Many proponents of school choice use the claim of the market’s capability to enhance efficiency and improve performance to call for its expansion. But no markets are perfectly competitive, and the local market for public goods is filled with institutional arrangements that make it differ from the neoclassical ideal. In this paper, we look at a particular legal arrangement and assess how it affects the ability of charter schools to gain market share. Using data from 37 states that have adopted charter schools as an education reform, we estimate a fully Bayesian model of the effects of various provisions in the charter laws on charter school density or market share. We find that barriers to entry built into state laws governing the issuance of charters have a strong effect on the growth of charter schools.

Institutions and the Market for Education

There are many types of school reform being implemented in the United States - and many of them expand choice. Charter schools fit into a pro-market, pro-competition agenda that structures many debates about how to reshape the way in which education is delivered. They are arguably the most popular way to expand choice employed by policy makers.

Appearing first in the early 1990s and growing virtually exponentially in market share, charter schools now play a prominent role in the nation’s public education system: As of May 2003, there were almost 2,700 charter schools operating in 41 states (and the District of Columbia) educating over 684,000 students. As is well known, charter schools, are publicly funded schools of choice that typically have fewer restrictions and regulations governing their behavior. In return for this greater freedom, charter schools are supposed to be held more accountable for their performance.1 Given their allure, charter schools have sparked serious scholarly debate. The mainstream of research in charter school reform focuses primarily on assessing the effectiveness of charter schools and on their propensity to innovate and experiment.

Given their prominence in the debates over markets and education, it is not surprising that charter schools have been the center of another literature: the effect of charter school competition on the traditional public schools. It is this area, the broader market for education in which charter schools play a part, that is the focus of this paper. Specifically, we investigate empirically the effects of variation of a particular set of institutions—chartering laws—on the market share of charter schools in the states.

The crux of the market argument for school choice, as espoused by supporters of charter initiatives (and school choice more broadly), is that once traditional public schools lose their monopoly control over enrollments they cannot lag behind charter schools (or any superior school) in the quality of the services they offer to parents as consumers. If they do, the market will punish them: they will lose their students to “better” schools and some of them may even be forced to close their doors.

One of the cornerstones of market theory is the assumption that there are no barriers to entry that prevent the new, innovative schools of choice, such as the charters, from increasing their share of the market. In any real market however, as Porter points out, there are a variety of factors that might serve as barriers to entry, including the deliberate tactics of competitors, switching costs, customer loyalty, economies of scale, and government policy. Even economist Milton Friedman believes that due to market imperfections such as monopolies and neighborhood effects, government is essential in setting and enforcing the rules of the game. However, as he asserts in the example of medical licensure, the consequence of such a barrier to entry may be a reduction in both the quantity and quality of the service provided.

Although economic theories examining the relationship between supply and demand sides of regulation have been around for over thirty years, the issue of legal barriers to entry in schooling is an area that is not rich in quantitative analysis. Here we are particularly interested in government policy—in the form of charter school legislation—as the crucial institution that shapes the market for education.

In the real institutional environment of educational choice it is manifestly not the case that neoclassical perfect competition exists. For example, in their investigation of legal barriers to entry in California and Michigan, Wong and his colleagues find evidence that there is “a significant positive relationship between a supportive legal environment and charter school density.” Similarly, Teske et al. note that in differences in charter laws in the states they study lead to different perceptions of charter schools by school district officials and different attitudes toward adopting the innovations of the new schools. The common thread in this research is that the nature of the market is mediated by legal and political factors.

In this paper, we look at a particular legal arrangement—charter school legislation—and assess how it affects the ability of charter schools to gain market share.

The Importance of Charter Laws

Charter laws, as institutions shaping policy outcomes, have several important dimensions that might matter to their market share:

Multiple Sponsors

The first of these is the number of sponsoring authorities allowed to grant charters. Proponents of charter schools argue that one of the most important differences among charter laws is whether a school board is a single chartering authority. This, they argue, inhibits the development of numerous independent charter schools. The researchers in the Center for Education Reform (CER) make this assertion and further report that 57% of charter schools operating in the 2000/2001 academic year were approved by entities other than a local school board. States with multiple sponsors have on average nearly eight times more charter schools than states with a single sponsoring authority.

The importance of multiple sponsors is also emphasized in the empirical literature on charter schools. In their study of charter schools in four cities, Teske et al. note that school and union officials in Massachusetts credit the dual nature of that state’s chartering provisions with facilitating the expansion of charters. Similarly, in discussing the case of the struggle of “Margarita Ortiz” to gain approval for a charter school in Oakland, Fuller (2000) notes:

But the Oakland school board refused to grant a charter for a new middle school; it said no to Ortiz and her comrades. The board was caught up in its own bureaucratic aloofness and penned in by the teacher union that feared the emerging threat posed by the new charters. Ortiz then figured out that Sacramento’s charter law provided more than one way to secede from the education establishment. So she went to the priest, the city’s fledgling Latino leadership, and well-heeled conservatives who backed school choice. Together they moved the county education office to approve their license for liberation.

