Testimony of Dr. Gerald Zahorchak Secretary of Education Senate Education Committee March 12, 2009

Good afternoon, Chairman Piccola, Chairman Dinniman, and members of the Senate Education Committee. Thank you for the opportunity to testify before you today on charter and cyber charter schools.

For too long, every discussion of charter schools in Pennsylvania has been framed as a debate between those who are “for” charters and those who are “against” them. The time has long passed for such unhelpful distinctions. Today – more than a decade after the passage of Pennsylvania’s charter school law – charters have become an established component of the public education landscape. Across the Commonwealth, 127 charter schools serve 67,000 students. This Administration supports every school – district-operated, charter or cyber charter – that provides a quality education to its students. And we support all efforts to ensure that our funding systems are equitable to students and to taxpayers.

With those principles in mind, I would like to share with you the Administration’s charter school proposal for inclusion in this year’s budget discussions. Simply put, our proposal is designed to learn from the successes of Pennsylvania’s charter schools and to improve public confidence in their operations.

Sharing best practices learned from charter schools

Charter schools are intended to serve as laboratories of innovation, and the rest of the Commonwealth’s schools and state policy-makers should have the opportunity to learn from charter schools that make the most significant gains in student achievement.

The legislation proposed by the Rendell Administration requires the Department of Education to produce an annual report that:

· identifies charter schools whose students are academically out-performing peer students;

· determines the best practices that are behind the schools’ success; and

· makes recommendations for any needed changes in legislation or policy to spread those best practices throughout public education.

Reducing bureaucracy

Under current law, charter schools bill each sending school district on a monthly basis. For a charter school that serves a single school district, this typically does not present a problem. But for charter schools that serve many school districts – including cyber charter schools – the existing process can create a paperwork nightmare.

As part of its comprehensive package of charter school legislation, the Administration would enable charter and cyber charter schools to receive direct payment from the Department of Education, at the request of the charter school. The legislation would maintain the ability of school districts to challenge payments that they believe are incorrect.

Currently, over one half of all charter schools are in Philadelphia. Philadelphia pays regularly each month as the charter school law requires. These schools would most likely not opt to be paid by the Department of Education because the Department has staff enough to pay only every other month despite the language of the Cyber Charter School law that requires monthly installments.

Even Cyber Charter Schools might opt out of this provision despite the fact that 40+% of school districts never pay. The hardship of having to wait two months for all income may be worse than getting a portion in a timely fashion and waiting potentially several months for the rest.

Increasing equity in cyber charter funding

Despite dramatically different cost structures, cyber charter schools are funded in the same way as “brick and mortar” charter schools. The school district of residence for each charter student is required to pay the charter a per-student rate based on the school district of residence’s own costs.

This is true. Many “brick and mortar” charter schools are established as regional schools. Those that are not, often function as regional schools drawing from numerous school districts. Thus the same dynamic that exists for a cyber charter school is true for the “brick and mortar” charter school as well.

Please note that the school district of residence is responsible for providing payment to the charter school regardless of whether the student had previously been enrolled in the school district, a private school, a home school program, or another school.

Which would also be true if the student opted to re-enter the existing public school.

Also note that there is incredible variation in school district tuition rates. In 2007-08, tuition ranged from a low of $5,400 for students from Reading School District to a high of $15,000 for students from Jenkintown School District. A cyber charter school that enrolled a student from each district would bill the Reading taxpayers $5,400 while billing the Jenkintown taxpayers $15,000 – for the exact same education.

Is the purpose of this comment to suggest that the Jenkintown student is receiving less than he or she deserves? If so, then the following could happen:

1. The school district could develop its own cyber charter school or cyber school program. Half of PA’s existing cyber charter schools were created by school districts and are run by the school districts IU.
2. The home school district could contact the parent and persuade the parent that their child is getting short changed and recommend that the student stay in the home school district school.
3. The home school district could take the money saved from cyber charter students leaving the district and reduce the tax burden on its citizens. The school district, through the payment formula or from a direct 30-42% subsidy from the state for each student, keeps over 50% of the money that they currently spend on each student.
4. Allow the parent to make the decision for their child. Some parents may decide that even with lesser funding, the education in a cyber charter school is better than leaving their child in their present condition.

