Charters Must Avoid Recreating the Failed School District Financial Model

Thursday, April 6, 2017

Charters Must Avoid Recreating the Failed School District Financial Model

Charter schools start out with big advantages, but there’s no guarantee they’ll keep them. It depends on whether they avoid the same financial traps that school districts have fallen into.

New charter schools control hiring and spending and can adapt to changes in students’ needs and improvements in instructional methods. In comparison, districts are frozen in place by commitments made in the past, to buildings, employees, and retirees.

Districts started out supple, with low overhead structures and few financial commitments to prevent money from reaching the classroom. They could readily adjust if student enrollment or residential patterns changed. But, in the mid-20th century, districts began to take on commitments that made them inflexible. They:

  • Assumed long-term debt for expensive school buildings
  • Employed teachers on civil service pay scales with automatic salary escalators
  • Negotiated teacher contracts that were affordable in their first year but would break the budget later
  • Promised pension benefits larger than current contributions could support

These commitments soaked up district money, making it difficult to adapt to changes in needs, technologies, and even student residential patterns. Worse, they ensured that districts could avoid financial collapse only by growing. If district enrollment continually increased, it was possible to build facilities in growing residential areas and pay escalating salary costs. Pensions could be paid if districts hired large numbers of new teachers—and encouraged many of them to leave before their contributions fully vested.

This all worked during the postwar baby boom. But from the late 1950s, districts that didn’t grow (or worse, lost enrollment to white flight) were in trouble. They lacked flexibility to adapt, and the fixed costs of past commitments forced them to spend less and less on the classroom, eliminating programs that parents valued, and causing further enrollment declines.

That’s why so many school systems run big deficits. It’s also the reason districts can’t compete effectively with charter schools and complain that charter growth hurts students in district-run schools. As students leave, the district’s total income declines.

CRPE will soon publish reports on how districts can function more effectively in a competitive environment. But there is an important message here for charter schools and charter management organizations (CMOs). It’s easy for a school or group of schools to become overly reliant on growth and optimistic revenue forecasts and in doing so to mortgage their futures. Really troublesome commitments are the ones that look small at first but grow later. Charter schools can get in trouble because of:

  • Long-term mortgages on buildings. Charter schools need the flexibility to move to new facilities if their current buildings are in the wrong place or can’t accommodate instructional innovations (for example, new uses of technology, student grouping strategies, blended learning models). Owning a building, especially one that can't easily be sold and repurposed and that can generate big repair costs, can be a major problem. Charter schools should seek to lease buildings. If they must own, they should choose buildings that can be easily sold. Intermediaries like school real estate trusts can manage stocks of buildings and lease to charter schools, helping them avoid the burdens of ownership.
  • Automatic salary escalators. Charter schools must be able to reward excellent teacher performance and retain “mainstay” teachers, but they also must live within their budgets. That will be impossible if, like school districts, their total salary budgets rise automatically every year, regardless of whether total income rises or is stagnant. Charter schools must avoid the combination of longevity-based salary scales and across-the-board tenures that have done so much to hamstring school districts.
  • Increased administrative costs at the charter school or CMO level. All schools need some forms of external help, but these vary over time. District central offices have grown by providing services once needed and then building units that continue providing them whether needed or not. The result is that as central office budgets and staffing have grown, schools control less and less of the overall district budget, and the district can’t respond to new needs because all the money is committed to entrenched activities. Much the same might already be happening to charter schools, especially those run by CMOs that can, like districts, decide what services to provide and skim off the money before it ever gets to schools. Even schools founded by big CMOs need—once they are through a short start-up period—to be free to decide what services they need and where they will get them. Any other arrangement threatens steady encroachment on school freedom and flexibility.
  • Employee pensions and benefits that aren’t completely paid out of current cash flow. Charter schools need to pay for employee pensions and benefits out of current cash flow, period. Otherwise, today’s schools, and the children they serve, pay for yesterday’s employees. Charter schools need to make contributions to pension plans chosen and managed by their employees, or to defined-contribution plans. Philanthropies could play a role by encouraging large defined-contribution plan providers (like a university-oriented TIAA) to offer plans for charter employees.
  • Over-reliance on philanthropic dollars. Schools or CMOs that can't operate unless they get a constant inflow of philanthropic funding may do a great deal of good for their students. But they can only scale as far as this funding will allow, and are only as stable as the policies of foundation boards. Defenders of the status quo are also right in saying that such schools aren’t models that others can follow unless total spending on K–12 education goes way up. Charter operators and funders might justifiably sustain such schools as charitable enterprises that benefit only the children who attend them. But they can’t simultaneously be seen as scalable models that can drive the overall reform of public education.

It’s troubling to see that many charter schools and CMOs are steadily accumulating fixed costs. Even now they can only meet those costs if they grow continually, if state funding continues to increase, and if they get frequent dollar infusions from philanthropy. (Last year in Los Angeles, at least one charter school tried to move teachers back to district employment before their unsustainable pensions came due.)

A few charter schools and CMOs with indulgent foundation angels might get away with creating and sustaining large fixed costs. But this kind of financing threatens quality, adaptability, and innovation. At the risk of sounding like a broken record (skip, skip, skip, skip, skip), without financial realism, some charter schools and CMOs might, in the near future, look a lot like the school districts of today.

Wed, 05/24/2017

Terry Ryan and Paul Hill offer real-world examples of how chartering can be successful in rural communities in this blog originally posted in Brookings Chalkboard.

Tue, 05/16/2017

Mike DeArmond and José Hernández profile Cleveland’s school transformation plan, launched five years ago, and find promising trends in its initiatives to improve school choice.

Wed, 05/10/2017

Robin Lake weighs in on the importance of change management when implementing personalized learning. This is the ninth installment in our series of "Notes From the Field."

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