Are Charter Schools the New Subprime Mortgages?

Yves here. University of Connecticut professor Preston Green and his co-authors warn that the rapid growth of charter schools is producing a charter school “bubble”. Key to the rise of charter has been lax and fragmented oversight, particularly the use of “multiple authorizers” to who approve charter schools, but have no obligation to deal with the mess when schools underperform or fail.

By Jennifer Berkshire. Originally published at EduShyster

A new study warns that we may be headed towards a charter school *bubble*…

sad bubbleEduShyster: It’s unusual to see the words *hair-raising* and *academic study* in tandem, but your new study merits that marriage. You and your co-authors make the case that, just as with subprime mortgages, the federal government is encouraging the expansion of charter schools with little oversight, and the result could be a charter school *bubble* that blows up in urban communities. Do I have it right?

Preston GreenThe problem of subprime mortgages began in part because the government tried to increase homeownership for poor people and minorities by enabling private entities to offer more mortgages without assuming the risk. Under the old system, the mortgage originator was still at risk if the mortgage went into default. With subprime, they were able to spread that risk by selling the mortgages on the secondary market. You had all these mortgage originators that could issue more mortgages without careful screening because they no longer had skin in the game. Now how are charter schools similar to subprime? In the charter school context, charter school authorizers are like mortgage originators.

EduShyster: There’s a great moment in the new movie The Big Short when Selena Gomez turns to the camera and explains to the world what collateralized debt obligations are. Here’s your opportunity to do the same, but for the convoluted world of charter school authorizing.

Green: Promoters of charter school expansion are calling for an increase in independent authorizers, such as nonprofits and universities. Supporters of charter school expansion believe that multiple authorizers will issue more charters, in part, because they are less hostile to charter schools than school districts. However, our research suggests another reason that multiple authorizers result in more charter schools: multiple authorizers are like mortgage originators with no skin in the game. In other words, these authorizers don’t assume the risk of charter school failure. That means that if something happens with the charter school, the authorizers don’t have to clean up the mess. Multiple authorizers may also weaken screening by giving charter schools the chance to find authorizers who *won’t ask questions.* In fact, CREDO has found that states with multiple authorizers experienced significantly lower academic growth. CREDO suggested that this finding might be due to the possibility that multiple authorizers gave charter schools the chance to shop around to find authorizers who wouldn’t provide rigorous oversight.

EduShyster: Your paper raises the spectre that a charter school *bubble* may be forming, particularly in urban areas where these schools are expanding the most rapidly, and often with the least oversight. Can you explain how a charter school bubble would form? And how can I bet against it?

Green: There is an intense push to increase the number of charter schools in Black, urban communities, where they’re very popular because of the dissatisfaction with traditional public schools. Because of this desire for more educational options, these communities are more likely to support policies that could lead to charter school bubbles forming. In fact, I would argue that we are at *Ground Zero* for the formation of such bubbles. Supporters of charter schools are using their popularity in Black, urban communities to push for states to remove their charter cap restrictions and to allow multiple authorizers. At the same time, private investors are lobbying states to change their rules to encourage charter school growth. The result is what we describe as a policy *bubble,* where the combination of multiple authorizers and a lack of oversight can end up creating an abundance of poor performing schools in particular communities.

EduShyster: What’s fascinating and frankly disturbing about your research is how well the subprime analogy fits, down to the edu-equivalent of predatory lending practices in particular communities. But it seems important to point out that these bubbles have their origin in worthy policy goals, like increasing home ownership, or sending more kids to college. Who would be against that?

GreenWho would be against that? That’s the power of the choice argument. Folks in poor communities and Black, urban communities obviously want better opportunities for their kids. And I don’t blame them for really pushing for better options. But I do feel that there are people taking advantage of their desire to get better opportunities by pushing forward more options for charters without ensuring that these schools are sufficiently screened. The argument that I hear all the time that drives me crazy is that *obviously this is a good choice. Look at all the parents who are standing in line.* That’s just evidence that people want a better education. That doesn’t mean that they’re actually getting it. What I’d love to see happen is that we have programs and oversight in place to ensure that their choices have meaning. I’m afraid that we’re going down a path right now where we may not be setting up those mechanisms to provide those assurances.

