Charter Schools Have Rainy Days Too! But Are They Ready for When It Pours?

• Author: Theodore Arapis,Sean Brandon
• DOI: 10.1177/02750740211013013
• Published date: 01 September 2021
• Date: 01 September 2021
• Subject Matter: Articles

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Introduction

Nearly 30 years since their inception in the United States,

charter schools have become an entrenched educational

option for parents and students. While their definition varies

somewhat by state, charter schools are considered “public

schools of choice, freed from rules but accountable for

results” (Finn et al., 2000, p. 14). They borrow elements

from both public and private schools: Like public schools,

they are open to all who wish to attend and are paid for in tax

dollars, but like private schools, they are more autonomous

than their public-school counterparts. Still, they are account-

able to an authoritative body, such as local, state, or univer-

sity boards, even cities (Vergari, 2007).

In the U.S. education system, the charter school move-

ment has been the fastest growing reform (Ericson, 2001).

Charter schools now operate in 45 states and the District

of Columbia (National Center for Education Statistics

[NCES], n.d.), all promising to remedy education inequity

between districts (Lay & Bauman, 2019), government

waste, and red tape (Ravitch & Viteritti, 1997). As such,

they have attracted the attention of scholars, who primarily

study their governance and effects on student achievement.

Governing boards,1 commonly known as charter boards,

could influence charter schools greatly by hiring (or firing)

staff, even outsourcing their management to for-profit com-

panies. Nonetheless, charter boards aim for efficient man-

agement and better student achievement (Lay & Bauman,

2019). But research on student achievement shows mixed

findings, with charter schools underperforming traditional

public schools in some learning areas and locations while

overperforming in others (Betts & Tang, 2019).

About their financial management, specifically how char-

ter schools accumulate and use fiscal savings, we know less.

Since the 1990s when scholars first began to study fiscal sav-

ings, the focus has been primarily on states and municipali-

ties (Gorina et al., 2019). School districts have also attracted

some attention, but only recently (see Arapis et al., 2017;

Barrett et al., 2019; Duncombe & Hou, 2014). There exists a

1Villanova University, PA, USA

2PA House Appropriations Committee (D), Harrisburg, PA, USA

Corresponding Author:

Theodore Arapis, Villanova University, St. Augustine Center, 800

Lancaster Avenue, Villanova, PA 19085, USA.

Email: theodoros.arapis@villanova.edu

Charter Schools Have Rainy Days Too!

But Are They Ready for When It Pours?

Theodore Arapis1 and Sean Brandon2

Abstract

Nearly 30 years since their inception in the United States, charter schools are now a well-established educational option

for parents and students. Although they are an important education provider schooling more than 3.1 million students

nationwide, we know little about their ability to accumulate fiscal savings for weathering rainy days and sustaining smooth

service. Unlike most other fiscal savings studies focusing on the unrestricted fund balance, we examine both restricted and

unrestricted fund balances across Pennsylvania charter schools, this study’s unit of analysis. Using a Newey-West regression

and data spanning the years 2011–2019, we show that charter schools consider all fund balance classifications when making

savings decisions; albeit the unrestricted was their primary savings vehicle. Given their limited revenue portfolio, they are left

with only a few options for accumulating fiscal savings. Surplus from tuition payments and additional revenues from private

funding sources appear as main fund balance boosters. Surprisingly, special education enrollment significantly increases the

unrestricted fund balance, a finding that requires further attention from legislators and policy makers. Concerns are also

raised about participation in the state pension system as it absorbs a significant amount of slack that otherwise could be used

for other purposes. Overall, most charter schools retain inadequate fiscal savings not capable of insulating their operation

from revenue volatility and other contingencies. Statutory fund balance minimums and the adoption of formal fund balance

policies articulating how savings are accumulated, used, and replenished should, therefore, be considered.

Keywords

fiscal savings, fund balance, rainy day fund, charter school

2021, Vol. 51(7) 560–575

consensus in literature that fiscal savings are an integral part

of the budget process across states, municipalities, and

school districts. States use formal budget stabilization funds

(rainy day funds) for countercyclical stabilization; setting

money aside in good times to manage fiscal stress and sus-

tain service provision during economic downturns (Hou,

2003; Sobel & Holcombe, 1996). Municipalities and school

districts build “informal” savings as part of their fund bal-

ance for purposes beyond countercyclical stabilization, from

maintaining tax rates and supporting a steady cash flow, to

paying for equipment or unexpected repairs, even funding

capital projects and other public demands (Davare, 2018;

Hendrick, 2006; Marlowe, 2005). Strategies states, munici-

palities, and school districts use to accumulate fiscal savings

may differ as well given their unique operations, governance

structure, and fiscal environment to name a few (Arapis

et al., 2017; Barrett et al., 2019; Gorina et al., 2019).

