Originally published in The American Prospect on June 6, 2016.
Last month, a teachers union-funded study in Los Angeles sparked a furor when it reported that the city’s charter sector—which educates 16 percent of L.A.’s public school students—drains upwards of $500 million a year from the district’s school budget.
In a brief accompanying the report, the teachers union and its allies charged that L.A.’s charter school explosion “limits educational opportunities” for more than 500,000 public school students, and “imperils the financial stability” of the district. Education reform advocate Peter Cunningham shot back in a blog post that the study’s premise that charters siphon money from traditional public schools “is like arguing that a younger child deprives an older child of parental attention.”
Such school budget fights are not just happening in Los Angeles. In cities all over the country—from Massachusetts, to Missouri, from Florida to Pennsylvania, from Washington state to Maryland—charters and local school districts are clashing fiercely over who gets what funding. Districts say charters steal their money, leaving them unable to properly educate the students who remain at their schools—very often those who are the most expensive to educate, like children with disabilities.
Charter advocates counter that districts’ financial woes began long before charters came on the scene, and students who seek alternatives shouldn’t have to suffer just because districts and unions face budget and organizational crises. Money should “follow the child” school choice supporters say, meaning per-pupil tax dollars should be directed towards whichever school system a student wishes to attend.
Charter school policy discussions often devolve into political battles that pit advocates armed with competing research studies against one another in arguments over academic impact. In some cities, like Boston and New Orleans, students attending charter schools have demonstrated significant test score gains. In others, the academic results have been no better than those in traditional public schools. And in some cases, charters have yielded worse results than the district schools.
The research examining charter schools’ academic effectiveness will continue indefinitely, but it is concerns about their fiscal impact that are becoming increasingly charged. As the pressure to expand charter schools continues to mount, and the budgetary health of local districts continues to decline, teachers, administrators, parents, and activists on both sides of the charter school divide are facing off over a dwindling resource: money.
Intensifying the heated political clash between charter schools and traditional school districts is that overall spending on public education, for all schools, has fallen. In 2015, the Center on Budget and Policy Priorities, a progressive think tank, found most states provide less financial support for public schools than they did before the Great Recession, and in some cases, much less.
“Even as we’ve come out of the recession, heels are dug in, and nobody is really considering putting in additional funds,” says Bruce Baker, an expert on school finance.
Funds are not only shrinking, but districts are hard pressed to manage costs that are “fixed” or “stranded” when students leave to attend charter schools, experts warn. Charter advocates say that as money follows the child, districts should figure out how to adjust to new fiscal realities. But it’s not always so easy to reduce certain expenses, at least right away, say researchers who have studied education funding. The cost of heating a building, for example, is the same for a classroom of 15 students as it would be for one of 18 students.
Similarly, a district that has lost only a few students from each grade can find it difficult to reduce the number of school employees. In 2013, Moody’s Investor Service, a bond credit rating agency, released a report which concluded that a small but growing number of school districts face severe financial stress as charter schools proliferate, specifically because these districts can’t reduce their costs as quickly as they lose revenue. This has forced already struggling districts to make further cuts to programs and services, and in some cases, to shut down schools entirely.
In 2014, education policy experts Robert Bifulco and Randall Reback co-authored a paper on the fiscal impact of charter schools, noting a dearth in existing research on the topic. They looked at Buffalo and Albany, two cities with relatively large concentrations of charter schools, and with public school districts facing stagnant, and shrinking student enrollments. The two concluded that charter school expansion produces negative fiscal impacts for school districts, yet that such harm can be somewhat mitigated by better coordination between charters, districts, and states. Bifulco and Reback found that, in general, closing schools can be the most effective way to manage some of the fiscal strain produced by charter growth, but that such closures are “politically contentious undertakings.”
Still, given that research shows money matters a great deal in education, many charter critics believe it is neither wise nor ethical to gamble that cost cuts will wind up improving student learning.
Still other academics suggest tight budgets may actually help boost student achievement. Ron Zimmer, an education researcher at Vanderbilt University, has said it’s possible that fiscal strain on district budgets could spur competition, potentially helping all students. Still, given that research shows money matters a great deal in education, many charter critics believe it is neither wise nor ethical to gamble that cost cuts will wind up improving student learning.
When the charter school expansion first started to take off, some states freed up transitional funds to help school districts cope with declining enrollments and fiscal fallout as students left for charters. Such transitional aid began “as a sort of compromise” between charters and district schools says Reback. Yet many of these compromise measures were reduced or eliminated once the recession hit.
For example, in Illinois, state law once provided a three-year, declining payment to districts to help them manage their budgets as charter enrollment grew. According to Kasia Kalata, the external affairs manager at the Illinois Network of Charter Schools, the state offered impact aid to support school districts with declining enrollments, but phased out the policy in 2009.