EduShyster: You make a provocative argument that what could ultimately cause the charter bubble to burst in these communities is lawsuits, including those filed by parents against charter schools on civil rights grounds. Explain.

Green: You’re already starting to see that happen. In New Orleans, for example, charters have been sued for failing to provide students with disabilities with an education. This is such a problem that the US Department of Education issued a guidance letter last year reminding charter schools that if they receive federal money, they also have to comply with federal statutes such as Section 504 or Title 6. You may also start seeing state constitutional challenges, like we saw in Washington state. Where I see this playing out is that if you have too many charters or options that aren’t public having a negative impact on the education system as a whole, you may start seeing challenges in these communities saying that the state is failing to provide children with a system of public education, or that the options provided aren’t of sufficient quality to satisfy the state’s obligation to provide a public education. The assumption is that if kids fail to get an education in a charter school they can return to the traditional system. But what happens if you don’t have that option? You may soon see that develop in all of these urban settings. The really scary scenario that I could see happening is that you end up with all of these options that aren’t traditional public schools with insufficient oversight by the authorizers and no real pressure to get these schools to perform well.  

EduShysterThe paper ends with some very helpful suggestions about steps that might be taken to avert a charter school bubble. Since the subprime mortgage crisis taught us that your advice will be completely ignored, I want to give you the opportunity to share here.

Green: If we’re going to have multiple authorizers, we have to impose standards to ensure that they do a good job, because without those standards there is really no incentive for them to ensure that these schools are operating in an acceptable manner. I should also mention putting sanctions in place to prevent the really squirrely practice of *authorizer hopping,* where schools are closed by one authorizer and then find another authorizer, which has happened quite a bit in places where oversight has been really weak, like Ohio. Further, authorizers should guard against predatory chartering practices, including fining students for discipline violations.

EduShysterAs someone who predicted the subprime crisis (who didn’t???), I’m going to go out on a limb and predict how this paper will be received. You, sir, will be characterized as an *anti-charter ideologue.* Is that an accurate description?

GreenI used to be much more pro charter than I am now. I was really, really, really pro charter. I see my research as explaining the systems aspect of charters. I look at how these schools fit into the system of public schools, and at what terms like *public* and *private* mean in terms of oversight and student rights. This particular paper lays out how instances of fraud and mistreatment of students can happen systematically—how they’re embedded in the system and not just examples of rogue charter school operators.

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  1. Marbles

    “The problem of subprime mortgages began in part because the government tried to increase homeownership for poor people and minorities by enabling private entities to offer more mortgages without assuming the risk”

    With a preamble like that, makes me really wonder if he understands the problem he seeks to address

    1. Yves Smith Post author

      Your comment is a classic example of the cognitive bias called halo effect, of seeing people as either all good or all bad: (btw, the Wikipedia definition is really poor. I wonder what set of forces led it to be edited into being lousy).

      His formulation is sloppy and I should have put a caveat at the top, but it’s not as incorrect as you suggest. The US has very extensive policies to promote homeownership. Moreover, there is a coalition of interests (basically builders, realtors, and the representatives of minority voters) that is pro-affordable housing (although using housing finance as the way to subsidize home ownership results in less, not more, affordable housing. Prices are bid up to reflect the cheap cost of funds). Regulators were also openly in favor of securitization (and mortgage securitization was far and away the most important type of securitization) as a way for banks to use their capital more “efficiently” and they blinded themselves to the fact that this would lead originators to originate whatever loans they could package and sell to investors. Greenspan admitted their was a “flaw” in his faith in “free markets” because investors didn’t do their due diligence on securitized mortgages.

      Moreover, the interviewee is an education expert, and says he was originally a supporter of charters at the end of the interview. For someone like that to come out so hard against charters is quite a reversal.

      1. perpetualWAR

        Yves, I had the same reaction to this description as Marbles did.

