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Imagine you live in a city with a set of open-enrollment public schools, serving predominantly low-income children of color, where students learn at twice the rate of their peers in neighboring schools. And what if those high-performing schools were ready, willing, and able to enroll more students, maybe even double or triple in size? Sounds too good to be true, huh?

Well, that city actually exists, and it’s Boston. But, remarkably, the powers that be are blocking the city’s best schools from growing for the simple reason that they are charter schools.

Conflict between charter schools and their local school districts is nothing new, having persisted since the first charter school opened in 1992. Although the level of vitriol ebbs and flows, there has rarely been a lasting rapprochement (see “Competition with Charters Motivates Districts,” features, Fall 2013). Over the past several years, the Bill and Melinda Gates Foundation has boldly attempted to broker nonaggression pacts and facilitate genuine cross-sector partnerships. There are now 15 such “district-charter collaboration compacts” in place, many of which promise to accelerate the development of “portfolio” school systems, with a mix of district-run and charter schools. Although the degree of alignment and cooperation varies from city to city, each district that has signed onto a compact adopts (at least on paper) a “theory of change” that includes charter schools as an integral part of a broader school-reform strategy.

Some “compact cities” have fully embraced charters as reform partners. Not surprisingly, New Orleans stands out as the leading example. As is now well known, after Hurricane Katrina, Louisiana’s newly created Recovery School District (RSD), which operated on a small scale before the storm, rapidly expanded its footprint in New Orleans. Using its authority to intervene directly in low-performing schools, the RSD took over 63 more New Orleans schools after the flood in 2005 (see “New Schools in New Orleans,” features, Spring 2011). While initially operating most of these schools itself out of necessity, the RSD began systematically replacing direct-run schools with charters. In 2013, more than 80 percent of New Orleans public school students attend charter schools, including 12 charters that are authorized by the Orleans Parish School Board, which still operates six of its own schools as well. Under the auspices of the district-charter compact, New Orleans has an integrated student-enrollment system, a common report card for all schools, and a transparent process for allocating facilities to school operators. New Orleans is not alone. Other urban districts, including Denver, Hartford, New York, and Spring Branch in Houston, have also embraced a school portfolio strategy with meaningful cross-sector collaboration.

The Charter Scene

Boston is also a “compact” city. The agreement between Boston Public Schools (BPS) and the Boston Alliance for Charter Schools, signed in September 2011, was billed as a shared commitment to “providing all Boston students and families with improved schools and broader choice, [through] a new culture of collaboration between the district and charter schools.” As a result of the compact, BPS and the local charter sector have established several school-to-school partnerships (some including local parochial schools) in order to share and develop effective instructional practices. In addition, the compact created joint initiatives to better align the student enrollment process, deepen the pipeline of well-prepared school leaders, and address the unique challenges of African American and Latino boys. Notably, discussions held under the auspices of the compact led Boston Public Schools to lease three empty school buildings to charter school tenants, and the district is planning to lease one more before the end of 2013.

Compared to the antagonism that defined the district-charter relationship in Boston before the compact, these are truly significant steps forward that have served to build trust across the divide and establish productive working relationships between senior district personnel and various charter-school leaders. Compared to some other compact cities, however, Boston is still in the early stages of developing a meaningful cross-sector partnership. According to an interim report from the Center on Reinventing Public Education, BPS and the city’s charter schools are still “getting to know each other.”

The Boston compact stops short of committing the district to supporting expansion of charter schools in the city. Two types of charter schools operate in Massachusetts: Horace Mann charter schools are effectively “in-district” charters whose applications must first be approved by a host school district and, with a few exceptions, the local teachers union. Teachers in Horace Mann charter schools must belong to the local union, but they may be subject to a thin contract that waives most of the provisions not associated with compensation. Horace Mann charter schools are authorized by the state Board of Elementary and Secondary Education (BESE) and receive their funding through the state, but the amount they can keep and use at their discretion is usually a subject for negotiation with their sponsoring district.

Commonwealth charter schools, in contrast, are fully independent of the local school district. Although Commonwealth charters are authorized by BESE and subject to most state laws and regulations governing public schools, they are exempt from certain regulations related to teacher certification and tenure, and they are free from the confines of any preexisting collective-bargaining agreements.

Not surprisingly, most Massachusetts school districts, including Boston’s, tend to support more Horace Mann charter schools but oppose any increase in the Commonwealth variety, since Horace Mann charters provide host districts with a great deal of discretion and ongoing oversight authority. Boston has made particularly effective use of Horace Mann charters, especially as a vehicle for turning around its lowest-performing district schools. Most notably, BPS has supported Horace Mann charter applications for the nonprofit school-management organization Unlocking Potential to operate two such schools. BPS has also gone a long way in providing Unlocking Potential with broad discretion over its staffing and budget policies. So far, Unlocking Potential’s results have been impressive, especially in terms of annual student-learning gains.

No Room to Grow

The current city administration has strongly opposed expansion of Commonwealth charters in Boston. State law specifies the number of Commonwealth charter schools that are allowed statewide and, via spending limits, the number of students who can be enrolled in charter schools in any given district. In 2010, the law was amended to double the number of charter students permitted in the state’s lowest-performing districts, from about 9 percent to 18 percent of public school students. Since then, seven “proven” school operators have been granted charters to expand their operations in Boston.

As of early 2013, virtually all of the new seats authorized for Boston under the 2010 amendment have been approved by BESE, leaving no room for additional growth in city charters. The first casualty of the 18 percent cap was Edward Brooke Charter Schools, one of the highest-performing elementary-school operators in Massachusetts, which was denied a charter to open a fourth school in Boston.

Facilities are a particular pain point for charter schools, and their access to underutilized BPS school buildings is one of the core concerns of the compact. As noted above, BPS took an important step in 2012 by leasing empty buildings to charter operators for the first time. Additional leases have been hard to come by, with few if any prospects for another round of long-term leases. While BPS staff has expended significant time and political capital in order to make this limited space available to charters, the district’s primary concern is a growing number of young students entering Pre-K programs and elementary schools. Compounding the facilities planning challenge is the upcoming launch of a new student-enrollment system, which will reallocate students among BPS schools. Notwithstanding these valid considerations, there appears to be a significant amount of underutilized space, which is unevenly and often thinly spread throughout BPS schools. According to data published on the district’s web site, Pre-K–8 capacity in BPS is more than 55,000 seats, while enrollment in these grades is only about 40,000. Actual excess capacity at these grade levels is probably much smaller than 15,000 seats, given the unique constraints in many of the buildings and the extra space requirements of specialized programs; but it’s clear that there is significant slack. There are almost 3,000 empty seats in the district’s high schools, where enrollment is dropping.

Even with a small risk to the district of ending up with too few seats, all the internal incentives at BPS are to hedge against unexpected enrollment increases, overall or in particular neighborhoods. This bias is compounded by the pain of closing or consolidating schools. The result is a strong reluctance to cede any more seats to charters, even though projected charter enrollment growth, based on schools that have been authorized but not yet filled, will almost certainly generate even more excess capacity in BPS buildings.

Record of Success

What makes Boston’s resistance to expanding charter schools so remarkable is that the city’s charter sector includes some of the best urban public schools in the country, of any kind.

