An investigation in Philadelphia finds that some charters now spend more on paying down the debt of lavish facilities than they spend on instruction.
“THREE FRANKLIN Plaza, a bow-shaped eight-story building at 16th and Vine streets, once hummed with 1,700 GlaxoSmithKline white-collar workers.
“Today, it is empty more than three months out of the year, a lone security guard watching over the corporate art still hanging in the lobby.
“From September to June, a charter school called String Theory occupies half the floors. The school acquired and began renovating this premier office tower in 2013 as part of a $55 million tax-exempt bond deal, arranged with help from the city’s biggest economic-development agency. It was the largest bond deal of its kind in city history.
“It is also the most conspicuous example yet of a risky, expensive and fast-growing financial scheme underpinning the rapid expansion of Philadelphia charters – a bond market now worth nearly $500 million. But the bond financing behind the mountain of money gets little scrutiny as to whether the debt is a smart use of Pennsylvania’s limited education dollars.
“The lack of transparency can translate into deals that may be unsustainable. Shortly after moving into its flashy high-rise, String Theory posted its first operating deficit. After revealing it was $500,000 in the red from paying out millions annually to bondholders, administrators told parents that they were cutting certain classes and suspending bus service as cost-saving measures.
“On the plus side, if the String Theory board members who indirectly own the Center City high-rise sell it, there could be a big profit. But is this the way charters should operate?”
“Charter schools used to inhabit repurposed supermarkets or old storefronts, but a Philly.com analysis of bond documents showed that an increasing number – one out of three charters today – have bought or constructed newer and larger school buildings with tax-exempt bonds, paying millions in debt and fees to consultants along the way.
“Bonds – school debt sold to investors who are gradually paid back with interest – have become popular among charters because they allow lower borrowing costs than standard commercial loans. Bonds are commonly floated by governments and school districts to get up-front money for infrastructure projects, but charters were long considered too risky an investment because they can be abruptly shut down.
As charter schools became more established, investment prospects improved. But the bonds that charter schools have tapped are still riskier and come with “junk” ratings, carrying high interest rates.
“They’re getting bond ratings that have an 8 or 8 1/2 percent interest rate, whereas a school district getting [government] bonds to finance a project can get much lower interest rates,” said Bruce Baker, a Rutgers education professor.
“This leaves charters spending more education dollars on interest payments – $78 million over 30 years on top of String Theory’s $55 million bond, for instance – at rates that are double or triple what the district pays.
The financing process and real-estate transactions themselves also entail millions in consulting and legal fees. Schools like String Theory can become enmeshed in complex and costly deals for marquee buildings that are difficult to sustain.
“There’s no real scrutiny of these deals, and charters end up saddled with big fixed costs,” said Michael Masch, former chief financial officer for the School District of Philadelphia. “They’re saying, ‘Look at this really prestigious building we have, that’ll attract people.’ But it’s a ridiculous amount of money to be spending on the facilities side.”
“Today, an increasing number of charters are spending more of their budgets paying down debt than on actual instruction. In the case of String Theory, which enrolls 1,400 students, the school now spends nearly one-third – $5.5 million – of its $16 million budget just to occupy the half-empty 228,000-square-foot high-rise, along with two older, smaller schools in South Philadelphia. That figure is more than String Theory spends on teachers’ wages – $5.3 million.”
Diane Ravitch's blog 
This is the most comprehensive story about charter spending in Phila in a long time. Be sure to read the entire story.
Diane, these are all legitimate issues.
1. Various gov’t entities can issue tax-exempt bonds. This is a subsidy from the federal gov’t to those entities.
2. If charters utilize the tax-exempt bonds via the schools, then there should be holds placed on their ownership of buildings. In other words, if the charter boards eventually sell that real estate at a profit, they should have to pay back the interest subsidies they received from the bonds prior to realizing any profits from the building sale.
3. All of this data should be publicly provided. Parents of kids attending these schools should be provided with the amount of funds used by the charter for building/capex, support, teacher wages, etc. If they still want to attend, so be it.
4. Charters should be required to post bonds to cover losses if they go under including the transfer of their students mid-year.