Similarly, in 2007, Michigan began to provide some categorical funding to districts with declining enrollments. But these allocations were never fully funded, and by 2012, the state eliminated them altogether. Michigan also lifted its charter school cap in 2011, leading to rapid charter growth.
“Right now you could open a charter school, for almost any reason, in any location, regardless of what that will do to district schools,” says Peter Joseph Hammer, a law professor at Wayne State University in Detroit. He says Michigan’s charter law, and the elimination of the state’s charter cap, has just been “devastating” to traditional public school finances. While the categorical grants that Michigan once offered provided some help, Hammer says even those measures were always “very small relative to the need” and mostly enacted to quiet critics.
Pennsylvania used to reimburse local districts up to 30 percent of their charter school costs, but in 2011, the state’s Republican governor eliminated these partial reimbursements. This was a loss of more than $240 million across the state, including over $110 million for Philadelphia alone.
Laws governing pension participation for charter school employees vary from state to state. Charters, though, have generally not been around long enough to accumulate their own unfunded pension liabilities. The question now is: do charters share responsibility to help pay down the pension legacy costs of area school districts?
Monique Morrissey, a pension expert at the Economic Policy Institute, a progressive think tank, says there is no reason to exempt charter schools from paying unfunded liabilities that are no more the public schools’ fault than they are the charters’. “In fact, I would say that even if charter schools are allowed to opt out of a pension system, they should be required to help pay down the legacy costs to maintain a level playing field,” she says. “Otherwise it creates a downward spiral, where every public school has an incentive to convert to a charter and/or every family has an incentive to choose a better-funded charter school, leaving fewer and fewer students—and less and less funding—in the regular school system to cover the legacy costs.”
In Morrissey’s view, the legacy costs are owed by taxpayers, not students in either regular public schools or charter schools. Thus, she says, “if funding is supposed to follow the students, legacy costs should be taken out of the equation and considered part of the overall budget, not something owed by certain schools and not others. Otherwise, students in regular public schools are effectively provided with less education funding than those in charter schools.”
There have always been disagreements between charters and traditional district schools, but Susan Spicka, the interim director of the advocacy group Education Voters of PA, says that losing those charter reimbursements in 2011 greatly exacerbated tensions between the two sectors. “We support the charter reimbursement and we think it’s a valid argument that, yes, you do have some costs you can’t get rid of right away just because you have fewer children,” Spicka says. “There should be some type of compensation [for districts] to handle those costs.”
Not everyone agrees. Such academics as Marguerite Roza and Jon Fullerton say that policies designed to help districts cope with the effects of shifting student enrollments “weaken the incentives that should drive change and adaptation.” Roza and Fullerton question the idea that schools have all these “fixed costs,” and argue that districts should think more seriously about cheaper alternatives like online schooling, defined-contribution plans, and modified tenure systems. Only by “adopting more nimble expenditure structures,” they have written, can districts feasibly adapt to a changing landscape.
Other “fixed costs” that tend to receive far less attention in conversations about the fiscal impact of charters are the billions of dollars owed by states and districts in pension obligations—and what effect the expansion of charter schools means for local districts saddled with these payments.
Unfunded pension liabilities are the estimated value of benefits earned by employees minus the assets set aside to pay them. Unfunded liabilities can arise because required contributions have not been made in full, or because actuarial assumptions have not been met. States and districts with large unfunded liabilities are now scrambling to find the dollars to pay up, resulting in painful cuts in other areas, including salary reductions for current teachers.
While some unfunded pension liabilities are due to market fluctuations, including sharp stock market declines in 2002 and 2008, leading economists say the most severe cases are due to politicians’ failure to keep up with employers’ share of pension payments over many years (most public-sector workers also contribute toward their own pensions). Instead of setting aside money for future retirees, political leaders opted to defer their responsibilities, borrowing against the next generation of public school students and taxpayers.
Though some education reform advocates have dismissed the idea that districts can’t sufficiently downsize when students leave for charters—they chalk the problem up to bureaucratic recalcitrance—many people acknowledge that such expenses as pension commitments simply cannot be scaled back when student enrollment shifts. “Lifetime health benefits and defined-benefit pensions, sometimes guaranteed decades ago, have created ongoing costs for districts that are unconnected to revenues and enrollment and cannot be easily reduced,” Roza and Fullerton write.
“The approach of the incumbents—the unions, the administrators—is to chain new teachers to the Titanic because they don’t want to let anyone escape,” says Michael Podgursky, a school finance researcher at the University of Missouri. “These young teachers, charter school teachers, TFA teachers, are cross-subsidizing the pension plans, so [the incumbents] don’t want to let anyone escape.”
