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School Finance 101: Clarifications on Charter Rent & Equitable Portfolio Management

Diane Ravitch today titled her post on my recent Think Tank Review to suggest that I agree with Mayor Bill de Blasio that some charter schools can afford to pay rent.

This statement while true as worded, misses the bigger point – how to create a system of equitable opportunities for New York City school children, regardless of whether that system includes or does not include charter schools. [bearing in mind important legal inequities that result from including charters in this mix]

While it is true that some charters can certainly afford to pay rent, this is all part of the bigger problem of the uneven sorting of children and resources that has occurred with charter expansion in NYC. It’s all part of a bigger systemwide equity issue which I write about in a forthcoming article in Ed Finance and Policy. I will post the conclusions of that article on my blog.

My think tank review piece specifically challenges the flimsy claims by Manhattan Institute that the only way to provide good schools in NY is to provide unfairly disproportionate subsidies to charter operators. The MI brief falsely and disturbingly assumes that deprivation of the public system to the benefit of the charter system can only yield good results. Charters good. District Schools Bad. Ugh…

Where I believe De Blasio has it correct is in his assertion that it is more important to consider the fiscal health of the broader system – that which serves the majority of the kids… and does so under a governance umbrella that affords those children the full array of statutory and constitutional rights of children in truly public schools.

As I explain in the Think Tank Review:

the central problem with the report is that the author assumes that there exists no possible downside when resources are transferred from city schools to charter schools. The assumption is that providing these subsidies benefits charters and harms no one and that not providing these subsidies harms charters and benefits no one. The policy brief entirely ignores the broader and more complex policy questions of what it takes to manage a balanced and equitable portfolio of schooling options.

In my forthcoming article coauthored with Ken Libby and Katy Wiley of U. of Colorado, we illustrate how charter expansion in New York City has played a counterbalancing role to the city’s efforts to improve equity across schools. As I explain in the Think Tank Review, NYC in the 2000s also adopted a fair student funding formula, the goal of which was to provide that schools serving more needy children were able to access more adequate resources. But expansion of charters had led to the following:

In the case of New York City, charter schools, particularly charter schools serving fewer high-need students, receive resources that are provided by foundations and philanthropies. This negatively impacts resource equity. The equity promise of weighted student funding formulas – which is to direct more resources to high-need students – cannot be fulfilled if outside funds are not adequately accounted for.

Perhaps the most troubling pattern in New York City is that charter schools serve fewer high-need students compared to district schools. This, in effect, concentrates higher need students within traditional public schools. While charter schools in New York City only serve 4% of students, there has been a steady push to expand the charter sector. If charter schools continue to serve fewer high-need students this expansion could lead to a more inequitable distribution of both children and resources in the city. Charters will need to educate more high-need students with existing budgets, or raise additional funds to serve more high-need students.
A notable factor in the inequitable situation in New York City is the additional support provided to many charters through the use of school district facilities. For charter schools that are already advantaged in terms of both access to philanthropy and serving less-needy students, access to facilities space in the high-rent marketplace of New York City provides further financial advantage, both over competing district schools and over less well-off charter schools. While the New York City Independent Budget Office has highlighted these concerns in recent reports, their findings seem to have fallen on deaf ears in terms of influencing policy moving forward. Most recently, the IBO has indicated that the predictability of school site budgets for district schools has begun to improve, such that by 2012, need factors in the city’s weighted student funding formula were significant predictors of school site budget variation (IBO, April 2013). However, this study tests whether school site budgets are more predictably a function of formula weights rather than focusing on exogenous cost factors. Further, the study ignores the position of charter schools in the mix.

(Baker, Libby and Wiley, in press)

We spent much time grappling with the policy implications of this finding. These inequities are problematic on many levels and should be addressed, but it remains difficult to determine just how. We explain:

The use of weighted student funding formulas to enhance equity, coupled with charter school expansion, presents a number of significant challenges to achieving more equitable resource distribution within school districts. This is particularly the case if charter schools are funded outside of district weighted student funding formulas, and further exacerbated if charters do not serve a comparable number of low-income students, English Language Learners, and special education students. Additional outside support from private donors and foundations further contribute to within-district inequities.

One might make the case that disparities in resources above and beyond a minimally adequate floor are non-offensive or cause no harm. For example, applying Baker and Green’s (2008) pure adequacy conception to the district and charter portfolio as a whole, it may be the case that the net increase to overall resources, leading to the provision of quality teachers, smaller classes and longer school years resulting in improved outcomes for a subset of the student population increases the aggregate welfare of children.

However, it is also important to consider that the provision of more adequate resources to some children may actually diminish the value of resources received by others, even if it does not lead to a change in dollars available to others. Baker and Green (2008) as well as Koski and Reich (2006) explain that to a large extent education operates as a positional good, whereby the advantages obtained by some necessarily translate to disadvantages for others. For example, Baker and Green (2008) explain that “In a system where children are guaranteed only minimally adequate K–12 education, but where many receive far superior opportunities, those with only minimally adequate education will have limited opportunities in higher education or the workplace.” (p. 210) This concern is particularly pronounced in a city like New York where children and families are constantly jockeying for position to gain access to selective admissions public middle and secondary schools, and where the majority of charter schools serve elementary and middle grades. The competitive position of children in otherwise similar district or charter schools with fewer resources is compromised by the presence of better resourced district or charter schools. Though surely, all would be less well off if all were substantially though equally deprived.