If all of these items are in place, then the public should be protected and parents can make informed choices. But it needs to be similar to a food label so folks can easily understand. I agree with you Diane that these are big issues. Dennis Bakke and Imagine Schools is notorious for turning a quick profit on real estate used for his schools while saddling the charter with massive facility costs.
I do take issue with the point about paying more in interest costs than principal. If I could get a 100-yr loan at 2%, I would pay a lot more in interest costs; however, that would be the deal of the century. Even after you own an asset, the opportunity cost is roughly 7%. So owning a $10M outright still has an effective cost of $700K/yr. Basic accounting but I’m sure this is lost on most of your readers.
Here’s what’s not lost on most of her readers, we don’t want our public tax dollars enriching greedy private companies at the expense of our students education. Yes, we are educators, not money grubbing businesses that couldn’t mKe it in the private sector and now are trying to fleece the public schools. Setting up parallel systems funded from the same source is expensive and foolish. But hey, it’s only public money, right.
The accurate parallel is Russia, where oligarchs snatched up national assets, in the past few decades. The question is whether Americans will allow the enemy within, to do the same, here.
Only an amoral or immoral person would describe a basic human need for children, in terms of economic opportunity costs. Shame on you.
Opportunity costs are what is given up when making a choice. They are the only true cost of anything, so they are essential to making decisions.
When a physician is doing triage at a catastrophe, for example, she must sometimes decide that spending time and resources on patient A will preclude patients B and C from treatment. The economic opportunity cost of treating patient A might be the death of B and C, the economic opportunity cost of treating B and C might be the death of A.
Not acknowledging those costs lead to poor decisions.
TE, you will not find a doctor describing triage in terms of “economic opportunity costs.” To most of us that implies that the doctor is standing there asking how much $$ will it cost to treat this patient given the chances of survival. What the doctor is saying is there are three other people I am pretty sure I can save if I treat them first as opposed to this patient (not client!) who in my professional judgement is not going to survive. That is what is most obnoxious about the charter school investor who is most interested in the expected return ($$) on their investment. “Clients” are chosen for how easy they will be to “educate.” I realize your field is economics but I find your insistence on describing all human interation in economic terms. No distractor questions about when we do or should we discuss the economics of education, please.
2old2teach,
Doctors make these kinds of decisions all the time. Someone who is not a good candidate for an organ transplant does not get an organ because someone else is more likely to benefit from the organ than the poor candidate is to benefit.
I am not describing all human interaction in terms of opportunity costs. I am describing the cost of choosing A instead of choosing B. When you make the choice, you say the cost is worth paying.
False analogies- a cottage industry in the right-wing
Examples:
(1) Household debt is similar to national debt (2) Worker collective campaign contributions are similar to multinational corporate and oligarch campaign donations (3) Economic opportunity cost analysis is similar to triage decisions (4) Public schools are similar to charter contrivances (5) TFA recruits are similar to dedicated teaching professionals (6) Venture philanthropy is similar to charity
(7) Due process is similar to guaranteed life-time employment
(8) Social Darwinism and “he ain’t heavy, he’s my brother”, are both
examples of humanity
Linda,
Perhaps you could give an argument against my position, showing how it is false?
It’s the Dick Cheney theory of triage …
3 ♥ 4 me, &clubs& 4 you …
It’s the Dick Cheney theory of triage —
3 ♥s 4 me, ♣s 4 you …
te,
Please don’t extend comparison, of economic opportunity costs analysis, to Sophie’s Choice. Too depraved.
Linda,
Opportunity cost does not belong to economis, it is inherent in making choices. Who gets the liver transplant, who gets into surgery must all be decided by thinking about who does not get the liver, who waits for surgery. What is it that you think about when two roads diverge in a yellow wood?
The issue I think, is that by charters buying their own buildings with no oversight, and then mortgaging those buildings (presumably to ownership) with state money, it’s a much more effective transference of the tax dollars charter owners receive into real estate they then own, rather than into the staff or instruction in the building which is a consumable.
