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

The House Appropriations Committee caused a sensation 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 granted 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 such a thing as a specialized company in charter schools and real estate. In some states, the the government will help finance a real estate development if it is a charter school, and in general the developers noted an abundance of money. However, as a chartered home loan bond financier told the Wall Street Journal, “There’s a ton of capital coming into the industry. The question is, does it know what it’s doing?” Many states have found a problem with charters that rent their buildings of their own owners as well.

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 question 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, extreme cases are known as “sweep” contractsin which the Charter Management Organization (CMO) fully manages the school in exchange for 95% of the revenue generated. A report that the Network for Public Education released earlier this year details many 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 has moved regularly on the board to allow payments from his school to himself, and as the school struggled to pay teachers, it paid his company tens of thousands of dollars dismiss school logo.

One could argue that the ban on for-profit charters has actually made matters worse, and 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 fraudsters are attracted to 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 shows Ohio Supreme Court decision, the CSM may well own all classroom equipment and resources; 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 behind— sometimes in the middle of the year — because the company operating their school decided that 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.

Jeremy S. McLain