He acknowledges that leaving districts to handle those costs alone as charters expand might make things more difficult for traditional school districts. But he says charters “didn’t make this mess.”
Josh McGee, a prominent pension reform advocate at the Laura and John Arnold Foundation, also thinks it would be wrong to ask charters to help pay down legacy costs, though he says it’s true it could be “cumbersome” if local districts have to pay the bulk of those pension liabilities alone. “But charter schools didn’t contribute to that legacy debt, nor can they raise funds from local taxpayers,” McGee says. “Charging charters for the unfunded liabilities that they weren’t around for is just a way to tax them and reduce their state aid.”
McGee says there is an argument to be made that local taxpayers should bear some of the pension costs, but suggests that states pick up the bills in order to mitigate any financial harm to school districts. Currently, according to Keith Brainard, the research director for the National Association of State Retirement Administrators, the source of the employer contribution varies across the country, ranging from local districts paying the full cost, to states paying the full cost, to “everything in between.”
Still, Brainard says, it would be fairly unusual for states that don’t currently pay the employer contribution to absorb those costs back from districts, as McGee suggests, though they could increase aid in other ways. In some places where states do currently pay the pension costs, like in Illinois, legislators are even trying to unload their pension obligations right back onto the backs of local districts. (The only district Illinois does not pay the pension contributions for is Chicago Public Schools.)
Some charter operators have begun to explore how they might extricate themselves from their state pension plans. “Charter schools are a cash cow for the pension plans, and once you’re in, it can be hard to get out—which is what a lot of operators face now,” says Podgursky. “As the costs are going up and up and up, many are saying ‘hey, we want out of here’—though generally escaping is hard.” In an effort to avoid adverse selection, pension plans do not typically allow individual schools to opt out.
As a result, some charter operators are turning to the courts. In 2013, charters in Georgia argued to the state supreme court that they shouldn’t be responsible to help pay down debt they didn’t create. Georgia’s high court agreed, and ruled that charters cannot be asked to share in the burden of paying down unfunded pension liabilities.
To complicate things still further, the question of whether charter employees should be eligible to participate in state pension plans remains unsettled. “They’re private employees for some things, like collective bargaining, but public for other things, like pensions,” notes Podgursky. Since 2011, the Internal Revenue Service and the Treasury Department have been scrutinizing this issue, and working to determine whether private charter teachers are “governmental” enough to participate in state plans. Asked to check on the status of this guidance, the IRS told The American Prospect that, five years later, it still has not been finalized.
For districts saddled with pension payments, the consequences can be severe.
“If the total payroll of the pension plan is slower than expected, by virtue of slow growth in the number of employees or slower growth in salaries, then there are fewer dollars available to fund the plan,” explains Brainard. Essentially, if charter schools do not participate in their state plan, either by not contributing to it as employees or not helping to pay down legacy costs, then there are fewer available dollars to pay down existing debts—obligations that cannot be “downsized” through layoffs or school closures.
In the absence of increased state and federal funding, tense battles over school spending are likely to be handled in piecemeal—and controversial—fashion. In 2015, for example, the Philadelphia School Partnership, a local philanthropic education reform group, offered to pay the Philadelphia School District $25 million in order to take the issue of stranded costs “off the table.” Partnership leaders wanted to push for more charter schools, without having to contend with school district worries about their fiscal impact. But the school district said the group’s offer was too low—generous, but insufficient to cover the yearly stranded costs they’d bear if more students were to leave for charters. Local advocates also protested the organization’s offer on democratic grounds.
“It would be a terrible mistake to take the money,” Susan Gobreski, the former executive director of the Education Voters of PA, told Newsworks at the time. “We cannot let benefactors make decisions like that. I’m very concerned about how much pressure is being put on the district to make decisions that are not in the best interest of the district or most of the kids in Philadelphia, and certainly not in the interest of Philadelphia as a community. This is ideology gone wild.
Tensions surrounding funding for the charter and traditional public school systems are not going away, and indeed are likely to grow more serious over time. While Bifulco and Reback offer some policy suggestions for ways to help mitigate financial stress as charter schools expand—such as constraining when students may enroll in charters in order to help districts plan their budgets more systematically—right now ideological divisions have left the two sectors at a stalemate. Charters market themselves as ways to “escape” failed school districts, touting their autonomy and independence. Traditional school districts resent charters for wooing away their students, and now fear charters are hollowing out their budgets. The bitter divide between education sectors has blocked cooperation and solutions. As the bickering over money continues, more and more public school students will likely cram into overcrowded classrooms, studying in schools without basic resources like textbooks, computers, teachers, and guidance counselors. With fewer and fewer dollars to go around, the price for policymakers’ impasse will invariably be paid by students.