The Charter Bond Time Bomb

Inspired by the stunning NEPC report on just how deeply and thoroughly charter schools are used as a mechanism for sucking public tax dollars into private pockets, I've been trying to read up on this stuff, in particular by looking through the work of one of the reports co-authors, Bruce Baker (Rutgers University). Baker operates the blog School Finance 101, and it's an excellent resource for those trying to make sense out of the arcane world of, well, school finance.

I'm dipping into Baker's work to lay out one simple progression that takes charters from vexing to terrifying in just a few steps of property acquisition, in the process setting a ticking time bomb. I'm going to try to lay this out in my own words, mainly as an exercise for myself (one of my personal and professional principles of learning is this: want to really understand something? try to write about it), but I recommend you follow the links and read the full originals. (Also, any mistakes in what follows are mine, not Baker's).

STEP ONE: Double Purchase and Zero Ownership

In this piece, Baker explains how the taxpayer buys the same property twice, and ends up with no control over it. Here's how I think it works.

I buy a house. Well, I take out a mortgage on the house. But now I'm on the hook financially for the house. I make my payments. I may even pay it off.

Then Chris comes along and proposes to buy the house from me. And Chris's proposal is that I take out a mortgage for Chris, but give Chris the deed to the property.

So now I have taken out two mortgages on the same piece of property. I have bought it twice. And it now belongs to Chris.

STEP TWO: Kick the Can and Light the (Very Long) Fuse

With schools, the device used for getting yourself in debt isn't a mortgage, but a bond.

A bond works like this: I loan you some money, and you promise to pay me regular interest on it. You also promise to eventually pay me back the principal when the bond "matures." That's why the highest-rated, most secure bonds are loans to things like municipalities-- organizations that nobody expects to vanish and skip out before the bond matures and the principal is due. That's important, because a bond is different from stock: when you buy stock, you own a piece of the company, but bondholders own nothing except the bonds.

Here is the scariest chart from Baker's recent piece on Subprime Chartering.

That's right. Billions of dollars in debt is out there, and it doesn't come due for decades-- well after the time that charter businesses have to decide whether or not to stay in the business. If I were an unscrupulous charter operator, I could float my charter on an ocean of bond money, use a variety of devices (see that NEPC report) to shovel that money into my pocket and then, when my renewal time came around, just not even apply to have my charter renewed. The possibilities are mind-boggling and remind me of nothing so much as Bialystock and Bloom in The Producers.

And even if I'm a moderately- or highly-scrupled charter operator, maybe I will do what many charter operators do-- decide that the business just isn't producing the kind of returns I need to make it worth my while, so I'm going to fold up my tent and go.  

Remember that much of this debt was not run up by the charters, but "on behalf of charters." So who's left holding the bag, and how many of those bag holders eventually discover that they are holding a bag of air, that the investment has vanished.

Set the whole host of educational issues aside-- is the continued proliferation of charters creating another financial time bomb? Are investors and bankers and venture capitalists and hedge funders creating a future financial catastrophe?

Probably not. I mean, those guys are knowledgable financiers who know what they're doing. Surely the investors and bankers and capitalists would never do something so foolish, reckless and short-sighted that it would pose a serious risk to the nation's economic health.

NY: Toxic Dollars

Polishing the Apple might well have been entitled Poisoning the Apple. The new report from Common Cause delineates just how much money has poured into New York education politics, from where, and to whom. It is not a pretty picture.

The full report runs over fifty pages, so I'm not going to try to capture the full Brobdinagian wreck here. But let me share some of the most striking findings.

The report lumps pro-ed-reform groups under the heading "privatizers," and I have no disagreement there.

2014 was a huge year for reformsters spending, with the privatizers outspending the union for the first time. There is a whole other conversation to be had about how much the union does or does not represent actual opposition to the privatizers, particularly those who fly the Democrat flag, but we'll let that go for now.

The union is not outspent in all areas-- between 2005 and 2014, the union (and friends) spent over $144 million on lobbying, while reformsters dropped a measly $44 mill. Reformsters are, however, catching up, with a staggering jump in reformster lobbying spending in 2014, when those expenditures jumped up to $12-ish million, over twice what the unions spent.

Who are the major players?

The biggest reformster player by far is the group Families for Excellent Schools, Inc; these guys are pumping tens of millions of dollars into the political arena. FES was founded in 2011 by five individuals, four of them Wall Street players. The group became the high-profile face of opposition to Bill DeBlasio, staging rallies and running expensive ad campaigns to thwart his plan to put a leash on NYC charter expansion. The group, which shares the same address as StudentsFirst of NY, has steadfastly refused to admit where their funding comes from. Mercedes Schneider has pierced a little of that fog, and the results are unsurprising-- FES has close ties to (among others) the Broad Foundation, the Walton Foundation, and the Tapestry Project, a group whose executive director is Eva Moscowitz's husband. The group also tried to produce some "research" to support their point of view, but as Bruce Baker showed, that research probably didn't cost them more than a couple of bucks. The FES motto is "Don't Steal Possible," which appears to be short for, "Don't Steal Possible When You Can Just Go Ahead and Buy It."

