Tony Kennedy, writing in the Strib last week, addresses the latest charter school “crisis”:
Minnesota’s charter school movement, which sparked a national rethinking of public schooling nearly two decades ago, has been infected by an out-of-control financing system fueled by junk bonds, insider fees and lax oversight.
“Out of control”.
Interesting bit of hyperbole, there. One might almost say it’s “unjournalistic”.
The vast majority of Minnesota’s charter schools putter away, doing their workadaddy hugamommy job of teaching kids, in rented quarters around the state.
Given the cost of rental property, especially in the Metro area, many charter schools gravitate toward low-rent warehouse, industrial and “incubator” space. The western part of the Midway – full of low-rent office and warehouse buildings – is home to many charter schools; half a dozen are clustered within a few blocks of Fairview and University. The rental space is affordable and up to code, generally – although if you’re used to public school spaces, to say nothing of showcases like Saint Paul’s Arlington High School, it’ll feel like you’re at a school set up in the garage.
And so some charter schools look for a home of their own, if you will, for reasons not a whole lot different than renters become homeowners; to have a secure home base; to be able to plan without the wacky exigencies of leasing; to have a “home”.
So some charter schools have found a way to own their own buildings.
It took some doing, of course – because state law forbids it, at least directly:
State law prohibits charter schools from owning property, but consultants have found a legal loophole, allowing proponents to use millions of dollars in public money to build schools even though the properties remain in the hands of private nonprofit corporations.
That’s one of those “tomayto-tomahto” things. Another way to phrase it – arguably more fair and accurate – would be “state law prohibits charter schools from owning property, but they have found a legal loophole, allowing proponents to, in effect, rent their own schools from shadow corporations they set up to build and operate the property”.
The key to making it all work is the state’s lease aid program, which was created 11 years ago to help spur competition in public education by offering rental assistance to groups promoting alternatives to district schools. In the beginning, many charters were located in dumpy strip malls and received no real-estate grants.
But the once-obscure program has snowballed into one of the fastest growing expenses in the state, with building projects receiving little of the vetting that typically accompanies other public works.
It works like this: the charter school’s governing board starts or affiliates with a company that, on the one hand, supervises construction and, on the other hand, floats a bond issue to pay for the building.
Now, when a public body – say, the City of Minneapolis – floats a bond issue, they go into it with a certain amount of collateral; the city owns snowplows, artistic drinking fountains, computers, police cars, City Hall and other things that can be hocked to make the payments on the bond. More importantly, they have taxing authority, meaning that if things get tight they can jack up taxes to make sure the payments get made.
Big corporations, likewise, have collateral to put up against bonds they might float. Not “taxes” per se, which is why corporate bonds are a little less popular and secure – a lot less secure in the case of, say, General Motors, after the Obama administration overturned contract law to make sure the unions got paid ahead of bondholders.
But I digress.
Now, if you’re a tiny little entity – say, a barber shop – you can float a bond issue, presuming you jump through a few legal hoops. Of course, most people won’t invest in your bond, since you have no collateral other than a Barbasol jar and some chairs, and you can’t raise taxes. But entities somewhere in between the barber shop and GM can float bonds. They have less revenue and fewer assets than Fortune 500 corporations; they have more than the corner barber shop; they can’t raise taxes on anyone. So the bonds are a little, maybe a lot, secure an investment than a municipal or big-corporate bond. Hence bond buyers expect more interest.
Now, the problem is that since the eighties, and the Michael Milken scandal (which, in those innocent days before Enron and Bernie Madoff, was considered a big scam), these bonds have had a name; a very pejorative name. A name that the media uses for them as a sort of shorthand – perhaps not understading what it means, or perhaps understanding it perfectly but shooting for that whiff of pejoration that they need to sell the papers (and, perhaps, fulfill the mission that the story’s sources intended fulfilled):
In the past decade, 18 charter schools have been built with $178 million in junk bonds, with financing costs on some projects chewing up nearly a quarter of the funds raised. Twelve more charter schools have taken steps to buy or build facilities, and the state projects annual spending on lease aid to reach $54 million in 2013, up from just $1.1 million in 1998.
The technical definitino of “junk bond” is a bond that isn’t rated by any of the big ratings services – Moody’s or Standard and Poor. It doesn’t mean – to someone in the bond business – that a bond is bad, or good for that matter; merely that it’s un-rated. Of course, rated bonds are generally considered safer than unrated ones – which is why the unrated, “junk” bonds have to pay higher interest.
