Bill would use state funds to help charter schools borrow money

PHOENIX — Republican lawmakers are moving to allow the use of state funds to help privately run charter schools borrow money at better interest rates.

The legislation approved Wednesday by the Senate Appropriations Committee would set aside more than $100 million in what effectively would be a guarantee to lenders that payments will be made on loans made to these schools. Those funds could be leveraged to effectively back $350 million in borrowing, Richard Stavneak, staff director of the Joint Legislative Budget Committee, said Wednesday.

The 5-3 party-line vote on SB 1531 sends the measure to the full Senate; companion legislation is expected to be taken up by the House.

The move is an outgrowth of efforts by Gov. Doug Ducey to ensure that there is space for students in the most in-demand public schools in the state. Put simply, the governor believes that lower borrowing costs will lead to more of these schools.

But Stavneak said while the measure is written to apply to all public schools, it really is aimed at charter schools.

These are privately run schools, which in Arizona can be operated on a for-profit basis. But they cannot legally charge students anything beyond what the state provides in aid. And they are not supposed to discriminate among applicants.

Stavneak said traditional school districts don’t need the help for one reason: Any money they borrow is backed by a tax on residents. So they already get good bond ratings and the lower interest rates that follow.

By contrast, he said this guarantee of payments could raise the bond ratings for charter school owners from B to AA-minus.

The proposal drew questions of its legality from Sen. Steve Farley, D-Tucson.

“This program on its face seems to be extending the state’s credit to private charter school operators,” he said. And the Arizona Constitution says it’s illegal for the state to “ever give or loan its credit … to any individual, association or corporation.”

“That’s a sort of open legal question,” Stavneak conceded.

House Minority Leader Eric Meyer pointed out that in order to be eligible for the money, a school would have to have an A rating from the state Department of Education. He questioned whether that runs afoul of yet another constitutional provision which requires equal treatment of all schools.

“Another legal question that I will defer to the lawyers,” Stavneak responded.

But the more immediate question is the issue of having the state on the hook if the owner of a charter school defaults on a loan.

“You can see all the shenanigans they could pull, even without dissolution of the corporation,” noted attorney Tim Hogan of the Arizona Center for the Law in the Public Interest. Hogan, who has sued the state over other education funding issues, said he would need to examine the provision more closely before deciding whether to contest it.

But Dawn Wallace, the governor’s chief education adviser, said the proposal is crafted in a way that should sidestep any legal problems.

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Gubernatorial press aide Daniel Scarpinato said his boss thinks the plan is a good idea.

“He believes that our best public schools in this state should have the ability to expand so that they can offer a great education to more students,” Scarpinato said.

The legislation as approved does not necessarily guarantee that: Stavneak acknowledged the charter operators would not have to use the money they borrow with the state guarantee to actually build new schools.

“So we may not get a single additional seat built,” said House Minority Leader Eric Meyer, D-Paradise Valley. “All the dollars could be used to refinance existing bonds, lower the interest rate on those bonds, and increase profits for the corporations that own charter schools.”

Wallace said what’s now in SB 1531 has some specific limits on who can borrow. Aside from having to be an A-rated school, Wallace said they also have to be “financially sound” and have a “verifiable enrollment demand” as shown by a wait list.

And they also have to be willing to provide assistance to an underperforming school, she said.

Wallace said all requests for help will be approved by a board composed of the governor, the treasurer and the gubernatorial-appointed director of the Department of Administration to ensure they have the ability to meet the debt service.

She said the legislation is crafted in a way that the governor’s lawyers believe avoids the constitutional problem. The key, Wallace said, is what the state is — and is not — agreeing to pay.

Take the case of someone wanting to build a $10 million elementary school and getting a loan from a private lender under this program.

If the company that owns the school misses a payment, this $100 million fund would pick up the obligation, making principal and interest payments.

And that $100 million, she said, is state money.

But Wallace said the state will not pay off the entire debt. Instead, it would start making payments only until the lender declares the borrower in default and begins foreclosure.

She said once that legal process was completed, the lender would be obligated to repay the payments the state made in the interim.

She acknowledged that presumes the lender actually recovers more from the sale of the property than the amount owed. If not, Wallace said, there is no obligation to refund the state’s payments.

Wallace said, though, the state could still pursue the company’s officials separately to recoup the funds. But she insisted that is unlikely to be necessary, saying the record throughout the country shows a very low rate of default by charter schools.