Education Funding

Growing Pains

By Lynn Schnaiberg — March 01, 1996 6 min read

Cuyler Reid admits that the finer points of school finance escape her. Meeting a payroll and managing cash flow were not what attracted the former teacher to the idea of creating the Valley Academy charter school in Phoenix. But Reid and her colleagues at the academy have been consumed with the task of making ends meet since they opened their K-10 school--Arizona’s largest charter school--this past fall.

In fact, higher-than-anticipated building costs and lower-than-anticipated state aid pushed the 488-student school within a whisper of closing its doors in early January. “It’s been very difficult,” says Reid, a member of the board of directors at the school and mother of a 1st grader there.

Valley Academy’s financial struggles provide a dramatic example of one of the chief stumbling blocks for the fledgling charter school movement. Charter schools are public entities in that they subsist on taxpayer dollars. What sets them apart in the states where they exist is their freedom from many of the rules and regulations that govern other public schools. Advocates believe that the independence enables them to better meet the needs of their students. But as Valley Academy and other schools like it have discovered, that independence has a downside when it comes to meeting fiscal responsibilities.

“Buildings and bucks, facilities and funding--those are the issues for charter schools across the nation,” says Linda Brown, 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 rules for who can start them and how they will be funded. Nationwide, there are more than 200 such schools. Arizona alone approved 51 charters in 1995, the year after the state law allowing them was passed, and as many as 50 more are expected to open this fall.

The back-to-basics Valley Academy, like many charter schools, grew out of discontent with the local public school system. “We had a concept of education we truly believed in, and nobody at the district would listen,” Reid says. She and two other women--a public school teacher and a former flight attendant--decided to take advantage of the state’s new law and create their own school.

Reid and her husband, who helped write the school’s business plan, began looking for space to rent. Many of the vacant schools they looked at were empty because they were in need of costly renovations. And the owners of office buildings or shopping centers--spaces that state policymakers have urged charter organizers to consider--said they did not want a school on their property.

Then there was the problem of start-up money. Banks rejected the school’s hefty loan applications because its organizers had no corporate history and no up-front money. And the $90,000 the state provides for charter start-ups was contingent on the founders’ proving that the academy had a home.

Reid and her colleagues eventually decided to build their own school, a collection of 17 portable classrooms set on 10 acres of leased land acquired with the help of a parent. But because they got off to such a late start--construction didn’t begin until August--the organizers had to pack a 12-month building project into six weeks. Even so, the opening date had to be pushed back to Sept. 25, and the project quickly exceeded its budget.

Valley Academy had expected to open with 610 students, but with the delay, far fewer actually enrolled. And that created even greater financial strains. The school had based its estimated $1.6 million budget on state per-pupil aid, which averages $4,000 a student.

In December, it received a check from the state reflecting its current enrollment, minus the amount the state had overpaid the school earlier. With no cash cushion to fall back on, organizers found they could not meet payroll for their 33 employees. A bailout came at the last minute: The school secured a loan for nearly $100,000 from a company headed by a state legislator who has four children at Valley. And parents and other community members donated some $10,000. As of January, Reid and the others were busy rewriting their budget.

Valley Academy is an example of a charter school that became too big too fast, says Kathi Haas, director of the Arizona department of education’s charter school office.

Still, Valley had an advantage most charter schools don’t: Organizers did eventually get start-up money from the state. According to the Education Commission of the States, a Denver-based clearinghouse, Arizona is one of only a handful of states that offer charter schools up-front money to get going. But some say even that isn’t enough. States, they argue, need to do more to ensure that charters can survive financially.

In Arizona, which has been applauded for so openly embracing charter schools, education officials concede that they may need to look more closely at applicants’ finances and their prospects for survival. “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,” Haas says.

Unlike public school districts, charter schools cannot levy taxes to help pay for their facilities. While some charters receive money from foundations and other private sources, their budgets are built chiefly on state aid. As a result, the schools often must dip into operating funds to cover the costs of building, renovation, and maintenance.

When approximately 100 charter schools in seven states were asked in a 1995 survey to rank their top three obstacles, those most often stated were a lack of start-up money, finances in general, and facilities. Charter school experts in California, Massachusetts, and Michigan report that many such schools in those 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 most 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,” says Eric Premack, a charter school consultant in California.

In California, many charter schools were once public schools that decided to convert. Some of these schools, Premack says, can still lean on their local districts for some support. 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.

To help charter schools in its state weather cash-flow difficulties, the Michigan Partnership for New Education, a nonprofit group, has helped create a $10- million fund that schools can turn to for loans. In Massachusetts, state officials have negotiated a short-term cash-flow fund with a bank.

While some charter opponents seize on the schools’ financial problems as a sign of the concept’s weakness, supporters say such predicaments are inevitable. They also say they are resigned to the fact that money troubles may result in some school failures. So far, only one charter school in California has had to fold for financial reasons.

Meanwhile, Cuyler Reid and her colleagues at Valley Academy are working hard to make sure their school isn’t next. “There’s nothing ready-made here,” Reid says. “It’s all being worked out as we go along.”

A version of this article appeared in the March 01, 1996 edition of Teacher as Growing Pains

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