School Finance 101: Pondering Chartering: Balancing Portfolios
The blogging has been quiet for a while. This is partly because I feel like most issues that arise have already been dealt with somewhere on this blog. Also because I’ve been involved in several, simultaneous, long-term projects. These projects intersect with many topics I’ve addressed previously on this blog. At times, this blog serves as a palette for testing/sharing ideas. So… in this, and a rapid fire sequence of follow up posts, I will share some excerpts of forthcoming, and early stage in progress work.
[from work in progress]
An Opportunity for Scalable Innovation
Since its origins in the early 1990s, the charter school sector has grown to over 6,500 schools serving over 2.25 million children in 2013.[i]In some states, the share of children now attending charter schools exceeds 10% (Arizona, Colorado), and in select major cities that share exceeds one-third (District of Columbia, Detroit, New Orleans).[ii]Modern day charter schools were conceived by union leader Albert Shanker in the 1980s as providing opportunities for creative, independent educators to collaborate and test new ideas with lessened policy constraints. [iii]To the extent these innovations were successful they might inform practices in traditional district schools. Over the next few decades, states adopted statutes providing opportunities for individuals and organizations, including traditional districts, to create these newly chartered schools. In some cases, statutes allowed for the creation of charters governed and financed by existing districts, and in other cases, for the creation of charters independent of district governance, while operating within the boundaries of and in competition with local public districts.
While charter schooling was conceived as a way to spur innovation – try new things – evaluate them – and inform the larger system, studies of the structure and practices of charter schooling find the sector as a whole not to be particularly “innovative.” [iv]Analyses by charter advocates at the American Enterprise Institute find that the dominant form of specialized charter school is the “no excuses” model – a model which combines traditional curriculum and direct instruction with strict disciplinary policies and school uniforms, in some cases providing extended school days and years.[v]Further, charter schools raising substantial additional revenue through private giving tend to use that funding to a) provide smaller classes, and b) pay teachers higher salaries for working longer days and years.[vi]For those spending less, total costs are held down, when necessary, through employing relatively inexperienced, low wage staff and maintaining high staff turnover rates.[vii]In other words, the most common innovations are not especially innovative or informative for systemic reform.
Emergence of Private Managers
The early charter movement coincided with the emergence of private management firms interested in public schooling. Two private for-profit companies tried their hand at providing school management services for public districts in the 1990s – Edison Schools, Inc. and Education Alternatives, Inc.[viii]Education Alternatives, Inc. a publicly traded for-profit company, failed financially while holding an operating contract for 9 (then 11) schools within Baltimore City Public Schools, soon after signing a contract with Hartford Connecticut Public Schools. The company failed prior to taking full responsibility for schools in Hartford. Edison Schools expanded cautiously in the wake of EAI’s failure, operating a school in Wichita, Kansas, in 1995 and 25 schools nationally by the end of 1996.[ix]Edison also faced financial troubles as a publicly traded stock, eventually buying back their company stock in 2003 and reverting to privately held status.[x]
As charter schools expanded, including online and hybrid schooling options, Edison Schools and other new, upstart for-profit companies shifted their growth strategy to the charter sector, where they could control employment contracts, increasing financial flexibility and profit potential. Coinciding with these developments, many now high-profile nonprofit charter management firms got their start as founders of single charter schools, including the Knowledge is Power Program (KIPP), with middle schools in Houston and New York City; Uncommon Schools, founded from North Star Academy in Newark, NJ; and Achievement First, founded from Amistad Academy in New Haven, CT. Presently the charter school landscape consists of a mix of schools operated by major nonprofit Charter Management Organizations, schools operated by for-profit managers, schools operated by other education management organizations described by Miron and colleagues as nonprofit in formal status but engaging in contractual arrangements more similar to for-profit organizations, and schools that remain independently operated (“mom-and-pop”).[xi]
From Portfolios to Parasites?