To add further complexity, about 16% of students in grades 1 to 12 in New York City are enrolled in private schools, a much larger share than presently attend charter schools.[1]It is possible that the presence of more elite and better resourced charter or district schools may encourage more families to stay within the publicly subsidized system and that those students may in turn compete more favorably with the many children attending the city’s private schools. Baker (2009b) found that private independent day schools in the city spent in 2007, on average, nearly twice the level of district schools, which is also much more than the highest spending charter networks. Private independent schools make up about 28% of the city’s private school enrollment, or only slightly less than the share served by charter schools during the period under investigation herein.[2]

Finally, the ability of well-funded charter school operators to leverage their additional resources to provide more competitive wages (at given experience and degree level) and more desirable working conditions may put both district schools and less well funded charter operators at a disadvantage regarding recruitment and retention of teachers on the local labor market.[3]That is, unless high resource charter operators are primarily drawing new talent to the city schools that might otherwise choose either to work in another location or other profession altogether, in which case the presence of these schools yields a net gain in teaching quality. The most likely case is some balance of talent influx and internal sorting.

Rather than tackle resource equity, the combination of charter school expansion and weighted student funding formulas encourages a conception of equal opportunity largely based on expanded school choice. This conception of equal opportunity focuses primarily on offering to children and families a portfolio of school options, including charter schools, and attempts to adjust for differences in individual student needs by attaching more dollars to higher-need students. In this context, weighted student funding formulas are used in part to provide an economic incentive for schools to serve high-need students as well as an acknowledgement that some students require additional resources to meet the same level of achievement. Equity, in this scenario, is based primarily on equalizing the freedom to choose from various schools. If schools of choice are equitably resourced to accommodate student needs, equity can be achieved through such a model. But that does not appear to be the case in either Houston or New York City.

In large part, the portfolio approach, without sufficient consideration of resource equity, substitutes preferences for individual liberty (or choice) in place of preferences for equity. This approach is problematic in that it conflates liberty with equity, assuming the former necessarily leads to the latter, regardless of resource distribution. This is simply untrue. This conception fails to acknowledge these two core values often operate in tension with one another, with individual choices collectively leading to substantial inequities. Access to high-resource charter schools serving low-need populations is unevenly distributed across children and families citywide, with most if not all high resource charter schools significantly oversubscribed.

As discussed previously, according to Independent Budget Office reports, the City of New York has, on average, provided relatively equitable public subsidy rates for charter schools. But equity of subsidy rate alone does not ensure equality of educational opportunity, especially where private contributions make up such a large share of total revenue. When evaluating equity achieved by state school aid formulas, it is well understood and broadly accepted that equal state revenue per pupil for local public school districts does not necessarily result in equal educational opportunities, or even equal per pupil expenditures distributed across children (Baker and Green, 2008, Berne  and Stiefel, 1984). But unlike state aid formula adjustments for local fiscal capacity, cities have limited ability to exert direct control over, or account for access to outside resources. The same is true of private giving to local public school districts (Brent, 2002). Solutions to these resource inequities are not readily apparent. While state school aid formulas are means tested (equalized) for local revenue raising capacity, it is difficult to conceive how city school systems could appropriately measure and account for differential access to philanthropy without creating either disincentives to raise private dollars or incentives to conceal private fundraising and assets.  But the fact that these emergent inequities are difficult if not implausible to manage directly does not negate their existence. The reality is that a select subset of children, through luck of the lottery, are provided access to schools with far more resources than others. A better alternative may be to establish mechanisms and create incentives to encourage more equitable distribution of giving across both charter and district schools.

Herein lies the most marked challenge to equity: charter schools that serve lower-need students while also accessing funding support above and beyond what is available to traditional district schools. While segregating high-need students in traditional district schools, this process ensures that opportunities for a well-funded education are contingent upon access, generally through lotteries, to philanthropic giving. KIPP Houston, for instance, received $65 million in pledges from a variety of foundations (Mathews, 2007). Charter schools in NYC also receive substantial contributions for operations and expansion (Hass, 2009). Nation-wide, between 1999 and 2010, charter schools operated by charter management organizations received approximately half a billion dollars in additional resources (Lake et. al, 2010).

The presence of charter schools that are able to secure additional funding while serving fewer high-need students also undermines common claims that charters “do more with less.” It is important to challenge this misconception not because there is something inherently wrong with “doing more with less,” but rather that many charter schools are not actually doing more with less. Recognizing the benefits to a student’s education brought about by extra funding resources may actually strengthen arguments for improving school funding more broadly. While it may be a disappointment to those eager to prove that schools can be pushed to “do more with less,” recognizing that they in fact are not doing more with less, or at the very least serve lower-need student populations than district schools, could bring clarity to this highly politicized issue.

(Baker, Libby and Wiley, in press)

Is the answer as simple as charging rent to charters identified as fiscally advantaged? I don’t think so, but that’s not off the table. The greatest difficulty with this approach is determining the right metric to decide who should pay rent and how much, and doing so in a way that doesn’t simply encourage deceptive accounting practices.
In my view, the answer lies in developing a better overall system for determining the operating subsidy for charter schools, consistent with and integrated with the citywide public school funding model, given the students they serve, and working with authorizers and the state to establish appropriate methods for capital financing.


[1]2012 American Community Survey 1-Year Estimates (C14002) Universe: Population 3 years and over more information. SCHOOL ENROLLMENT BY LEVEL OF SCHOOL BY TYPE OF SCHOOL FOR THE POPULATION 3 YEARS AND OVER

[2]National Center for Education Statistics, Private School Universe Survey 2009-10. As defined by membership in the National Association of Independent Schools, other regional Independent School Associations, or National Independent Private School Association. NAIS Schools alone served nearly 12,500 (among those reporting) in 2009-2010.

[3]See appendix D for salary and class size comparisons for select NYC charter networks with district schools.

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Bruce D. Baker

Bruce D. Baker is a Professor in the Graduate School of Education at Rutgers, The State University of New Jersey, where he teaches courses in school finance polic...