Over the past few years, several studies of charter school performance in Boston have been conducted by a variety of researchers using different methodologies. Regardless of the sponsoring organization or the research design, these studies all reach the same conclusion: Commonwealth charter schools in Boston are exceptionally high performing.

A 2009 study by a team of Harvard and MIT researchers, under the direction of Thomas Kane of the Harvard Graduate School of Education, examined the differing effects on middle-school academic achievement (as measured by the Massachusetts Comprehensive Assessment System or MCAS, the statewide testing instrument) of Boston Public Schools, Commonwealth charter schools, and “pilot” schools. Pilot schools are autonomous schools, analogous to in-district charters, which were created shortly after the Massachusetts charter-school law was enacted. The study, which compared students who “won” and “lost” charter-school admission lotteries, found that achievement gains among Boston charter-school students were significantly higher than those of their peers in either BPS or pilot schools, especially in math. The impact of Boston charters was so large over the course of middle school that they effectively closed the math achievement gap between students in Boston and those in Brookline, its wealthy suburban neighbor.

In February 2013, the Center for Research on Education Outcomes (CREDO) published its findings from an analysis of matched student pairs, comparing MCAS gains of Boston charter-school students with demographic “twins” from BPS. The results were even more dramatic than the Harvard-MIT study (see Figure 1). The CREDO report found that students in Boston charter schools gain the equivalent of 259 additional days of instruction in math and 245 days in reading compared to their counterparts in traditional district schools. In other words, Boston charter-school students are learning at more than twice the rate of their district-school peers. “The average growth rate of Boston charter students in math and reading is the largest CREDO has seen in any city or state thus far,” the authors write. “The Boston charter schools offer students from historically underserved backgrounds a real and sustained chance to close the achievement gap.”

Another research team, led by Josh Angrist and Parag Pathak, directors of the School Effectiveness and Inequality Initiative at MIT, compared “long-term outcomes” of Boston charter-school students to outcomes for BPS students who had entered charter-school admission lotteries (see Figure 2). Unlike previous studies, which focused on MCAS results, the MIT report tracked performance on Advanced Placement and SAT tests. It also looked at the number of students qualifying for scholarships to state colleges, along with postsecondary enrollment data. The study found that Boston charter schools doubled the rate of AP test-taking, boosted composite SAT scores by more than 100 points, and increased enrollment in four-year colleges by almost two-thirds. The MIT authors conclude that previous findings of strong MCAS performance in middle school are consistent with later measures of academic success, specifically those that are indicators of improved college readiness. “The effects of Boston’s charters are remarkably persistent,” they write.

A Matter of Politics

Boston charter schools are also wildly popular. NewSchools Venture Fund commissioned a poll of 625 Boston voters in March 2013. “Increasing the number of students who can attend charters in Boston is a popular idea, with 64 percent in favor and just 23 percent saying the limit should stay,” according to MassINC, which conducted the poll. “Voters [are] especially supportive of the idea of allowing schools with a proven record of success to expand, with 73 percent in favor of this proposal.” The city’s two competing newspapers, the Boston Globe and the Boston Herald, which cater to the left and right of the political spectrum, respectively, have both given Boston charters consistent and full-throated editorial support. A broad cross-section of business, community, and philanthropic leaders has come together in support of lifting the charter cap, both in Boston and statewide.

Unfortunately, the growing chorus of charter supporters has had little influence to date on the one decisionmaker who really counts—the mayor. Boston’s public schools are governed by a school committee that is appointed by the mayor, so effectively Thomas M. Menino has had control over the Boston Public Schools for the past 20 years. In 2009, Mayor Menino tacitly supported an increase in the number of “proven” Commonwealth charter schools that could operate in Boston as part of a broader education-reform bill that invested school districts with greater authority to intervene in low-performing schools and permitted districts to establish a few Horace Mann charter schools without the required union sign-off. Equally important, Menino appointed a charter school leader to the school committee in 2012. Nevertheless, the Menino administration opposes any further growth of Commonwealth charter schools.

The mayor typically defends his opposition to charter growth by expressing concern over the impact on the BPS budget and his belief that Commonwealth charter schools “pick and choose” their students. The long track record of charter schools in Boston has produced a wealth of data that should dispel these criticisms once and for all. As I wrote in a recent op-ed for CommonWealth magazine, here’s what the data show:

The year before the first charter school opened, Boston Public Schools (BPS) enrolled just under 60,000 students. BPS now enrolls about 57,000 students, while almost 7,000 students attend charter schools. Meanwhile, the BPS budget has doubled from about $405 million in FY 1995 to more than $815 million last year. Accounting for enrollment changes and inflation, the district’s real per-pupil spending grew by more than 20 percent during this period (from $6,747 per pupil to $8,246 per pupil in 1995 dollars).

Opponents often accuse charter schools of serving a less-needy student population. While the demographic profiles of Boston’s charter schools do not perfectly mirror BPS, they are roughly similar. Recently released data show that 76 percent of BPS students are black or Hispanic, compared to about 84 percent of charter school students. Almost 72 percent of BPS students come from low-income families, virtually the same proportion as in the charter sector. About 19 percent of BPS students are classified as having special needs, while 14 percent of charter school students have disabilities. There is no doubt that charter schools have fewer students with severe or multiple disabilities, since charters generally lack the district’s scale and capacity for a full-range of highly specialized services and are not eligible for the extra funding these students require. For students with milder learning or behavioral challenges, the standard academic programs that many charter schools offer may help to reduce the need for special services and thus the number of students classified under federal and state special education rules.

The biggest demographic difference between BPS and charter schools involves students whose first language is not English. About 45 percent of BPS students come from homes where a language other than English is spoken, compared to 21 percent in Boston charter schools. Part of this difference reflects the areas of the city in which charter schools are located and the racial and ethnic makeup of the surrounding neighborhoods, which supply most of the students. For example, less than 30 percent of Boston charter-school students are Hispanic, compared to almost 40 percent in BPS. This gap is declining, however. Recent recruitment efforts have drawn more English language learners to charter schools; the increase was nearly 3 percentage points last year alone. Among charter schools adding new campuses, the percentage of incoming students whose first language is not English shot up from just under 30 percent two years ago to 55 percent in 2013.

Charters’ Time Has Come

So, if the conventional arguments against more charter schools lack substance, why does the administration still support the cap? Other than the usual issues of self-interest and bureaucratic inertia, Boston Public Schools presents one more, fairly unique obstacle to charter growth: the district’s recent improvement. Boston is now widely recognized as among the best urban school districts in America. In 2006, BPS won the coveted Broad Prize for Urban Education. On the 2011 Trial Urban District Assessment of the National Assessment of Educational Progress (NAEP), Boston ranked third out of 21 comparable districts in 8th-grade math and seventh in reading. Boston’s four-year high school graduation rates have risen consistently over the past six years, reaching almost 66 percent for the Class of 2012. College enrollment rates in the first year following high school graduation have also been going up, reaching 70 percent in 2010. Just over 49 percent of the Class of 2006 completed college within six years, up about 9 percentage points over the Class of 2000. As the recent comparative studies have shown, these results pale in comparison to Boston’s high-performing charter sector but are stronger than those in most other urban public school systems.

