Charter Schools: A Crisis In SubPrime Education

TUESDAY, JULY 8, 2014

Why Charter School Scandals Resemble the Subprime Mortgage Crisis

BY MARK NAISON

 

To understand why  we may be approaching a charter school crisis that resembles the one that developed around subprime mortgages, you need to understand how investment banks and credit rating agencies seized upon an instrument to make homeownership available to people with limited resources as a vehicle to make fortunes and advance careers, leaving the tax payers with a large bill. I think something similar is happening today with charter schools, once seen as an opportunity to provide better educational opportunities for families in low and moderate income neighborhoods. In each instance,  an institution initially aimed at expanding opportunity for those with limited resources became, because of government favoritism and lack of oversight, a vehicle for profit taking on a grand scale by the very privileged that sometimes left those the institution was designed to help in very bad shape

 

  The subprime mortgage was a loan offered by banks and financial institutions to people whose credit rating and financial position was too weak to qualify for a normal 20 to 30 year mortgage at the prevailing interest rate.  To protect the lender, this was done by making the interest rate much higher, with the penalty, in the case of default, being repossession of the home that was purchased. This was obviously a high risk endeavor for the borrower. But because the nation was becoming more economically polarized, with working class incomes plunging and middle class incomes stagnant, the Clinton administration and federal lending agencies started pushing this instrument as a way of keeping the dream of homeownership alive in the nation, especially among working class people and people of color.  Banks, savings and loans, and mortgage companies rose to the challenge, writing millions of these mortgages to people whose incomes and collateral did not qualify them for a conventional mortgage.

 

At times, they aggressively marketed these mortgages, pushing them on people who never dreamed they could purchase a home, triggering a wave of new residential construction in many parts of the nation.  It seemed like a democratic moment in the nation’s history- millions of new home owners, many of them people of color, a boom in residential construction, work for lawyers and bankers specializing in residential loans.

 

 But underlying this boom were shady practices that elected officials chose to ignore. Many of the mortgages were written in ways that hid the risks borrowers were taking with variable rates that rose sharply after the first few years.   There was no way  borrowers were going to be able to pay their mortgages with the rates they would have five or ten years after they were initially written and many  would lose the homes they had purchased.  Worse yet, investment banks began to bundle these mortgages into bond offerings, and sell them as a safe investments to insurance companies, pension funds, government institutions, and high end investors around the world, raking in huge commissions as they did so.  And here, corruption on a grand scale turned a risky lending practice into a destabilizing force of deadly proportions in the global economy.  

 

Rating agencies, seeing huge profits being made by their best customers, the large investment banks, started giving triple A ratings to bonds based on the bundling of individual mortgages which, were they rated, would have been giving a rating of “F.” This practice ended up spreading the risk into every corner of the global economy, as investors rushed to gobble up the bonds, more mortgages were written and sold to meet the demand. And for a while it all seemed to work. Millions of people who never had homes how had them, while fortunes were being made in the writing, bundling and marketing of these mortgages.

 

   But inevitably, the boom turned to bust.  When the high rates on the mortgages started kicking in, millions of people defaulted on their loans, not only losing their homes but setting in motion a chain reaction which destabilized not only the banks which had written the mortgages, but the financial institutions which had bundled them, along with their customers. Some of the largest banks and insurance companies in the nation failed and went under, and others had to be rescued through an injection of funds from the federal government at huge expense to tax payers.  And as the economy plunged into near Depression, the residential housing market was shattered, and along with it the dream of widespread home ownership among the poor. Today, there are 13 million abandoned homes and commercial properties in the US, while large numbers of families live doubled and tripled up in properties which were designed to be private homes

 

      While the comparison is not exact, there are some powerful similarities between what happened to subprime mortgages and what is currently taking place with charter schools, another “short cut” to opportunity which has been seized upon by elites for financial and political gain, to the detriment of those for whom the charter school was initially designed to help.

 

     Charter schools, which are public funded schools which have their own boards of directors and can set their own hiring policies, curricula, and patterns of student recruitment and discipline independent of the regulations governing public schools , were initially created to promote greater experimentation and innovation in public education.  Many early charter schools were created by teachers and parents and promoted innovative pedagogies. Some still do.

    But somewhere along the line, public officials began to see charter schools as a way of circumventing expensive labor contracts with teachers unions and of providing an alternative to public schools in inner city communities which had been battered by disinvestment, job losses and drug epidemics. They invited foundations and the private sector to come in and create charter schools on a far larger scale and with a very different model than parent/teacher cooperatives, using private money as well as public money.  The professed goal was to give inner city parents and students safe alternatives to battered, underfunded and often troubled public schools, something many parents welcomed, but inviting powerful interests to help shape what was essentially an alternate school system free from public regulation and oversight proved to be as dangerous as it was tantalizing.

 

    By the end of the Clinton Administration, “Charter School Fever” had started to spread through Corporate America and Wall Street, spurred on by an investment tax credit that offered huge tax breaks for those who invested in charter school construction.  Not only did the number of charter schools rise exponentially in every city in the country, but self- described “education entrepreneurs” began creating  charter school chains, some of them non profit, some of them for profit,  which attracted  private funding along with public money, headed by powerful “CEO’s” who were sometimes relatives and friends of powerful politicians, and in a few instances, politicians ( or ex-politicians) themselves. Flush with funding the chains began building new schools in inner city neighborhoods where public schools were starved of funding, or in some cases, colonizing existing public school buildings and seizing the best facilities.  

 

Founders of the new chains eagerly embraced the corporate model of management, giving their executives far higher salaries than their counterparts in public education, and creating a climate of insecurity and fear for their teachers, along with data driven performance targets, with the expressed goal of vastly outperforming inner city public schools on the standardized tests which had become the central component of school evaluation following the passage of No Child Left Behind.   

