Time to End Tax Breaks for Charter Schools and The Ultra-Rich

Originally published on Diane Ravitch’s Blog

Joe Biden’s nomination of Miguel Cardona for Secretary of Education was telling. It shows the incoming administration’s reticence to take a side in the ongoing battle over school choice and standardized testing.

On the campaign trail, Biden drew cheers from teachers for his promise to end standardized testing, but he noticeably never added any such policy to his website. As was well known by teachers in those audiences, federally mandated tests provide no educational benefit but play an important financial role in charter school expansion.

President-Elect Biden did vow to cut federal funding to for-profit charter schools, however this affects only about 12% of charters (who could easily change their model while still enriching their for-profit management arms). Biden has acknowledged charter schools siphon money away from public schools, agreeing to language in the DNC platform to discourage charters from discriminating against high-need students. However Democrats for many years have bent to pressure from deep-pocketed industrialists seeking ever more charter schools.

The same billionaires threatened to fund ‘other’ candidates if Hillary Clinton didn’t continue to signal support for charters. Remember Eli Broad’s explicit ultimatum to withhold campaign cash if Hillary sided with teachers against charter schools? We do.

Broad also donated money to then-senator Kamala Harris, and like many ultra-wealthy education reformers, Broad made good use of the “revolving door”, hiring Biden’s former chief of staff Bruce Reed (2011–2013) to run his foundation.

AS THE DOOR REVOLVES: The same day he nominated Cardona, Biden rehired Reed as deputy chief of staff, despite pre-emptive protest from progressives. Alexandria Ocasio-Cortez and the Squad cited Reed’s past hostility to safety net programs like Social Security. A former top advisor to President Bill Clinton, Reed’s own bio touts his oversight of the 1996 welfare reform law, the 1994 crime bill, and the Clinton education agenda.

In 2014, while serving as CEO of the Broad Foundation, Reed made worrisome comments to Hillary’s education advisors, suggesting in private that whole cities could be mass-charterized in the wake of natural disasters, calling New Orleans an “amazing story”. Reed also voiced support for personalized digital learning using the Summit Charters model.

By 2015, Reed was a senior advisor for Emerson Collective, the “social change” LLC founded by billionaire Laurene Powell Jobs who is also close to VP-Elect Harris. Though it’s unclear how Reed might influence Biden on K-12 education, he is expected to have a “major role” as Deputy Chief of Staff particularly shaping technology and data privacy policy. Echoing Trump, Reed calls for the elimination of Section 230 which protects internet companies from lawsuits over user postings.

TAX BREAKS FOR CHARTERS: Even after watchdogs exposed significant waste and fraud in the charter school industry, hardly any notice was paid to federal tax credits for investors of “nonprofit” charter school construction and financing as public schools struggle for resources. One such program, the New Markets Tax Credit (NMTC), did make it onto Biden’s web page, showing he wants to expand the credit to $5 billion per year and make it permanent.

It might not be controversial to dangle a seven year, 39% tax refund before wealthy investors to start caring about neighborhoods in dire need of manufacturing and low-income housing, but why does the NMTC favor charter schools over traditional public schools which are literally crumbling on our heads?

I tried to find whose idea it was to include charter school construction, financing and leasing deals in the NMTC.

The program itself traces back to 1998 when a “membership organization” called NMTC Coalition, comprised mostly of banks, investment funds, developers, LLPs and LLCs came together under the management of Rapoza Associates, a large DC lobbying and government relations firm who supplies policy briefs and “comprehensive legislative and support services to community development organizations, associations and public agencies”. Sound a little like ALEC?

Legislation was championed by then-Speaker Denny Hastert and fellow Republican Texas Rep. William Archer. The program was signed into law by President Clinton and went live as part of the Community Renewal Tax Relief Act of 2000. It appears charter schools weren’t included until 2004. The California charter nonprofit ExEd claims to have “pioneered” NMTC charter financing deals, boasting of dozens under their belt. By 2017, more than $2.2 billion in NMTC allocations were deployed to expand charter schools nationally.

Their contention was that although charter schools receive operational funding for enrolled students, they must procure and finance their own space, thus they needed a helping hand from Uncle Sam. Today however, 27 states have enacted legislation granting some level of access to district facilities, suggesting a re-examination is in order.

Operators also contended that their charter renewal terms, usually five years, are shorter than typical mortgage terms which range from 10 to 30 years. This need for charters to quickly show results introduced a perverse incentive, the obsession for high scores on standardized tests so the school can not only guarantee their charter renewal, but demonstrate to lenders they are a safe bet (or attract even more expansion capital).

STAKES RAISED FOR TESTING: Because the NMTC tax credit and a host of other federal programs give charters significant fundraising advantages over public schools, it provides financial impetus to target nearby public schools for closure. Anything that can be done to raise standardized test scores — specifically when compared to the nearby public school scores — can mean better credit. This not only gives rise to round-the-clock test prep, but the notorious practice of cherrypicking students.

Shiny new facilities help attract the best test-takers, while rigid “zero tolerance” discipline policies are employed to dump “troublesome” kids back on the public schools. With the deck stacked, superior test scores create the “secret sauce” narrative used to sell politicians on charters and drum up support for more tax breaks.

EMPOWERING WHO? Over the decades, poverty-stricken areas have been repeatedly carved up and designated as “Enterprise Communities”, “Empowerment Zones”, “Renewal Communities” or “Promise Neighborhoods”. In 2004, President Bush announced the “Opportunity Zones” program which Donald Trump renewed in his 2017 tax reform law, with support from Democrats like Cory Booker. This program could potentially dwarf the NMTC because it allows tax credits and deferments for trillions in untapped capital gains income.