As early as the mid-1990s, authors including Paul Hill, James Guthrie and Lawrence Pierce (1997) advocated that entire school districts should be reorganized into collections of privately managed contract schools.[xii]This contract school proposal emerged despite the abject failure of Education Alternatives, Inc. in Baltimore and Hartford. This proposal provided a framework for renewed attempts at large scale private management including the contracting of management for several Philadelphia public schools in the early 2000s. Philadelphia’s experiment in private contracting yielded mixed results, at best.[xiii]Notably, Hill and colleagues’ contract school model depended on a centralized authority to manage the contracts and maintain accountability, a precursor to what is now commonly referred to as a “portfolio” model. In the portfolio model, a centralized authority oversees a system of publicly financed schools, both traditional district operated and independent, charter operated, wherein either type of school might be privately managed.[xiv]The goal as phrased by former New York City schools’ Chancellor Joel Klein is to replace school systems with systems of great schools.[xv]
A very different reality of charter school governance, however, has emerged under state charter school laws – one that presents at least equal likelihood that charters established within districts operate primarily in competition, not cooperation with their host, to serve a finite set of students and draw from a finite pool of resources. One might characterize this as a parasitic rather than portfolio model – one in which the condition of the host is of little concern to any single charter operator. Such a model emerges because under most state charter laws, locally elected officials – boards of education – have limited control over charter school expansion within their boundaries, or over the resources that must be dedicated to charter schools. Thus, there is no single, centralized authority managing the portfolio – the distributions of enrollments and/or resources – or protecting against irreparable damage to any one part of the system (be the parasites or the host).
Figure 1 displays a system in which a set of District Operated Schools (DOS), District Charter Schools (DCS) and Independent Charter Schools (ICS) serve a geographic space previously governed and operated entirely by local elected officials. In many states, independent charter schools may only be authorized by a government or government appointed entity – a single authorizer. Nonetheless, these schools are not required to be responsive to local elected governance (unless required under state charter law) and have little or no incentive to be concerned with the financial condition of their host. In other states, additional entities may authorize charter schools to compete for students and resources in the same geographic space. This approach further disperses authority for schools serving any geographic area. Among other issues, dispersed authorization provides the opportunity for potential charter operators, including those with previously failing track records to “shop” for authorizers who will more readily permit their expansion and more likely turn a blind eye to academic failure and/or financial mismanagement.[xvi]
Proponents of the dispersed governance model in Figure 1 assert that competition both for governance/accountability and for management/operations of schools provides greater opportunity for rapid expansion and innovation. However, some of the more dispersed multiple authorizer[xvii]governance models have been plagued by weak accountability, financial malfeasance and persistently low performing charter operators, coupled with rapid, unfettered, under-regulated growth.[xviii]
Nonetheless, charter advocacy organizations including Bellwether Education Partners (BEP) continue to argue for more rapid growth and increased market share for charter schooling. BEP provides a facile extrapolation (along unconstrained linear trajectories) to claim that at current rates, the charter sector will grow to serve 20 to 40% of all U.S. students by 2035. For charter expansion advocates like BEP, however, even this rate is too slow, constrained by having too few authorizers, caps on new charters in some states and unwillingness of districts as authorizers to approve new charter applications.[xix]For charter advocacy organizations, tight centralized regulation and slow or limited growth of charters is a non-sequitur, with the optimal balance somewhere between approximately 40% (Washington, DC) and 100% (New Orleans) of children served by independent charter schools.[xx]
Fiscal Stress, Inefficiency & Charter Expansion?
Increased attention is being been paid to the fiscal and enrollment effects of charter schooling on host districts. These concerns come at a time when municipal fiscal stress and the potential for large-scale municipal and school district bankruptcies are in the media spotlight.[xxi]Many high profile cases of municipal fiscal stress are in cities where the charter sector is thriving.[xxii]Some charter advocates have gone so far as to assert that school district bankruptcy presents “huge opportunity” to absolve the taxpaying public of existing debts and financial obligations and start fresh under new management, reallocating those funds to classrooms.[xxiii]Of course, this strategy ignores the complexities of municipal bankruptcy proceedings, and the contractual, social and moral obligations for the stewardship of publicly owned capital (and other) assets and responsibility to current and retired employees.
Advocates for charter expansion typically assert that charter expansion causes no financial harm to host districts. The logic goes – if charter schools a) serve typical students drawn from the host district’s population, and b) receive the same or less in public subsidy per pupil to educate those children, then the per pupil amount of resources left behind for children served in district schools either remains the same or increases. Thus, charter expansion causes no harm (and in fact yields benefits) to children remaining in district schools. The premise that charter schools are uniformly under-subsidized is grossly oversimplified and inaccurate in many charter operating contexts.[xxiv]In addition, numerous studies find that charter schools serve fewer students with costly special needs, leaving proportionately more of these children in district schools. Perhaps most importantly, the assumption that revenue reductions and enrollment shifts cause districts no measurable harm for host districts ignores the structure of operating costs and dynamics of cost and expenditure reduction.