In a sense, “Junk Bonds” are no different than subprime mortgages; they are a way for a group that can’t ordinarily float a bond issue to get financing; the interest is higher and the terms are worse than the more-secure bonds – municipals and the like – but that’s how the market deals with getting financing to less credit-worthy people and organizations. The only major difference is that nobody is requiring the Federal Government to pay for “junk” bonds that default.
But to “the American street”, the term “Junk Bond” has a corrosive connotation. Now, I’m not sure if the Strib’s Tony Kennedy knew this – but I’m going to suggest that whomever his “sources” are on this story do.
It’s not only unwarranted, but it paints charter schools with a brush that slops plenty of paint over onto regular schools, transit districts, water and soil commissions, and municipal governmetns. Joe from Como Park – a person with considerable in-depth professional knowledge of how local government and bonding works, and who wrote to me under an assurance of anonymity – emailed me about the article:
…look at any small-town municipal bond for a fire station or sewer plant or for that matter, any school district building bond. Local governments routinely pay hefty fees to financial consultants to help them with the bond process, people like the Ehlers firm mentioned [in the Kennedy article]. Bond financing is a highly regulated jungle of red tape and the people who know how to navigate it are worth their hire. Criticizing charter schools for paying the same sort of consultant fees that school districts routinely pay for the same services is sheer gall.
People who know how bonds work, know that. Most of Kennedy’s audience are, unfortunately, not part of that particular “in” crowd.
So why the concern? Besides the money I mean?
Well, here’s one reason:
State lawmakers are frustrated by the building boom. Since 2000, at least 64 public school buildings in the metro area closed because of declining enrollment. Charter schools are responsible for recruiting away some of those students.
Voila; it’s the competition. Charter schools are an example of “school choice”; parents are choosing; the district systems are losing. The establishment sees that parents are fleeing; their response is to try to put a bookhself in front of the escape hatch.
“When district schools are closing, should we allow charter schools to build new buildings?” said Rep. Jim Abeler, R-Anoka, who was cleared in 2001 of legislative ethics charges for voting to boost lease aid even though he personally received the funds from a charter school he helped start. “These are being built with 100 percent state moneys, but who is minding the store on using that money well?”
More importantly, and disturbingly, Abeler was one of two members of the “Override Six” cleared by voters for voting to overturn Governor Pawlenty’s Tax Bill veto. I don’t know Rep. Abeler’s voting record as re charter schools, but I’m going to guess from his statement above that he’s doing his best to stay nice ‘n tight with the Minnesota Federation of Teachers (please correct me if I’m in error).
“Out Of Control” and “Junk Bonds”; that’s two inflammatory, almost disinformatory terms used so far to describe the charter school building boom in this piece. Why not go for the trifecta?
Jim Markoe, a board member of both St. Croix Prep and the building company, said the insider payments were cleared by bond lawyers involved in the deal.
“Everybody has done everything morally, ethically and legally, and I’ll stand by that until the day I die,” Markoe said.
Sen. Kathy Saltzman, D-Woodbury, chair of the Minnesota Senate Subcommittee on Charter Schools, said lawmakers had no idea charter school insiders were taking such large fees on building projects.
“If they have enough lease aid to do bond deals that pay salaries or one-time bonuses to insiders, obviously they are getting more lease aid than they need,” Saltzman said.
It has such ugly connotations these days. It was “insiders” that brought us the Savings and Loan collapse, the Enron debacle, the “backdating” scandal at local corporate giant United HealthGroup, and on, and on.
And the fees involved? Issuing bonds is complex – as complex as a hundred mortgage closings all in one deal. Attaching assets, taxes and collateral to what amounts to an otherwise-unsecured IOU – which is basically what a bond is, whether it’s issued by the United States Treasury or Kickapoo Creative Arts Charter and Construction – takes some fairly critical, and rare, expertise, both financial and legal. Like getting a smooth house closing, or sueing a corporation, it’s not something that can be left to chance, or amateurs; professionals cost money.
On Wednesday, we’ll finish going through Mr. Kennedy’s piece.
And on Friday, we’ll take the concept of “insider” a step further, and try to discuss Mr. Kennedy’s sources for this story, and their motivations.