School Choice & Charters Opinion

Quality Charter Schools Require Transparent Funding

By Aaron Smith — June 23, 2016 3 min read
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With federal and state education laws mandating everything from curriculum to teacher credentialing to even instructional hours, it’s a stretch to say that policymakers have created the conditions necessary for “laboratories of innovation” to flourish since the first charter schools law was passed in 1991. Despite these barriers, many charter schools have managed to innovate around the edges, while a select few have successfully overhauled conventional approaches to education within the confines of state and federal rules and laws.

Aaron Smith
Although there is much to learn from these experiences some of chartering’s most important innovations from the past 25 years are found outside the classroom. One such example is how funding policies have made fulfilling the basic responsibilities of delivering a quality education--let alone innovating--especially difficult for charters.

In most states, charters don’t receive capital funding, forcing operators to spend about 15 percent to 20 percent of their classroom money on facilities. As a result, it is difficult for quality charters to expand, and one million students remain on waiting lists nationwide. In recent years, tax-exempt bonds have helped alleviate this problem. Charter school facilities bond issuance went up 41 percent in 2014 and set a single-year record with $1.9 billion in financing.

Behind this growth is the Local Initiatives Support Corporation’s 2012 Charter School Bond Issuance study, which found that poor academic performance was a primary cause of at least 73 percent of defaults, nearly half of which did not include academic disclosures. Prior to LISC’s report, academic disclosures were used with varying degrees of rigor and charter bonds were viewed as somewhat risky investments. Unlike traditional school districts, charters don’t have taxing authority and must rely primarily on operational funds derived from parental demand to service debt obligations.

Since 2012, underwriting criteria have evolved and academic disclosures now include comprehensive data on factors that indicate quality such as waitlists, student persistence, college readiness, and even organizational efficiency. Such transparency signals to investors whether demand for a charter’s services will likely persist in the future. It also helps ensure that scarce resources are invested in high-performing schools. As a result LISC’s most recent study in 2015 found that the annual default rate has declined, which it largely attributes to “more stringent underwriting standards that often accompany a maturing credit sector.”

This case study illustrates how transparency, choice, and portable funding can combine to promote quality options for families. Importantly, it also raises questions about how policymakers should apply such lessons to not only the charter sector, but other policies as well. For example, could states use credit ratings and similar underwriting standards to determine eligibility for facilities funding? And what role might third-party evaluations play in providing transparency with education policies such as Education Savings Accounts or even state accountability systems?

Charters have played a vital role in providing countless families with access to more options. Moving forward, policymakers should give them the autonomy necessary to truly become the ‘laboratories of innovation’ originally envisioned 25 years ago, while applying the valuable lessons they have already taught us both inside and outside of the classroom.

Aaron Smith is an education policy analyst at Reason Foundation, a nonprofit think tank based in Los Angeles. Previously, he was senior director of analytics at YES Prep Public Schools.

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