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The charter school gravy train: All aboard!

An education advocate in New York brought this article to my attention today. It was published last year in Forbes magazine and is relevant today in Seattle.

gravy train

Charter School Gravy Train Runs Express To Fat City

On Thursday, July 25, dozens of bankers, hedge fund types and private equity investors gathered in New York to hear about the latest and greatest opportunities to collect a cut of your property taxes. Of course, the promotional material for the Capital Roundtable’s conference on “private equity investing in for-profit education companies” didn’t put it in such crass terms, but that’s what’s going on.

Charter schools are booming. “There are now more than 6,000 in the United States, up from 2,500 a decade ago, educating a record 2.3 million children,” according to Reuters.

Charters have a limited admissions policy, and the applications can be as complex as those at private schools. But the parents don’t pay tuition; support comes directly from the school district in which the charter is located.   They’re also lucrative, attracting players like the specialty real estate investment trust EPR Properties EPR -2.29%(EPR). Charter schools are in the firm’s $3 billion portfolio along with retail space and movie megaplexes.

Charter schools are frequently a way for politicians to reward their cronies. In Ohio, two firms operate 9% of the state’s charter schools and are collecting 38% of the state’s charter school funding increase this year. The operators of both firms donate generously to elected Republicans

The Arizona Republic found that charters “bought a variety of goods and services from the companies of board members or administrators, including textbooks, air conditioning repairs and transportation services.” Most charters were exempt from a requirement to seek competitive bids on contracts over $5,000

In Florida, the for-profit school industry flooded legislative candidates with $1.8 million in donations last year. “Most of the money,” reports The Miami Herald, “went to Republicans, whose support of charter schools, vouchers, online education and private colleges has put public education dollars in private-sector pockets.”

Among the big donors: the private equity firm Apollo Group APOL -2.2%, the outfit behind the for-profit University of Phoenix, which has experimented with online high schools. Apollo dropped $95,000 on Florida candidates and committees.

Lest you get the idea charter schools are a “Republican” thing, they’re also favored by big-city Democrats. This summer, 23 public schools closed for good in Philadelphia — about 10% of the total — to be replaced by charters. Charters have a history in Washington, D.C., going back to 1996.

And they were favored by Arne Duncan when he ran Chicago Public Schools. Today, he’s the U.S. secretary of education. In 2009, Duncan rolled out the Obama administration’s “Race to the Top” initiative, doling out $4.4 billion in federal money to the states — but only to those states that lifted their caps on the number of charter schools.

Too bad the kids in charter schools don’t learn any better than those in plain-vanilla public schools. Stanford University crunched test data from 26 states. About a quarter of charters delivered better reading scores, but more than half produced no improvement, and 19% had worse results. In math, 29% of the charters delivered better math scores, while 40% showed no difference, and 31% fared worse.

Unimpressive, especially when you consider charter schools can pick and choose their students — weeding out autistic kids, for example, or those whose first language isn’t English. Charter schools in the District of Columbia are expelling students for discipline problems at 28 times the rate of the district’s traditional public schools — where those “problem kids” are destined to return.

Nor does the evidence show that charters spend taxpayers’ money more efficiently. Researchers from Michigan State and the University of Utahstudied charters in Michigan, finding they spent $774 more per student on administration, and $1,140 less on instruction.

About the only thing charters do well is limit the influence of teachers’ unions. And fatten their investors’ portfolios.

In part, it’s the tax code that makes charter schools so lucrative: Under the federal “New Markets Tax Credit” program that became law toward the end of the Clinton presidency, firms that invest in charters and other projects located in “underserved” areas can collect a generous tax credit — up to 39% — to offset their costs.

So attractive is the math, according to a 2010 article by Juan Gonzalez in theNew York Daily News, “that a lender who uses it can almost double his money in seven years.”

It’s not only wealthy Americans making a killing on charter schools. So are foreigners, under a program critics call “green card via red carpet.”

“Wealthy individuals from as far away as China, Nigeria, Russia and Australia are spending tens of millions of dollars to build classrooms, libraries, basketball courts and science labs for American charter schools,” says a 2012 Reuters report.

The formal name of the program is EB-5, and it’s not only for charter schools. Foreigners who pony up $1 million in a wide variety of development projects — or as little as $500,000 in “targeted employment areas” — are entitled to buy immigration visas for themselves and family members.

“In the past two decades,” Reuters reports, “much of the investment has gone into commercial real estate projects, like luxury hotels, ski resorts and even gas stations. Lately, however, enterprising brokers have seen a golden opportunity to match cash-starved charter schools with cash-flush foreigners in investment deals that benefit both.”

So how can you, as a retail investor, grab a piece of this? How can you reclaim some of your property tax dollars from the fat cats?

As with many other instances of “extraction”… good luck.

Sure, you could buy shares of the aforementioned EPR Properties. Unfortunately, you’re buying strip malls and ski parks along with charter schools. It’s not a “pure play.”

