traditionally under-resourced districts. These districts may have become failing because they lacked the property tax base with which to generate the revenues necessary to provide an educational quality commensurate with affluent districts. State and federal governments may have contributed to the under-resourcing by providing aid that neither funded all students’ needs nor accounted for the lack of a proper tax base.

A $10,000 tuition grant is inequitable. A $10,000 grant may be less than the per pupil cost for religious schools and independent schools’ tuition. If private religious or independent schools cannot reject potential voucher students even for lack of capacity, who pays the difference between the $10,000 tuition grant and religious schools’ per pupil cost or independent schools’ tuition creates inequities. Affluent parents could more easily afford to pay the delta while requiring all parents to pay the delta would disenfranchise low income and poor parents.

If private religious or independent schools are given no discretion on whether they can afford to accept voucher students, these schools might be forced to close, expand even if expansion was uneconomical, or create a two-tiered tuition scenario within the school with non-voucher students paying higher tuition to offset the voucher deficit. Should private independent schools have discretion, they might admit only voucher students whose parents were willing to pay the delta, fail undesirable voucher students (e.g., disciplinary records), or refuse voucher students that were more expensive to educate such as special education, ELL, and free-and-reduced-price lunch creating more inequities. Moreover, many religious schools are already financially distressed while others are closing due to budgetary pressures (see Baker, 2010).

Copying a practice common to professional sports, the voucher program would create student “free agents” who would have an opportunity to attend a private or religious school potentially providing a higher quality education. If the program did not require voucher students to attend their chosen school for the full academic year, these free agents could use their vouchers to transfer to another school midyear. Private or religious schools losing free agent voucher students during the year would lose voucher revenue. These schools would experience increased costs especially if they had hired additional personnel or built more classrooms and other facilities to accommodate voucher students.

If no deadline exists by which voucher students must enroll such as by April before the upcoming school year, enrollment would be difficult to forecast exposing operating budgets to greater risk. If private religious or independent schools are given no discretion on accepting vouchers students, the more desirable of these schools could suffer overcrowding and congestion. These problems could cause free agent voucher and more mobile non-voucher students to depart during the year exacerbating operating and financial problems. Housing values might plummet commensurate with increased school overcrowding. Also, enrollment increases stemming from vouchers might not be equally distributed among schools or by grade level.

If no provision is made to provide equally accessible and affordable transportation, vouchers would disproportionately benefit the affluent who can more easily afford transportation. Not all students would have equal access to private or public transportation including public light rail. If the failing school district was required to provide or pay for voucher student transportation, failing school costs would increase especially if transportation expenses were not capped.

Failing school neighborhoods or districts depress housing values because poor school quality is negatively capitalized in housing values. Low assessed housing values keep district property values low. Those who can vote with their feet move to districts providing housing and schools that better meet their preferences. White or middle class flight exacerbates the decline of neighborhoods as jobs and capital exit with them. Taxpayers are investors who want their major asset, their home, to appreciate in value. Home owners or catchment area residents have a vested interest in the success of their local TPSs because they strive to offset the risks posed by vouchers to their community-specific social capital and property values which cannot be easily diversified.

The voucher plan subsidizes private religious or independent schools at the expense of traditionally under resourced failing TPSs. The voucher plan is not a means for improving failing schools. On the contrary, the voucher plan creates a triple assault on failing TPSs. First, the voucher plan diverts essential funds away from needy TPSs. Second, the voucher plan causes failing TPSs losing voucher students to lose state and federal enrollment based aid. Third, failing TPSs’ costs increase because costs do not decrease proportionately with lost enrollment. The more mobile and affluent voucher students may be more likely to use vouchers. Losing voucher students increases the proportions of those more expensive to educate remaining in the failing TPSs increasing costs.

If vouchers were used to their logical extreme perhaps with full funding and transportation, large high poverty urban areas could lose students to the extent that the traditional public education system would close leaving a skeletal district. Lacking true TPSs, housing values might plummet further eroding the tax base and increasing the exodus of the remaining relatively more mobile and affluent taxpayers. Neighborhood erosion would accelerate driving out businesses and employment. If taken to the extreme, an unfettered voucher plan could culminate in the demise of urban areas with a preponderance of failing schools.

The provision of education through local public school districts in which students who live in the district attend its TPSs enables community members to get to know and understand one another. Fischel (2002) argues this “reduces the transaction costs of citizen provision of true local public goods” such as public education (p. 1). The public benefit of children attending their local schools rather than schools in more remote areas accrues to the families living in the catchment areas. This “network of adult acquaintances,” that Fischel (2002) defines as “community-specific social capital,” would be reduced to the extent voucher students left their residential district.

