Minnesota Lawyer
At a rally on Tuesday morning, children held signs advocating an exemption from the school-aid shift for charter schools. (Staff photo: Peter Bartz-Gallagher)
Academia Cesar Chavez has operated on St. Paul’s East Side for a decade. The bilingual elementary school’s primary goal is to lower the achievement gap for Latino students. Enrollment next year is expected to be nearly 400, with more than 90 percent of the students of Latino descent.
Ramona Rosales, the executive director, says the school has been financially vigilant and currently holds a 20 percent operating reserve. But if the state delays 40 percent of school payments this year — as anticipated in the budget agreement reached by Gov. Mark Dayton and the GOP-controlled Legislature — Rosales worries about the school’s viability.
She estimates that Academia Cesar Chavez would need to borrow $650,000 to continue normal operations. Banks have balked at lending the school that much money. “We’re fiscally sound,” Rosales said. “This is not supposed to be happening to us.”
The 60-40 schools shift enacted in Tuesday night’s special session — which will save the state $700 million in the current biennium — will hit charter schools like Academia Cesar Chavez particularly hard. That is because, unlike public school districts, they cannot secure loans with the full backing of taxpayers. That allows public school districts to borrow money with interest rates of generally less than 1 percent. But charter schools have to seek credit in the public marketplace.
A study released in March by the Nonprofits Assistance Fund determined that nearly half of the 110 charter schools surveyed borrowed money to cover cash shortfalls stemming from the $1.9 billion shift that was in place during the last budget cycle. It also found that schools struggled to access credit and were paying loan fees ranging from 6 percent to 23 percent. The study concluded that a shift of that magnitude was “unsustainable for many charter schools in Minnesota and unless this is addressed, solid, high-performing charters will be at risk of ongoing financial instability.”
Eugene Piccolo, executive director of the Minnesota Association of Charter Schools, puts it more starkly. “There are schools that are getting very close to the edge,” he said. “This might push some of them over.”
Piccolo further argues that politicians are misleading the public when they claim that education funding is being increased by $50 per pupil. “Yes, everybody can say they’ve increased funding for education, but in reality, have you done that?” he asked. “At what point does it become a tipping point, [and] you can never afford to pay it back?”
Public school districts will not be immune from the effects of a 60-40 shift, either. Charlie Kyte, executive director of the Minnesota Association of School Administrators, estimates that 60 to 70 percent of school districts will probably have to borrow money to make ends meet. In addition, he points out that even those districts that aren’t forced to borrow will take a financial hit because they will not be earning interest on cash reserves that they tap to pay their bills. “One hundred percent are either going to pay interest or lose interest,” Kyte said. “Every district is going to see a cost for this.”
Kyte is also concerned about the possibility of rising interest rates as schools wait to receive their full allocation of dollars. “Thank goodness the interest rates right now are fairly low,” he said. “The likelihood of this money being paid back anytime soon is remote. As we go further down the road, it’s just absolutely a sure thing that those interest rates are going to rise significantly.”
Minneapolis Public Schools has so far managed to rely on cash reserves to manage previous shifts. But James Grathwol, a lobbyist for the school system, says that it will almost certainly need to borrow money to address cash shortfalls if the 60-40 shift goes forward. He is worried about the long-term financial stability of the school system given the turbulent funding situation.
“I think the real issue is the state’s recent predilection for using an education aid payment shift rather than actually solving the problems with tax increases or deep spending cuts,” Grathwol said. “We have a deep philosophical divide here. It’s not being resolved. It’s being skirted.”
Public school districts also expect to take a financial hit from damage to the state’s bond rating. Earlier this month Fitch Ratings downgraded Minnesota’s rating, citing the state’s acrimonious budget standoff and repeated reliance on short-term budget fixes. School districts, and all other local units of government, will likely find it more expensive to borrow money because of that development. If the other two bond rating houses — Moody’s Investors Service and Standard & Poor’s — eventually follow suit, it could make borrowing costs significantly higher.
Kyte says that this is especially a concern for major capital projects such as building new schools. “The reality is that interest rates [are] going to kick up a little bit,” said Kyte, noting that it is impossible to predict exactly how much they will increase. “I can tell you if the interest rates on those bonds go up half a percent, it’s a lot of money that the local taxpayers are going to pay.”
Rep. Mindy Greiling, DFL-Roseville, the lead minority member of the Education Finance Committee, has long been a critic of relying on education funding shifts to balance the state’s books. Greiling worries that school districts have been too willing to go along with the accounting gimmicks and now are going to face real economic repercussions. “The schools will suffer a huge blow,” Greiling said. “I’ve been telling them for years quit being so quick to offer up the shift, because it’s becoming a habit.”
Academia Cesar Chavez’s Rosales fears that the funding shift could ultimately threaten the school’s ability to keep its doors open. “I am pleading to the governor and the Legislature that they will reconsider this, that they will consider something different for charter schools,” she said. “We can’t lose hope.”
