Are Public Schools And Private Equity A Bad Mix?

Jeff Bryant

A recent article in the New York Times looked at the “dire effects” when private equity firms gain some control over public services like emergency care and firefighting. The reporter should have added education to the list.

As the article explains, most people don’t really know that sometimes when they engage with what has traditionally been the public service sector – basic things we pay our tax dollars for – they are interacting with private interests who have profit as a motive.

This conflict of interest, what the reporters prefer to call “a fundamental tension,” often leads to disastrous results – say, when you call 911 and an ambulance never shows up or your house catches fire and the fire department sends you a big bill for putting it out – all because the private provider wants to cut corners or attach fees in order to improve the bottom line.

But while it’s true, as the article states, “Cities and towns are required to offer citizens a free education,” that doesn’t mean that schools aren’t “fair game for privatization.”

Indeed, just a few days later, a different edition of the Times reported on what private ventures into public education look like in Detroit.

The Turbulent Bazaar Of School Choice

That article by Kate Zernike describes an education landscape where charter schools, taxpayer funded schools that are privately operated, rapidly open and close and parents scramble to get their kids into schools that often deliver a substandard quality of education. Zernike writes:

The unchecked growth of charters has created a glut of schools competing for some of the nation’s poorest students, enticing them to enroll with cash bonuses, laptops, raffle tickets for iPads and bicycles. Leaders of charter and traditional schools alike say they are being cannibalized, fighting so hard over students and the limited public dollars that follow them that no one thrives.

As Zernike explains, the idea was to create competition and choice, so schools would be incentivized to improve or be forced to “go out of business.” Of course, this makes about as much sense as building two competing water systems to see which one operates the best, and then leave the pipes from the “losing” system buried in the ground. But such is the thinking of what is known as “education reform” these days.

Detroit’s system of choice also incentivized a predatory sector to move into the city and figure out how to make a good return on investment by getting just enough students to enroll before “count day” and convincing just enough parents to believe that the school will make their kid a winner despite the fact he or she is woefully below grade level in reading and math achievement.

The predatory nature of the expanding charter school sector is particularly bad in Michigan, where 80 percent of charters are run by for-profit companies, accreditation agencies seem to operate on a “come-one-come-all” basis, and the state’s laissez faire regard for education gives charter management firms lots of leeway to exploit desperate families.

But what’s going on in Detroit is rapidly becoming reality for many American communities, especially in urban centers, where a marketing ethic has taken the place of education expertise in school governance.

Detroit’s market-based school system is a substitute for the traditional system where parents and taxpayers relied on having public schools as anchor institutions in their communities – much like they rely on fire and police stations, parks and rec centers, and the town hall.

The supposed benefit to all this new way of providing education is that parents get a choice about where they send their children to school. But while parents are pushed to pick their schools on the increasingly turbulent bazaar of choice, there are many unanswered questions about who gains and who loses from this.

Indeed, while the first Times article cited above leaves education out of its reporting on the privatization of public services, the second piece leaves unexamined the increasing role of private equity in shaping the risky new education landscape in the country.

Education Endeavor Or Real Estate Venture?

The very same week the Times ran its story about the charter industry’s pillaging of Detroit’s public schools, the Washington Post and other outlets reported on a $250 million gift bequeathed to charters by the Walton Family Foundation.

The Walton Foundation, in case you don’t know, is the philanthropic project of the family who created and operate the Walmart retail chain. WFF and the Bill and Melinda Gates foundation are the largest private donors to the charter industry.

As Post reporter Emma Brown notes, this particular capital outlay from the Waltons is “to help urban charter schools deal with a problem that has sometimes slowed their growth: access to facilities.”

WFF’s commitment, called the Building Equity Initiative, “is expected to create space for an additional 250,000 students by 2027,” Brown reports.

If this Walton donation sounds more like a real estate venture than an education endeavor, that’s because the charter industry as a whole is beginning to resemble a playground for private equity.

As the Wall Street Journal recently reported, “Real-estate investors are showing an increasing interest in charter school development as the demand grows for classroom seats and some state and local governments become more willing to help finance charter-school projects.”

That report ticks off a list of private-equity firms that are raising and investing hundreds of millions of dollars for ventures into acquisition, renovation, and construction of new and existing charter schools.

The article warns that the flood of private-equity money into charters can entice otherwise well-meaning charter operators into “costly deals with developers who are more concerned with investment return than educating children.”

The article quotes spokespeople from the investment community who say there’s no other way for charter operators to get the money to expand their industry. But that’s starting to change as well, the article reports, now that many states “backstop tax exempt bond issues for some charter schools, reducing their capital costs when acquiring facilities.”

These publicly financed arrangements come with great risks, however, due to the high failure rates of charter schools. (Remember, a portion of charters is supposed to fail in order to show the system is “working.”). As school finance expert and college professor Bruce Baker warns on his personal blog, the accumulated debt related to charter schools – many whose contracts may expire well before the maturity rate of the revenue bond becomes due – is starting to resemble a bubble.

What About Democracy?

This is not to say that all charter school operators are in it for the money or folks like the Waltons are investing in charters in order to earn profits. Money is not the only capital good. Political control is also a highly prized good, and the more influence private equity has in public education, there is a danger that democratic control over education may decrease.

Charter schools, for instance, are fundamentally less democratic than public schools. And changing from traditional way of funding education – where taxpayers agree to share costs of schools, and those assets are handed from one generation to the next – to a system in which charter school real estate and operations are controlled by private equity takes control out of the community.

The writers for the Times didn’t do it, but connecting these two articles puts public education in its rightful place as a public good – as vital as emergency care, fire and police protection, and municipal water and sanitation services – rather than a private commodity. With this perspective in mind, ensuring guaranteed access will always be more important than providing choice.

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