Leave it to a book club discussion about The Great Recession to make you start thinking about things other than financial crashes. Like charter schools, for example.

That’s what happened when our group assembled recently to discuss Stress Test: Reflections on Financial Crises, former Secretary of the Treasury Tim Geithner’s book about the implosion of financial markets at the end of the George W. Bush administration.  Geithner defines a stress test as the result of when “Regulators would delve into the books of major financial firms to calculate how much additional capital they would need to survive.”

There was great conversation and insight in abundance as we discussed the 2008 crash – which made me think about another upheaval that could implode both financial markets and the privatization/school choice movement in the future, if current trends continue.

As I got into my car to drive home from book club, I remembered Geithner’s observations about the former Federal Reserve Chairman Paul Volcker and his stewardship of our financial system:

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Conflicts-of-interest. Mind-boggling compensation. Risk.  Geithner could have also been talking about the characteristics of charter schools as well as concerns harbored by the legendary Fed chairman. Hmm … come to think of it, John Kasich also worked seven years at Lehman Brothers until the investment bank tanked in 2008.

It all fits.

The learnings derived from the book club conversation came back to me a few days ago when I read about the federal government’s decision to “phase out the use of private for-profit prisons to house federal inmates.”  The announcement by the U.S. Department of Justice said that the private prison chains “compare poorly to our own bureau facilities,” have safety and security issues, don’t offer full programs like publicly-operated facilities, and “do not save substantially on costs.”

Consider the magnitude of these statements and replace the term private, for-profit prison with another word choice. What do you get? Private, for-profit charter schools. Thank you, dear book club, for discussions that keep the cobwebs out of the brain and in the process help repair as well as build new neural networks to connect otherwise unrelated concepts.

But wait. There is much, much more to this story.

On the heels of the Justice Department announcement, the price of Corrections Corporation of America stock plummeted by 37%. Since CCA is the largest owner of private prisons in the United States, that slide created a very loud thud.

As Tim Geithner, Paul Volcker and others in finance will tell you, there are many variables that influence the price of securities in financial markets. CCA stock value took a huge hit due to the uncertainty of future contracts and the revenue that comes with such agreements. Last year, for example, 45% of the company’s revenue came from federal sources, and the fallout from the Justice Department’s decision will continue.

Geithner’s observations about Wall Street’s conflicts-of-interest, mind-boggling compensation and risky management behavior can certainly help illuminate the sometimes dimly-lit world of publicly-traded companies like CCA.  Moreover, the former treasury secretary reminds us about how Kasich’s Lehman Brothers, Goldman Sachs, and other financial institutions helped to tank the American economy and nearly cause a modern-day Depression in 2008. The public needs to understand that these same issues – conflicts of interest and mind-boggling compensation levels among other capital sins – are endemic with private, for-profit charter schools.

Likewise, the actions of the U.S. Justice Department in exiting from contracts with private prison chains also illustrates the key role of government as a driver or economic activity, as Secretary Geithner illustrated so well in his informative book. But an article recently published in a law review provides some ominous warning signals about the charter industry that go beyond anything published to date about privately operated but publicly funded schools. The title of the article, Are We Heading Toward a Charter School ‘Bubble’? Lessons From the Subprime Mortgage Crisis, could have been suggested by Tim Geithner or Paul Volcker.

Certainly, there is a sense of déjà vu when comparing the rapid growth of the largely unregulated charter industry with the earlier debacle in the financial markets:

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In a close examination of The Great Recession and current practices and trends in the charter industry, Mark Naison, a professor of African American Studies at Fordham University, sees a direct connection between the subprime mortgage crisis and the proliferation of largely unregulated charters – institutions created by public tax dollars.

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The lack of federal oversight for the charter industry is compounded by the fact that since 1995, the federal government has provided more than $3.3 billion to encourage the proliferation of charters, mostly through Public Charter School Program grant awards and other incentives to states.

In absorbing all of this information and the not-so-subtle warnings from the past, the recent announcement by the NAACP at its annual convention in Cincinnati put the organization on record as favoring a “moratorium on the proliferation of privately managed charter schools” due to continuing concerns about the lack of public governance, fiscal mismanagement, conflicts of interest, increased segregation, and other negative factors that should not be present in public education.

A final observation to a “what if” charter school doomsday scenario would be the sudden failure of one or more publicly traded national charter chains, due to a precipitous decline in valuation caused by a huge financial scandal, loss of authorizer agreements or a combination of other factors.  Recall that Corrections Corporation of America’s stock price went south after the U.S. Justice Department’s announcement of its decision to phase-out the use of private prisons to house federal inmates. What if publicly traded national chains like K12, which has two online schools in Ohio, and the troubled Imagine chain, which apparently has lost half of its Ohio schools during the last several years, suddenly closed due to fiscal and academic issues, sending thousands of students to other schools? What if other for-profit, publicly traded, non-transparent national charter chains, like at least one national, for-profit prison chain, also fail, causing a near-subprime issue for the country to face as a result of the failed school choice/charter school dalliance 0f the last two decades?

The warning signs – and they are numerous – are there for all to see, particularly in Ohio, where conflicts-of-interest, exorbitant administrative salaries, treasurer scandals, inflated leases  charged by subsidiaries of the charter chains, and ineffective governing boards hand-picked by the school operators, are the rule rather than the exception. And we haven’t even mentioned the malfeasance of the conflicted-by-charter-campaign-money Ohio legislature, which has done nothing to drain the deadly charter school swamp which harbors lethal fiscal viruses that have severely wounded public education.

Indeed, the warning signs are right here for all to see. In particular, the law review article referenced several times here mentions the incredible award of $71 million in federal funds to Ohio for the purpose of expanding its conflicted and dismally performing network of charter schools, a largely unregulated colony that is currently draining more than $1 billion annually from the Buckeye State’s constitutionally established public school system.  The jury is still out as to whether the funds will be released, in spite of strong protests from some Democratic members of Ohio’s congressional delegation, who believe that the federal grant award is undeserved because of the nature of the charter school swamp and the denizens that reside in its murky waters.

Soon, my friends will have another book club meeting, discussing a topic not related to financial firm meltdowns, imploding markets, regulatory oversight failures, or, heaven forbid, hundreds of mysterious and resource-consuming charter schools. When we do meet, I will thank my friends for recommending Stress Test and for priming me to connect some other narratives that lead us to follow the money trail that winds its way through the dense, Amazon-like charter jungle.

In the end, gentle reader, voodoo economics (trickle down) begets voodoo public policy (charter schools, vouchers) begets voodoo accounting (charter school scandals). With the public’s blood pressure rising as a result of continuing low performance, scandals and charter malfeasance, that simple cause and effect string should soon make all of us candidates for our own individual stress test.

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Denis Smith is a retired school administrator and a former consultant in the Ohio Department of Education’s charter school office. He writes about education issues as well as politics and constitutional reform.

 

 

 

 

 

 

 

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