The publicness of local public schools is an argument against vouchers in the following sense. By enabling parents to select schools outside their communities and outside of local public supervision, vouchers work against the neighborhood and community networks that facilitate the bottom-up provision of local public goods. Community-specific social capital is more difficult to form if members of the community send their children to schools in other communities. (p. 1)

Vouchers erode community-specific social capital and, thereby, the public support necessary for proper public funding of public education.

References

Baker, B. D. (2010, March 23). Would $8,000 scholarships help sustain NJ private schools? [Web log post]. Retrieved from http://schoolfinance101.wordpress.com/2010/3/23/would_$8,000_scholarships_help_sustain_NJ_private_schools?

Fischel, W. A. (2002). An economic case against vouchers:  Why local public schools are a local public good. Dartmouth Economics Department Working Paper:  Dartmouth College, Hanover, NH.

 

The Inequities of Inter-district Public School Choice

Like a statewide voucher program, an inter-district public school choice program permitting students attending a failing local education agency (LEA) to attend any neighboring LEA within a 20 mile radius lacks educational and taxpayer equity, and does not provide an equal educational opportunity for all students. Asymmetric information would adversely affect school choice especially among economically challenged families. Not all students have equal knowledge of or access to desirable alternative traditional public schools (TPSs).

Quality alternative TPSs may not be equally available within a 20 mile radius. More affluent families would have higher quality information on alternative TPSs and greater means of enabling their children to attend a choice school such as through family provided transportation. If parents pay tuition to the choice district rather than their failing district, and the tuition is more expensive in the receiving district’s TPS, children of more affluent families would have an unfair and unequal opportunity to attend choice schools compared to poor children.

If full transportation subsidies or free and accessible public transportation are not provided, economically disadvantaged children will lack an equal and equitable opportunity to participate in inter-district public school choice. Not all students would have equal access to private or public transportation including public light rail. If failing school districts were required to provide or pay for transferring students’ transportation, failing schools’ costs would increase especially if transportation expenses were not capped or if the state or federal government did not pay transportation expenses.

Several aspects of the inter-district public school choice program would cause taxpayer inequity. Taxpayer inequity would result when poor parents are unable to send their children to choice TPSs due to their inability to afford the choice TPSs’ tuition or lack of affordable accessible transportation. Taxpayer inequity would result when taxpayers living in the same catchment area have unequal and inequitable access to desirable alternative TPSs. Taxpayer inequity would result should host district residential taxpayers pay higher (or lower) property taxes than out of district school choice parents for the same kind, size, quality, and location of property. Affluent parents can use their disproportionate resource advantage to obtain a superior education for their children while children of parents unable to participate fully or fairly in the choice program would receive an inferior education by continuing to attend failing TPSs even though both families may live in the same catchment area.

State law requiring chosen target TPSs to accept transferring students, even if capacity constrained, results in taxpayer inequity. Forced acceptance of transferring students could result in TPS or district overcrowding. Grade congestion could result should a disproportionate number of students transfer into only a few grades by school or district. Overcrowding could result in higher class sizes, building expansions, or new school facility acquisition or rentals. Overcrowding would diminish the quality of education causing an exodus of students to alternative choice districts.

Incremental teachers, aids, and administrators might be hired to accommodate increased enrollment. Increased personnel and facility costs would most likely require property tax increases. Larger class sizes, TPS or district overcrowding, lower educational quality, and property tax increases would combine to lower local education’s capitalization in district property values. This would cause the relatively more mobile host district taxpayers to vote with their feet. Also, state law requiring chosen target TPSs to accept transferring students may violate court ordered desegregation plans.

Like the statewide voucher program, the inter-district school choice program would divert scarce resources from failing TPSs to choice TPSs. The failing schools would lose enrollment based state and federal aid commensurate with lost enrollment. Failing districts may be failing because they were traditionally under resourced. Failing TPSs may have become failing because their district lacked the property tax base with which to generate the revenues necessary to provide an educational quality commensurate with affluent districts. State and federal governments may have contributed to the under resourcing by providing aid that did not account for the lack of a proper per pupil tax base and did not fully fund the needs of all students.

Poor school quality is capitalized in housing prices making housing values low in failing school neighborhoods. Low assessed housing values keep district property values low. Those who can vote with their feet move to districts providing housing and schools meeting their preferences. White or middle class flight exacerbates the decline of neighborhoods as jobs and capital exit with them. Taxpayers are investors who want their major asset, their home, to appreciate in value. Home owners or catchment area residents have a vested interest in the success of their local TPSs. Whether living under a statewide voucher program or inter-district choice program, homevoters (see Fischel, 2001) strive to offset risks to their community-specific social capital and property values which cannot be easily diversified.

References

Fischel, W. A. (2001). The homevoter hypothesis:  How home values influence local government taxation, school finance, and land-use policies. Cambridge, MA:  Harvard University Press.