Moody’s Investor Service recently opined that “charter schools pose greatest credit challenge to school districts in economically weak urban areas.” [xxv]Specifically, Moody’s identifies the following four areas posing potential concerns for host urban districts with growing independent charter sectors:
- Weak demographics and district financial stress, which detract from the ability to deliver competitive services and can prompt students to move to charter schools
- Weak capacity to adjust operations in response to charter growth, which reduces management’s ability to redirect spending and institute program changes to better compete with charter schools
- State policy frameworks that support charter school growth through relatively liberal approval processes for new charters, generous funding of charters, and few limits on charter growth
- Lack of integration with a healthier local government that can insulate a school system from credit stress
District officials in Nashville, TN recently contracted consultants to evaluate impact of charter expansion on their district. The consultants’ report noted specifically:
- They will continue to cause the transfer of state and local per student funds without reducing operational costs.
- They will continue to increase direct and indirect costs.
- They will continue to negatively impact deferred maintenance at leased buildings.
- They may have an offsetting impact on capital costs, if they open in areas of need for increased capacity. [xxvi]
Recently published academic analyses raise similar concerns. Robert Bifulco and Randall Reback (2014) evaluate the fiscal impact of charter expansion on two mid-size upstate New York cities – Albany and Buffalo.[xxvii]They find that charter schools have had negative fiscal impacts on these districts, and argue that there are two reasons for these impacts. First, districts are generally unable to adjust their expenditures on a student by student basis, because costs range from fixed costs (district wide and school overhead costs that are not reduced by the transfer of individual pupils), to step costs (including classroom level costs, also not reduced by the transfer of individual pupils) to variable costs, which are most easily reduced on a student by student basis, but constitute a relatively small share of school district budgets. These concerns echo those of consultants to Nashville Public Schools. Further, Arsen and Ni (2012) find that higher levels of charter school enrollments in Michigan school districts are strongly associated with declining fund balances, and that revenues declined more rapidly than costs in districts losing students to charter schools.[xxviii]
Second, Bifulco and Reback point out that “operating two systems of public schools under separate governance arrangements can create excess costs,” or inefficient expenditures.[xxix]Other authors have raised similar concerns about additional, often exorbitant overhead expenses created by introducing school systems within school systems (independent charter schools within districts).[xxx]That is, while inducing fiscal stress on host districts, charter expansion may also be increasing total overhead costs. Two studies of Michigan charter schools, which operate fiscally independently of local public districts, have found them to have particularly high administrative expenses and low direct instructional expenses. Arsen and Ni (2012) found that “Controlling for factors that could affect resource allocation patterns between school types, we find that charter schools on average spend $774 more per pupil per year on administration and $1141 less on instruction than traditional public schools.” (p. 1) Further, they found “charter schools managed by EMOs spend significantly more on administration than self-managed charters (about $312 per pupil). This higher spending occurs in administrative functions traditionally performed at both the district central office and school building levels.” (p. 13)[xxxi]
Izraeli and Murphy (2012) found that district schools in Michigan tended to spend more on instruction per student than did charter schools, and the gap grew by about 5 percent to nearly 35% percent over the period studied (1995-96 to 2005-06) (p. 265). Further they found the spending gap for instructional spending to be greater than that for general spending. The overall funding gap between district and charter schools was approximately $230. The spending gap for basic programs was $562 and for total instruction $910. The authors note “much like a profit-maximizing firm, charter schools generate a surplus of revenue over expenditure.” (Izraeli & Murphy, 2012, p. 265)[xxxii]
Baker and Miron (2015) show that in New Jersey, charter school administrative expenses are “nearly $1,000 per pupil higher than those of other regular school district types, and the share of budgets allocated to administration is nearly double.”[xxxiii]Further, that local public school districts maintain responsibility for providing some services to charter school students, and thus, the administrative overhead associated with those responsibilities. That is, on a per pupil basis, district administrative expenses are being over-stated and charter school administrative expenses understated. Additionally, these publicly reported administrative expenses do not include, for example, expenses (including executive salaries) from regional or national management organizations above and beyond management fees, further potentially understating total administrative expenses of the charter schools.