Caps on Total Number

Another provision in the charter law that can have an obvious effect on the absolute number and density of charter schools is the limit on the total number of charters that can be granted. This is a common provision: only 12 out of the 37 charter laws we study5 do not place a cap on the number of charter schools in the state/district, or on their number allowed per year. Note that we do not include a measure of caps in our statistical model, for reasons given below.

Allowable Applicants

A third provision of charter laws that is possibly important for charter school market penetration is the presence or absence of limits on exactly who can charter a school—for example, are for-profit EMO’s (educational maintenance organizations) allowed, or only non-profit groups, or only groups affiliated with the traditional public schools? One reasonable conjecture is that states that permit a larger number of individuals and groups both outside and inside the structure of public schools to apply for a charter will have higher charter school density than states that allow only public schools and their personnel to start charter schools.

Conversions

Finally, charter schools can be either newly created or the existing public or private schools can be converted into charter schools. In 2000 all the states with charter laws allowed for the conversion of public schools to charter status, but only 10 allowed private school conversions. It is reasonable that states that allow for both types of conversions will have, on average, more charter schools than states that prohibit private schools conversions.

Discussion

“Institutions matter” is a familiar refrain in political science and policy studies, and it comes as no surprise that they matter in the case of school choice policy. The institutional environment that states create for their school choice initiatives (or, more accurately, the environment created by political conflict and compromise) can have a profound effect on the performance policies and programs, including market-based reforms. In our examination of the effect of charter school legislation on market share, we find that one particular set of provisions regarding who can grant charters has a substantial effect on their share of a market for education. This finding supports earlier qualitative research and anecdotal evidence suggesting that multiple sponsoring authorities enable charter school founders to avoid procedural or political obstacles occasionally erected by one authority.

Those applying the market model to even private goods must take into account the actual institutional arrangements, historical circumstances, and other factors that may make the market less than fully competitive. This point is even more germane in the case of public goods. Since at least 1990, with the publication of Chubb and Moe’s seminal study of school choice, advocates of market-like approaches to school reform have been forced to pay at least superficial attention to how markets for schools might actually function. Our work shows that the concern for how public policies affect access to the local market for schools matters substantially. Consistent with economic theory that emphasizes the importance of barriers to entry, our findings suggest that actors who support or oppose the successful spread of charter schools as an educational alternative have, in the sponsorship provisions of charter legislation, a potentially powerful lever for affecting the market share of the charters. In turn, both proponents and opponents of charter schools are justified in focusing on this seemingly minor provision of charter laws.

Credits

By Ted Kolderie, July 1, 2005, Center for Education Reform

When Ray Budde died the news made the New York Times. This is not easy to do. The Times obituary page is reserved for people of special interest and of significant accomplishment. Susan Saulny, who covers education, wrote the story. It was reprinted elsewhere. On the West Coast National Public Radio did an interview about it. So this was pretty special for the charter idea.

The attention to Ray Budde did puzzle people. "Who was Ray Budde? What did he have to do with chartering?".

It is an interesting story. It helps to explain where the charter idea began. And it is important for what it says about the way ideas start and spread, and about the way movements grow and develop.

Ray said he'd always had a strong interest in "the way things are organized" and in "how things work or don't work in organizations". He'd been a teacher, then junior high principal in East Lansing MI. In the late 1960s he was teaching educational administration at the University of Massachusetts when the dean reorganized its school of education. He was interested in organizational theory, and in 1974 offered the Society for General Systems Research some ideas for the reorganization of school districts, in a paper he titled "Education by Charter".

As he told the story years later in a piece he wrote for The Kappan (September 1966) he asked colleagues and friends: "Does this make sense? Is it workable? Would a district be willing to give it a try?" The response? Zero. Nobody thought there was a problem significant enough to require such a restructuring. The attitude then was: Get a good new program idea, run some inservice training. That'll do it. So Ray put the idea away and went on to other things.

Then came the 1980s: The Nation At Risk report and all the media attention and the Carnegie Forum report that followed. And suddenly everyone was talking 'restructuring'. So Ray dusted off his paper and in early 1988 got it published by the Northeast Regional Lab. He sent it around widely; even to then-President George H.W. Bush. Then he waited. And waited.

One Sunday in July his wife put down the newspaper and said: "Hey, Ray, you've made the New York Times!" And she showed him the column reporting the American Federation of Teachers' support for the idea of teachers setting up autonomous schools. Albert Shanker, president of the AFT, had in fact floated the proposal in a talk at the National Press Club in the spring of that year. He said Ray Budde had the best name for these schools: charter schools.

