Brendan P. Walsh

Charter schools in Michigan will undoubtedly grow now that Michigan “uncapped” them.  This is a disruptive event and as such, as an advocate for public education, I wanted to better understand the economic model of charter schools.

I used the State of Michigan’s Center for Educational Performance and Information (CEPI) and its most recent report from the 2008-9 school year.  As with most public school financial reports, I organized my analysis to a per pupil basis and using standard state prescribed report formats.  All reports contrast Local Education Agency (or LEAs, the official name for traditional, geographically based public school districts) and Public School Academies (or PSA’s, the official name of charter schools).

This first view is the highest-level analysis showing per pupil expenditures broken down by cross-functional expenses.

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We can see right from the outset how different the economic models are.

LEAs per pupil expenditure is 31% higher than PSAs, clearly a reason for some parties to be excited about this prospect; however, there’s more to this as we will see shortly.

Even more striking is the difference between the LEAs’ Salary and Benefits expense as compared to the PSAs’ Purchased Services expense.  The PSA model is built primarily on the use of contracted resources as opposed to direct employees, enabling circumvention of retirement and benefit costs.

A different cut of the data breaks it down at a functional level, meaning even if the PSA is buying a contracted service for instruction, that cost will appear in that expense area, as seen below.

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Basic Instruction for PSAs is much lower than LEAs.  This could be attributable to a variety of factors, but among the biggest is that charters pay very little in benefits since they contract most of their work out.

Added Needs instruction is also significantly lower for charters, perhaps in large part for the same reasons Basic Instruction is lower. But we also know from other research that charters enroll a significantly smaller proportion of special needs students leading to significant cost savings in their model.  This pattern is also seen in the charters’ lower Student Services expense.

Oddly, however, charters’ administrative costs and operations and maintenance costs are much higher than traditional public schools.  Also, it should be no surprise that since charters are not primarily geographically based, their Transportation costs are much lower.  The same goes for Community Service expenses.

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The above two charts contrast the Compensation cost breakdown between LEAs and PSAs.  As mentioned before, the charter model clearly relies upon contracted services, which appear as Purchased Services in Michigan public school financial reports.  So let’s take a look at that breakdown.

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None of this should come at any great surprise other than the Instruction line item.  Among Purchased Services, this is the charter model’s highest cost.  Somehow the charter schools buy as a service that which the LEAs hire in the form of teachers.

All of this might lead us to conclude that the charter model is the more efficient of the two, and I would have thought the same until I compared General Fund Revenue sources.

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This was the shocker for me.  It’s no surprise that LEAs’ Local revenue is higher.  After all, these ARE local school districts and the state does allow for limited operational millages.  Other sources of local revenue might be for food service, athletic fees, and the like.  In this regard, the LEAs local revenue could be misleading since districts charge for food service and increasing have charged more in athletic participation fees.

But the state and federal revenue being higher for charter schools was the biggest surprise – and this is how growth of charter schools could become an even bigger financial problem for the state of Michigan.

1. The numbers clearly show charters derive a higher revenue stream from the state than do traditional public schools.  This is a backward step that if it were applied to all LEA students equates to a cost increase approaching $1 billion.
2. As charters draw more and more students away from distressed traditional public schools, a growing number of which are already in a deficit position, who covers this bill?
3. Perhaps even more damaging than either of these two, if every district operated in the same financial model as the charters by contracting nearly every human resource, the ever dwindling revenue stream keeping the Michigan Public School Employee Retirement System (MPSERS), will dry up completely.  Pensions in this system are a constitutional obligation.  Who will pay for this?

Barring a significant, and unlikely, change in charter school operating models, we can anticipate an increase in the state’s portion of K-12 expenditures, a stratification of special needs students, and an increase in expenses farthest away from student instruction, and significantly increases in the state’s long-term debt for an even further underfunded pension system.