Clearly if they are not looking at getting the most cost effective facilities to be able to put as much money towards instruction as possible, and the money that could be going towards instruction is going towards big bond payments that the city took out to help the charter pay for the building (I’m assuming the city is not agreeing to buy the building for itself – if it is – should not that purchase have met with public scrutiny?)
But if the bond dollars and payments are the city’s way of subsidizing charter building costs that they then pay back out of state education dollars, it’s just an elaborate scheme to get prime real estate into the hands of charter owners while spending as minimally on operating a “school” as possible.
M provides the best answer to virginiaspg’s patronization. Relative to education, the inherent flaws in attempting to quash insatiable Wall Street greed can be avoided by the elimination of charter schools, From a macro policy perspective, they contrast poorly in terms of academic performance and, therefore, there is no rationale for them.
There is compelling evidence that 18% is a representative, ball park number for the amount that Wall Street made on charter school debt, in 2014.
A WSJ reporter researched and interviewed a spokesman for a firm with $1.4 billion in charter school debt. There is no reason to believe, the reporter cherry-picked an unrepresentative industry player, extracted information to give a false impression, or that the company spokesman intentionally sought to mislead readers, by citing an irrelevant return number, in an article specifically about charter school debt return.
The inflated amount of return at the individual investor’s level, due to machinations involving taxing vagaries, would highlight further manipulation by the richest 0.2%, at the expense of U.S. economic growth.
““On the plus side, if the String Theory board members who indirectly own the Center City high-rise sell it, there could be a big profit.”
For whom? The bondholders? String Theory? Certainly not the public. Color me unimpressed.
Yep
What leapt out of the posting at me:
“The lack of transparency can translate into deals that may be unsustainable. Shortly after moving into its flashy high-rise, String Theory posted its first operating deficit. After revealing it was $500,000 in the red from paying out millions annually to bondholders, administrators told parents that they were cutting certain classes and suspending bus service as cost-saving measures.”
From the heavyweights of the self-proclaimed “education reform” movement and their enablers and enforcers: “Rheephorm today, rheephorm tomorrow, rheephorm forever! It’s all about the kids!”
😱
This needs to be translated into standard American English—
“It’s all about a few adults shamelessly enriching themselves at the expense of the vast majority of students and parents and their associated communities.”
And don’t expect the rheephormistas to self-correct and set things right because it’s déjà vu all over again.
Very Old. Very Dead. Very Roman. And a Guy.
“For greed all nature is too little.” [Lucius Annaeus Seneca]
😎
P.S. Since it’s not on the CC-mandated list, I refer all the shills and trolls that frequent this blog to google “George Wallace” and “Governor” and “Georgia” and “segregation.” Because, dontchaknow, a behind, er mind, is a terrible thing to waste…
😏
Charterbagging • The Movement That Asks the Question:
“How Dumb Can The Public Be?”
Good term, I hope not this dumb forever. We see our elected politicians are not concerned about our welfare. If anything this money grab by businesses have taught us, our political leaders are not answering to us but to the money in the public education issue.
Actually, Jon, I think this term is brilliant! I plan to use it soon in an op-ed piece for my local paper. It should be particularly effective here, in the South. I won’t give you credit, however (limited word count and a bump on the bed of a, hopefully, smoothly flowing stream). But, be sure, your were the inspiration. Thank you for your neologism, and I think many need to understand, or at least investigate, its power.
On second thought, I might actually start the piece by giving you credit and inspiring my article. It might be a good opening. I live in Tennessee, and we have a Charter mess. However, I live in a rural area, with no Charters. I need to think about my approach, but, even here in the rural South, the term ‘Charterbaggers’ will raise hackles, and it needs to be used in defense of public schools. I think the term will work almost as well in the North, as even there they understand the negative impact on our nation’s future caused by carpetbagging ‘entrepreneurs’ that raped the post-war South. (At least, I hope there is still some of that history being taught).
Thanks for the appreciation. I think I’ve been using that for a few years now. A quick search takes it back at least a couple:
https://deutsch29.wordpress.com/2013/06/24/forget-evidence-white-bese-and-corporate-reform-ideology/#comment-1862
I think it starts with exaggerated numbers on potential enrollment. All the poor decisions and negative consequences stem from the original bad numbers, and of course the numbers are used to advance an ed reform political agenda. It’s “creating demand” to support growth and it’s an old, old scam. They didn’t invent it.