Fiscal savings are necessary for charter schools too, which

like school districts also have “rainy days,” unplanned

expenses, and other contingencies that could add pressure to

their operation and service provision. Charter schools, how-

ever, differ in many important ways from school districts.

Charter schools, for instance, lack taxing authority. As a

result, they maintain a severely limited revenue portfolio

which is reliant on their state or sponsoring school district for

tuition payments (Education Commission of the States

[ECS], 2020). Charter schools and school districts differ in

their costs as well, as in some states charter schools are free

from collective bargaining (Miron, 2017), teacher certifica-

tion requirements, and student transportation services (ECS,

2020). Depending on the state, they could also select whether

to participate in the state retirement system or offer their own

retirement plan (National Association of State Retirement

Administrators [NASRA], 2017). Evidently, charter schools

operate within a unique fiscal environment. As such, strate-

gies school districts use to accumulate fiscal savings may not

be relevant for charter schools.

Given this lack of attention, we offer first an exploratory

analysis of fiscal savings trends across charter schools; then

our attention shifts to identifying strategies of fiscal savings

accumulation. In our study, we examine both restricted and

unrestricted fund balance classifications reported by

Pennsylvania charter schools, this study’s unit of analysis.

Using a Newey-West regression and data spanning the years

from 2011 to 2019, we show that charter schools consider all

fund balance classifications when making savings decisions;

albeit the unrestricted was their primary savings vehicle.

Following our findings, surplus from tuition payments and

additional revenues from private funding sources appear as

main fiscal savings boosters. Surprisingly, special education

enrollment significantly increases the unrestricted fund bal-

ance as well, a finding that requires further attention from

legislators and policy makers. Concerns are also raised about

participation in the state pension system as it absorbs a sig-

nificant amount of slack that otherwise could be used for

other purposes. Overall, most charter schools retain inade-

quate fiscal savings; statutory fund balance minimums and

the adoption of formal fund balance policies articulating how

savings are accumulated, used, and replenished should,

therefore, be considered.

Our study advances the literature on three main fronts.

First, we build upon the extant fiscal savings literature across

general purpose governments and school districts and add

new knowledge from charter schools. Second, our findings

show that fiscal savings decisions are made not only for the

unrestricted fund balance which is typically the focus of the

literature thus far, but for the restricted as well. Such system-

atic investigations are necessary for broadening our under-

standing of fiscal savings behavior and advancing the

literature further. Third, in addition to the aforementioned

theoretical implications, our study also makes practical sug-

gestions for prudent management of fiscal savings that char-

ter school boards and legislators should consider.

Following this introduction is a discussion of the U.S.

charter school movement and a review of the fiscal savings

literature. The research methods section presents more

details regarding the data, model, and estimations strategy.

Next, the findings of the study are analyzed, followed by

conclusions and policy recommendations.

Theoretical Framework

Charter School Basics: From Their Inception to

Their Funding Challenges

As an idea, charter schools were first introduced in the 1970s

when Ray Budde, an education professor at the University of

Massachusetts, Amherst, described a new type of school that

would provide teachers “increased responsibility over cur-

riculum and instruction in exchange for a greater degree of

accountability for student achievement” (Saulny, 2005).

Others during the 1980s, including the American Federation

of Teachers (AFT) union president Albert Shanker, saw char-

ter schools as laboratories for developing ideas that could

reinvigorate the entire public school system. Inspired by a

school in Cologne, Germany, he advocated for more innova-

tion and autonomy by empowering teachers in the school’s

decision-making (Pendergrass & Kern, 2017).

For schools to be effective, economists John Chubb and

Terry Moe (1990) argued, they need autonomy. Only then

will they be able to develop clear objectives, ambitious pro-

grams, strong leadership, and high levels of teacher profes-

sionalism. A new institutional structure was then proposed in

their book Politics, Markets, and America’s Schools (1990),

where control would be transferred from the institutions to

schools, parents, and students. Still, the state would deter-

mine the criteria for such schools and only those applicants

that satisfied the requirements would be granted a charter to

open a school, enroll students, and receive public money.

School districts would have no authority over charter schools

561

Arapis and Brandon