School management

What’s wrong with running for-profit charter schools?

The House Appropriations Committee caused a stir with a small paragraph in its 198-page health, labor and education spending bill.

SECOND. 314. None of the funds made available by this Act or any other Act may be awarded to a charter school that contracts with a for-profit entity to operate, supervise or manage the activities of the school.

The presence of for-profit operators in the charter school industry has long been of concern to critics, with nearly every state banning a strictly for-profit charter school. But charter school operators have long worked through a variety of loopholes, keeping the industry highly profitable, and most of those loopholes involve a nonprofit charter school hiring a for-profit company.

It’s not about contracting out services like school buses or running cafeterias; these types of secondary functions are frequently contracted out in both charter and public schools, but they are not the primary activities of the school.

The bill is clear and specific about targeting for-profit entities that “operate, supervise or manage the business of the school.”

Sometimes the money comes from the real estate side of the charter business. There is a company that specializes in charter schools and real estate. In some states, the government will help fund a real estate development if it is a charter school, and in general developers have noted an abundance of money. However, as one chartered mortgage bond financier told the Wall Street Journal, “There’s a ton of capital coming into the industry. The question is, does he know what he’s doing? ” Many states have had a problem with charters also renting their buildings to their own owners.

Buffalo’s Carl Paladino is an example of a real estate operator making money on the real estate side. Paladino has worked with charter operators flipping properties and entering into “sale-leaseback” agreements, as detailed in a report by the Alliance for Quality Education. Paladino not only benefited from the schools, but also from investments in surrounding properties. He wasn’t shy about any of this. On the issue of making money working with charters, the Buffalo City News quoted him: “If I didn’t, I’d be a fucking idiot.”

While many charters may outsource core functions such as curriculum, the extreme cases are what are known as “sweep” contracts, in which the charter management organization (CMO) manages entirely the school in exchange for up to 95% of the revenue that comes in. A report the Network for Public Education released earlier this year details many of the creative ways CMOs are making a profit. CMOs come in a variety of sizes, from chain operations that run many schools to mom-and-pop CMOs that run a single school.

These provisions can become convoluted. In Florida, a charter founder routinely left the board to allow his school’s payments to himself, and as the school struggled to pay teachers, it was paying tens of thousands of dollars to his company to authorize the school logo.

One could argue that the banning of for-profit charters has actually made matters worse and that what would have been clear and overt attempts to profit from a school are now hidden behind several operational layers.

But all of this still leaves a simple question: what’s wrong with having charter schools run, directly or indirectly, for profit?

Certainly, the presence of so much money in a largely unregulated industry is an invitation to bad actors, and while most charter school operators are ethical and honest, a disturbing number of fraudsters are drawn into the sector. And it’s important to remember that the money at stake here is taxpayers’ money.

Yet taxpayers often find that their money has become not just profit, but an asset for someone else. This report from the National Education Policy Center explains how the public can end up paying for a building – more than once – and that building is still private property.

The battle over ownership can be a problem for the charter school itself. As this Ohio Supreme Court decision shows, the CMO may very well own all the equipment and resources in the classroom; if the CMO withdraws or terminates his contract, the school he served may become an empty shell.

This question highlights one of the other problems in the hidden world of for-profit charter; these organizations are businesses and make decisions for commercial, not educational, reasons. As Carl Paladino said, if they don’t make a profit, they’re fools. Each year brings multiple stories of students and families left adrift—sometimes mid-year—because the company operating their school decided the business case for continuing operations was too weak. When your favorite restaurant or department store closes, it can be upsetting, but when your child’s school closes, it’s disruptive and damaging. For-profit businesses cannot provide the kind of stability families need and deserve.

The fundamental problem with for-profit charters is simple: the more money they spend on meeting student needs, the less profit they get. And because the revenue stream is mostly fixed and unchanging, the only way to “generate” more profits is to spend less of that revenue on students. For-profit charter management will naturally tend towards an adversarial relationship with the people it is meant to serve and will face an endless struggle over how to measure success.