U.S. States Have Failed to Address Charter School Corruption. It’s Time for Federal Intervention.

In the United States, charter schools are publicly-funded, tuition-free institutions that operate largely independent from the traditional public school system. Charter schools are established through a contract, or charter, between the school and an “authorizer,” which is the school district, state education agency, or other entity that a state has sanctioned to approve these charters. Once approved, charter schools do not have to follow the same regulations as traditional public schools but instead are required to operate under the terms and academic standards set by their authorizing contract.

Proponents tout charter schools’ autonomy and flexibility: free from burdensome education laws and local regulations, these schools can be innovative in their curricula and management, and can compete with one another and with traditional public schools in the education “market.” Parents will then have the opportunity to “vote with their feet,” and they—along with the public funding designated for their children—will flow into better schools, leaving the poorly performing charter schools to shut down.

Or so the argument goes. In reality, thanks to rampant corruption that has come to plague the charter school industry, this public funding often flows not into the best schools but rather into the pockets of dubious school officials and their affiliates. There have been numerous charter school corruption scandals: self-dealing real estate leases, exorbitant salaries for school executives, and kickbacks from inflated purchases of school equipment and supplies, to name a few.

The sources of charter school corruption have been well documented. Lax state transparency laws give charter schools not only a freedom to innovate, but also a freedom from accountability. There is little transparency in how these schools use public funds, either in their spending on students or in their contracts with third parties. (Self-dealing real estate contracts have emerged as one of the most persistent forms of charter school corruption.) And while a charter school’s authorizer might seem to be well-positioned to hold the school accountable, perverse incentives and a lack of oversight can lead the authorizer to overlook (or even facilitate) corrupt activities. Furthermore, loopholes in many state education laws allow organizations to evade bans on the operation of charter schools as for-profit companies, with these organizations setting up schools as non-profit shell companies and then using so-called “sweeps contracts” to divert some or all public funding the school receives into for-profit management organizations.

Given these well-known risk factors, two questions naturally follow: what are the solutions, and who should implement them? Education reformers and anticorruption advocates have tended to focus mainly on the first of these questions, proposing a sensible and straightforward suite of reforms: a requirement that charter schools produce more regular, transparent disclosures of their financial, operational, and academic information; a prohibition on transactions involving entities affiliated with school officials, particularly in real estate contracts; a prohibition on sweeps contracts; regular audits of charter schools’ real estate purchase and leasing agreements; and regular risk assessments to identify the incentives and opportunities for fraudulent activities.

But who should be implementing these proposals? This question has not received as much attention. For the most part, advocates for charter school reform assume that states, as the primary regulators of public schools, should take the lead. But state governments, which have been the target of multimillion-dollar lobbying campaigns from the charter school industry, have been slow to address charter school corruption, with some critics plausibly asserting that in this area the state governments have been captured by the industry.

The failure of states to properly address charter school corruption has prompted calls for federal intervention. On this front, there is good news and bad news. The good news is that the governing Democratic Party has signaled an interest in this issue, and a provision of a spending bill approved by the House Appropriations Committee last year, Section 314, would indirectly ban sweeps contracts by withholding federal funds from charter schools that contract with for-profit management companies. The bad news is that this proposal only addresses one of the problems at the root of charter school corruption, and in its current form the provision might actually make charter school corruption worse. This is because Section 314 fails to account for the fact that, even without federal funding, charter schools can continue to operate using the vast resources they receive from states and from the private donations and low-interest loans that have become a staple of the charter school industry. By withholding federal funds from the charter schools most susceptible to corruption (those which are evading state laws by operating for-profit charter schools through non-profit subsidiaries), Section 314 would push these organizations even further into the regulatory dark. If these schools no longer receive federal funding—the precondition of which is compliance with various federal education requirements—they will be even less regulated, will face less oversight, and as a result will be even more prone to corrupt practices.

If the federal government wants to crack down on charter school corruption—as it should—it must take a more effective approach. Rather than just cutting off the funding of certain schools, as Section 314 does, Congress should establish specific federal requirements for charter schools and withhold funding from states that fail to comply with these requirements. For example, Congress can make funds to states conditional on the recipient state prohibiting authorizers from granting or renewing charters for organizations that employ sweeps contracts. That way, a school would not be able to eschew federal funding in order to continue using these contracts; rather, using these contracts would result in a school losing its charter. This same approach would also allow Congress to push states to implement the other solutions discussed above, such as disclosure mandates, prohibitions on self-dealing real estate contracts, and the commission of regular risk assessments.

While states are—and probably should be—the primary regulators of public education, the federal government has a long history of stepping up when states fail to ensure fair and adequate education for the nation’s students. The rampant corruption in charter schools, which has siphoned public funds out of education, justifies such intervention.

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