Do Charter Schools Hurt Public School Finances?

A new Moody’s report says more charter schools mean more problems for traditional public schools.
by | October 16, 2013
AP/Joe Raymond

The growth of charter schools is choking public school resources and hurting their credit ratings, argues Moody’s in a new report.

The effect is especially pronounced in the urban centers of the Northeast and Midwest, where population declines and a steady shift to greater charter school enrollment is draining schools of cash. The problem comes down to those enrollment factors, a system’s ability to adjust spending and state policies promoting the growth of charters.

Nationally, charter schools claim 4.6 percent of overall enrollment, up from just one percent of all students in 2000. Charter schools are independently run but receive public money based on the number of students they enroll. With their own school boards, they’re typically free to experiment with disciplinary and instructional methods.

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The study didn’t include costs of specific credit downgrades or a comprehensive list of districts that have reported credit pressure but noted that Detroit and Philadelphia have had a particularly hard time with demographic and enrollment shifts. Detroit’s population dive between 2000 and 2010 accompanied a shift toward greater charter enrollment, leading to a 58-percent decline in public school enrollment.

(Chart via the Moody's report.)

The National Alliance for Public Charter Schools criticized the study, saying Moody’s unfairly focused on two districts that aren’t representative of the financial situations in other cities.

“For Moody's to ignore the fact that 18 other urban schools districts around the country have at least 20 percent of their student populations enrolled in charter schools and are in fine financial health is disconcerting and does a disservice to investors,” said Nina Rees, the group’s president, in a statement.

The group pressed the case argued by many charter organizations that all state funding “should follow students” wherever they attend school. That will inevitably lead to “bad” situations for a “handful of school districts,” but the ultimate question is what’s best for the academic outcomes of students, the National Alliance argues.

Moody’s says it’s not that simple, and Detroit illustrates another problem emphasized in the report. In theory, losing a student to a charter school would be a wash because, though the district isn’t getting state money for that kid, it also doesn't have to educate that student. But the reality is that traditional public schools face obstacles to reducing staff or making serious operational changes because of collective-bargaining agreements and the difficulty of closing underutilized schools. Charter schools often lack unionized workforces.

A few districts have turned to strategies that could serve as models for districts looking to drastically cut costs to align with current enrollment. Highland Park and Muskegon Heights school districts in Michigan are outsourcing school operations to private charter companies.

Policies such as state-instituted caps on the number of charter schools and a limit on the number of bodies that can authorize new charters limit such schools growth. Moody’s blames Michigan’s “notable” number of credit-stressed districts on its emphasis on school choice, which has fueled a flight from the state’s urban centers to its suburban districts.

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