Chiara is right, as usual. The market for reform education is artificially high, as the result of scams at the local level and, vulture philanthropy at the state and national levels, spent on politicians, astroturf groups, media, and the ubiquitous non-profit, self-serving “charities” that promote human capital pipelines, under the guise of civil rights.
I read a NYTimes piece on a charter start-up and the charter operators themselves said the original demand estimate at a school should be reduced by 60% because obviously an expression of interest or even a name on 5 or 6 or 7 waiting lists doesn’t mean “enrollment” yet I see these “waiting list” number bandied about as if they’re real numbers. They’re not. It’s political.
That’s how you end up with 17 Columbus charter schools failing over one summer- over-stating demand to get the charter. Can you imagine the chaos that creates in the public system? Lawmakers would need a plan to close 17 public schools but there was NO plan for the charter system. They can take that kind of risk BECAUSE the public system exists as a back-up.
I resent them using public schools that way. Our schools have value other than as a lever they can pull when the “choice” bottom drops out. It’s not fair to kids in the public system, who have enough chaos in their schools as a result of ed reform already. Our schools have value APART from their back-up role in “choice” systems. The recklessness really, really bothers me because they’re not absorbing the risk- the public and public schools are.
The anger is ratcheting up for all of us, against the divine right of kings to take public assets and turn them into private property.
Columbus is a cesspool of corruption which rained down from the kingdoms of Waltons, Gates, etc.
In an interview, Melinda Gates audaciously implied she reflected Emerson’s quote about making just one person breather easier. The kings’ and queens’ distorted beliefs about themselves (if it’s not just PR), are delusional.
The CDC warns of an alarming new children’s disease, Parasitic ProfitKochi, specific strain, BCWD (Broad,Gates,Walton,DeVos),
transmitted by amoral adults, living in unhealthy political conditions, and spreading from U.S. urban populations to global neighborhoods.
I don’t know if you saw this:
“Instead, key department staff who worked on the evaluations, including Joni Hoffman, Ohio’s charter school director, are refusing to answer any questions from The Plain Dealer and other media about their involvement or that of Ross. Ross may have known as early as March that ODE calculations were excluding online schools, despite a law that mandated their inclusion, The Plain Dealer’s Patrick O’Donnell has reported.”
They found someone in state government to ask about charter schools! Rather than just collecting generic pro-charter quotes from the Fordham people, they’re actually asking state charter school officials to explain this.
http://www.cleveland.com/opinion/index.ssf/2015/09/ohio_gov_john_kasich_should_or.html
Thanks.
Speculative? An empty building with nothing in it?
Exaggerated claims and hype?
Called “String Theory”?
How apt.
Send this post to Tom Wolf’s office, This is a public disgrace.
The thing that TE never gets is that Sophie makes her choice in an engineered context.
The question we should be asking is —
Who chose to engineer that context that way?
cross posted at http://www.opednews.com/Quicklink/Philadelphia-Some-Charter-in-Best_Web_OpEds-Charter-School-Failure_Charter-Schools_Debt_Education-150921-939.html
with my comment at the end, which has embedded links with the quotes from this site… Below:
“There is a very serious problem associated with deregulation of public school funding turned over to privately managed charter schools. The absence of oversight and auditing facilitates criminal schemes, such as the one that was just revealed in Dayton, where three men were convicted of bribery and other charges”.
But to see how the scoundrels do the deed ,look at the Knox County Tenn, schools as Diane Ravitch reports: “which hired The Parthenon Group to do a “resource analysis” to the board about “improving “the school system. Parthenon made the usual recommendations – increase class size, cut librarians, counselors, etc- all about cutting costs. Some of us did a little investigating into Parthenon & presented this info to the school board in 2014. On the Parthenon Group’s website we located 2 presentations they gave to potential investors about money making opportunities in education. One of their prime examples for return on investment $$$ was Corinthian College. You may recall Corinthian’s fraud & its backdoor investor bailout by Duncan’s DoEd.”