        The housing crisis was not, IMHO, stoked by the notion that poor people should buy homes. The housing crisis was stoked by the large criminal bankers figured out that they could rehypothecate the notes to more than one entity! Why not multiply pledge the same collateral? I mean, it was brilliant. If I could sell my car and steal it back to re-sell it to another schmoe, why wouldnt I? Especially since I bought the regulators?

        1. Susan

          Valid point, but the argument is not really that the housing crisis was caused by the need for housing by poor people; the important point is that the criminals had such a good cover for their actions. They could get away with so much because they were able to claim that they were only trying to help poor people get housing, just like would-be criminals in the charter school game can claim they are only trying to help poor kids get a good education. As a society, we have to stop falling for this.

      2. Arizona Slim

        The interviewee isn’t the only one who has done a 180 on charter schools. Diane Ravitch is another prominent example.

  2. Robert Dannin

    Well stated. For ‘unschooled’ readers however you ought to emphasize that in contrast to subprime mortgage lending, the charter bubble is being inflated with public funds. The authorizing institutions are merely straw dogs used by the charter school operators to siphon tax dollars allocated originally for public school districts into the hands of private entrepreneurs. Oversight, if it can be so termed, is a matter of different agencies depending on the state but generally relegated to compliant bureaucrats and pro-charter appointees. The fox is in hen house; children and their gullible parents are victims. As one charter operator candidly told me, “Every potential student is a ‘walking check book’.

    1. Cwaltz

      The housing bubble also was largely guaranteed by public funds. The reality was that if you reneged on paying your mortgage the va,fha,etc,etc guaranteed that mortgage.

  3. B Tilles

    Excellent article. This seems to be another instance of the neo-liberal template of public subsidy and private (for profit) control in action.

  4. Ulysses

    One of the worst aspects of the current system is that there are enormous incentives to build new charter schools, with no incentives to provide for their long-term success. Juan Gonzalez was all over this in 2010:

    “What happens is the investors who put up the money to build charter schools get to basically or virtually double their money in seven years through a thirty-nine percent tax credit from the federal government. In addition, this is a tax credit on money that they’re lending, so they’re also collecting interest on the loans as well as getting the thirty-nine percent tax credit. They piggy-back the tax credit on other kinds of federal tax credits like historic preservation or job creation or brownfields credits.

    The result is, you can put in ten million dollars and in seven years double your money. The problem is, that the charter schools end up paying in rents, the debt service on these loans and so now, a lot of the charter schools in Albany are straining paying their debt service–their rent has gone up from $170,000 to $500,000 in a year or–huge increases in their rents as they strain to pay off these loans, these construction loans. The rents are eating-up huge portions of their total cost. And, of course, the money is coming from the state”

    Privatize the profits, socialize the losses– it’s the Wall St. way!

  5. joey

    The fundamental problem is that educating the public will involve educating both the socioeconomically and intellectually disadvantaged, as well as the truants and the behaviorally disruptive. If there were a way to accomplish that without violating federal guidelines, it wouldn’t take a charter school to do it.

    Jefferson County KY has one of the largest single school districts in the country because the entire county including Louisville is one district with one exception. Anchorage, the richest neighborhood managed to get an independent school district in place before the city and county systems were merged to aid in integration. Since then, traditional and magnet programs have siphoned the industrious and gifted out of the general school population, and there isn’t enough room at the special needs schools. A regular middle or high school is by default a very difficult place to succeed.

    If charter schools are just going to continue to privitize the alternative (magnet/traditional) school path, they will fall out of federal compliance. If they comply, the difficult students’ presence will render the advantage over public schools null.

    1. cyclist

      Just looked up the poverty data for the two districts you mention. Jefferson County has 71.6% of students eligible for free or reduced lunch under NSLP, while Anchorage Independent has one NSLP eligible student out of a total of 387!

    1. armchair

      I had meant to write: to check everything that can go wrong with a charter school, see these links on Deion Sander’s disastrous charter school experiment.

  6. Charles D

    There are a few good charter schools that educate children that the public system has difficulty accommodating. Those are generally independent mom-and-pop charter schools, but even within their ranks there is potential for abuse. The charter “movement” is based on fallacious reasoning: 1) Our schools are failing. Actually SOME schools are failing and we have known for some time exactly which ones they are, the ones in poor communities. 2) The answer to failing public schools is to privatize them. It’s difficult to point to any public service that has been run more efficiently for its customers by private corporations.