In addition, the uneven reshuffling of children and resources across schools within geographic boundaries can exacerbate inequities. Numerous studies have found charter schools to yield imbalance distributions of children by their income status, language proficiency and race. [xxxiv]Under some models, like the New Orleans all-charter system, stratification exists by design. [xxxv]Baker, Libby and Wiley (2014) find that through the sorting of children and resources, charter expansion induces inequities within districts – inequities among charter schools and between charter and district schools. [xxxvi]But, to the extent that charter share remains small, these inequities remain limited. [xxxvii]Profit-status of charter operators also may lead to very different available school level resources available to children, as for-profit schools seek to achieve profit margins, while non-profits seek to enhance revenues through tax exempt private giving.[xxxviii]Finally, the concentration of needy children in some schools can dramatically increase the costs of improving outcomes for those students. That is, uneven sorting of children by needs can create additional inefficiencies. [xxxix]
Finally, it is conceivable that the dissolution of large centralized school districts and introduction of multiple school operators into a single geographic space could compromise efficiency associated with economies of scale, which operate at both the school and district level. Numerous studies of education costs have found that the costs of providing comparable services rise as district enrollments drop below 2,000 students and rise sharply at enrollments below 300 students. Further, a comprehensive review of literature on economies of scale in education by Andrews, Duncombe and Yinger (2002) finds “there is some evidence that moderately sized elementary schools (300–500 students) and high schools (600–900 students) may optimally balance economies of size with the potential negative effects of large schools.”[xl](p. 245) To the extent that charter expansion creates independent “districts” operating with fewer than 2,000 pupils and/or increases shares of children attending schools with smaller enrollments than those noted above, inefficiencies may be introduced.
[i]Tabulation by author using data from NCES Common Core of Data, Public School Universe Survey(s)
[ii]Weber & Baker, (2015) Do For-Profit Managers Spend Less on Schools and Instruction? A national analysis of charter school staffing expenditures. Working Paper. Rutgers University
[iii]Shanker, A. (1988). Restructuring our schools. Peabody Journal of Education, 65(3), 88-100.
[iv]Preston, C., Goldring, E., Berends, M., & Cannata, M. (2012). School innovation in district context: Comparing traditional public schools and charter schools. Economics of Education Review, 31(2), 318-330.
[vi]Baker, B. D., Libby, K., & Wiley, K. (2012). Spending by the Major Charter Management Organizations: Comparing Charter School and Local Public District Financial Resources in New York, Ohio, and Texas. National Education Policy Center.
[vii]Epple, D., Romano, R., & Zimmer, R. (2015). Charter schools: a survey of research on their characteristics and effectiveness (No. w21256). National Bureau of Economic Research.
Toma, E., & Zimmer, R. (2012). Two decades of charter schools: Expectations, reality, and the future. Economics of Education Review, 31(2), 209-212.
[viii]Richards, C. E. (1996). Risky Business: Private Management of Public Schools. Economic Policy Institute, 1660 L Street, NW, Suite 1200, Washington, DC 20036.
[xi]Miron, G., & Gulosino, C. (2013). Profiles of for-profit and nonprofit education management organizations: Fourteenth Edition—2011-2012. Boulder, CO: National Education Policy Center.
[xii]Hill, P., Pierce, L. C., & Guthrie, J. W. (2009). Reinventing public education: How contracting can transform America’s schools. University of Chicago Press.
[xiii]Mac Iver, M. A., & Mac Iver, D. J. (2006). Which Bets Paid Off? Early Findings on the Impact of Private Management and K‐8 Conversion Reforms on the Achievement of Philadelphia Students. Review of Policy Research, 23(5), 1077-1093.
The authors found:
Non-Edison EMO schools actually performed worse than district-managed schools. With the exception of one older K-8 school in one cohort, Edison schools did not significantly outperform district-managed counterparts. Students in long-established K-8 schools generally outgained students in middle schools, but gains were not as large in newly-established K-8 schools. Across all types of schools, the second cohort of students obtained greater gains than did the first.
[xiv]Hill, P. T. (2006). Put Learning First: A Portfolio Approach to Public Schools. PPI Policy Report. Progressive Policy Institute.
More recently, the phrases “sector agnosticism” and “relinquishment” have been used to describe systems that turn a blind eye to whether public access schools are privately or publicly (elected officials/government) governed, or at the greater extreme, that public officials should “relinquish” any and all control of publicly accessible schooling to private providers/managers who will be far more responsive (than publicly governed/managed entities) to the needs and demands of children and their parents.
