A third of Arizona’s charter schools are running on debt

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According to a study conducted by the Grand Canyon Institute, a third of Arizona’s charter schools are in debt and more than a quarter of them have over $100,000 in losses.

The study looks at a school’s overall finances including their audits, Research Director for Grand Canyon Institute Dave Wells says. When a school runs out of money, they have a net loss so they have to pull from their assets. That eventually leads to having a net loss in assets, and it increases the school’s liability.

“We think about four in 10 have financial stress,” Wells says. “That can vary a great deal. They range from some that have small debts and ones that have already declared bankruptcy. There are ones that are in debt but are among the fastest growing and have a great product like BASIS.”

BASIS has increased their locations from two to 18 in the last eight years. The took 20 percent of the enrollment growth in charter schools over the last four years, Wells says. Based on their 2016 audit, they had lost $10 million out of about $100 million and their negative assets were at $23 million. Wells says BASIS would defend themselves by saying they are refinancing their debt to a lower interest rate.

The charter board is only allowed to close schools for academic reasons, not finance reasons. The board attempted to close StarShine Academy in 2012 for finance problems, but they were forced to allow the academy to remain open. StarShine reached $12.7 million in debt after building a bigger campus. Their projection of higher enrollment was miscalculated, and the students didn’t come. They recently declared bankruptcy.

“When [StarShine declared bankruptcy], they were only spending one dollar out of four in the classroom because they were spending more on their debt service,” Wells says. “The same is true for Phoenix Advantage [Charter School]. Today they are only spending about 25 percent of their money in the classroom.”

For students whose education is founded on investing in them, the charters are failing them. Wells says the Grand Canyon Institute would like to see a proactive action by the charter board to either find a financial improvement plan for the schools or close them down sooner instead of waiting for the middle of the year.

At the moment, the charter board has two options when a school comes up for renewal. They can choose not to renew the school and close it. The other option is to renew it for 20 years. There’s no in between.

“We want the legislature to give the charter board the authority to intervene for finance reasons…,” Wells says. “We think there should be a place for financial probation, where charters can be watched on a careful basis and they have to provide financial improvement plans. The charter board would oversee that and see whether or not they are going to meet those things.”

THE GRAND CANYON INSTITUTE IS RELEASING A NEW REPORT THAT SHOWS THAT ONE-THIRD OF ARIZONA CHARTER SCHOOLS ARE RUNNING IN THE RED. AMONG THE SCHOOLS WITH FINANCIAL PROBLEMS; BASIS, ONE OF THE TOP SCHOOLS IN THE NATION AND, ACCORDING TO THE REPORT, IS DEEPLY IN DEBT. HERE NOW WITH MORE ON THE REPORT IS DAVE WELLS-, RESEARCH DIRECTOR FOR THE GRAND CANYON INSTITUTE. Good to see you again. Thanks for joining us.

DAVE WELLS-Good to see you.

TED SIMONS-Red flags, net losses. What are we talking about here?

TED SIMONS-We are talking about charter schools running in the red. District schools don't do that. Murphy elementary is the exception to that. One third of charter schools are not meeting the financial dashboard the target board put together and a third of them have a hundred thousand dollars in losses.

TED SIMONS- What did you look is at in the report?

DAVE WELLS-The overall finances. If you don't have enough money, you have a loss and you have to pull from assets to do that. Overtime, it can mean a net deficit. You have more liability than assets.

TED SIMONS- How many charter schools are failing or risk of failing?

DAVE WELLS-Four of ten are on financial stress. That can vary a great deal. They range from ones that are small and some have declared bankruptcy like star shine Academy and those growing with a product like basis moving in a positive direction but their finances deserve scrutiny. Millions of dollars of a deficit by 2016. That is a celebrated operation.

TED SIMONS-What is happening?

DAVE WELLS-Basis has gone from two places to 18 in the last eight years. They have taken 20% of the enrollment growth in charters over the last four years. 2016, the last audit we have for them, they Ross: $10 million out of a hundred million dollars and their negative net assets are $23 million. First of all, they refinanced debt at a lower interest rate, but they have had to pay a prepayment penalty and loan reissuance cost that amounted to $10 million. Their loss was on these one-time things. It's like refinancing the house and putting the cost back into the mortgage. That's what's happening with basis.
TED SIMONS- But you get to keep your house. Sounds like they'll stay in operation.
DAVE WELLS- We are told their debt service is looking better, where you have enough to pay your debt. Their rating with standard imports.

DAVE WELLS-Phoenix advantage Academy, star shine, what happened to them? Right now, the charter board can only close school boards for academic reasons not for financial reasons. They were threatened with a lawsuit and renewed the charter instead. Star shine went forward and got in more debt, 12.5 medicals to build a bigger campus, but students didn't come. As a result of that, they had to declare bankruptcy. They are still in operation but declared bankruptcy because they were spending $1 out of $4 in the classroom. Same with star advantage.

TED SIMONS- Is this dumped at the last minute? What did you find out?

DAVE WELLS-It's growing. Charters will be 200,000 students. That's a lot of kids whose financial investment is vested in them. You only get to be ten years old once. If you get cheated out of the education you could have, we don't spend a lot of money on education in Arizona. If charters have to spend on the debt rather than the classroom, it's not an advantage. We would like to see help for the schools or close them down sooner so we don't see them close middle of the year.

TED SIMONS-How many are self-financed?

DAVE WELLS- In terms of debt?

TED SIMONS- In terms of the whole operation.

DAVE WELLS- They have different setups. We have more development industrial authority bonds that they take out. They get these through municipalities. They are not at risk for them. It's an outside lending that they get tax free for investors. Others get money through their own chain or education management organization they are affiliated with. Sometimes when things go wrong there, the leasing company has to forgive things or close it down.

TED SIMONS-The dynamic of the charter landscape, who is gaining? Who is losing students?

DAVE WELLS- A lot of them are struggling. You can imagine if you were going to take national lampoon Christmas movie, Chevy Chase builds a pool to get a Christmas bonus. He finds out he's not going to get the bonus, and he has to kidnap his boss. The charters are like that. We are going to have future students and when that doesn't happen, things go haywire. The charters have stagnant or declining enrollment, but a few big players are taking up 60% or more of the student growth.

TED SIMONS-Give us remembered of the report. What are you finding out there somewhat are you suggesting?

DAVE WELLS- We want the legislature to give the charter board the authority to intervene for finance reasons. Right now when the charter comes up for renewal, they have two choices. They cannot renew the charter, close the school down or renew it 20 years. We think there should be a place for financial probation where the charter can be watched on a careful basis and incorporate improvement plans and the charter board would oversee that.

TED SIMONS- Are they amenable to those ideas?

DAVE WELLS-We hope so. We provided draft recommendations last week. We have had meetings with the charter board. We hope to have a constructive dialogue with them. It's in the best interest of kid's education. We are for charters. We want it to be more financially accountable to have better education for the kids.

TED SIMONS-Managed to bring in national lampoon to the conversation. Thank you for joining us. ¶ ¶

DAVE WELLS-You're welcome. ¶ ¶

Dave Wells: Research Director, Grand Canyon Institute

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