The history of publicly traded charter school firms is limited and ugly. Edison Schools traded publicly from 1999-2003. During that period, it reported one profitable quarter. Shares reached nearly $40 in early 2001… only to crash to 14 cents.

“There’s a risk to taking education to Wall Street,” says Education Week — “one that helps explain why so few publicly traded companies cater to the educational needs of students in elementary, middle and high school.”

That risk is spotlighted by the only pure play currently trading on a U.S. exchange. In December 2007, just as the “Great Recession” got underway, K12 Inc. went public under the ticker symbol LRN.

It has proven, at best, a trading vehicle.

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Share prices hit nearly a four-year low in December 2012 when The New York Times published an expose on a K12 online charter school venture. Nearly 60% of its students are below grade level in math, and 50% in reading. One-third don’t graduate on schedule.

The story also revealed CEO Ronald Packard collected a salary in 2011 — $5 million — nearly double that of the previous year. And that his bonus is linked not to student performance, but to enrollment.

It’s a lot easier to escape this sort of scrutiny if your charter school venture is privately held — or, in the case of EPR, mixed in with other ventures that have nothing to do with education.

Well, I tried.

“I spend a great deal of time, money and resources looking for new investment ideas that you, dear reader, can act on independently,” I wrote in my Apogee Advisory, early in 2012… “Sometimes what I find instead is outrage.”

For now, the big money in charter schools is confined to those on the inside.  In late 2010, Goldman Sachs announced it would lend $25 million to develop 16 charter schools in New York and New Jersey. The news release said the loans would be “credit-enhanced by funds awarded by the U.S. Department of Education.”  Of course.

Written by Addison Wiggin

About the author: 

Mr. Wiggin is the executive publisher of Agora Financial, LLC, an independent economic forecasting and financial research firm based in Baltimore, MD and the editorial director of Agora Financial’s daily 5 Min. Forecast and Agora’s flagship publication The Daily Reckoning.

 Addison Wiggin is also the founder of Agora Entertainment, and executive producer of the highly acclaimed documentary film I.O.U.S.A., which was nominated for the Grand Jury Prize at the 2008 Sundance Film Festival and shortlisted for a 2009 Academy Award. He is also a three-timeNew York Times best-selling author.

3 comments on “The charter school gravy train: All aboard!

  1. David J McNeal
    February 4, 2014

    With regard to the article, simply stated, “money has it’s hands in the education pot.” As long as you have money and are interested in “more money” or “more property” or “more power and influence” you will have success in this growing market. In the end, education suffers, children suffer, teachers suffer. Once again, it’s the ” little fish” being eaten by the “big fish” and it doesn’t matter the color of the fish; however, in poorer areas, there is the majority color and that’s where it’s does matter.

    Education reform isn’t supposed to be about building new schools, we all know that; but as long as private money. Dictates the direction of this country, “little fish” will continue to suffer.

    I combat this by ensuring that my child’s education is robust and includes influences outside of her home and school district. “One child at a time and none will be left behind.”

  2. David J McNeal
    February 4, 2014

    As a parent of a charter school student , I am extremely curious with regard to (Danny Weill 2009) statement, “dummies down” curriculum. Recently, I’ve been on the hunt for Information regard curriculum in NYC. From public, to charter, to private schools to see what the differences are when matched against each other. Now, with my child fairing excellently, I’m am concerned that this excellence may be a cloak for an inferior curriculum. So, I need help! How do I get this information on line?
    Should I google “private school curriculum?” What’s the best private, parochial schools in NYC? Should I Google gifted and talented programs? What’s the best avenue to take.

    By the way! I do supplement my child at home and I don’t rely solely on what’s she’s taught in the school. She gets more than extra work after school. I am proactive and in need of a little help. Thanks to all….

    • seattleducation2011
      February 4, 2014

      Many charter schools hire teaching staff that are not certified. A pre-packaged program that doesn’t allow any slip up’s is a safe way to go, particularly if the subject matter is basically test preparation for standardized tests.

      Because charter schools live or die, theoretically, by their students’ test scores, it’s in the best interest of the CEO and board members of a charter school to have high test scores and graduation rates.

      Play it safe, teach to the Common Core Standards, do a lot of test prep and voila! The charter school is home free.

      That’s how its done. There are no miracles or real miracle schools.

      The high graduation rate is created by many students being counseled out of the charter school. English Language Learners, special ed students and students with behavioral issues are counseled out or simply not selected based on a very long application and interview process. The process of selection weeds out parents who cannot be involved in their children’s lives for various reasons and families who are not supportive of their child’s education.

      How do you compare? I suggest the old fashion way. Talk to other parents, visit schools that you might be interested in, talk to your student’s teachers to get a sense of the teacher, the school and how your child is doing.

      You are already doing the most important thing, being involved in your child’s education and allowing them the opportunity to explore different subjects and interests.

      Don’t, though, evaluate a school based on its test scores.

      Dora

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This entry was posted on February 3, 2014 by in Cashing in on ed reform, Charter schools and tagged , , .
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