Ultimately, the mayor of Boston cannot decide how large the city’s charter sector can be; that is within the purview of state government. The state, through BESE, is also solely responsible for authorizing and overseeing charter schools. Unfortunately, the mayor is not alone in opposing charter growth, despite their proven benefits to students. The governor and the legislature are equally cautious about letting charter schools become a larger part of the public education landscape, even in the highest-need school systems, which includes Boston’s.

Nevertheless, a pro-charter mayor could shift the balance on Beacon Hill in favor of lifting the charter cap. In March 2013, Menino announced that he would not seek reelection in November 2013, ending an unprecedented 20-year run. About a month later, BPS superintendent Carol Johnson announced that she would leave her post at the end of July 2013. Vacancies in these two offices create an opportunity for resetting the district-charter relationship and moving Boston closer toward a reform strategy that takes full advantage of the city’s remarkable charter schools.

The Boston story over the last two decades is a cautionary tale for charter school proponents everywhere. Even in a city with remarkably strong charter schools, supported by business, philanthropy, and the media, breaking through the political and bureaucratic barriers that limit growth is a persistent challenge. Mayoral control is often a blessing for education reformers, but it can also be a curse. In the end, mayors tend to follow, rather than lead, their constituents. In the absence of a sizable, well-organized and mobilized block of voters, the path of least resistance for most mayors is to focus on things that are within their control (like a school district), rather than on things are not (like independent education entrepreneurs). Ultimately, charter schools in Boston and throughout the country must wean themselves from dependence on a handful of friendly political and district leaders who come and go, and instead take control of their own destiny by becoming a more potent political force.

The last three mayors of Boston have served for an average of 15 years each, so establishing a positive working relationship with the new mayor will be a high priority for the city’s charter schools during the transition to a new city administration. To be effective and sustainable, however, such relationships must be based on a reasonable balance of power. If a collaborative modus vivendi cannot be established with the new mayor, the sector will need to get much better at flexing its latent political muscle at both the state and local level. The popularity of charter schools among Bostonians and the growing number of families whose children attend them is potentially a huge political asset to a new administration; it can also be a credible threat. To date, the Boston charter sector has kept a fairly low political profile, in hopes of avoiding attacks while pursuing incremental growth. Given a well-entrenched mayor, that may have been the only viable option. But the status quo has changed.

What’s wrong with Boston? As Shakespeare might say, “the fault, dear charter schools, is not in our politicians, but in ourselves.”

James Peyser is managing partner for city funds in the NewSchools Venture Fund’s Boston office.

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NewSchools Venture Fund, a nonprofit grant-making organization, has been for more than a decade one of the leading private funders of CMOs serving low-income urban neighborhoods. Along the way, we have amassed data and direct experience that provide a window into this world. Our analysis suggests that most of the CMOs in our “portfolio” are outperforming the local districts, especially for low-income students. Nevertheless, there is significant variation across our sample. The highest-performing CMOs in the NewSchools portfolio tend to be those that have embraced a “no excuses” approach to teaching and learning. These CMOs have created organizational and school cultures based on explicit expectations for both academic achievement and behavior, with meaningful consequences when those high expectations are not met.

Creating a New Market

In 1999, NewSchools Venture Fund made its first grant to University Public Schools, an emerging charter school network founded by Don Shalvey and Reed Hastings in California that would soon be renamed Aspire Public Schools. Supported by follow-on investments from NewSchools and the Bill & Melinda Gates Foundation, Aspire became the nation’s first nonprofit charter management organization. Since then, NewSchools has helped launch and grow many more CMOs, mostly in California, New York, Philadelphia, Chicago, and Washington, D.C. Working alongside NewSchools have been national funders like the Walton Family Foundation, the Fisher Fund, the Robertson Foundation, the Dell Foundation, the Broad Foundation, and the Charter School Growth Fund (see “The $500 Million Question,” forum, Winter 2011). These and a variety of locally based investors, notably the Robin Hood Foundation in New York and the Renaissance Schools Fund in Chicago, have channeled hundreds of millions of dollars into developing an entirely new sector of public education.

What’s a CMO?

Unlike EMOs (education management organizations), their somewhat older cousins, CMOs are not-for-profit. Their nonprofit status has at least three advantages: access to philanthropic capital, greater mission alignment, and diminished political resistance. And, unlike more loosely organized school networks, CMOs manage their schools directly, either under contract to a school board of trustees or under a fully integrated governance structure (in states where single charter school boards can operate multiple schools or campuses). Under such arrangements, a CMO has effective authority to hire and fire a school’s leadership team and to establish most of the educational and operational systems in each of its schools.

Most CMOs are organized much like a typical school district, at least on paper. There are centralized functions, including executive leadership and several operations teams, which provide certain administrative, financial, and educational support services to each school in the network. The schools are generally distinct units (often with separate legal status and their own boards of directors), but they operate under the overall control of the central office.

By the most recent national accounting in 2008, there were more than 80 CMOs, operating almost 500 schools. The most well-known charter school network in the country is the Knowledge Is Power Program (KIPP), but the KIPP Foundation is not a CMO. The 99 KIPP schools around the country are legally and operationally distinct from the foundation and, up until recently, each KIPP school stood on its own as an individual charter school. Over the past few years, several high-performing KIPP schools have begun to grow their own small clusters of schools, often managed in a way that qualifies them to be called CMOs.

My focus in this article is on the CMOs in the NewSchools portfolio, which often operate 10 to 20 schools or more, serve thousands of children, and are materially different from their smaller counterparts, especially in terms of finances and management. Beginning in the school year 2003–04, we began to collect data on our CMOs: their central offices, student performance, staffing, growth, and finances. The combination of quantitative data and a decade of firsthand observations of CMOs in action forms the basis for this analysis.

Although the data presented below represent a unique look inside some of the more well-established CMOs in the country, it is important to keep in mind their limitations. First, the NewSchools portfolio includes 18 CMOs, just a slice of the total market. Second, this sample was not randomly selected. Indeed, the NewSchools investment model is based on high standards and thorough diligence for each venture we support. Third, the achievement data that we have collected do not track individual student growth over time, but instead are based on annual snapshots of grade-level and school-level performance. Finally, the data are mostly self-reported by the CMOs, and although we have scrubbed the submissions, there may still be errors and inconsistencies.

It should also be noted that NewSchools is not an unbiased observer. We believe strongly in the potential of charter schools and CMOs to transform educational outcomes in historically underserved communities and on that basis have invested millions of dollars and thousands of hours. Nevertheless, we are committed to transparency and to letting the facts speak for themselves.

The Portfolio

If the NewSchools CMO portfolio were a single school district, it would rank in size among the top 50 in the country, comparable to that of Fresno or Fort Worth. These CMOs operate exclusively in urban neighborhoods, serving predominantly low-income, high-need students (see Figure 1). The demographics of the CMO schools are roughly similar to nearby district-run schools.

