Charter Schools Exploit Lucrative Loophole That Would Be Easy to Close

While critics charge that charter schools are siphoning money away from public schools, a more fundamental issue frequently flies under the radar: the questionable business practices that allow people who own and run charter schools to make large profits.

Charter school supporters are reluctant to acknowledge, much less stop, these practices.

Given that charter schools are growing rapidly — from 1 million students in 2006 to more than 3.1 million students attending approximately 7,000 charter schools now — shining a light on these practices can’t come too soon. The first challenge, however, is simply understanding the complex space in which charters operate — somewhere between public and private.

Unregulated Competition

Charters were founded on the theory that market forces and competition would benefit public education. But policy reports and local government studies increasingly reveal that the charter school industry is engaging in the type of business practices that have led to the downfall of other huge industries and companies.

Charter schools regularly sign contracts with little oversight, shuffle money between subsidiaries and cut corners that would never fly in the real world of business or traditional public schools — at least not if the business wanted to stay out of bankruptcy and school officials out of jail. The problem has gotten so bad that a nationwide assessment by the U.S. Department of Education warned in a 2016 audit report that the charter school operations pose a serious “risk of waste, fraud and abuse” and lack “accountability.”

Self-Dealing

The biggest problem in charter school operations involves facility leases and land purchases. Like any other business, charters need to pay for space. But unlike other businesses, charters too often pay unreasonably high rates — rates that no one else in the community would pay.

One of the latest examples can be found in a January 2019 report from the Ohio auditor-general, which revealed that in 2016 a Cincinnati charter school paid $867,000 to lease its facilities. This was far more than the going rate for comparable facilities in the area. The year before, a Cleveland charter was paying half a million above market rate, according to the same report.

Why would a charter school do this? Most states require charter schools to be nonprofit. To make money, some of them have simply entered into contracts with separate for-profit companies that they also own. These companies do make money off students.

In other words, some “nonprofit” charter schools take public money and pay their owners with it. When this happens, it creates an enormous incentive to overpay for facilities and supplies and underpay for things like teachers and student services.

Millions of Public Dollars at Stake

The Cincinnati and Cleveland charters are prime examples of this perverse incentive structure. In both cases, the Ohio report showed, the charters were leasing property from the subsidiaries of the charter school operators.

In fact, these and other similar subsidiaries were leasing facilities to several other charters in the state. These charters spent twice as much on rent as others in the state.

Thomas Kelley, a law professor specializing in nonprofit law, unearthed similar problems in North Carolina, where charter school management companies obtain “ownership of valuable properties using public funds” and then charge the nonprofit charter schools rent far in excess of what is necessary to cover the cost of acquiring and maintaining the facilities. Because of the self-dealing, he questioned whether the charters actually qualify for nonprofit status under federal law.

The windfalls from these self-dealing practices can be sizable. In Arizona, Glenn Way, a former state legislator, has made about $37 million selling and leasing real estate to a chain of charter schools that he founded and, until recently, directed as chairman of the board, according to local reporting.

The laws around these issues are so permissive that even current state legislators can get into the game. An Arizona state senator, Eddie Farnsworth, who advocated for the state current charter laws, just sold his charter school chain for $56.9 million, netting himself $13.9 million in profits, which is to say nothing of the lease payments the chain will still have to pay him going forward.

One outraged community in Ohio tried to address this self-dealing through the courts and quickly discovered a dead end. When Ohio closed some charters for poor performance, the local charter school board wanted to reuse the leftover books and computers.

The charter company said they would have to pay for the items, even though they had been purchased with taxpayer money. Following the letter of the law, the Ohio Supreme Court agreed, explaining that once public money gets handed over to charter school companies, everything they buy belongs to them, not the public.

This brutal truth prompted legislative reform in Ohio, but just a few weeks ago, the National Alliance for Charter Schools was back in Ohio asking the state to increase funding for charter school facilities.

In our view as scholars who focus on education policy and law, we believe Ohio needs to stick with reform and the rest of the nation needs to get up to speed on the facts.

Stopping Financial Abuses

Cleaning up these practices and closing loopholes is not about being for or against charter schools. It is about good and transparent government. Charter schools, after all, run on public money.

And right now, that money can be spent almost any way the industry sees fit. The time has come for oversight that ensures public money is meeting its public purpose — serving students, not private interests.

In our view, lawmakers should prohibit charter school owners and operators from leasing and purchasing property from their other companies. They should also require state officials to audit facility purchases and leases for irregularities.

Finally, we believe policymakers and lawmakers should enlist those inside charter schools for help. Give charter school teachers and employees whistleblower protections and a financial reward to alert the public to abuses. These steps will not end charter school debates, but they will fix problems that should not even warrant a debate.