On January 9, the Grand Canyon Institute released its third policy paper on charter school financial practices in Arizona — Red Flags: Overleveraged Debt.
The title of this policy paper speaks for itself. The key findings in this paper are that:
- Arizona’s charter schools hold $2.56 billion in debt and long-term commitments while depreciated property and assets are valued at $1.4 billion. Depreciated value is used because that is what a charter holder could realistically sell their property for if in financial distress. This method also recognizes depreciation as a charter (and district) debit item on an audit.
- Charter schools in Arizona control 7 percent of educational real estate assets while holding 33 percent of all school debt and long-term commitments.
- While charter school enrollment has grown substantially, one-third of Arizona’s charter schools have stagnant or declining enrollment.
- The charter sector is consolidating with 10 charter companies attracting 73 percent of all new enrollment growth from FY 2014 through FY 2017.
- Since 1995, 43 percent of charter sites have closed their doors; 67 of these 427 closures occurred unexpectedly during the school year.
- 80 percent of charters hold debt in the form of tax-free, high interest speculative bonds, guaranteed substantially by projected enrollment.
Therein lies the problem. Charters with stagnating or declining enrollment with debt payments guaranteed by projected enrollment growth are now struggling to meet their financial commitments.
Since June 2017, six schools have closed their doors during the school year leaving families scrambling or gave up their charter voluntarily due to poor financials. Grand Canyon Institute estimates that 27 more charters are in danger of closing in the next year or two. These schools are losing $1,000 or more per student per year. Another 67 are in serious peril, losing between $400 and $1,000 per student per year.
Grand Canyon Institute has shared its data with the Arizona State Board for Charter Schools so that it is aware of those schools that are in serious strife.
As the 2019 Legislature begins its work, Grand Canyon Institute calls on Arizona’s lawmakers to work together in developing a series of charter school reform measures that will improve the sector’s financial sustainability through enhanced transparency and accountability. To this end, based on its three policy papers on charter school financial practices, Grand Canyon Institute puts forward the following recommendations that charters should:
- Guarantee their debt based on property values only, not projected enrollment, unless they can demonstrate a trend in growth. Those that currently hold debt based on projected enrollment growth should be required to report whether they are achieving that growth in their audits.
- Be required to seek out a commercial loan quote and report their chosen debt instrument and interest rate to the Arizona State Board for Charters Schools.
- Be provided with Charter Additional Assistance as early support for schools, and based on satisfactory academic performance and the fair market value of actual facility costs.
- Justify executive and administrative compensation from all tax-funded sources benchmarked to comparably sized district schools.
- Use a standard format for audits that includes detailed accounting rather than generalized expenditures and revenue figures.
- Adopt the recommendations of the U.S. Department of Education’s inspector general with regard to conducting business with related parties and use IRS standards to identify and categorize related-party transactions.
Grand Canyon Institute respects the Arizona State Board for Charter Schools’ efforts to provide oversight of the state’s charter sector. We encourage Governor Ducey and legislators to increase funding to the under-resourced agency so that it can fulfill its oversight obligations.
Grand Canyon Institute representatives have met with legislators from both parties and other stakeholders to discuss proposed legislative and rule changes to improve financial transparency and accountability of the charter sector. We’re confident that working together we can ensure a more financially viable and stronger charter school sector.
If Arizona is going to continue to allocate $1.5 billion per year to charter schools to educate 17 percent of the state’s public school students, then our Legislature should approve legislation and invest the resources to ensure they operate with sufficient financial oversight and transparency.
George Cunningham is Grand Canyon Institute board chairman and a former state legislator. He voted for Arizona’s first charter school legislation in 1994 as a state lawmaker. Curt Cardine is a Grand Canyon Institute research fellow and a retired charter school executive, school superintendent and educator. He is the principal author of Grand Canyon Institute’s policy papers on charter school financial practices in Arizona.