    Unfortunately the charter school idea is being promoted by billionaire hedge fund managers and huge corporations drooling over the potential to get their greedy mitts on billions in taxpayer funds. The education of children is not a factor in their thinking.

  7. steelhead23

    I also think this fits the thesis Yves presents in Econned. The Friedmanesque assumption that corporations would not take unreasonable risks out of a fear of failure is wrong. This assumption wholly misses the fact that the corporation is an aggregation of individuals, individuals with self-interests, interests that may and likely do vary from those of the corporation. That is, the corporate goal of profit maximization is subordinate to the interests of the individual – which can be boiled down to money and power. In this way, the responsible entity (the corporation) may not recognize the risk an individual employee is taking on behalf of the corporation. Similarly, a school district should not assume that an individual charter school shares its interest in providing high quality public education to all. Their primary goal is money and power. This would be made even worse if the authority to charter a school was given to entities other than the school district.

  8. Phil

    Once we get a lot of “Dotheboys Hall” type schools then the parents will start screaming and then the lawyers will circle and the bubble will burst. In the meantime the already bad public schools will have deteriorated even further and the spiral of decline will continue. Public education does need fixing, but charter schools are not the panacea for the problem. The issue is not just in the US, the UK has a similar process, they call them Academy’s, and they have the same problems. With a few first wave showcase successes and a second wave of failures and substandard schools.

    1. jrs

      Yes the similar process in the U.K is interesting and makes one wonder, just profiteering off public money everywhere as far as the eye can see? Or the type of stuff they discuss at Davos and the Bilderberg Group?

      I agree there is much wrong with public education, it doesn’t mean education can’t be made even worse though.

  9. GlobalMisanthrope

    But it seems important to point out that these bubbles have their origin in worthy policy goals, like increasing home ownership, or sending more kids to college. Who would be against that?

    That’s the problem. A lot of people should be against that. Buying a home and going to college are not universally good and, therefore, are not necessarily worthy policy goals. That rarely gets acknowledged.

    Home ownership is only good for those who can comfortably afford to buy and maintain a well-built, well-located home in an appreciating market. Sending more kids to college is only good if they can afford to comfortably pay for it or if there are actual jobs waiting at the end that pay enough so that borrowing to pay for college doesn’t result in penury.

    1. jrs

      right, whereas living wage jobs and affordable shelter are universal goods (I could see a possible exception for teenagers who live at home and don’t really need a living wage, but even most fast food jobs are worked by adults now, so all jobs should pay a living wage).

  10. PQS

    One issue that drives me crazy in the entire charter school distraction is that the focus on college for everyone has siphoned away attention from real alternatives for students: trade schools and trade unions.

    In my business, construction, we are crying for skilled workers and have been for several years. Some trades have been in short supply for a decade or more. These are good jobs – most of them are well into the 30$ and hour or more to start up here in the Pacific NW. And a career in construction can be a long term investment for a person, because after you’re too worn out to do the work, you can either own a business, become a supervisor, or otherwise impart your skills and experience and get paid to do it. But the huge distraction of charter schools and etc. means we’ll be untangling that mess for years. Meanwhile, a thousand plumber positions go unfilled every year and the prisons will fill up with disaffected kids who weren’t served very well.

    1. perpetualWAR

      Oh dear God I sincerely want to comment. The PNW (and other places) doesnt give a sh*t about skilled labor in construction. The key is getting the work done the cheapest way possible. I took a huge breather from construction sales. Tried to get back into it. Learned that all the money has been siphoned out. I sat down with a man who had been in the industry forever. He said, “Doing the same work now for less than half the price.” I asked him how he was surviving. He told me he simply doesnt do a job that isnt paying in CASH.

  11. Lambert Strether

    IIRC, reader Paul Tioxon is from Philly, and Philly has had a rich, not so say redolent, experience with charters. I’d like to hear if there are examples from Philly that support the thesis of the article.