On average, each CMO operates about a dozen schools, with future growth projected to reach just over 20 schools each. Our CMOs have been adding an average of 1.6 schools per year, although the pace of new school openings in any CMO is often uneven from year to year. The average annual CMO enrollment growth rate has been just over 45 percent. Many schools open with one or two grades and grow upward, adding one grade per year, to keep pace with the original cohort of students. Average school size at full enrollment is 442 students. Half of our 18 CMOs serve (or will serve) students in grades K through 12, three serve middle and high school, three are networks of elementary schools (including K–8 schools), and three operate only high schools.

Closing the Achievement Gap

The first question in any discussion about CMO schools is, how good are they? Measuring school or student performance is fraught with problems, especially if the goal is to make comparisons across classrooms, schools, districts, or states. We do not propose to solve these problems here. Specifically, our analytical approach is to use statewide assessments to compare student performance in our CMOs’ schools to that of students in the local district and state. Although we are able to track school and grade-level performance over time, our data set does not capture individual student results. Consequently, we are unable to measure directly the value our schools are adding to their students’ learning growth, relative to other schools. Given the similar demographics between schools in our portfolio and those in their local districts, however, we believe it is possible to make reasonable, albeit imperfect, comparisons between these two samples.

Looking at each of the CMOs in the NewSchools portfolio individually, we find that half are producing breakthrough results, with average proficiency rates that are at least 15 percentage points higher than their local districts. About 20 percent are outperforming the districts by a modest amount (proficiency rates that are between 5 and 15 percent higher than the districts). Another 20 percent are performing about the same as the local district, and the remaining CMOs are underperforming their districts. Performance among schools within a CMO can also vary. When comparing school-to-district gaps within a CMO, the typical standard deviation is almost 10 percentage points. This level of variation seems to hold for large and small CMOs alike.

Viewed as a group, schools managed by our CMOs achieve rates of proficiency on state assessments in reading and math that average about 9 percentage points higher than those of schools in their local districts (see Figure 2). The gap widens to almost 12 percentage points when we compare only low-income students. Limiting the sample to schools open five years or more, the gap widens to more than 14 percentage points. Across the portfolio, CMO schools perform somewhat better in math than in reading, when benchmarked against their local peers on state assessments. On average, the math-reading proficiency gap is about 4 percentage points. Not surprisingly, the performance of these CMO schools relative to their non-low-income peers statewide is not as impressive.

Although the NewSchools data set does not include state test results for individual students, it does include grade-level performance for most schools, which makes it possible to track improvement of cohorts of students from one year to the next. Looking at these data across all the elementary and middle schools that had test results for at least one grade in 2007, one finds a fairly consistent pattern of improvement. Annual math gains between 2007 and 2010 were almost 6 percentage points, while reading gains averaged more than 8 points per year.

Critics often suggest that superior performance in the charter sector is a result of high levels of attrition, caused by implicit or explicit efforts on the part of school staff to “counsel out” the students who are hardest to educate. Excluding students who move away, our data show average attrition rates of about 12 percent, compared to many schools in high-poverty urban neighborhoods that have annual attrition rates of close to one-third. Interestingly, the highest performers in our portfolio have below-average attrition rates of approximately 9 percent, while the lowest performers have above-average attrition rates of close to 20 percent. Apparently, the dynamic is what one would hope for: Parents at higher-performing schools are more likely to stay put, while those at lower-performing schools are voting with their feet.

A recent study commissioned by America’s Promise Alliance found that the average four-year graduation rate nationally is approximately 75 percent. Graduation rates among minority students are typically less than 65 percent, and among large urban school systems, graduation rates fall below 55 percent. Across the NewSchools CMO portfolio, comparable graduation rates average 65 percent. According to a 2010 U.S. Labor Department study, just over 70 percent of the graduating class of 2009 enrolled in college the following fall. Statistics for low-income students show the college-going rate for high school graduates at 57 percent. Eighty-four percent of graduating seniors from our CMOs enrolled in college, almost 60 percent in four-year colleges.

Finances and Staffing

The second question about CMOs is inevitably, how much do they cost? To answer this question, one has to examine financial data at both the school and central-office levels. Even though most CMO schools operate at breakeven on public revenue, many require significant private financial support before they can survive on public revenue alone. Philanthropy plays a key role in financing CMO start-up and growth.

The underlying economic model of all CMOs is based on predictable public revenue streams, tied to school enrollment. Average per-pupil public revenues (from all sources, including federal Charter School Program start-up grants) across the NewSchools portfolio were more than $11,500 in 2010, ranging from about $9,000 to $16,000, depending on the states and cities where schools are located. Public revenue for charter schools is typically 10 to 20 percent below per-pupil funding levels at neighboring district-run schools. In addition, charter schools are generally required to spend a significant portion of their budgets on rent or facilities-related debt service, an extra cost that is generally not included in most charter-school funding formulas. Taken together, these two factors can reduce charter school resources available for educational programs by 25 to 35 percent, relative to comparable district-run schools.

With a few exceptions, the vast majority of charter schools operated by NewSchools CMOs are self-sufficient on public revenues (excluding major capital costs). These schools typically incur deficits prior to their first year of operation (although these deficits are sometimes carried on the books of the CMO central office), as they begin to hire staff, upgrade facilities, and purchase equipment and supplies, all before the first students arrive and before any public tuition payments are made. About half of new schools run at breakeven during their first year of operation, although school-level deficits are common in the first three years of operation for those schools that begin with only one or two grade levels. About 40 percent of schools in the NewSchools portfolio incur cumulative deficits through their first three years of operation. These early deficits are often partially offset by start-up grants from the federal Charter School Program and the Walton Family Foundation, which together typically amount to more than $500,000 per school, spread out over several years.

The largest component of a typical school operating budget within our CMO portfolio is instructional personnel, which comprises just under half of all school spending (see Figure 3). School administration and other noninstructional activities account for about 17 percent of expenditures on average, with facilities expenses close behind at 15 percent. Nonpersonnel instructional expenses are just under 10 percent of a typical budget, with the remainder going toward building reserves and CMO management fees.

Operational spending per pupil during the 2010 school year was approximately $10,200, with average school surpluses of just under $500,000. Typically, these surpluses are used to build operating reserves of about 5 percent of a school’s yearly budget, to insure against normal cash-flow needs, temporary revenue interruptions, or fluctuations in annual per-pupil funding levels. Additional reserves are occasionally required as part of debt covenants, especially regarding bonds or loans for school buildings. Many schools have larger reserves to lay a financial foundation for a future purchase or renovation of a permanent facility.

The net philanthropic need for all schools managed by CMOs in the NewSchools portfolio is effectively zero, but since the schools that operate with surpluses generally do not cross-subsidize those with deficits (sometimes even within the same CMO), the actual school-level philanthropic need across the 71 schools in the portfolio with operating deficits was more than $25 million in the 2010 school year, or just under $360,000 per school.

The average central-office budget in 2010 was about $5.3 million, or more than $1,500 per pupil. More than 60 percent of central-office costs were for personnel. On average, central offices employed about 45 staff, which is 14 percent of total CMO staff, including school-level personnel. Staffing in the average CMO home office is dominated by personnel providing educational services (including assessment, curriculum, and professional development) and operations (including finance and facilities). Over the past five years, the relative sizes of these two categories have been moving in the opposite direction: The education staff has been growing (from 21 percent to 34 percent), while the operations staff has been shrinking (from 33 percent to 25 percent).The ratio of central-office staff to total CMO staff tends to decline over time, averaging about 30 percent in year one and falling to 12 percent by year seven. The average number of central-office staff per school fluctuates from year to year within most CMOs, but does not seem to consistently trend up or down over time. Across the NewSchools portfolio, central offices tend to have about 4.5 staff per school, although some of the larger CMOs are beginning to see this ratio drop.

