Shaky Finances Putting the Squeeze on Charters

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Cuyler Reid admits that the finer points of school finance escape her. Meeting a payroll and managing cash flow were not the driving forces behind the former teacher's ambition to help found the Valley Academy charter school in Phoenix.

But Ms. Reid and her fellow organizers are being forced to face the numbers over and over as they navigate their K-10 school--Arizona's largest charter school--through shaky financial times. Higher-than-anticipated building costs and lower-than-anticipated state aid pushed the 488-student school within a whisper of closing its doors earlier this month.

"It's been very difficult," said Ms. Reid, a member of the board of directors at the school and the mother of a 1st grader there. "There's nothing ready-made here--it's all being worked out as we go along."

'Buildings and Bucks'

Valley Academy's financial struggles are a dramatic example of one of the chief stumbling blocks for the fledgling charter school movement. The pioneering schools were intended to flourish because of their flexibility. But many new charter schools are feeling the squeeze of being viewed as neither a public entity nor a private enterprise.

"Buildings and bucks, facilities and funding--those are the issues for charter schools across the nation," said Linda Brown, the director of the charter school resource center at the Pioneer Institute, a Boston think tank.

Each state that allows charter schools--20 in all--has its own version of who can start a charter school and how exactly the state funds it. The schools operate largely outside state control while receiving state funding for the children enrolled. More than 200 charter schools are up and running across the country. (See Education Week, Nov. 29, 1995.)

Valley Academy's troubles come in a state that is being closely watched for taking the most hands-off approach to charter schools. Arizona approved 51 charters in the first year after the 1994 law passed, and the state is poised to open as many as 50 more next fall.

'Last-Second Bailout'

The back-to-basics Valley Academy, like many charters, grew out of discontent with the local public schools among parents like Ms. Reid.

"We had a concept of education we truly believed in, and nobody at the district would listen," Ms. Reid said. She and two other women--a public school teacher and a former flight attendant--decided to take advantage of Arizona's new charter school law and propose their own school.

They scouted a building. Ms. Reid and her husband, who helped write the school's business plan, spent their spare time looking for space to rent. But many vacant schools were empty because they were in need of costly renovations, such as asbestos removal. And owners of office buildings or shopping centers--unconventional spaces that state policymakers have urged charter organizers to seek out--said they did not want children on their property.

Even when the search seemed promising, banks rejected the school's hefty loan applications out of hand because its organizers had no corporate history and no money up front. The state's $90,000 in start-up money, meanwhile, was contingent on the founders' proving that Valley Academy had a place to call home.

Ms. Reid and her colleagues eventually chose to build their own school, a series of 17 portable classrooms set on 10 acres of leased land they acquired with the help of an interested parent.

Since Valley's founders got started later than anticipated--they began assembling their campus in late August--a nine- to 12-month construction project was packed into six weeks, recalled Robin L. Hamblin, a civil engineer who recently joined the school's board of directors.

The project quickly exceeded the original budget, and the facility has run afoul of city health and safety codes for buildings.

A delayed opening on Sept. 25 contributed to the school's falling short of its projected enrollment of 610 students. And that steep plunge has created even greater havoc in the school's finances. The school bases its estimated $1.6 million yearly budget on state aid, which averages $4,000 per student.

In December the school received a check from the state for more current enrollment figures minus the amount that had been overpaid in earlier checks. The school had no cash saved to cushion the blow of receiving a mere $16,000 check, and suddenly it could not meet payroll for its 33 employees.

"We got bailed out at the last second," Mr. Hamblin said. The school secured a nearly $100,000 loan from a company headed by a state legislator from Phoenix who has four children at Valley Academy. And parents and other community members donated money to the tune of $10,000.

Not surprisingly, the school is in the process of rewriting its budget--which the state plans to audit--and though its doors are open, it still may wind up in court over building code violations and face steep fines, according to city officials.

Starting Up

Valley Academy is a case of becoming too big too fast, said Kathi Haas, the director of the Arizona education department's charter school office.

Compared with charter schools in other states, Valley is big. But even though its organizers entered the costly and complex realm of building a school from scratch, they arguably had a leg up on schools elsewhere since Arizona is one of only a handful of states that offer state start-up money for charter schools, according to the Education Commission of the States, a Denver-based clearinghouse on state education policy. States also use federal money to offset start-up costs.

Yet, even in states that provide start-up help, some charter school observers say, policymakers have yet to strike a balance that promises such schools will survive financially in their public-private no man's land. And Arizona officials, who have been cheered by charter proponents for creating few roadblocks to starting schools, say they need to look more closely at how they evaluate applicants' business plans.

"I'm hoping that's something we'll take a very in-depth look at before we actually charter any of the schools for next year," Ms. Haas said.

Unlike public school districts, charter schools cannot levy taxes to help pay for their facilities costs. While some charters receive money from foundations and other private sources, their budgets are built chiefly on state aid. So charters often must dip into that money to cover the cost of building, renovating, and maintaining facilities in addition to paying teachers and buying supplies, said Bill French, a financial consultant for nearly a dozen charter schools in Arizona.

He said almost every school he's worked with has needed its budget rewritten, largely because the organizers underestimated their facilities costs.

Dealing With Cash Flow

In a 1995 survey of roughly 100 charter schools in seven states, the schools ranked their top three obstacles as a lack of start-up money, finances in general, and facilities, according to the ECS.

Charter observers in California, Massachusetts, and Michigan report that many charter schools in their states have had problems securing loans because they have little or no collateral. Cash-flow problems are common, since the way many states dole out aid leaves schools dry for months at a time. And where traditional public schools can float bonds, charter schools can't.

"If public schools didn't do short-term borrowing, they'd be in big trouble, too. On paper, they're often broke," said Eric Premack, a charter school consultant in California.

In that state, many charter schools are public schools that converted to the charter program and can still lean on their local districts for support, he said. And charter schools started by nonprofit groups with proven financial histories also tend to have fewer problems than those started by small groups of individuals. Several charter schools are also succeeding as for-profit ventures.

In response to some charter schools' cash-flow woes, the Michigan Partnership for New Education, a nonprofit East Lansing group that oversees charter schools for the state, has helped create a $10 million loan fund from private businesses. Central Michigan University in Mount Pleasant, which has authorized the majority of the state's 45 charter schools, employs a full-time auditor to work on the schools' finances. In Massachusetts, state officials have negotiated a short-term cash-flow fund with a bank.

While charter school opponents may seize on schools' financial problems as signs of inherent weakness, supporters say they expect such problems to occur. They also are resigned to the fact that money troubles may cause some schools to fail. So far, only a school in California has folded.

Ms. Reid said she wants to make sure Valley Academy isn't next.

"We don't want to see charter schools fail," added Ms. Haas of the Arizona education department. "But we knew that was a possibility, and it's not our place to go and rescue them."

Vol. 15, Issue 18

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