Yesterday, I contemplated why hedge fund manager and principle founder of Democrats for Education Reform, Whitney Tilson, would be quoted in the New York Times saying that “hedge funds are always looking for ways to turn a small amount of capital into a large amount of capital” as an explanation for financial support of charter schools by Wall Street. Offering the benefit of the doubt, I considered that Tilson may have simply meant that relatively small cash investments could result in returns of human capital in the form of better educated students.
I no longer consider that.
It turns out that United States tax and immigration laws have created a healthy flow of money from the very wealthy into the charter school movement, possibly in ways not exactly imagined by the authors of those laws but which nevertheless have made charters a favored project of quite a few .1% movers and shakers in world capital. The New York Times printed an article back in 2010 that reported the interest of the financial sector in promoting charter schools, but it did not examine the connection of that interest to actual returns on investment. While I cannot dispute claims that hedge fund managers like charters because many of them focus on test scores, are not unionized and they are seen as a way of polishing local philanthropic credentials, there is another reason that money flows into charters: it gives a return on investment.
In this piece on Forbes, financial analyst and author Addison Wiggins, explains the mechanism in the tax code that allows Wall Street to show a return on investment in charter schools:
In part, it’s the tax code that makes charter schools so lucrative: Under the federal “New Markets Tax Credit” program that became law toward the end of the Clinton presidency, firms that invest in charters and other projects located in “underserved” areas can collect a generous tax credit — up to 39% — to offset their costs.
So attractive is the math, according to a 2010 article by Juan Gonzalez in the New York Daily News, “that a lender who uses it can almost double his money in seven years.”
That isn’t sexy Gordon Gecko kind of money, but it is also guaranteed. Put down money to fund the creation or expansion of a charter school, and a firm can double its money in a predictable time table and get to brag to the press about it is bringing new education options to urban areas. The Gonzalez article in the New York Daily News also reported that JPMoragan Chase was setting up a more than 325 million dollar fund to invest in charter schools taking advantage of the tax credits. This strategy is attractive enough that there are firms specifically devoted to connecting charter schools and financial backers.
To be fair, it is entirely possible that this is a more cost effective way of increasing the number of classrooms in some urban areas than traditional school construction projects funded by bonds; I do not currently possess the data to make such an analysis. However, two very important considerations must also be made. First, using the federal tax code in this way means that the cost to the public comes from potentially lost federal revenue instead of being paid in a predictable way at the local and state levels. Second, when a city funds school construction traditionally, it is usually doing so to create schools that are obligated to educate and accommodate every student within its zone. Many charter schools love to brag about their “awesome” results and make incredibly impressive claims about their test scores and graduation rates. As Bruce Baker of Rutgers demonstrates here, such claims rarely can stand even moderate scrutiny. North Star Academy in Newark, NJ, for example, claims that 100% of its seniors graduate, which is true — if you ignore that 50% of the students who enroll in 5th grade never make it to senior year.
So what we have are major charter school chains with deceptive or outright fraudulent marketing backed by the titans of finance who are making hefty returns on investment and are donating significant sums to politicians to keep the returns flowing.
In addition to onshore capital returns, investments in charter schools can be beneficial to foreign investors via the EB-5 visa program. Under this program, foreign investors who spend at least $500,000 in the United States on a development project can earn a visa for himself and his family. According the Reuters article, this path is so attractive to foreign investors that Florida alone expected 90 million dollars for charter schools from foreign investors in 2013. Much like the tax credits for domestic hedge funds, there is an industry developing to connect wealthy donors looking for EB-5 eligible projects to charter schools seeking capital.
To my knowledge none of these actors are channeling investments into neighborhood schools in need of infrastructure funds, estimated at over 250 billion dollars in 2008. But the good news is that some hedge funds are getting a guaranteed return on investments and some foreign born multi-millionaires are getting green cards.
Al Shanker, the former head of the American Federation of Teachers, helped envision the idea of charter schools. In a blog post from 2012, NYU’s Diane Ravitch wrote an open reminder to then New Jersey Commissioner of Education, Chris Cerf, about what Mr. Shanker thought charter schools should do. Charter schools, in Shanker’s vision, were meant to serve students who were most needy and had potentially failed already within other schools — instead, many of today’s charters deliberately avoid or push out those students. Shanker also saw charters collaborating with other public schools. As small laboratories of innovation, their goal should have been to translate what they had learned about working with students to the rest of the public school system. Today, many charters aggressively compete with public schools and far from being a true part of the public education system, large numbers in some states are managed by for profit Educational Management Organizations who are responsible for their bottom lines. According to Ravitch, Shanker turned against charters when he saw a pattern of corporate and for profit interests taking over the movement.
I have no doubt that with 1000s of charters operating across the country, that many of them embody the original vision to provide innovation and collaboration and truly dedicate themselves to serving the most needy of our students. However, today, they are being greatly overshadowed by deceptively marketed brands of charter chains that rake in Wall Street and foreign investment, aggressively lobby state and federal officials for preferential treatment and build their reputations for success on the backs of students they refuse to serve and work to evict from their schools. Eva Moskowitz of the Success Academy chain can summon 7.75 million dollars in donations in one evening while most states’ education spending remains below pre-recession levels.
But, again, the good news is that some hedge funds are getting a guaranteed return on investments and some foreign born multi-millionaires are getting green cards