As Figure 3 shows, CMO management fees are typically about 7 percent of a school’s budget, although it is not uncommon for fees to reach 10 percent or higher, depending on the breadth of services provided by the central office. On average, these fees covered more than 55 percent of central-office costs in the 2009-10 school year.

During its first year of operation, a CMO central office earns relatively little of its revenue on management fees from preexisting schools. If the central office is established before the first school opens, annual fee revenue begins at zero. On average, fee revenue rises steadily as a percentage of total central-office costs, as the number of schools and students grows, exceeding 60 percent by year seven (see Figure 4).

Over the first seven years of operation, a typical CMO central office in the NewSchools portfolio incurred a cumulative operating deficit of more than $7.3 million, which translates into $800,000 to $900,000 per school, or up to $2,000 per seat at full enrollment. The distribution of deficits around this mean, however, is wide, ranging from under $300,000 per school to $2 million or more. Although it is difficult to allocate these costs precisely to specific activities, a significant portion of central-office expenditures is associated with growing the network of schools and building capacity for supporting new schools that are just beginning to come online.

Putting school-level and central-office economics together, CMOs in NewSchools’ portfolio have run cumulative deficits through the 2010 school year of more than $250 million, which amounts to about $3,150 per student at full enrollment for the schools that are currently up and running. Some school-level deficits are offset by surpluses at other schools within the same CMO network; other annual deficits at both the school and central-office levels are funded out of reserves built up through surpluses in prior years. As a result of these factors, the net philanthropic need to date has probably been closer to $200 million, which translates into an average per-seat need of about $2,600, or more than $1 million per school. In some cases, this figure has exceeded $4,000 per seat and in others it has been under $500 per seat. (These figures appear consistent with an unpublished analysis conducted by the Charter School Growth Fund on the CMOs it has supported.) To keep this in perspective, the 25 to 35 percent inequity in per-pupil funding for charter schools mentioned above amounted to approximately $275 million in lost revenue for our CMOs in the 2009-10 school year, an amount that swamps their annual philanthropic need, even if the public funding gap is greatly exaggerated.

Patterns and Connections

The final question about CMOs is, what makes the highest performers better than the rest? The data do not point consistently to the causes for this variation, but there are some differential patterns in spending, staffing, and school design that suggest possible sources. Based on direct observations by the New-Schools team over the years, the effectiveness of management and execution may be equally important, although it is not so easily quantified.

The five highest-performing CMOs in NewSchools’ portfolio operate 85 schools and serve more than 28,000 students. Their low-income students have proficiency rates that are more than 25 percentage points higher than those in their local districts. Comparing these CMOs with the bottom five performers in the NewSchools portfolio, we find similarities: school sizes are virtually the same; central-office spending as a share of total CMO spending is about the same, as is instructional spending as a percentage of total spending. Nevertheless, there are quantifiable differences: School-level spending per pupil is higher, central-office staff comprises a higher percentage of total CMO staff, and the share of central-office staff devoted to human resources is greater.

The 20 percent spending gap between the lowest and highest performers is clearly a significant factor, although at least one of the CMOs in the top five spends less per pupil than the portfolio average. Our high-performing organizations spend some of the extra money hiring more teachers. Although the average number of students per teacher among the top five performers is only slightly lower than among the bottom five (15.1 vs. 16.6), the average masks larger differences. Three of the top five performers have student-teacher ratios below 14, while three of the bottom five performers have ratios above 18.

Another important factor is the investment that the most successful CMOs are making in building the capacity of their central offices, especially the focus on recruiting and developing talent, as well as building instructional support systems that are grounded in the use of performance data. Based on our observations and feedback from school personnel, these deep levels of central-office investment appear to be adding significant value to student performance.

The rate and pattern of growth also appear to have some connection to performance differences. Although the high-performing CMOs have added new schools at a faster overall rate than the low performers (1.7 per year vs. 1.3), their average enrollment growth is slower (37 percent vs. 49 percent). At the same time, the pattern of growth among the high performers has been more consistent over time, while the low performers tended to grow faster early in their development.

Of at least equal importance are less easily quantifiable differences in school design. Specifically, the most successful organizations strive to create enthusiasm for learning and an expectation of college success for all, with a commitment to hard work and persistence in the face of initial failures or setbacks. They have adopted standards-based curricula, with an intensive focus on literacy and numeracy as the first foundation for academic achievement, which typically manifests itself in extra time for reading and math each day and a relatively heavy reliance on direct instruction and differentiated grouping, especially in the early grades. And they are increasingly focused on developing and deploying comprehensive student assessment and coaching systems to ensure more effective and consistent classroom practice, not just from year to year but during the course of each school year.

Although several factors appear to distinguish the highest from the lowest performers, there is no obvious or simple pattern. With respect to almost every variable that we have examined, there is a wide distribution of data from one CMO to another, even among organizations with comparable performance, operating in the same markets, serving similar grade levels. Although the data can give us some hints about where the answers lie, some of the differences in CMO performance are most likely tied to the quality of management and effectiveness of execution, factors that are difficult to measure. It has been said that high-performing schools are the result of a hundred 1-percent solutions. Not only is there no silver bullet, but there is not even a secret sauce. The key to success is an unflagging attention to detail and an uncompromising commitment to excellence in all things, from the classroom, to the hallway, to the principal’s office. As difficult as it is to do all of this while growing a new organization, it is even harder to sustain it over time, especially as the original founding teams give way to a new generation of leaders. Some CMOs are already beginning to take and pass this test, but it will remain one of their greatest enduring challenges.

James A. Peyser is managing partner for city funds at NewSchools Venture Fund and a former chairman of the Massachusetts Board of Education.

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Moreover, it is clear that the vast majority of states have set their academic achievement bar far lower than federal standards, as measured by the National Assessment of Educational Progress (NAEP). Since No Child Left Behind (NCLB) pegs its accountability mechanism to state test results, rather than NAEP, there is a natural incentive for states to maintain or even weaken their already-low standards. If this pattern of behavior persists, much of NCLB’s promised educational benefit will be lost.

One response to this disappointing reality has been a renewed call for nationalized standards and assessments. The concept of common standards for all American children has a definite appeal. After all, algebra is the same in Massachusetts as it is in Mississippi. More tellingly, in an era of labor mobility and global competition, our national economic well-being is threatened by the weakness of many state education systems. In other words, it matters to California employers that New Jersey’s academic standards are low.

Nevertheless, transforming NAEP (or its successor) into a mandatory national test to replace state assessments as the primary measure of school and student performance is a highly questionable proposition. Indeed, the whole enterprise sounds like a case study of being careful what you wish for; it is fraught with potential for producing a cure that is worse than the disease.