[xviii]http://www.dispatch.com/content/stories/local/2015/10/21/charter-study.html and http://www.freep.com/article/20140622/NEWS06/140507009/State-of-charter-schools-How-Michigan-spends-1-billion-but-fails-to-hold-schools-accountable
[xxiv]Baker, B. D. (2014). Review of charter funding: Inequity expands. Boulder, CO: National Education Policy Center. Retrieved August, 7, 2014.
[xxvii]Bifulco, R., & Reback, R. (2014). Fiscal impacts of charter schools: lessons from New York. Education, 9(1), 86-107.
[xxviii]Arsen, D., & Ni, Y. (2012). The effects of charter school competition on school district resource allocation. Educational Administration Quarterly, 48(1), 3-38.
“Overall, the results do not support the hypothesis that competition from charter schools spurs regular public schools to shift resources to achievement-oriented activities. Charter competition has had remarkably little impact on standard measures of district resource use in Michigan schools. On the other hand, higher levels of charter competition clearly generate fiscal stress in districts. Moreover, changes in resource allocation cannot explain the differing trajectories of districts that do and do not turn back the competitive challenge. There are no significant differences in the resource allocation changes made by districts that stabilize enrollment loss to charters and those that continue to spiral down.”
[xxix]Bifulco, R., & Reback, R. (2014). Fiscal impacts of charter schools: lessons from New York. Education, 9(1), 86-107.
[xxx]Baker, B. D., Libby, K., & Wiley, K. (2012). Spending by the Major Charter Management Organizations: Comparing Charter School and Local Public District Financial Resources in New York, Ohio, and Texas. National Education Policy Center.
[xxxi]Arsen, D. D., & Ni, Y. (2012). Is administration leaner in charter schools? Resource allocation in charter and traditional public schools. education policy analysis archives, 20, 31.
[xxxii]Izraeli, O., & Murphy, K. (2012). An Analysis of Michigan Charter Schools: Enrollment, Revenues, and Expenditures. Journal of Education Finance, 37(3), 234-266.
[xxxiii]These averages mask the highest administrative expenses, which occur in Camden Community Charter School (at $5,325 per pupil, higher than their instructional expense of $4,225)[xxxiii] and TEAM Academy (a KIPP school, at $4,851 per pupil,[xxxiii] but still much lower than their instructional expense at $8,639 per pupil).
[xxxiv]Stein, M. L. (2015). Public School Choice and Racial Sorting: An Examination of Charter Schools in Indianapolis. American Journal of Education, 121(4), 597-627.
Ladd, H. F., Clotfelter, C. T., & Holbein, J. B. (2015). The Growing Segmentation of the Charter School Sector in North Carolina (No. w21078). National Bureau of Economic Research.
Kotok, S., Frankenberg, E., Schafft, K. A., Mann, B. A., & Fuller, E. J. (2015). School Choice, Racial Segregation, and Poverty Concentration Evidence From Pennsylvania Charter School Transfers. Educational Policy, 0895904815604112.
LOGAN, J. R., & BURDICK‐WILL, J. U. L. I. A. (2015). SCHOOL SEGREGATION, CHARTER SCHOOLS, AND ACCESS TO QUALITY EDUCATION. Journal of Urban Affairs.
[xxxv]Adamson, F., Cook-Harvey, C., & Darling-Hammond, L. (2015). Whose choice?: Student experiences and outcomes in the New Orleans school marketplace. Stanford, CA: Stanford Center for Opportunity Policy in Education.
[xxxvi]Baker, B. D., Libby, K., & Wiley, K. (2015). Charter School Expansion and Within-District Equity: Confluence or Conflict?. Education Finance and Policy.
[xxxvii]Baker, B. D., Libby, K., & Wiley, K. (2015). Charter School Expansion and Within-District Equity: Confluence or Conflict?. Education Finance and Policy.
[xxxviii]Weber, M., Baker, B.D. (2015)
[xxxix]Baker, B. D. (2011). Exploring the sensitivity of education costs to racial composition of schools and race-neutral alternative measures: A cost function application to Missouri. Peabody Journal of Education, 86(1), 58-83.
[xl]Andrews, M., Duncombe, W., & Yinger, J. (2002). Revisiting economies of size in American education: are we any closer to a consensus?. Economics of Education Review, 21(3), 245-262.
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