SBOE Warned of Risk in Renting to Charter Schools

State Board of Education member David Bradley, R-Beaumont, thinks Texas' charter schools deserve better than the strip malls, warehouses and vacant churches some of them call home — but the SBOE's lawyers told him and other members Wednesday to proceed cautiously with his proposal for the state to invest about $100 million in facilities to rent to charter schools. The lawyers advised the board to get an opinion from the state attorney general's office or risk litigation down the road.

That's because the SBOE wants to use the $23 billion Permanent School Fund to finance the deals, and by law the board has to invest the money for maximum return — a goal that could conflict with investments in charter school facilities. The AG's office can take up to six months to issue an opinion, throwing the proposal into uncertain territory as new board members, some of them opposed to the plan, prepare to take office in January. Gail Lowe, R-Lampasas, the chair of the board, would have to request the opinion, and she did not indicate at the meeting whether she would. (Nor does she seem to support Bradley's plan.)

Board Attorney Gus Fields, of the Strasburger firm in Dallas, said he believes charter schools are “not likely to be able to provide a high return in comparison to the risk you're probably taking. ... There are an awful lot of constitutional and statutory constraints on how the Permanent School Fund is to be used to promote education.” Best, then, to get the AG's opinion, said Gary Lawson, another Strasburger attorney on contract to the board: “Being tied up in controversy is not probably in your best interest."

Bradley has proposed that the state take on the role of landlord as a way to help charter schools deal with one of their toughest-to-finance expenses: real estate. With 40,000 students on charter school waiting lists statewide, said David Dunn of the Texas Charter Schools Association, financing facilities is the No. 1 problem facing such schools, which receive less funding help from the state than traditional public schools. Bradley, who circulated a 47-page draft proposal among board members outlining how the deals would work, has maintained that a bet on charter properties would earn money at rates comparable to many current Permanent School Fund investments.

Other board members agree that charter schools need help, but expressed doubts about the profit they could expect on such investments if charters were given favorable lease terms, as some interpret the intent of Bradley's plan. Lawyers said Wednesday that, while the state Constitution doesn't prohibit investments that benefit charter schools, the board is still bound by its investment standards — namely, investing for maximum return — regardless of who else might benefit in the arrangement. And because charter school properties are relatively risky and their long-term returns and hard to predict, Bradley's plan could arguably violate those standards, they said.

 

But charter schools need help somehow, according to testimony Wednesday at a meeting of the board Committee on School Finance/Permanent School Fund, which Bradley chairs. Two school administrators said starting their schools would have been easier with the stability and willingness of a landlord such as the state. Dunn seemed increasingly open to the idea after saying last month that his association would prefer loan guarantees from the state.

Patricia Williams, superintendent and principal of Ambassadors Preparatory Academy in Galveston, ran down the familiar list of reasons she hears for why new charter schools make for risky investments: Their cash flow is tied to variable enrollment; they have a short credit history; their management teams can have little business experience; their charters sometimes extend just a few years, not the 15 or 30 typical in a loan agreement; they have little upfront cash. Moreover, public school districts are sometimes reluctant to rent space to charter schools perceived to be taking students away from the district. 

So why should the state get involved? “I think all of our goals are the same,” Williams said, “and that is to be accountable for providing a quality education for all of our students, whether it is a traditional public school or a charter school.”

"It would have helped if we could have received more money from state,” added Wilma Green, principal of Mainland Preparatory Academy in LaMarque. “We had to go out and find someone who was willing to take a risk on us.”

Some board members remained skeptical of the proposal. “I hope you understand our dilemma here,” committee Vice Chair Rick Agosto, D-San Antonio, told Dunn. “If this board decides that the intent of this fund is to be in mortgage business, we have to look at this not just from a opportunity to assist. We have to look at it from a business perspective.” Board member Bob Craig, R-Lubbock, said he opposes to the plan (a lawsuit, he said, is “the last thing we need”). Board members Patricia Hardy, R-Weatherford; Cynthia Dunbar, R-Richmond; and Rene Nuñez, D-El Paso, had questions as well.

Most crucial, though, was Lowe, who must now decide whether to request an opinion on the proposal from the AG's office. On Wednesday, Lowe was skeptical, quizzing Dunn on the “favorable” terms he envisions under the plan. Did he mean “less-than-market conditions,” she asked?

“It would have to be a good deal for the charter,” Dunn said.

Lowe said a good deal for charters may be a bad deal for their landlord: “It also has to be a good deal for the Permanent School Fund and its assets," she said, "and the ability to provide something at less than market conditions may not necessarily be what's prudent for our assets."

She and other members pressed the SBOE's investment consultants on what they would recommend to the board. They refused to say, explaining that the risks and payoffs surrounding charter schools are simply not well enough understood. It's not a clear make-or-break plan, said consultant Rhett Humphreys of NEPC, an investment consulting firm based in Massachusetts.

Facing a months-long wait for the attorney general's opinion, interested parties floated other ideas about how to give charter schools a hand. Dunn said a bond guarantee is another way the state could help — an idea TCSA prefers, he said last month. Hardy also backs that idea, which she sees as a “safer position” for the board. Alternately, the Legislature could exempt from property taxes private landlords who rent to charter schools, Dunn said. Taking inventory of public school buildings sitting empty could also help, an idea Craig favors.

In any case, charter school funding is sure to come up in the next legislative session, Dunn said, but with the state facing an $18 billion budget shortfall, “it's probably not something you want to bet the house on.”

 

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