We’re from Washington and We’re Here to Help

Let me frame my comments by declaring that I am an NCLB supporter, albeit one who has a narrow view of the law’s virtues and a fairly jaundiced view of its most sweeping aspirations. In my opinion, NCLB’s greatest value is creating accountability for the allocation and use of federal funds with at least some connection to school performance and student outcomes.

At its most basic level, NCLB introduces the notion that federal money will continue to flow only if districts and states are actually able to demonstrate that they can run effective schools, not simply comply with rules and regulations. The only way to reliably evaluate such performance is through a system of standards and assessments. I’m sorry to say that most of the law’s other requirements (like “highly qualified” teachers) seem to me mostly symbolic and prone to creative (and wasteful) noncompliance or endless backsliding. The federal dollar itself is still just a small slice of the education funding pie (see Figure 1).

Equally important, we take the federal government’s limited constitutional role seriously. There are always good reasons for creating a single, national solution to the problems of the day, whether the problem is education, welfare, health care, housing, transportation, or economic development. In almost all these cases, federal policies and programs have had serious negative consequences that all too frequently offset their benefits, stemming at least in part from the conceit that complex human problems can be solved by getting a bunch of smart people together to craft an elegant solution.

Establishing a single set of national standards and assessments would effectively make the federal government the owner and operator of America’s public education system. This would in turn inevitably draw the Department of Education deeper and deeper into the business of operating schools, most likely by issuing an ever-expanding set of ineffectual yet burdensome edicts. Such an outcome is not consistent with my view of a wise and limited federal government.

The State of the States

The question on the table should not be whether or how to adopt national standards, but what problem are we trying to solve? There is a great deal of frustration, which I share, that state standards are inconsistent and that some states are making themselves look better than they really are by gaming the system. While that’s truly unfortunate, I think this controversy is ultimately a sideshow. The real issue is how to substantially raise the level of academic achievement.

My home state of Massachusetts is arguably an NCLB poster child. We have curricular standards that are highly regarded. We have assessments aligned with those standards and they are reasonably consistent with NAEP. And we have an accountability system that has led to at least a few cases of direct state intervention in underperforming schools and districts. Nevertheless, I would not pretend to say that we have yet figured out how to dramatically and persistently improve educational outcomes, especially for poor kids. Standards, assessments, and accountability are absolutely necessary, but they are not even close to sufficient. Creating great schools is infinitely more messy and contextual than creating a performance measurement system. Expending intellectual and political capital on nationalizing the yardstick is probably not as valuable as applying these scarce resources to building great schools.

For many states, moving to NAEP-based standards would clearly be a step in the right direction, at least in the long term. But making the transition by federal fiat would in all likelihood stop current progress in its tracks for all states, mine included. In Massachusetts, we have made measurable progress in performance, although in many cases these gains have been incremental and are beginning to level off. I’m convinced that much of the modest success we’ve enjoyed has been tied to the adoption of a statewide graduation requirement based on our 10th-grade MCAS test (Massachusetts Comprehensive Assessment System), beginning with the class of 2003, not the result of a national standard or ethic. That graduation requirement set the passing standard at “needs improvement,” which is roughly equivalent to NAEP’s “basic” level. Now that we are seeing the vast majority of students get over this threshold, the current challenge is raising everyone’s sights toward proficiency. This will be as difficult a process as setting the graduation requirement in the first place, which was no walk in the park.

If we were all of a sudden to drop MCAS in favor of NAEP, or some other national test, I have no doubt that all forward momentum would stop as we attempted to bring our state laws and regulations in line with new federal requirements and as schools recalibrated their education programs to a slightly different set of standards and tests. The process would again get in the way of the substance. From where I sit, this interregnum would serve no higher purpose for the children of my state, and would be damaging to the current cohort of public school students, especially those entering the upper grades.

Carrots, Not Sticks

Finally, under the heading of unintended consequences, I am very fearful that placing sole responsibility for standard setting with the federal government could result in the worst of all possible worlds: national standards and assessments that embrace the conventional wisdom and social agendas of the education “experts” who staff our schools of education, teachers unions, and national associations. It’s naive to believe that the cloistered environment of the National Assessment Governing Board (NAGB), NAEP’s progenitor, can be sustained if the stakes are raised so high. Although the rhetoric has been dampened or driven underground, the curriculum wars are not yet over. In a different political context, one that is more hospitable to the “education establishment,” there should be no doubt that there would be enormous pressure to mold national standards and assessments to fit that establishment’s worldview. Indeed, as Chester Finn and Diane Ravitch acknowledged recently in the Wall Street Journal, the Bush administration itself is already responding to the heat by turning a blind eye to stagnant NAEP results in order to showcase NCLB’s success and “to accommodate state pleas for flexibility.”

If we could adopt a constitutional amendment empowering Diane Ravitch, Chester Finn, and their heirs to oversee the development and maintenance of national standards, I’d be willing to set aside my reservations and sign on the dotted line. But short of that unlikely occurrence, centralizing this much power in a single place creates far more risk of catastrophe than allowing 50 states to muddle along their more diverse paths.

Because of such concerns, I’m against pushing for mandatory national standards and assessments. Instead, I propose a more incremental approach, one that tries to create greater rigor within our current state-based systems, without ripping them up root and branch.

Specifically, I suggest adding NAEP performance as a factor in determining the allocation of federal funds. For example, if a district makes Adequate Yearly Progress (AYP) based on low state standards (relative to NAEP), it may lose some federal money or be ineligible for certain grant funds, even though it is not technically “in need of improvement” under NCLB.

To support this new system, DOE should fund the development of more-detailed curriculum frameworks (perhaps several different alternatives) and a national test-item bank for interim and annual assessments, all aligned to NAEP standards. States would be free to choose among these frameworks or stick with their own homegrown versions.

This approach might lead to more consistent standards over time, but it would do so gradually through incentives, rather than quickly through compulsion. It would also avoid (I hope) a distracting and potentially damaging political food fight on the nationalization of education standards. Instead of devoting scarce time, energy, and money to this sort of risky venture, I would prefer to expend these resources on developing effective strategies for turning around failing schools, accelerating the pace of new-school creation and replication, deepening the educator talent pool, and broadening parental choice.

James Peyser is a partner with NewSchools Venture Fund and chairman of the Massachusetts Board of Education.

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How much will the federal No Child Left Behind Act (NCLB) cost? Critics argue that NCLB’s requirement that states bring all students up to academic proficiency by the year 2014 represents a massive unfunded mandate. William J. Mathis, for example, claims in a recent Phi Delta Kappan article that public K-12 spending needs to rise by at least 20 to 35 percent to meet the goals of NCLB-an increase of $85 to $150 billion a year. These critics reason that unless the feds put a lot more money on the table, financially strapped state and local governments will be forced to raise taxes sharply. Otherwise, the entire reform effort could collapse of its own weight.

The funding issue has three components. First is the cost of designing and implementing a statewide testing system. Second is the cost of establishing a state-level system for evaluating schools and districts and for intervening in those schools that continuously underperform. Third, and most controversial, is the cost of ensuring that schools have enough resources to provide the high-quality educational opportunities that students need to meet the academic standards required by NCLB.

