The Trump administration’s “school choice” plan is destined for court, and maybe not with just the usual suspects as plaintiffs.
The administration’s budget proposes deep cuts to programs to help low-income and other disadvantaged students at traditional public schools, which Education Secretary Betsy DeVos and her allies call “government schools” and regard as sinister institutions somewhere on the socialism spectrum. But the budget proposes an additional $1.4 billion to expand charter schools and to provide vouchers for religious and other private schools. The proposal would allow, and perhaps require, “portability” of local and state funds. When a child enrolls in a charter or private school, funds would “follow the child.”
School choice is the New Coke of education policy. The supposed superiority of charters and private schools is based on dogma, not objective research. Students in public schools perform every bit as well when the circumstances of the students are taken into account.
Charters have become a separate school system in many districts, and separate is inherently unequal now just as it was in 1954, even if the basis for separation is more subtle. Charters recruit kids who do not have special needs, will not be discipline problems, and are likely to perform well in any school. Charters often expel other kids for pretextual disciplinary reasons, who then enroll in traditional public schools. Civil and disability rights organizations have already successfully challenged some of the discriminatory policies that make traditional public schools the high-risk pool in some districts. More such challenges are certain.
But there may also be an unexpected legal challenge.
Moody’s Investors Service published research in 2013 that found that charter schools were a growing credit risk for public schools. The risk was largely the result of “state policy frameworks that support charter school growth,” such as permissive rules for the authorization of new charters and increased enrollment in existing charters, as well as per-pupil or other funding formulas based upon enrollment. According to Moody’s, public schools that lost enrollment to charters “often cut academic and other programs, reducing service levels and thereby driving students to seek educational alternatives, including charter schools,” which “can exacerbate the loss of state and local revenues, as portions of both will follow those students to charter schools.”
Some analysts say the cycle that Moody’s described became a “death spiral” for some public school systems, such as Detroit’s. At the end of 2011, Michigan’s governor signed legislation to remove the statutory cap on university-approved charter schools. Charter schools in Detroit increased from 52 to 64 the next year, and the explosive growth continued. For the 2005-2006 school year there were 130,719 students enrolled in Detroit Public Schools and 25,802 enrolled in charters. For the 2013-2014 school year, there were 48,511 students enrolled in DPS and 58,612 enrolled in charters. State per-pupil funding for 2013-2014 was $7,246 for charter schools and DPS alike. Charters are not responsible for any part of DPS’s debt.
Moody’s reduced the Detroit Public Schools’ credit rating from B3 to Caa1, two notches above imminent default, on March 24, 2015. Moody’s specifically cited the “growing charter school presence” as a cause for the system’s financial difficulty.
Charter-Friendly Legislation May Violate the Contract Clause
Investors in public school bonds may have a claim that such charter-friendly state legislation impairs their contracts with public school districts in violation of the Contract Clause of the U.S. Constitution. The courts have been sympathetic to challenges to state legislation under the Contract Clause where the contract impaired is the state’s or a political subdivision’s own, especially where the contract is a debt instrument sold on financial markets, and most especially where the legislation is a change in taxes or spending, as opposed to new public health and safety protections.
Enrollment-based funding formulas in Michigan and elsewhere resulted in the loss to public schools of far more funds than the incremental cost of educating children enrolled in charters. Public schools lost funds for fixed costs, including debt service for bonds to pay for school construction, renovation, and equipment to serve the expected enrollment.
The powers of the purse are core legislative functions. State legislatures have discretion to set tax and spending priorities, the Supreme Court said in 1977 in United States Trust Co. v. New Jersey, but “complete policy deference to a legislative assessment of reasonableness and necessity is not appropriate where the State’s self-interest is at stake. A government entity can always find a use for extra money, especially when taxes do not have to be raised.” The Court cautioned that state legislatures may change spending priorities, but “the obligations of its own contracts” are not simply one priority for legislatures to consider “on a par with other policy alternatives.”
