For months, Star Tribune execs have told me to watch for a flood of impact investigations. It’s begun. Three weeks ago, the paper unleashed a three-parter on nursing home falls that may prompt tougher state oversight; a week ago Sunday, the Strib published “Out of Control,” on a charter school “building spree” where high financing costs and lax regulations pluck scarce dollars and can hurt classroom education.
Demonstrating enterprise and changing laws; these are exactly the sorts of stories readers — and media critics — want the Strib to do. Speaking to charter school advocates afterward, they too were angered by much of what Tony Kennedy reported, including high financing fees and a back-scratching deal that netted one school’s insiders $140,000. (The school, St. Croix Prep, published its response here.)
The Strib also documented how the building boom has led to bigger class sizes — not exactly an optimal educational outcome.
Legislators have already declared they’ll take another whack at charter-affiliated building corporations, which own facilities because the schools legally can’t. These nonprofits aren’t as transparent as public entities, acknowledges Eugene Piccolo, executive director of the Minnesota Association of Charter Schools. (According to Kennedy, one building corporation had been led by an embezzler and another by a convicted sex criminal.)
All in all, a pretty good demonstration of how big media can devote major time and deliver a solid public-policy punch. “People are willing to talk about the lease-aid issue,” says DFL State Sen. Kathy Saltzman, one of the piece’s heroes. “They were not willing to talk about this a week ago.”
The Strib shined an appropriately bright light on abuses, but may have also blinded readers to some complexities.
(I should note that even though my wife, the nonprofits lawyer, represents charter schools, she hasn’t worked with them or affiliated building corporations on bond deals. Also, Blois Olson, who writes for MinnPost, represents several of the charter schools in his p.r. practice and has had, shall we say, extensive back-and-forth with Kennedy.)
Using the Strib’s story as a jumping off point, here are a few additional thoughts on lease aid.
It’s not the construction, it’s the enrollment
While absolutely not dismissing the problems the Strib unearthed, you can overstate the charter building boom’s direct impact on taxpayers. For example, consider this Strib chart, which didn’t feature the explanatory content in print:
Given the front-page headline (“Junk bonds fuel a building spree …”), readers could be forgiven for assuming that charter construction was the big factor behind lease aid soaring 3600 percent in 15 years.
But the building boom had little to do with the spending boom. Here’s what did:
“Charter lease aid sees fast rise in use” because charter enrollment is rising fast. Since 2004, lease aid has been capped at $1,200 per pupil unit. (The state weights pupils based on their grade level; kindergarteners lower, high schoolers higher.)
Though a few schools are grandfathered in at a higher amount, the $1,200 cap hasn’t budged since ‘04, and you can see the impact on average per-pupil aid:
Most schools are at or near the cap, meaning whether they built or not, they’re not getting more per pupil unit. For example, St. Croix Prep got $1,155 per pupil unit in 2008, before its new building opened; now it gets the $1,200 max. That’s a hike of $45 a kid, or 3.8 percent — without adjusting for inflation or a rent increase a landlord might charge.
Another school mentioned in the piece, Kaleidoscope, got $1,200 per kid before and after its new building.
As Doug Thomas, who led a charter-school building campaign in Henderson, Minn. quips, “How can they say spending is out of control when there’s a cap?”
Ultimately, complaints about lease aid are really complaints about families choosing charters.
Sure, bigger charter facilities create bigger enrollments, producing bigger lease aid payouts. From 2008 to 2009, St. Croix Prep’s enrollment grew from 485 pupil units to 785, boosting its total lease aid from $558,630 to $942,324.
But that’s a debate about charter enrollment in Minnesota — not whether schools pay an independent landlord or their affiliated building corporation.
It’s true bigger buildings mean more kids can leave public schools and weaken those systems. For some, that’s a feature, not a bug, though as a public school parent, I’m worried about that cannibalization.
Still, buildings (which, by the way, are more often bought than built) are just the tail wagging the dog. Parents were jerking their kids out of public schools well before the “junk-bond boom” — St. Croix Prep had a big waiting list, supporters note.
There’s no free interest-rate drop
Another graphic did score a direct hit. It compared finance costs for a public and a charter building project.
Each cost deal about $15 million. However, the charter paid five times the fees and interest of a comparable public-school project — $2.8 million more in fees and $26 million more in interest.
My eyes popped when I saw that gap. But it is the result of a deliberate policy choice.
Fundamentally, lawmakers decided years ago they didn’t want the risk of charters succeeding or failing. A pretty good cautionary tale was included in the Strib piece: the city of St. Paul lost hundreds of thousands on an ill-advised decision to help fund a charter building.
You want to pay a lower interest rate? Find someone with deep pockets to suck up the risk. Public schools know where to find those deep pockets: your pockets. Public school bond rates are low because they’re backed by the full faith and credit of taxpayers.
For now, charters are forced onto the private market, which naturally wants to get paid more for the higher risk. One expert in the Strib piece advocated that charters get “public bonds.” Yes, that would cut borrowing costs. But in return, do you want to be on the hook?
Chas Anderson, deputy director of the state education department, says her agency would “probably not support” a move to secure state bonding authority for charter buildings. And with the bonding bill already a scrum, do Minnesotans want charters crowding out something else?
By the way, liability is why voters don’t get to approve charter school building initiatives as they do public ones. Taxpayers aren’t on the hook for a default — private bondholders are. Yes, we do pay $1,200 per pupil unit in lease aid. But no one’s screaming for a vote every time a charter negotiates a lease with a landlord, and the public payout is identical.
This is also why, if a charter school fails, its building doesn’t go back to the public. You’re not on the hook for the failure; the bond buyers are, and the asset is how they get some of their money back. Yes, you’re contributing that $1,200 per kid, but again, no one is screaming about getting back identical payments to an independent landlord, and you’ll never see that money again, either.
Getting rid of building corporations no panacea
“Junk bonds” may seem a ripoff — though advocates note they are also used for nursing homes and other privately owned projects that get regular state funding. I heard various back-and-forth about whether lawyer John Cairns’ per-deal fees (low $40,000s to mid-$55,000s) were high or fair, but the Strib provided no evidence that other non-taxpayer methods (say, bank financing) are ultimately cheaper.
Facing “junk bond” rates — which, by the way, weren’t provided save for one deal — some schools decided not to expand, and that’s probably a good thing. A 2009 law change gave charter sponsors and the state education department more power to stop bad deals, taking a bit of air from the “out of control” meme.
As good an idea as getting rid of affiliated landlords may be, I worry the public will conflate “eliminate building corporations” with “lower interest rates.”
For example, Kennedy’s Wednesday follow-up mentioned “letting charter schools own property and eliminating the need for building companies and junk bond deals.”
How would replacing building companies with school ownership eliminate junk bond deals? Investors only care about risk. They don’t care if the payer is a building company or a school.
Anderson says schools with long performance records might get marginally lower rates than a newly formed building corporation, but she calls the impact “limited.”
Piccolo has mentioned state-paid mortgage insurance to buy down risk while keeping taxpayer liability at bay. The mortgage insurance cost could, perhaps, be deducted from lease aid. The concept has potential, but no one knows how high a price underwriters would place on such boutique policies. Would there be a net savings?
Saltzman has other options she’s exploring, but acknowledged no slam-dunk solution: “There are more questions than answers.”
That’s an important thing to remember as the debate moves off the front pages and into the nitty-gritty of policy-making.