We have examined these three components in light of our own experiences in Massachusetts. Since Massachusetts embarked on a path similar to that mandated by NCLB well before the law’s adoption and has proceeded further than most other states, its experience may be useful in evaluating what is required nationally.

Our analysis suggests that many critics greatly exaggerate the shortfall of federal resources. Specifically,

• Federal spending to develop and administer mandated assessments is adequate for now, but will need to increase over time. The needed dollar amounts are relatively small and could be met easily by reallocating funds from lower-priority programs.

• Federal support of school evaluation and technical assistance, required under NCLB, is underfunded. This gap is likely to grow significantly as more schools are found to be “in need of improvement.” Much of the gap can be filled, however, by allowing states to allocate more of their federal dollars to supporting turnaround efforts in low-performing districts.

• No one-neither critics nor supporters of NCLB-really has any idea what it would cost to bring all students to proficiency by 2014 (or even 95 percent of all students, given the exceptions already built into the law), or if it can be done at all. The only question we can reasonably answer is whether there is enough money in the system to allow well-run schools to meet their goals for improvement.

From this perspective, school spending may, in some states or districts, be below what is required to steadily improve student achievement in line with federal requirements for “adequate yearly progress.” However, the extent of the shortfall appears to be a small fraction of the figures put forth by NCLB’s critics. Our calculations using a school improvement approach based on data from Massachusetts suggest a national gap of perhaps $8 billion a year, concentrated in a few states. This is only 5 to 10 percent of the critics’ estimates, which are based on far more speculative and problematic models.

One of Several Mandates

In approaching these questions, it is crucial to remember that the federal government has a long-established interest in the operation of public schools and the academic achievement of students, dating back at least to the National Defense Education Act of 1958. Even before NCLB, most states had already committed themselves to a standards-based reform strategy. In some states, such as Texas and North Carolina, this was the result of internal pressures for reform. Other states were responding to the mandates of the 1994 reauthorization of the Elementary and Secondary Education Act, the predecessor to NCLB. Under the reauthorization, each state was supposed to develop comprehensive academic standards with curriculum-based tests that would be administered annually at three grade levels, in both reading and math. The problem was that these federal requirements lacked teeth. By the time the 1994 reauthorization was superseded by NCLB in 2002, only 21 states were in compliance with its accountability provisions. At its most basic level, NCLB attempts to fulfill the promise of earlier efforts by putting in place specific implementation timelines for those states that wish to continue to receive federal aid.

In addition, a wave of school finance lawsuits has placed half the states under court orders that effectively mandate comprehensive reforms and increased spending. The central claim in the latest, and most successful, of these lawsuits is that schools need a minimum amount of per-pupil funding in order to provide an “adequate” education. The plaintiffs in these lawsuits often draw on the same or similar reports that critics of NCLB use to make their case that a large funding shortfall exists related to NCLB’s mandates.

Later in this essay we will demonstrate that these methods of determining the spending necessary for an adequate education suffer from severe shortcomings, and we will present an alternative approach that generates more credible numbers. For now the point is simply that much of what is alleged to be an NCLB mandate is either not new or actually results from states’ actions. Most states have already dramatically increased their spending on education and have poured considerable resources into testing programs-changes driven by earlier federal initiatives, state-level policy, and court decisions, not NCLB. That NCLB raises the bar (and the stakes) is not in question. In assessing the burden of implementing the law, however, analysts must take care to focus on the fiscal impact of changes at the margin, instead of the total cost of education reform.

Student Assessment

Under the 1994 reauthorization, each state was supposed to put in place criterion-referenced tests to be administered annually at three grade levels, in both reading and math. By the 2005-06 school year, NCLB requires states to implement annual standards-based math and reading assessments in grades 3 through 8, plus at least one more round in grades 10 through 12. In addition,beginning in the 2007-08 school year, states must administer annual science tests at three grade levels (once each in grades 3-5, 6-9, and 10-12). In total, NCLB will require 17 tests per year, while the previous federal law required only six.

A number of states, however, had already committed themselves as a matter of law or policy to roll out many of these tests, with or without a federal mandate. Massachusetts, for example, has a statutory requirement to develop student assessments at three grade levels in five subject areas (English, math, history, science, and foreign languages). In addition, the commonwealth’s board of education determined as a matter of policy to implement a somewhat broader assessment program, adding an extra year of testing in both English and math in 2001. Other states, such as California, Colorado, Florida, Iowa, North Carolina, and Texas, adopted assessment systems that exceeded the old federal requirement. Five states met the full NCLB testing mandate before it even went into effect.

A survey by the Government Accounting Office (GAO) reports that, on average, states will have to add eight or nine tests to their existing programs as a result of NCLB. This number probably overstates the added burden, however, since it includes tests that were required under the previous reauthorization but not implemented by the states. It is reasonable to assume that NCLB itself will actually account for fewer than half of the 17 tests it eventually requires.

When fully implemented, the law’s reading and math testing provisions will require states to administer approximately 45 to 50 million tests a year. The GAO’s report estimates that the total cost to states of developing, administering, scoring, and reporting tests of the type currently administered would have been $442 million in fiscal year 2003, or roughly $9 per student tested.

Based on cost data from Massachusetts, we believe that the actual costs for tests of the quality necessary for an effective accountability program may run as much as twice the GAO’s estimate. However, many states do not have all these tests in place for this school year. Moreover, many states have laws and policies requiring administration of such tests-with or without NCLB. All in all, it looks as if the incremental cost for implementing the new English and math tests soon to be required is about $400 million.

In short, the Department of Education’s current level of appropriation for state assessments-$391 million-appears to be enough to cover the full marginal cost of federally mandated tests that states actually administered. This level of funding may not be sufficient going forward, however, as more states roll out the full complement of required tests and enrich the tests with more open-response questions.

School Evaluation and Intervention

Besides measuring and tracking student achievement, NCLB requires districts and states to respond when schools repeatedly fail to meet improvement expectations. Such intervention was also required under the previous federal law, but without the explicit requirements and timetables of NCLB. As a result, little outside intervention in underperforming schools has occurred.

Last year, under the NCLB rules, more than 8,600 schools around the country were listed as “in need of improvement” by state departments of education-less than 10 percent of all public schools in the country. As the “adequate yearly progress” aspect of the law results in increasingly heightened performance expectations, this number will probably rise, too, even though many schools will “graduate” off the list due to improving (or at least fluctuating) test scores.

Under NCLB rules, schools that fail to meet their adequate yearly progress targets are subject to an escalating series of interventions. The mandated roles for state departments of education in this process are scorekeeper-determining which schools and districts are missing their targets-and provider of technical assistance. Many states have enacted legislation that provides considerably greater authority for intervention, up to and including takeover powers in cases of persistent underperformance.

NCLB requires states to set aside about $230 million of their federal funds for grants to schools in need of improvement. Individual grants are supposed to be at least $50,000, with a ceiling of $500,000. Given 8,600 underachieving schools nationwide, however, the $230 million set-aside can support an average grant amount of only about $25,000, assuming each qualifying school receives a grant. As a practical matter, grants of this size will likely be focused on planning and professional development for staff.

