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Location, Location, Location: How Would a High-Performing Charter School Network Fare in Different States?

By Chris Lozier and Andrew J. Rotherham
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A great deal of attention is focused on the sustainability of charter schools, particularly the growing charter school networks that are demonstrating outstanding results with challenging students. In many communities these schools and networks enjoy an increasing market share, and their outcomes are changing the debate about what is possible in education and the levels of achievement that should be expected from low-income youngsters.

As a result, these schools face a variety of political criticisms. However, there is a substantive question that demands the attention of policymakers: Can these networks scale up and become financially sustainable? While some charter school networks are running surpluses because of productivity and other improvements, more than half have slowed their growth and postponed the point at which they expected to be sustainable purely on public dollars. This has led some critics to write the concept off as a marginal or hopelessly challenged idea that cannot achieve substantial impact at scale. In fact, the story is much more complicated. Unpacking the financial side of charter school networks and better understanding its various dimensions reveals the complexity of the issue and the implications for philanthropic strategy and public policy.

To date, most of the analysis of the finances of these schools is anecdotal and does not account for some basic dimensions of the issue—in particular, the shortfall charter schools face in public funding. Charter schools receive, on average, 19% less funding than traditional public schools. The shortfall ranges from 41% in Washington, DC, to 5% in Indiana. As a result, most charter schools rely on significant philanthropic aid to avoid operating at a loss, and most need private funding to help finance growth and capital costs. In the commentary about charter sustainability, the conflation of these different funding sources, the public funding shortfall, and capital and operating dollars creates confusion about where the actual challenges lie and how sustainable these schools are.

HOW THIS STUDY SEEKS CLARITY ON THIS ISSUE

In this paper we do not examine different operating strategies for charter schools or analyze the impact of their often educationally intensive models on finance. Instead, because public charter schools are funded predominantly by public dollars, we simply ask what impact location—and its associated variances in public funding and the cost of providing an education—exert on charter school finance. In other words, we know that charters generally receive less funding than other public schools—a problem made more acute in places where even the funding for traditional public schools is insufficient.

We also know that the cost of providing an education varies considerably across states. In particular, 17% of the nation’s 5,453 charter schools, including some of the highest-profile charter school networks and charter schools in the country, are located in California, a state with high labor and facilities costs and widely considered to have inadequate education funding overall. As a result, we believe that public finance plays an outsized but too little examined role in the debate about the sustainability of public charter schools.

Examining this, we conducted a thought experiment using the finances of Aspire Public Schools, a large and highly successful network of public charter schools in California. Imagine we could drop Aspire into another state, adjust expenses for the local conditions, and adjust public funding based on what local schools typically receive. Would Aspire’s financial position be improved? Would Aspire still require philanthropy—as it does now—to operate its network of schools? These questions are important for the light they shed on two larger questions:

  1. Is Aspire already an example of a high-performing and affordable system of schools that just happens to be swimming upstream in a particularly difficult environment, or does it remain a work in progress toward the goal of becoming a high-performing school network that the taxpayer can afford?
  2. Is California fiscally more challenging than other states, and how do the most populous charter states stack up in this regard?

We hypothesized that in different states Aspire might enjoy higher revenue, lower costs, or both. This paper provides policymakers with a high-level glimpse at what some of these hypothetical situations would look like in practice. By using research on state charter funding and geographic K-12 expense variances as well as a proxy for cost of facilities, we estimate what Aspire’s 2006-07 financial performance would have been in 23 other states (including the District of Columbia) that have charter schools and were included in a recent comprehensive analysis of charter school finances.

Our analysis finds that location does matter when thinking about charter school sustainability. Based on Aspire’s operating margin (total revenue less total expense divided by total revenue), Aspire would have been better off in 18 of those 23 jurisdictions, with the average of those hypothetical operating margins 11.6 percentage points higher than Aspire’s actual result in California. Looked at another way, Aspire would have enjoyed a higher surplus per student in those same 18 jurisdictions, with the average of those exceeding Aspire’s $60 per student surplus by about $1,400. These are substantively significant amounts because, although Aspire is not-for-profit, like any venture it requires a sufficient operating margin for sustainability and expansion.