  12. Pespi

    There was so much money being made. There’s still some. Makes me wish I had some amorality pills so I could take advantage of these things.

  13. DWelker

    So sorry for having missed this thread yesterday when people where reading top of the front page. The term bubble is being chosen precisely because it is now immediately recognized as code for ‘artificial activity’ while also holding a kernel of economic truth to attract more serious attention by policy makers.

    To wit:

    California School Finance Authority agenda item scheduled for 1/13/16

    Resolution No. 16-01 – Authorizing the Issuance of Charter School Revenue Refunding Bonds in an Amount Not to Exceed $100,000,000 to Finance and Refinance the Acquisition, Construction, Expansion, Remodeling, Renovation, Improvement, Furnishing, and / or Equipping of Educational Facilities Located in Alameda County, Los Angeles County, Sacramento County, San Joaquin County, and San Mateo County for College for Certain, Inc. (Action Item)
    Underwriter: Stifel, Nicolaus & Company, Incorporated
    Trustee: MUFG Union Bank, N.A.
    Borrower: College for Certain, Inc.
    Owner of Facilities: College for Certain, LLC
    User of Facilities/Lessee: Aspire Public Schools operating: 1) Aspire Langston Hughes Academy; 2) Aspire Port City Academy; 3) Aspire Alexander Twilight College Preparatory Academy; 4) Alexander Twilight Secondary Academy; 5) Aspire Lionel Wilson College Preparatory Academy; 6) Aspire Golden State College Preparatory Academy; 7) Aspire East Palo Alto Phoenix Academy; 8) Aspire Pacific Academy; 9) Aspire Titan Academy; and 10) Aspire Junior Collegiate Academy

    NOTE: in this obligated group bond structure, the schools (which get the per pupil state allocation each year) are the tenants, while the landlord is a private (not-for-profit) subsidiary LLC controlled by the same management company who charges fees to the same tenant schools.

    If any of the NC readers who are muni bond types and want to help dig into this, I work at the National Education Association and we might be able to work something out.

  14. Wayne Gersen

    I don’t see any financial peril here. The profiteers won’t lose any money if the charter bubble bursts nor will the taxpayers who’ve diverted their funds to the profiteers so they won’t have to have their taxes raised to pay for “lazy union teachers”. The only losers in this are the students who are enrolled in for-profit charter schools that either push them out because their test scores are too low or their behavior is problematic, the handicapped minority students who are barred from attending, and the children whose parents make no effort to either seek out a better school for their children or to speak out against the underfunding of their local public schools. By the time this gets resolved in the courts the students who were short-changed will be out of the failing schools.

    Finally, and most discouragingly, court rulings requiring economic and social justice which are presented as the solution to this problem don’t have a record of success. In 1954 the SCOTUS mandated that schools be integrated with all deliberate speed and 42 state supreme courts have acted on or are facing lawsuits over inequitable funding…. and both segregation and funding inequities persist. Why? Because legislators pay no attention to the powerless and voiceless children being raised in poverty. In this case the legislators have the added dividend of getting campaign contributions from the hedge funders who want to privatize public schools.

    1. Yves Smith Post author

      HuH? Did you miss that real estate prices (outside vacation spots) are strongly influenced by the quality of schools? So if a charter school delivers bad results, or worse, fails or is decommissioned, property values will tank, which will ravage the tax base.

    2. Wisdom Seeker

      > I don’t see any financial peril here.
      > The only losers in this are the students…

      That is the biggest pair of contradictory statements I’ve seen on the internet in quite a while…

      Although I hate the phrase “human capital”, it’s worth remembering that a nation’s greatest products are its children. Everything depends on the aggregate success of the younger generations. If they are numerous and productive, everyone will prosper. If they are undereducated, make poor decisions, become a burden to their elders and parent poorly their own children, it’s awfully hard to sustain the economy, support all the political, provide a safety net for retirees, etc.

      It’s also worth realizing that many of the United States’ great entrepreneurs (such as Carnegie), especially in the 1800s and 1900s, grew up in poor but ambitious and supportive communities. The children of elites are more likely to inherit the status quo than to change it.