Conversely, if the Jenkintown student is being deprived, the Reading School District student’s educational experience is being enhanced. While wealthier school district administrators might object, it is a well understood and accepted practice for the State to provide more subsidies to less affluent school districts. The current funding formula for cyber charter schools is consistent with the philosophy of the State.

When the legislatively mandated Task Force on School Cost Reduction examined the issue, it found as follows: “The evidence strongly indicates that local school districts are over-funding cyber charters to the detriment of other educational needs. In addition, the fact that tuition is based on expenditures in the school district of residence creates additional problems. Given that cyber charter schools may attract students from across the state, and given the great variance in school district expenditures in the commonwealth, there is also significant variance in the tuition paid to cyber charter schools. This creates an irrational funding system whereby two students attending the same cyber charter can bring with them two very different revenue streams, neither of which may reflect the cost structure of actually providing education in a cyber charter.”

Consistent with the Task Force’s recommendation, our legislation establishes statewide regular and special education tuition rates for cyber charter schools based on the most efficient and effective cyber charters. In 2009-10, the cyber charter school tuition rates would be a maximum of $8,856 for regular education and $13,695 for special education, and never more than a school district’s existing charter tuition rate calculation. In future years, the actual cyber charter tuition rate used to calculate school district payments would increase by the rate of inflation. School districts would save an estimated nearly $15 million a year from this change.

This new tuition rate would not help less affluent school districts. They would continue to pay the same rate, if their current rate is less than $8,856. If the average tuition rate of less affluent schools is halfway between $8,856 and Reading’s $5,400, the average coming to the cyber charter school from these schools would be: $8,856 + $5,400 = $14,256 / 2 = $7,128. Since cyber charter schools attract students from less affluent schools in greater proportion, the amount coming to cybers would be closer to the $7,128 figure than the $8,856 figure. Assuming that the Secretary’s numbers are correct, for cyber schools this could be a reduction of income of 20% or more.

Using the $15 million savings figure, the reduction to cyber charter schools would be close to 8%. (22,000 students x $8,856 per student).

In addition, the legislation places limits on the excess fund balances held by cyber charter schools consistent with the limits faced by school districts, based on the size of their budgets. Cyber charter schools currently hold $10 million in total unreserved, undesignated fund balances, and under this bill at least $2.5 million would be returned to school districts and local taxpayers.

As was brought out in last year’s testimony and repeated in the testimony of this day (March 12, 2009), these so called “fund balances” are a mirage. These fund balances do not exist because:

1. 40%+ of all school districts never pay their required payment to cyber charter schools for the education of the student residing in their home district. This bill is later paid by the Department of Education which withholds this payment from the home school district. This payment may be delayed as much as 6 months during which time, the cyber charter school is required to provide services to the enrolled cyber student. Thus, the so called “fund balances” are never real dollars in the cyber school’s bank account. They are largely paper dollars that are reported as receivable items.
2. School Districts tax their residents during the summer and have the greatest majority of their money in the bank before school opens in the fall. Cyber Charter Schools bill the school district only after the student is enrolled. The school district is required by law to pay for that student in 12 equal installments. This creates a cash flow problem that can only be solved by running the school on less than budget income. Banks are reluctant to loan money to cyber schools that have low cash balances because cyber schools have no other way of generating money. School Districts may generate new cash with a majority of the School Board voting for a tax hike.
3. School Districts keep two kinds of accounts – “unreserved, undesignated accounts” and “reserved, designated accounts.” Cyber school usually do not put their cash in “reserved, designated accounts” because they have an ongoing need for the cash. If this bill were to pass, the so called “unreserved, undesignated fund balances” would be transferred to “reserved, designated accounts” (real estate funds for example). Thus, the intent of the law would be nullified.
4. “When compared to total educational expenditures, cyber schools represent a fraction of total public school spending. In 2006-07, cyber schools received about $150 million in total funding—0.66% of public school spending.” Cyber School Funding Formula: The Wrong Mixture, Jessica K. Runk, Commonwealth Foundation Newsletter: July 1, 2008, http://www.commonwealthfoundation.org/commentary/cyber-school-funding-formula-wrong-mixture . The $2.5 million that would be saved by returning so called excess fund balances would amount to .011% of all public funding. Sending less than one tenth of one percent back to the home districts would have a negligible impact on the system.
5. Even if these fund balances did exist, the amount returned to home districts would be about $1 million dollars for each cyber school or less than 1% of total cyber expenditures or less than $30,000 per school district.