Budde's proposal was actually for a restructuring of the district: for moving from "a four-level line and staff organization" to "a two-level form in which groups of teachers would receive educational charters directly from the school board" and would carry the responsibility for instruction. It dealt with existing schools. This is the concept that Paul Hill later called the 'contract district'; that the Education Commission of the States later termed the "all-charter district'. Shanker introduced the idea of the teachers starting schools new (though within existing school buildings). But like Budde, Shanker simply put his idea out there; did not move to implement it.

Implementation began in Minnesota. A study committee of the Citizens League, chaired by John Rollwagen, then CEO of Cray Research, picked up the idea early after Shanker's Press Club talk. It further modified the idea; envisioning it in a framework of state policy, and with schools being approved by the state as well as by a local board.

In October 1988 the Minneapolis Foundation brought Shanker to Minnesota for the Itasca Seminar. Two legislators present - Sen. Ember Reichgott and Rep. Ken Nelson - picked up the idea and, as legislators are wont to do, began thinking about state legislation.

Sen. Reichgott's charter provision got into the Senate omnibus bill in 1989 and again in 1990. The House would not accept it. As the conference committee was breaking up in 1990 Rep. Becky Kelso went over to Reichgott and said, "If you'd like to try that charter idea again next year I'd like to help you". And in 1991 Kelso and Nelson did get a - compromised - version through the House. The Senate agreed. Gov. Arne Carlson signed it into law.

In 1992 California enacted a chartering program, in somewhat different form. In 1993 six states acted, introducing more variations on the original idea. Through the 1990s the concept continued to evolve; an 'open system', like LINUX, continually changed and improved by all those working on it.

Charter school law needs adjustments

GRIPES DESERVE ATTENTION OF LAWMAKERS

San Jose Mercury Editorial, October 25, 2006

Approving and monitoring charter schools has become increasingly contentious.

That became clear in testimony last week at a hearing that Sen. Joe Simitian, D-Palo Alto, held at the Santa Clara County Office of Education. And it was borne out in the same building 12 hours earlier, when trustees of two local school districts and members of the county education board sparred over two charter applications.

In what has become a familiar pattern, the local districts had rejected the charters out of hand. On appeal, the county office conscientiously, but somewhat resentfully, reviewed the applications. The board conditionally approved one -- Rocketship -- despite San Jose Unified's veiled threat to sue. There are now 20 charter schools in Santa Clara County.

``It is bizarre to us that local school districts don't want to charter schools any more,'' county board member Bill Evers said at one point.

The Legislature crafted the charter school law to ensure local districts would evaluate charter schools on merit, based on nine criteria. It hoped districts would work with and learn from innovative charters. County education offices were designated as appeals boards, but the Santa Clara County office has become the de facto chartering agency.

Many school districts resent charter schools' competition for students and state dollars. Some will always be defiant, regardless of what's good for families that want alternatives. However, the Legislature could improve the chartering process and reduce the acrimony by:

• Softening the financial impact on districts. By law, school boards are prohibited from considering the financial impact on their districts when evaluating charters. But the loss of roughly $6,000 per student to charter schools is the real reason why many districts vote no.

Some states offer a grace period, continuing to reimburse districts for a year after students leave. Illinois weans the districts over several years, on a declining scale.

California should explore this idea. This year, the Legislature took the opposite approach, passing AB 2954, which would have given districts with declining enrollments the right to reject charters. Fortunately, Gov. Schwarzenegger vetoed it.

• Expanding building aid. Under Proposition 39, districts are obligated to provide suitable classroom space to charter schools. Many refuse; others give them the worst space. (San Jose Unified, which provided Downtown College Prep with a former elementary school, is a notable exception.)

The state should expand its lease assistance program for charters located off district grounds in high-poverty areas.

• Allowing other groups to grant charters. Giving districts a veto over charters is like giving Microsoft power over Google. Qualified charter school applicants deserve fair reviews and constructive oversight. Other states, like New York and Minnesota, allow university schools of education to authorize and monitor charter schools. California's legislators killed a bill allowing this a few years ago; it's time for another try.
• Covering costs of review. A district that authorizes a charter is entitled to receive from 1 percent to 3 percent of a charter's annual tuition revenue for oversight fees: between $12,000 and $36,000 for a school of 200. But there's no reimbursement for the initial application review. The Santa Clara County Office of Education, which works collaboratively with charters, can spend hundreds of hours and tens of thousands of dollars on each application. To encourage this cooperation, the state should cover the board's costs.

California has a basically sound charter law. But the state could do more to ease tensions and recognize, as Simitian said, the complaints of ``legitimate competing interests.''