For Opportunity Zone deals to be available to public schools, they would need to first sign over their property to investors. But it’s not clear these programs always work. Besides being rife with cases of abuse like the Steven Mnuchin or Rick Scott front-page patronage scandals, a University of Iowa study of 75 enterprise zones in 13 states found little to no economic benefit and noted other harmful impacts such as displacement, gentrification, or giveaways for development in up-and-coming areas that would have happened anyway.

As chronicled by Network for Public Education and noted by Congress, the array of charter school flim-flams has been incalculable — from exorbitant CEO salaries, predatory leases and consulting fees to management firms charging taxpayers to buy out a school’s name and logo. Even school districts got into the act, authorizing charter schools just to generate oversight fees that help plug budget gaps. But there’s a marked difference between sketchy charter operators and multi-billion dollar federal programs helping charters replace existing schools.

A SWEET ONION: The tax credits, designed by the rich for the rich, are only the first layer of the subsidy onion for charter schools though. Linked to the tax breaks are tax-exempt charter school financing bonds traded in investment markets, and then even more inducement via a secondary tranche of bonds leveraged by government subsidies to backstop the first set of bonds against default. One such program, administered through the infamous No Child Left Behind Act is the Credit Enhancement for Charter School Facilities Program, which not only assumes downside risk, it artificially buoys bond ratings and lowers interest rates for the borrower.

These credit enhancements can be backed by federal or state funds, banks or private investors but again, the guarantees may be tied to academic performance benchmarks which precipitate discrimination against high-need students.

To lure developers into distressed neighborhoods, enormous bond guarantee and credit enhancement funds (starting at $100 million) were created under the Community Development Financial Institutions (CDFI) program, enacted as part of the 2010 Small Business Jobs Act. Charter school developers were among those offered access to long-term credit at below-market rates. In 2012, twelve of these CDFI fund management groups came together to form the Charter School Lenders Coalition, underwritten by who other than the Gates and Walton Foundations.

The collaborative melded together ALL of the aforementioned programs with a stated goal of lobbying congressional reps to support more charters. Earlier in 2020, high-profile Democrats including Senators Bernie Sanders, Elizabeth Warren and Chris Van Hollen co-sponsored legislation that would automatically deploy CDFIs in areas impacted by natural disasters or economic crises.

If all these financial instruments are starting to sound complicated, it’s no accident — I’ve spared readers most of the dizzying acronyms like CDEs, CMOs, UDAGs and QALICBs, but to be sure, this is how these nested layers stay under the radar. Even the developers — be they charter operators or wealthy financial backers — require a lot of hand-holding by intermediaries to guide them through the maze of applications and policy intricacies.

This is where yet another funding stream comes in, namely the federal Charter Schools Program, or CSP, which since 1994 has grown to into a $440 million annual fund for discretionary grants found to be so wasteful a third of 2006–2014 grantees never opened or quickly folded. Other recipients were found to be buying skyboxes or private jets, or unscrupulously charging themselves rent in areas where local authorities are ill-equipped for oversight.

PULLING OUT THE STOPS: By the time Betsy DeVos took the helm, the U.S. Dept. of Education wasn’t just awarding start-up money to school-level charter developers but to all manner of other financial go-betweens including charter associations, nonprofits, state educational agencies, charter authorizers, and credit enhancement funds. The DeVoses knew that money rained on the alphabet soup of entities finds its way to real estate and banking interests, trickling on to pro-charter candidates, local PACs, and the media.

A week before the 2020 election, DeVos shamelessly announced the Trump Administration will ignore the prohibition on federal funds for charters affiliated with religious organizations, rupturing the separation of church and state.

The NMTC technically expires on Dec. 31, 2020 but proposals for renewal have been very popular — the 2019 bill in the Senate had 37 bipartisan co-sponsors including Minority Leader Schumer, Amy Klobuchar and center-left Senators Jeff Merkeley and Sherrod Brown. The House version had 130 co-sponsors including Karen Bass and 22 other members of the Progressive Caucus.

If there was an amendment to remove the exclusive carve-out for charter schools from the NMTC, it would allow the community investment to continue (for better or worse) but take the finger off the scale in the competition for educational resources.

Nothing will deter oligarchs like the Koch family bent on undermining public education. It may not deter data-mining tech titans seeking lucrative contracts or access to captive student audiences. It may not deter social engineers who think their wealth ordains them to rejigger education as they see fit. It may not deter Betsy DeVos and her ilk from crusading for taxpayer-funding of religious schools.

But it could deter the garden-variety investor just looking to turn a buck, and shine light on the little-seen giveaways to charter school backers. Also, it will put members of Congress on record either for-or-against charters. We see new House members infusing new energy into the fight, showing Biden, Harris and other policymakers the real-world harms and inequity built into charter school tax credits.

UPDATE: The NMTC program was renewed through 2025, as well as the Empowerment Zone program, as part of H.R. 133, the Consolidated Appropriations Act of 2021. The legislation was quietly passed by Congress on Dec. 21 and signed into law by President Trump Dec. 27 including an unprecedented $12 billion set-aside for Community Development Financial Institutions (CDFIs)

RELATED: Getting rich on Charter Schools with the Clintons’ New Markets Tax Credit (March 20, 2016)

Jake Jacobs is a middle school teacher in NYC and an advocate for public schools.