Cloaking Inequity

A Reuters article The new U.S. visa rush: Build a charter school, get a green card describes a new “loophole” for foreigners to buy their way into the US by sending charter schools money. Thanks to Karen from Houston for bringing this article to my attention. Here are some excerpts:

Volatility has made it tough for startup schools to get financing. But an unlikely source of new capital has emerged to fill the gap: foreign investors. Wealthy individuals from as far away as China, Nigeria, Russia and Australia are spending tens of millions of dollars to build classrooms, libraries, basketball courts and science labs for American charter schools. Under a federal program known as EB-5, wealthy foreigners can in effect buy U.S. immigration visas for themselves and their families by investing at least $500,000 in certain development projects… Enterprising brokers have seen a golden opportunity to match cash-starved charter schools with cash-flush foreigners in investment deals that benefit both.

Last month, Fitch Ratings warned it was likely to downgrade bonds backed by charter schools because the sector is volatile and the schools are highly leveraged. Such risks mean charter-school debt is typically considered speculative, rather than investment grade, said Eric Kim, a director at Fitch Ratings. Meanwhile, the IRS has signaled it plans closer scrutiny of charter schools’ tax-exempt status if they rely on for-profit management companies to provide their classroom space and run their academic programs, Hall said. He sent his clients a long memo this summer warning that the stepped-up IRS oversight could put some at “significant risk.”

This fall alone, more than 150 established charter schools didn’t open their doors to students. Such volatility “will spook people, no doubt about it,” said David Brain, chief executive officer of Entertainment Properties Trust, which has historically owned movie theaters but branched out to invest in charter schools, including the six that were shuttered in St. Louis. Brain said the closures did not affect his company’s bottom line and he remains convinced charter schools are a profitable sector.

Charter schools have become particularly trendy because they are pitched as recession-proof. An investor forum in China last spring, for instance, touted U.S. charter schools as a nearly fool-proof investment because they can count on a steady stream of government funding to stay afloat, according to a transcript posted on a Chinese website.

Arizona educator Holly Johnson, who runs three charter schools and plans to open a fourth next year, said she couldn’t believe how easy it was to secure $4.5 million in funding from abroad. “We didn’t have to do anything at all,” she said, other than open her schools to potential investors. They didn’t ask many questions, she said. Their concern was more basic: “They wanted to come over and make sure it was real.”