Tag Archives: Charter School Bubble

Trouble, trouble, charter bubble…

Student MarchTiming is everything in life. On the very same day that thousands of Boston public school students walked out of school to go to the Massachusetts State House to advocate for their schools, the Joint Committee on Education held a hearing on various bills related to charter school expansion. Occasionally the stars are truly aligned. Some of the students in the photo above made their way into the hearing room and gave powerful testimony on the connection between charter  school expansion and budget cuts at their schools. Some members of the committee fidgeted, others paid close attention. Then, a non-student gave the following testimony, made available to the Parent Imperfect by a special exclusive arrangement. Since time wouldn’t allow him to say the whole thing in the hearing, we share it here.
There are all sorts of arguments for and against charter schools, but I want to share one today that has not gotten a lot of attention. It’s based on a recent article by four highly-respected academics that appeared in the University of Richmond Law Review. The article is called, “Are We Heading Toward A Charter School Bubble?: Lessons From the Sub-Prime Mortgage Crisis.”  The basic argument is quite simple.
 
charter bubbleGovernment at all levels did a lot of things to make it easier for people to get mortgages in the run-up to the subprime crisis. The so-called market was more than happen to oblige. A key factor in the creation of the bubble was that the people approving the mortgages (the originators) had no skin in the game. They could care less if the borrowers could pay back the loans: Their job was to write mortgages.
 
The explosive growth of charter schools has some disturbing things in common with the subprime mortgage mess. Those who are authorizing more charter schools and more seats in existing schools have little or nothing to lose, personally, if the schools fail our children. They also have little understanding of the pressures present in the charter market.
 
Now the subprime mortgage market was a license to print money, until it wasn’t. Then the bubble popped. What forces might put charter schools in the same sort of vulnerable position as subprime mortgage holders?
 
The charter school business model depends on many things going right for them, but three stand out:
 
Public funds for public schools1. They need a steady stream of public money, approved by public office holders and delivered by state bureaucracies. Are you sure that you will have the funds to grow charter schools at even the reduced rate of growth proposed by my dear mayor…let alone what the governor is talking about? I don’t need to remind you that the foundation budget for education in the Commonwealth is in the process of being re-evaluated for the first time in decades and that Massachusetts Law requires Chapter 42 reimbursement of some of the funds going to charters. The price tag contains many hidden costs. Will you  have the political will (not to mention the cash money) to continue to divert ever larger amounts of public money to charter schools as public schools disintegrate before your eyes? If not, the charter experiment is in trouble, especially if the numbers of charters continue to expand.
Gates2. But the charter business model doesn’t run on your money, alone. Charters schools also require a lot of private philanthropy to function. Until now, the Gates’s, the Waltons, the Broads and the Barrs (not to mention our own beloved Boston Foundation) have been ready to step up. Are you ready to make a bet that the private money will be available to float this bubble when there are two or three times as many charter schools? If the bloom on the charter rose even begins to fade, the monied few will drop charters like a bad habit. You’ve seen it happen before…many times.

3. But that’s not all. Charters are schools and schools need buildings. This is, perhaps, their biggest vulnerability. In Boston, our Mayor seems ready to turn public buildings over to charters at fire sale prices, which will give the bubble a new lease on life. Even if that new lease happens (lots of people will try to prevent it), charters will continue to need capital financing. Today, that financing happens only because the Federal government provides tens of millions of dollars annually in tax credits to encourage investors to put big money into charters, and then it guarantees payment of those loans so the risk to the investor in close to zero. No wonder the hedge funds are flocking to charters! A 39% tax credit? You know the fiscal environment in Washington better than I do. Are you sure that this cumbersome and costly mechanism will be able to provide capital financing for existing charters and all the new ones that could be coming on line? I’m not
 
Big shortThe sky is not falling, but four very smart analysts have concluded that there is reason to believe that we have a charter school bubble in our future. Are you clear enough about the endgame in the current charter mania to bet against these guys? If you do, you may secure yourself a place in the charter short version of The Big Short, coming to a theater near you. The futures of tens of thousands of school children across Massachusetts depend on you getting this right. Don’t pump up the charter bubble!
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