  15. Elizabeth Hanson

    Ed-reform, largely funded by Bill Gates and in the making for many years, has as its focus the privatization of public education. Why? Because there is a lot of tax money, billions and billions in K-12 and wall street / corporate interests want that money. So, first they use a narrow curriculum to dumb down the kids… then they give them hard to pass tests…. then they deem the schools are failing… then they take them over with for profit charter schools. It’s formulaic. I’ve been a teacher for 30 years and along with my husband, an educational researcher, we wrote this book. Lots of money, lots of darkness…

  16. allan

    Charter schools in NC less diverse than traditional schools [News&Observer]

    A report showing the student population at state charter schools is wealthier and whiter than student bodies at traditional public schools was pulled Wednesday from the State Board of Education’s consideration.

    Lt. Gov. Dan Forest argued that the report, intended for the legislature and full of data on charter school enrollment, demographics and costs, was too negative.

    “The report, to me, did not have a lot of positive things to say,” he said.

  17. Paul Hirschman

    Don’t ever forget: education “reformers” all send their kids to private schools–you know the schools that ignore Common Core Learning Standards, Annual High Stakes Testing, College and Career Readiness. These elements of “education reform,” according to Bill Gates, create a national market for education “goods and services.” Once, that is, public money–about $600 billion annually around the nation–is free to be spent by education entrepreneurs who get contracts to provide every aspects of educating young Americans. (Buildings, teachers’ salaries and benefits, sports turf, professional development, food suppliers, subs, summer programs, computers, and on and on and on.)

    So the owners of the educompanies never risk subjecting their own kids to an inferior education, while, simultaneously getting their hands on an annual stream of $600 billion of taxes to leverage their new corporate education paper.

    Rich kids get a real education, while the money set aside for everyone else’s kids, gets lifted by educrooks and leveraged into even greater public debt. (Shades of Michael Hudson) (Who needs or wants an educated citizenry, anyway? Slaveowners knew the folly of educating peons…wisdom our leaders are rediscovering.)

    Plutocrats and rent: the new America. Free public education operated by self-taxing communities–an idea whose time has passed.

  18. Wade Riddick

    The charter school movement is a way for elites to skim the public education budget through contracting fraud. It provides an end-run around Progressive Era restrictions on public bid laws and campaign donations from educators.

    Public school systems put out bids for meals and textbooks through a transparent public process to prevent politicians and their cronies from defrauding taxpayers. With campaign finance being the corrupt miasma that it is, these checks are hardly foolproof today but today’s horrendous greed chafes under even these inadequate safeguards. Hence charter schools.

    Charter schools are under no such restrictions and they can contract and subcontract to their hearts content. There are all sorts of ways to skim. They can flip real estate back and forth to jack up the “rents” paid by the school to its “landlord.” They can pad the textbook and food bill. That last one is a particular favorite of privatized prisons. Prisoners may get $18 a day budgeted for food but somewhere along the way prisoners wind up with $2 – which might be exactly what they’re making for a full day of work.

    And charter schools don’t have public employees to worry about. Their employees can give money to politicians and participate in campaigns to whatever degree they’d like – fully subsidized by taxpayer funds (yet no doubt under the gentle guiding hand of their hedge fund managers).

    The 2008 implosion was an insurance fraud scheme that came about because, for the first time in about four centuries, insurers sold multiple policies on the same risk to people who didn’t have any other direct financial stake in the insured asset. Among the many ways taxpayers were defrauded, these counterfeited investments were palmed off on pension funds. Bad money was exchanged for good.

    This is part of a much larger pattern of elites privatizing public services to skim off the budget. For-profit jailing becomes kidnapping for profit. For-profit military contractors yield endless war. Privatized tax collection is on its way and will descend into outright extortion under color of authority – just like it did prior to the Magna Carta.

    It turns out there’s no liberty in Libertarianism.

    What hath Paulism wrought?

    Public campaigns are a public utility. They provide information to the public about their choices for public office. Whenever funding is privatized for public service the result is a raffling off of offices (and budgets) to the highest bidder.

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