 

    By the middle of the Bush administration, hundreds of new charter schools had been created in cities throughout the country and charter schools were rapidly emerging as the favored strategy for inner city education among an unprecedented array of interests including Wall Street and Silicon Valley, Civil rights organizations, Hollywood and the media, and the Democratic and Republican leadership. The prospect of creating great schools in inner city communities while  offering opportunities for profitable investment, all without raising taxes or increasing school budgets proved irresistible to  a broad spectrum of the nation’s leadership. 

 

Charter Schools, like subprime Mortgages, were increasingly marketed as a Win/Win proposition for all concerned, a way to help the poor while unleashing the creative power of the private sector. The power and breadth of this emerging coalition was revealed for all the nation to see when Hurricane Katrina struck the city of New Orleans in 2005.   

 

Charter School advocates literally seized upon Katrina as the “Perfect Storm,  putting forth a plan to turn New Orleans into all Charter School district by phasing out and closing all public schools in the city. During the last three years of the Bush administration, the plan was put into effect with the full support of the city administration and the state legislature, leading to the closing of scores of New Orleans public schools and the firing of thousands of teachers, many of them teachers of color, replacing them with charter schools staffed by mostly white teachers supplied by Teach for America.

 

   But in terms of Charter School Fever and Charter School Favoritism, the Bush years proved to be only a prelude to what was to transpire in the Obama Administration.  With the appointment of Arne Duncan as Secretary of Education and the launching of Race to the Top, President Obama not only made Charter School Favoritism official national policy, he put hundreds of billions   dollars of federal funds behind an effort to force municipalities to close “failing” public schools (defined as failing exclusively on the basis of student test scores) and replace them with charters. 

 

 At a time when the nation had fallen into a severe Recession, municipalities eagerly complied as a way of getting much needed federal funds, closing public schools en masse and creating thousands of new charters, often with little oversight and only the most perfunctory investigation of the school founders and boards of directors.  Ironically, this was done even though the available research showed that charters did NOT outperform public schools in the same neighborhoods, with comparable student populations.  But data and evidence, when its results were inconvenient, did not deter the President and Secretary of Education from promoting Charter Schools as their preferred solution to problems of educational inequality, a position affirmed for all to see when the President celebrated “National Charter School Week” rather than “Teacher Appreciation Week.”

 

       It is in the Obama years, with the financial incentives of Race to the Top sparking rapid charter school growth with little oversight, that the abuses associated with charter schools began to take on proportions akin to those associated with the subprime mortgage crisis. In the case of the charter school industry, the abuses took two forms:  mistreatment of students, teachers, and families, and fiscal issues ranging from mismanagement to outright embezzlement and fraud.

 

   Many of the educational abuses of charter schools stem from their determination to make sure their test scores surpass those of neighboring public schools, thereby justifying the favorable treatment they receive, and hope to receive in the future.  These abuses include:

 

** Discrimination against Special Needs students and English Language learners. In every city in the nation, charter schools enroll far lower number of such students than public schools in the same neighborhoods.

** Expulsion or harassment of student who do not test well, sometimes right before state tests. In some cities, public school teachers have called this “The Charter School Dump” as they can expect an influx of charter schools students, who they HAVE TO accept, shortly before test time.  On one instance a famous charter school operator in NY expelled his entire 8th grade class because of their disappointing performance on tests

** Draconian discipline policies which would never be tolerated in public schools such as putting students in closets, having them stare at walls, or wear special articles of clothing to indicate they are being punished when they violate school behavior codes.

** Telling students, parents and teachers to avoid all contact with their counterparts in co-located or neighboring public schools lest they be “polluted” or “corrupted” by such contact.

** Failure to hire or retain teachers of color. Charter schools have far lower proportions of such teachers than public schools with comparable student populations.

 

Not all charter schools practice these forms of discrimination. But enough do, with the number growing every day, that the issue cries out for investigation at the city, state and federal level.

 

The same is true of fiscal abuse and political favoritism, which, if anything, may even be more prevalent. These include

 

**Inflated salaries for Charter School CEO’s and founders of charter school chains. One charter school operator in Washington DC is under investigation for drawing more than 3 million dollars in compensation a year.

** Putting public officials, and relatives of public officials on the boards of charter schools seeking public funding. Instances of this have been uncovered in Indiana, Florida, California, and Tennessee and can probably be found in most other states.

**Outright embezzlement of funds by charter school operators, instances of which have been uncovered in New York, Illinois, Michigan, Ohio and Connecticut.

** Involvement of charter school operators in real estate fraud with the intention of inflating the value of properties in neighborhoods where new charter schools are being built.

** The creation of on line and for profit charter schools, without serious oversight, even though such entities have no track record of effective instruction.

** The granting of charter school franchises, in some states, to religious institutions which teach creationism and biblical literalism, and exclude students who do not share those beliefs.

 

  What we have here, to put it bluntly, is a pattern of discrimination and fraud that hurts the very families 

the charter schools were intended to help, allows ambitious individuals to enrich themselves at public 

expense, and ultimately undermines the quality of public education in cities throughout the nation. 

The entire charter industry, riddled with fraud, corruption and discrimination, is poised to slowly build 

to a public education collapse if the trends of cherry picking the best students, dumping the high needs 

kids into public schools then closing them for under performing continues.

 

 It is time that all forms of Charter School Favoritism come to an end, that Charter Schools be subject to the same level of oversight that public schools are, that closing of public schools to make way for Charters stop immediately and that there be no further expansion of charter schools until their patterns of governance and operation fully investigated