Fixing PA’s Charter School Formula Could Save $365 Million a Year in Taxpayer Money

PA Auditor General Jack Wagner said today that Pennsylvania could save $365 million a year in taxpayer money by adopting separate charter and cyber charter school funding formulas similar to those used in other states, and by closing an administrative loophole that permits double-dipping in pension payments through the calculation of tuition rates.

A study by the Department of the Auditor General shows that Pennsylvania has overpaid charter schools because its formula is pegged to educational costs in the sending school district rather than on the actual educational cost to the charter or cyber charter school.

Wagner’s special report found that Pennsylvania charter schools spent an average of $13,411 per student, which was about equal to the funding they received. That amount was about $3,000 more than the national average of about $10,000, Wagner’s auditors found. While Pennsylvania cyber charter schools received about the same funding level as bricks-and-mortar charter schools, they spent an average of $10,145 per student, reflecting their lower operating costs. Wagner’s report found that Pennsylvania cyber charter school’s average cost of $10,145 was $3,500 more than the national average of $6,500.

Wagner’s special report estimated $315 million in sustainable annual savings if Pennsylvania paid charter and cyber charter schools the national averages for its 100,000 charter and cyber charter students. He noted that most of the savings would flow to local taxpayers who are the primary funding source for charter and cyber-charter schools.

"With the tightening of school budgets and funding available to school districts throughout the state, Pennsylvania’s flawed and overly generous funding formula for charter and cyber charter schools is a luxury taxpayers can no longer afford,” Wagner said. “While I have long supported alternative forms of education, as the state’s independent fiscal watchdog, I cannot look the other way and ignore a broken system in which charter and cyber charter schools are being funded at significantly higher levels than their actual cost of educating students. It is time for the Pennsylvania Department of Education, along with the General Assembly and the Corbett administration, to fixPennsylvania’s flawed funding formula for charter and cyber charter schools.”

The projected $365 million in savings were calculated as follows:

• Brick-and-mortar Savings, $210 Million – Taking the approximate $3,000 per student rate difference between Pennsylvania’s costs and the national average brick-and-mortar costs, and multiplying by the number of brick-and-mortar charter students in 2011-12 (70,000 rounded figure);
• Cyber Savings, $105 Million – Taking the $3,500 per student rate difference between Pennsylvania’s costs and the national average cyber costs, and multiplying by the number of cyber students in 2011-12 (30,000 rounded figure);
• Double-Dipping Savings, $50 million – Taking the estimated per student Public School Employee Retirement Systems’ (PSERS) contribution rate in 2011-12, multiplied by the number of charter/cyber students in 2011-12 (100,000).

Wagner’s auditors found that based on the five U.S. states with the largest student enrollment in independently operated charter and cyber schools, Pennsylvania’s spending of $12,657 was clearly the highest among the five states with the most charter and cyber charter students. Ohio spent $10,652; Michigan, $9,480; Texas, $8,954; and Arizona, $7,671.

Wagner said that Pennsylvania could save taxpayer dollars by correcting the charter and cyber charter school funding formula by implementing existing state models that have proven to be more equitable, including using a set state-based rate to fund charter and cyber schools like some other states across the country have done. The report further noted that across all states, funding levels appear to dictate spending habits.

Wagner said Pennsylvania taxpayers could realize even greater savings if the commonwealth directly funded charter and cyber education as do Michigan and Arizona. If Pennsylvania used Michigan’s rate of $9,480, it would save about $318 million annually; if it used Arizona’s rate of $7,671 it would save nearly $500 million annually, based on 2008-09 state rates reported by the U.S. Department of Education.

In Pennsylvania, school districts have been heavily dependent on local property taxes to provide funding to school districts, including charter and cyber schools, Wagner said. In 2009-10, local property taxes accounted for 44 percent of all school district revenue, compared with just 28 percent nationally.

One loophole within the charter and cyber school funding formula that Wagner highlighted in his special report was a double dipping of retirement benefits at charter and cyber schools. Wagner’s report noted that in 2010-11, school districts paid retirement costs that equate to approximately $500 per student, because of a duplication of state reimbursements for school districts costs that charter and cybers schools are eligible to receive in direct state funding. Wagner said the double-dipping into the retirement reimbursement is particularly concerning, given the fact that Pennsylvania’s public educational organizations are seeing a steep rise in the cost of the commonwealth’s public employee pension system.

In addition, Wagner’s report found that 42 percent of cybers and 30 percent of brick-and-mortar charters paid management companies in 2010-11. He said that because Pennsylvania’s charters and cyber charters are funded by a school district’s per-student tuition rate, our funding method has attracted management companies to cyber charters and charters in urban areas, noting that 100 percent of the state’s top five charter and cyber schools that have the highest student enrollment used a management company in 2010-11. The report noted that a review of a management company contract found the company’s fees were based on a percentage of the school’s total revenue and not on the management services provided.

"Pennsylvania needs a fair and appropriate public education funding system capable of sustaining both traditional public schools and charter and cyber schools, and Pennsylvania taxpayers should not be spending one dollar more than the actual cost to educate our children in a charter or cyber school,” Wagner said.

Wagner’s special follow-up report on charter school funding made several key recommendations to the Pennsylvania Department of Education, the General Assembly and the governor, to save taxpayers money, while maintaining high-quality school choice options.

• Correct the charter/cyber funding formula based on existing state models that have proven to be more equitable, and develop a statewide brick-and-mortar charter school funding rate and a statewide cyber school funding rate;
• Develop a charter school funding model that avoids double-dipping of commonwealth retirement contributions to state funded programs such as the Public School Employees’ Retirement System;
• Develop limits on the fees management companies can charge to save on excessive administrative costs to run charter and cyber schools;

Pennsylvania Department of Education should lead the charge to correct the charter school funding formula and to improve oversight of charter schools to prevent the commonwealth from continuing to pour money into poorly run schools.