Funding growth, expanding opportunity: Novel funding mechanisms for schools of choice

Key Points

• Private school choice programs and the organizations that support them could do a much better job deferring the capital, infrastructure, and other fixed costs of participating private schools.
• If we want school choice programs to transform the educational landscape, they have to be able to spark the creation and expansion of high-quality schools, which the current funding arrangement does not allow.
• Recommendations for improving funding for private school choice programs include decreasing start-up costs, helping schools access bonds and other low-cost financing, getting the private sector involved productively, and fostering partnerships with support institutions and venture capital sources.

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Executive Summary

What does the future hold for private school choice programs? The recent past has seen tremendous growth in the number of states creating voucher, tuition tax credit, and Education Savings Account programs. More and more students are using state support to help defray the cost of a private education.

But these programs are starting to run into a constraint: space. If we want choice programs to truly transform the educational landscape across the country, they have to be able to spur high-quality schools to scale up and create new seats for students, and they have to be able to spark the creation of new high-quality schools. The current funding arrangement for these programs prevents that, as they generally fund at or barely over the marginal cost of adding an additional student to an already efficient private school.

In this paper, I look at the myriad funding mechanisms for private, charter, and traditional public schools and try to apply lessons from each of these sectors to private school choice programs. From bond financing to venture capital investments, private school choice programs and the institutions and organizations that support them could do a much better job deferring the capital, infrastructure, and other fixed costs of participating private schools.

Some recommendations include:

1. Decreasing start-up costs through incubators and “tiny schools”;
2. Helping schools access bonds and other low-cost financing through moral obligation pledges, sovereign school funds, and credit support;
3. Getting the private sector involved productively through B-Corps and low-profit limited liability companies; and
4. Fostering partnerships with support institutions and venture capital sources.

The traditional public and charter school sectors have figured out how to build buildings and start new schools. It is time for the private sector—and particularly private schools with students financed by school choice programs—to catch up.

Introduction

Money. In Cabaret, it makes the world go ’round. According to Pink Floyd, it is a gas. It, specifically of the cash variety, ruled everything around the Wu-Tang Clan.

For all of the lofty talk about instruction and school design in K–12 education, at the end of the day, it all comes down to money. Schools have both current operational costs, such as teacher and administrator salaries, and fixed capital costs, such as the buildings and the computers and desks inside them. To make education happen, educators need access to money for both. If schools can only access the latter, they will have schools without students. If they can only access the former, they will have students but no schools.

This helps to explain one of the more vexing issues in the school choice community: namely, the different trajectories of charter schooling and private school choice programs. Figure 1 shows a comparison in enrollment in the two sectors since the year 2000.

Both of these programs (at least the modern version of vouchers) started at approximately the same time, but one has grown to have almost 10 times the enrollment as the other. This is particularly stark because charter schools had to be created with no foundation. More than 6,500 charter schools exist now that did not exist 25 years ago.

Now, charter schools have obviously had many advantages that private school choice has not, most notably broader and deeper political support. Many more students attend charter schools because more students are allowed to choose charter schools. But, it is also true that more and more students, particularly in states such as Florida, Indiana, Louisiana, Wisconsin, and now Nevada, have the ability to choose private schools.

As private school choice supporters break through the political logjam that has stifled the growth of their sector, they are quickly running into another problem—space. Quality seats in existing private schools are limited. Case in point: in 2014, the Friedman Foundation released a study of Indiana private schools that found about 41,000 private school seats available to voucher students across the state.[1] In the 2015–16 school year, more than 30,000 students will participate in the program and, if trends continue, will overwhelm the supply of private school seats in the very near future. Unless new schools can open, the sector risks quickly hitting a point of saturation with no possibility of market expansion. School choice will be nice for the handful of kids that fill empty seats, but it will not drive change anywhere near to the effect that its proponents hoped. Put plainly, if supporters hope to see private school enrollment numbers reach the level of charter school enrollment numbers, they are going to have to get serious about covering the fixed costs of buildings, desks, computers, and so forth.

In this paper, I hope to accomplish three things. First, I would like to make the case that the current funding levels and methods private school choice programs use are insufficient to cover the capital costs necessary for schools of choice to grow, scale, and serve more students. Second, I would like to sketch out the many ways in which schools—traditional public, charter, and private—are currently funded to help widen the perspective of school financing options. Finally, learning from these other funding programs, I would like to offer concrete options to help lower or defray start-up costs for schools of choice.

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Notes

1. Andrew D. Catt, Exploring Indiana’s Private Education Sector (The Friedman Foundation for Educational Choice, November 2014), http://ift.tt/1VB9nQO.

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