Arizona has among the lowest levels of per-pupil funding in the nation, holds the distinct honor of being the worst state in which to be a teacher, and ranks number forty-six of fifty in educational quality. Yet, despite the bleak outlook for education in the state overall, the nation’s top five high schools by rank are located there.

All five schools are operated by the BASIS charter network. The network has grown rapidly, from one location in Tucson, Arizona to over twenty locations across the United States, and even one in China. Although the schools have deservedly gained recognition for their excellent results on the College Board’s Advanced Placement exams, they have also faced criticism for their lack of financial transparency, loose procurement systems, poor governance, and a fairly high expense structure. The schools collectively reported an accumulated deficit of $32 million as of 2017. BASIS is by no means unique, but attracts attention because of its high rankings. With close to 90% of its budget coming from public coffers, one cannot help but wonder if the cost of high performance is justifiable, especially from an investor’s viewpoint.

The data show that charters spend significantly more dollars on administration and significantly fewer on classroom instruction than their fully public counterparts. Although it is difficult to make sweeping generalizations due to the local nature of charter school spending, these findings have been proven across multiple states, including Michigan, Texas, and Louisiana.

Charter systems like BASIS often establish limited liability companies to manage the schools. Educational management organizations, or EMOs, now operate close to thirty percent of all charter schools in the country. EMOs add another layer of opaqueness because they are not required to provide expense reports like their public schools peers. Since charters receive the majority of their funding in the form of federal grants and state taxpayer funds, the lack of transparency is troubling. However, opaque operations and administrative bloat are not the only pitfalls.

Charter schools have been issuing bonds, classified as tax-advantaged municipal securities, to fund their expansion. Through December 2014, investment-grade charter school bonds had a relatively low default rate of 1.2%, but non-investment grade charter school bonds had a 6% default rate, markedly higher than that of junk bonds. In the 2016–17 school year in Arizona alone, one-fourth of charter schools showed signs of financial distress. Overall, the financial failure rate of charter schools in the state is around forty-two percent.

Not all charter schools that show warning signs are at immediate risk of default, and of course, every investment comes with risk. However, the lack of transparency and local government power to regulate charters makes them far less accountable to their de facto investors, the taxpayers, who are forced to foot the bill without the voting rights that typical shareholders enjoy. Better transparency could keep intact the free-market vision behind the existence of charter schools while ensuring sounder financial fundamentals for all parties involved.

Journalist, career coach, & recovering investment banker. Writing about work, business, politics and social change. anitaramaswamy.com

Journalist, career coach, & recovering investment banker. Writing about work, business, politics and social change. anitaramaswamy.com