Are charters in danger of closing?
Following the abrupt closure of at least three Arizona charter schools over the past year, a new report concludes more than 100 of the state’s charters are in danger of closing because of excessive debt and other financial troubles.
It’s a “near certainty” that more than 50 of the state’s 544 charter schools will close in the near future, according to the report by the Grand Canyon Institute, a self-described centrist think tank.
As a whole, Arizona’s 544 charter schools owe more to creditors than they’re worth as businesses contracted with the state to educate kindergarten
to 12th-grade students, the report states. “Like any business, an overleveraged charter is financially vulnerable and could fail if it then suffers an income loss,” the report states.
“You will see a bunch of charters folding suddenly,” said Curt Cardine, the study’s main author and a former charter executive for EdKey Inc., a large Arizona charter chain that had a $7.74 million net deficit as of June 30, 2018.
Cardine didn’t predict when the schools would close, and the names of those schools were not included in the report.
The report, the third from the group on charter schools, follows a year-long Arizona Republic investigation that examined how minimal state regulation and oversight has produced multi-millionaire charter operators — sometimes through transactions that add significantly to the schools’ debt.
The Republic also found 1 in 4 charter schools had significant financial red flags, and that when compared to district schools charters spend much more on administration than in the classroom, even though charters receive more per-student state funding than district schools.
Differing opinions from state’s charter groups
Kathy Senseman, chairwoman of the Arizona State Board for Charter Schools, which regulates the schools, disputed that so many charters will close, saying Grand Canyon Institute’s estimates are “a little inflated.”
But, she said, she considers the institute’s research to be “fair.”
Arizona Charter Schools Association, a non-profit that represents the industry, was less diplomatic, calling the report “The Grand Canyon Institute’s latest unsubstantiated, anti-charter screed.”
“Let’s be clear: there is absolutely nothing in our state’s long charter history that supports GCI’s assertion of a coming wave of charter insolvencies,” said Matt Benson, a spokesman for the association. “In fact, going back a decade, Arizona’s track record for charter closures has been stable and consistent with approximately one school closing each year due to financial distress. That’s one school out of more than 500 operating statewide, a financial failure rate of less than 0.2 percent. Epidemic? Hardly.”
The report noted four charter schools that have closed since 2016 had for several years filed financial reports with the Charter Board showing they were in financial distress. The Charter Board allowed the schools to stay in business despite their financial problems because the board lacked the authority to shut them down.
One of those schools, Discovery Creemos Academy, abruptly closed a year ago.
Daniel K. Hughes, the school’s president and chief executive, admitted in Maricopa County Superior Court to defrauding the state and federal government by inflating student enrollment figures to get additional funds. He is scheduled to be sentenced Tuesday and faces up to five years in prison.
The numbers behind the study’s findings
The report’s authors examined financial records, including loan documents and school audits submitted to the state for all Arizona charter schools between fiscal 2014 to 2017. The Grand Canyon Institute found:
❚ Charter schools have $2.56 billion in debt, while their property and assets are valued at $1.4 billion.
❚ The state’s charter market holds 33 percent of all public school debt while educating just 16 percent of Arizona’s 1.1 million public-school students.
❚ Arizona charter schools primarily borrow for buildings and classrooms using what are deemed as “junk bonds” with high-interest rates guaranteed by projected enrollment growth. If the growth does not occur, charters have to spend more on mortgage payments and less in the classroom.
❚ One-third of charter schools are losing enrollment. While the charter sector has grown significantly during its quarter-century of existence, three-quarters of the growth from fiscal 2014 to 2017 was captured by 10 charter companies, with Basis Charter Schools Inc. being the biggest winner with 5,683 additional students.
❚ Charters receive “additional assistance” funds from the state that are intended for building debt because charters cannot get local voter approval for bonds. All charters, including online schools, receive the money whether they need it or not.
The think tank recommended charter companies not be allowed to incur new debt beyond the value of their property unless they can document years of student growth.
The organization also stated the charter additional assistance funds (up to $2,100 per student) should only go to schools with “satisfactory academic performance” and only to pay for facility funding at no more than fair market value.
The Grand Canyon Institute also recommended charter companies with debt be required to disclose whether they have met their enrollment projections.
Lastly, the group recommended that online schools only receive additional assistance money if it is used to cover the cost of computers that students could use in their homes or for subsidizing students’ internet service.
As part of its investigation, The Republic found Primavera online charter school Chief Executive Damian Creamer paid himself $10.1 million the past two years, as his online school had dropout rates in excess of 40 percent, low test scores and small portions of its budget dedicated to teacher pay.
‘Legislature should approve ... oversight and transparency’
Senseman said the Charter Board successfully sought from the Legislature changes to the law that allow the board to shut down charter schools with significant financial problems. She said the board also has developed rules to implement the reforms, and it could begin taking action against charter schools perhaps later this year.
Senseman said the board likely would place a financially failing school on a plan of assistance to keep it open and not disrupt the education of students. If a school will not agree to state assistance, the board has leverage to shut it down, she said.
Senseman expects lawmakers this year will make additional changes to the charter school laws, and her organization will be seeking legislative approval for eight additional staff to regulate charter schools. The agency currently has 11 employees.
George Cunningham, Grand Canyon Institute chairman, agreed that the Charter Board needs more staff for its regulatory duties.
“If Arizona is going to allocate about $1.5 billion per year to charter schools, then our Legislature should approve legislation and invest the resources to ensure they operate with sufficient financial oversight and transparency,” Cunningham said.
Benson said the Charter Association is working with lawmakers to produce a “package of smart, charter-backed reforms.”
“These consensus and targeted reforms will improve transparency and accountability in the key areas of charter governance, finances, procurement and oversight while maintaining the essential autonomy and freedom that has enabled Arizona charter schools to flourish over the past quarter-century,” he said.
The Charter Association the past several years has fought the reforms sought by Democrats, who are the minority party.