Improving special education accountability

The bill would also ensure that all revenue collected by a charter school (bricks and mortar or cyber) to provide special education is actually spent for that purpose. In the last year for which data are available, charter schools collected $78 million for special education and spent $50 million on special education programs and services. Under this legislation, charter schools would use their audited annual financial reports to show that they provided special education services with all of the taxpayer funds that they received for this purpose. If there are excess funds that did not get invested in special education, they would be returned to serve the students in the sending school district.

The way this proposed legislation is written, there would be a cap on Special Education money that could be sent to a cyber school based on “actual costs.”

“The department shall establish the cyber special education actual cost level for the 2009-2010 school-year by calculating the sum of the amount determined under subparagraph (i) and the lowest 2007-2008 expenditures for special education per special education student of all cyber charter schools that achieved adequate yearly progress in the 2006-2007 or 2007-2008 school years. The amount shall be certified by the department and adjusted annually by the percentage increase in the average of the State wide average weekly wage and the employment cost index.”

Once this “cap” is established, it will rise based on the “average weekly wage and the employment cost index,” not based on prices of Special Education delivery or based on the needs of the children. Special Education Directors would be forced to ration out the school’s services to be certain that the school did not go above or below this cap. If the school went above the cap, it would have to subsidize Special Education services from the general fund. If the school fell below the cap, it would be forced to return the difference to the home school district.

This approach is certainly unrealistic if not illegal for the following reasons:

1. Basing next year’s total costs on last year’s budget does not take into account changing economic conditions.
2. Basing all eleven school’s cap on the experience of one or two schools is unfair because all charter schools have different totals of students (400-8,000) and each school has different capacities to serve Special Education Students.
3. Cybers did not anticipate this approach to funding and have consistently not factored the costs of running an inclusion education model. When a regular education teacher takes 20% of his or her time to help educate a Special Education student, that time is not normally designated as a Special Education cost. There is no provision in this bill for cyber schools to revise their 2007-8 school expenditures to reflect true costs.
4. The more effective a cyber school is in teaching Special Ed students, the more likely the school will attract more and harder to service Special Ed students. This bill could encourage schools to provide mediocre service in order to make the school unattractive to prospective Special Ed students. It could also encourage Special Ed departments to add unnecessary services to an existing student’s IEP in order to not be required to return this money.

In addition, this legislation recognizes that speech and language challenges typically require a less intensive level of services, at a lower cost, than other disabilities. As a result, the bill proposes establishing a new tier of the charter school special education tuition rate for students identified as having a speech or language disability; the rate would be equal to the regular education rate plus 20% of the additional calculation for special education under current law.

This conclusion may be true in a traditional brick and mortar school. Cyber schools face unique challenges delivering instruction to students with speech and language challenges. This provision is arbitrary and contains assumptions that have not been documented with research.

Thank you again for the chance to speak to you today about improvements to Pennsylvania’s charter school law. I look forward to talking with you about ways that we can enhance the Commonwealth’s reputation as being at the forefront of school choice, academic achievement and fiscal responsibility.

If the State were interested in “school choice,” it would be more proactive in chartering more new cyber schools and would not be looking for more ways to cut funding.

If the State were interested in academic achievement, it would recognize that class size is one of the most important criteria in improving achievement. Cutting funding forces fewer teachers to educate more students.

If the State were interested in “fiscal responsibility.” It would be asking the question, “How could we get more students into cyber schools. Cyber schools already educate for less with fewer resources.