California Bans For-Profit Charters and Some Services Performed by For-Profit Vendors
Assembly Bill 406, signed by Governor Brown on September 7, 2018, amends the Charter Schools Act (“CSA”) to expressly prohibit a charter school from being operated as, or by, a for-profit corporation beginning July 1, 2019.
All charter schools are recipients of state funding, but are also intended to operate independently and are exempt from most laws applicable to traditional public schools unless otherwise stated in the law or the individual charter. Currently, Education Code Section 47604 of the CSA provides that a charter school may (but is not required to) elect to operate as, or be operated by, a nonprofit public benefit corporation. Nonprofit corporations are generally organized for a public purpose, not for the private gain of any person. Charter school authorizing agencies (including school districts and county boards of education) often require nonprofit status because Section 47604 limits the liability of authorizing entities when a charter school is operated this way.
Nevertheless, the law has been silent as to whether a for-profit entity can operate or manage a charter school directly, or to what extent a nonprofit charter operator may contract for the services of for-profit companies. Prior, failed legislative attempts have sought to subject charter schools to more laws applicable to traditional public schools, and respond to the notoriety of for-profit entities’ involvement in charter operations. For example, K12, Inc., a for-profit education management company that was heavily referenced in the legislative analysis of AB 406, has contracted with certain charter schools in California to provide nearly all aspects of the charters’ operation in exchange for a portion of their annual state funding. Following accusations that it manipulated attendance records and misled parents into enrolling students in the charter schools it managed, K12, Inc. settled false advertising and unfair competition claims brought by the California Attorney General.
AB 406 amends Section 47604 to specify that, as of July 1, 2019, a petitioner who submits a charter petition, or a charter renewal or material revision application, “shall not operate as, or be operated by a for-profit corporation, a for-profit educational management organization, or a for-profit charter management organization.” According to its author, this bill comes in response to a “disturbing trend” to privatize public schools in the charter sector, whereby a for-profit company becomes the primary vendor for the school. In passing AB 406, the Legislature considered whether the shareholder-driven goals of any for-profit corporation, coupled with the CSA’s failure (until now) to restrict for-profit operation, “provide a perverse incentive for these charter schools to limit services for students in order to increase profits.”
While the bill author’s purpose was to prohibit all for-profit corporations from operating charter schools, there is likely to be disagreement as to what types of service contracts will actually be prohibited under AB 406. Although the revised Section 47604 attempts to define operation by or as a for-profit, and will now list specific services a for-profit entity is prohibited from performing – including selection of charter board members, managing “day-to-day operations” of the charter school, and budget approval or management – charter operators and their authorizers may have different interpretations of these services. At least some for-profit companies are likely to take the position that their services for affiliated nonprofit charter schools do not have to change under the new language in Section 47604. In fact, a K12 Inc. spokesman reportedly said that K12 does not believe it will have to change its current operations in order to comply with AB 406.
Therefore current and potential charter operators will need to be mindful of the explicit prohibitions, and may also need to delve more deeply into proposed management and services arrangements in order to determine whether a particular charter complies with both the letter and spirit of this new law. We also anticipate that some for-profit charter operators or management companies may rush to submit charter petitions immediately in an effort to obtain charter approvals
before the new prohibitions go into effect, which would allow them to operate under a for-profit structure for up to another five years.
We encourage you to consult with legal counsel regarding these governance and operations issues should you receive any charter petitions or renewal or material revision requests, and current authorizers may want to work with legal counsel now to review the governance structure of existing charters to determine any impact AB 406 may have on them going forward.