Families for Excellent Schools, Inc, is spending more money on NY politics than anybody-- and nobody otside of their organization knows where that money is coming from.

How to raise money

The union and reformsters have different techniques for raising money, and the difference tells us a great deal.

Pro-privatization campaign contributions totaled $46.1 million raised through 5,700 contributions from less than 400 wealthy individuals, associated organizations and PACs.

Got that? The reformsters gathered over $46 million from just 400 contributors. The top five: Michael Bloomberg ($9.2 million), James Simons ($3 million), Paul Singer ($2.2 million), Daniel Loeb ($1.9 million) and David Koch ($1.6 million).

Meanwhile, the union raised over $87 million in campaign funds from over 18,000 contributors.Their top five contributors were organizations, including the union itself.

Befriending Andy Cuomo

Between 2005 and 2014, privatizers contributed a little over $3 million to the Cuomo campaign coffers. During that same period, the union contributed $153,892.06 to Cuomo's campaign (it is not clear whether that includes the cost of Randi Weingarten's 11th-hour robo-call in support of Cuomo's Lt. Governor).

Privatizers also kicked in $5 million to the Senate GOP Housekeeping Account (because "housekeeping" is a prettier word than "slush") while the union contributed less than half a million-- so less than a dime for every every reformster dollar.

Patterns of Campaign Support

This may seem like an arcane point here, but once the union and the reformsters collect their money, they spend it differently, and those differences have implications for the exercise of influence.

The vast majority of union money goes to PACs, and that translates mainly to advertising and PR campaigns to support particular positions, to sway the public in a particular direction. However, the reformster money goes not only to PACs, but to the party and candidate committees.

So even though the union had twice the money to spend that the reformsters did, the union only gave about $1 million to the candidate committees, while reformsters gave $14 million to individual candidate committees. The union gave under $7 million to the party, but the reformsters contributed almost three times the amount.

In other words, the union is trying to influence the election, but the reformsters are influencing the candidates and the parties. We can argue (and should, really) just how separate from the candidates the individual PACs are, but the PACs are certainly one more step removed form the candidate than his actual campaign committee. This is the difference between saying, "We're going to help you by cleaning up the neighborhood," and "We're going to help you by giving you money to furnish your house." This is about reformsters stocking up on favors.

Does this pay off?

I cannot recommend enough that you go read this entire report to get all the details, specifics, and painful facts and figures. But the bottom line here is that where you find heavy contributions from reformsters, you find New York legislators working hard to make sure privatizers can make a profit.

FES, Inc.'s visible lobbying and ads and rallies in Albany may be the more obvious exercises of their money and reach, but when the Senate GOP Committee is raking in $5 mill from charterific contributors and then making sure that the State of New York sets aside tax dollars just to support charters, that should give us pause as well. Andrew Cuomo has announced his intent to break public education; privatizers are getting their $3 million's worth.

One can argue that the money is not corrupting the system, but simply following its own interests. In other words, maybe it's not that Cuomo attacks public ed because he's been paid to, but that reformsters support him because he is already a public ed-hating troll. But if Cuomo and the GOP are already firmly on your side, why do you need to give them more money the God? Sure, you support the people who favor your interests-- that's politics. But this isn't support-- this is SUPPPOOOORTTTTTT!!!!! And it's support given straight to the politicians, not to organizations that support their interests. This kind of money doesn't just say, "Keep up the good work." This is the kind of money that says, "Don't forget who your friends are."

The Marketplace of Ideas

This sort of toxic money flinging, repeated in state after state across the country, is a reminder of the weakness of the reformster ideas.

Remember when it took millions of dollars to politicians to get Civil Rights legislation passed? Or the way that a small group of billionaires convinced a few states' legislators to legalize same-gender marriage?That's right-- those things didn't happen. They didn't need to.

If the people of the US overwhelmingly, strongly desired to tear down our system of public education and replace it with privatized profit-making charter schools, we'd be there. If the system of disenfranchising local people and replacing their community schools with smaller, more exclusive, more expensive charters was really appealing, folks would be outside state capitals clamoring for it. Groups like Families for Excellent Schools would have actual real live grass roots support instead of relying on 400 shadowy contributors who don't even have enough courage of their convictions to be public and visible.

Not that the collective political voice of America is always wise or right. But if you have to buy friends for your child, that tells you something about your child. If your political agenda can only survive on the strength of your checkbook and the depth of your pockets and the powerful friends you can buy to look after it, maybe you are backing the wrong horse.