In United States Trust, the Supreme Court struck down legislation that repealed a statutory prohibition on the use of automobile toll revenues collected by the Port Authority for public transportation as an impairment of the contract with the Port Authority’s bondholders. The legislature was free to make public transportation a greater funding priority, but not by raiding revenues already contractually promised.
Several lower court decisions have since struck down legislation that resulted in the loss of revenues by public sector debtors, especially revenues that paid debt service for bonds issued for capital projects. In Davies v. City of Minneapolis, the Supreme Court of Minnesota held that the repeal of a hotel-motel liquor tax enacted to pay for the construction of a domed stadium was an unconstitutional impairment of bondholders’ contracts. In Pierce County v. State of Washington, the Supreme Court of Washington held unconstitutional a cap on a motor vehicle excise tax collected in three counties to help pay for “a comprehensive, multi-billion dollar regional transportation system.” In neither case did the legislation provide for other revenue to compensate for the loss.
The courts have not been persuaded by the argument that the debtor still had sufficient revenue from other sources to pay the bonds, so no harm no foul. Credit markets reward the ability to repay easily.
The courts have also struck down legislation where the effect on public debtors’ contracts was more complicated. In Continental Illinois National Bank and Trust Co. v. State of Washington, cost overruns and delays in the construction of nuclear power plants led to a citizen initiative to place controls on public spending for energy production. The initiative required that bonds issued to finance “any major public energy project” be approved first by referendum. The initiative applied to projects already under construction. A Washington State government agency was then building three nuclear power plants and had already issued bonds to pay for the construction to that point. A failed referendum would have effectively required the government agency to abandon the plants unfinished. The agency had promised earlier investors that the agency would issue additional bonds necessary to complete the plants. The Ninth Circuit said that the referendum requirement would “impair the ability of [the state agency] to carry out its covenants in the manner originally promised,” to repay bonds with revenues from the electricity generated by the plants. “Limitation of public spending is . . . certainly a legitimate state goal,” the court said, “but its weight is diminished when the state limits its own previous financial commitments.”
In Tyrpak v. Daniels, the Supreme Court of Washington struck down legislation that allowed one local government to annex territory from a contiguous local government. The local government that lost territory also lost property tax revenue, the principal source of funds to repay bonds, which impaired their bondholders’ contracts. “[T]he relevant question,” the court said, “is whether the legislation detrimentally affects the financial framework which induced the bondholders originally to purchase the bonds, without providing alternative or additional security.”
State legislation to encourage the growth of charters has detrimentally affected the financial framework of public schools. Investors relied on the existing framework when they decided to purchase schools bonds. And states that enacted legislation to encourage the growth of charter schools have generally provided no alternative revenue to pay public schools’ debt.
Most states that have created parallel systems of traditional public school and tax-funded charter schools have not paid for the additional costs with additional taxes. Instead, most states have paid for charters from traditional public schools’ funds and thus lowered the priority of the obligations of their own contracts with investors in public school debt. The Contract Clause forbids that policy alternative.
Any Remedy Would Be a Victory
It is unlikely that a successful Contract Clause challenge would result in the elimination of funding for existing charters. A court would more likely enjoin new charters or the expansion of existing charters, or perhaps limit the future diversion of funds to the incremental costs of educating children who enroll in charters to protect the contract rights of bondholders. Any remedy a court might fashion, however, would be an enormous victory for traditional public schools.
A legal challenge by bondholders would be more than defensible to the public. DeVos’s clueless testimony at her confirmation hearing was an embarrassment to billionaire dilettantes everywhere, but “alternatives” to public schools remain wildly popular with what Bernie Sanders calls “the billionaire class.” Most Americans are more skeptical. Americans don’t regard public schools as creeping socialism or public school teachers as union thugs, and don’t support looting public schools to pay for charters or private schools.
It is a fight that supporters of traditional public schools should welcome.