The number of schools needing improvement under NCLB may increase substantially. In fact, this seems likely to occur once the requirement that all subgroups of students within a school make adequate yearly progress comes into effect. In this case, much more money will have to be appropriated or reallocated to school improvement grants in order to fund the minimum mandated interventions. If, for example, one-third of all schools found themselves “in need of improvement,” then the minimum amount of federal support required to fund grants of $50,000 per school would be $1.6 billion.

Although the specific allocation for school improvement grants appears to fall well short of the minimum amount required by federal regulations, other sources of federal funds could more than close the gap, if they were directed to low-performing schools. For example, grants to states for “innovative programs” total more than $380 million. These resources, however, are allocated to districts on the basis of an enrollment-driven formula. Grants for improving teacher quality are much larger, exceeding $2.9 billion in 2003. Once again, these funds are allocated to districts by formula. Both of these grant programs provide relatively more money to districts with higher proportions of low-income students, which also tend to be lower-performing districts. Nevertheless, a more flexible allocation method would free up considerable resources to support the specific school improvement activities mandated under NCLB.

Rarely mentioned in the discussion of intervention programs is the cost of developing and sustaining a state evaluation infrastructure capable of conducting in-depth analysis and diagnosis of struggling schools and districts. Even with just 8,600 schools in need of improvement, it is not possible for state education agencies to develop and implement effective turnaround strategies, no matter how much money is available. Some form of triage must be used to identify those schools and districts most in need of help and least able to help themselves. Scanning the test results is not enough to determine which schools and districts require acute care and to prescribe the appropriate treatment. States must conduct in-depth evaluations of the facts on the ground, using a reliable protocol and experienced educators.

Massachusetts has been pioneering such a process for the past several years. To date, 18 schools have been declared underperforming, and each one has been required to develop an improvement plan, in collaboration with the state department of education, based on the findings of a diagnostic evaluation. A similar district-level procedure recently resulted in two districts’ being identified as underperforming. The annual budget for this in-depth evaluation work is $2.4 million, and it is still in its launch phase. When fully implemented, the budget could easily double. Virtually none of these costs is covered by federal grants. If a similar evaluation infrastructure were put in place in every state, the total cost might reach $250 million a year.

The Cost of an “Adequate” Education

These discrete funding issues are important, but they pale in comparison with the claim that schools need to spend at least 20 to 35 percent more ($85 to $150 billion) to meet NCLB’s performance goals. The source of this claim is a series of recent consultant reports commissioned by teacher unions, school board associations, legislative bodies, and others, often for use in school finance cases.

A fundamental problem with these reports is their tendency to rely on the outdated notion that education can be reduced to a simple production function between input and output. Of course, the amount of spending can matter a great deal if it is raised from very low levels. But over the range of spending commonly observed among school systems in the United States, the effect on student achievement is often swamped by how wisely the money is spent, by bureaucratic and contract rigidities, and by a host of important policies and decisions that have nothing at all to do with money. The fact is that most research finds, after controlling for demographic factors, no consistent causal relationship between expenditures and achievement over the current range of spending levels.

Consider, for example, data from the school finance case currently being litigated in Massachusetts. The plaintiffs point out that high-performing districts often spend considerably in excess of the foundation budget, the state’s measure of what is necessary to provide an adequate education. But the association between performance on state tests and spending as a percentage of the foundation budget-the plaintiffs’ preferred measure of spending-vanishes after applying even the most rudimentary demographic controls (see Figure 1).

Nonetheless, the claims that schools are underfunded rest on models that purport to quantify the level of expenditure necessary to meet higher performance standards. Two approaches are used most frequently: the “professional judgment” and “successful schools” models. The professional judgment approach asks educators to build their ideal school budget from the bottom up, by answering questions such as: What is the optimal class size? How many teacher aides, computers, and professional development days should there be? Their instructions typically encourage them to “be creative and innovative,” to create new programs or services, and to assume there are no revenue constraints. By contrast, the successful schools approach uses observed spending levels in the highest-performing schools as models from which to calculate necessary spending in other, lower-performing schools.

There are several methodological problems with the typical implementation of both of these approaches. The principal problem with the professional judgment model-the model drawn on most heavily by Mathis-is that there is no attempt to tie observed spending levels to actual student outcomes. It assumes that educators already know, instinctively or by dint of personal experience, what resources are necessary to meet higher standards, so the analysis of data is considered superfluous. This raises questions of possible subjectivity.

Take the Massachusetts case, for example. The plaintiffs’ professional judgment study, performed by University of Virginia professor Deborah Verstegen, relied on employees of the school systems where the plaintiff students are enrolled to determine the ideal level of school spending. Verstegen’s panelists included the superintendents of seven plaintiff districts. As the judge pointed out, one of the panelists was the mother of the named plaintiff in the original 1993 case. The study’s findings implied that almost every district in the state-even the wealthiest-was underfunded, with an average shortfall of 66 percent. Ironically, the only sizable district judged to be spending enough was Cambridge, where student performance has been persistently low.

While in the past there may have been few alternatives to the professional judgment model’s input-based approach, today it seems out of step with the spirit of standards-based reform. The successful schools approach, to its credit, does focus on measured performance in a standards-based system. However, in practice, the approach is typically flawed by its method for selecting high-performing schools. As has been long established, family background is the strongest predictor of academic success. Children from wealthier, better-educated families also tend to live in communities where property-tax revenues and school budgets are high. The successful schools model typically assumes that a school’s high test scores are primarily a function of its budget, rather than a student’s family background. As a result, high-spending schools may be identified as “successful,” not because they add more educational value, but because they enroll children from high-income families. The red bubbles in Figure 1, which indicate the districts identified as successful by the plaintiffs in the Massachusetts litigation, illustrate a concrete example.

As typically applied, the successful schools approach also has a number of technical flaws. Most important is its use of average spending among high-performing schools as the minimum level necessary for fiscal adequacy. By using this method, half or more of the successful schools themselves are inevitably found to have insufficient funding to be successful. While it may be true in Lake Wobegon that all districts can be at or above average, the laws of mathematics rule that out for the rest of us.

In Massachusetts, the plaintiffs commissioned a successful schools study by John Myers. Myers selected the top 75 districts and estimated their average level of per-pupil expenditures for regular education students. Because the selection criterion was the level of state test scores (with no attempt to gauge value added), the 75 districts were disproportionately high income-with incomes 50 percent above the state average-and the share of their students who were eligible for free or reduced-price lunches was only 4 percent, compared with 24 percent statewide. Myers’ practice of using the average spending from this high-spending group (as well as some other flawed procedures) implied that 90 percent of Massachusetts students are in under-funded districts, including 70 percent of those in the “successful” districts. On average, Massachusetts spending was judged to be 20 percent too low.

The studies used to claim that NCLB requires a 20 to 35 percent increase in school funding are similar to those brought to court in Massachusetts. Many are by the same author. Lacking scientific grounding, they are too flawed and too sensitive to changes in assumptions to sustain a compelling critique.

Improvement Model

Although any approach to calculating fiscal adequacy is bound to have limitations and flaws, state laws and courts increasingly require that some rational method be developed to approximate the price of an adequate education. Given that mandate, we suggest an “improvement” version of the successful schools approach, based at least in part on the rate of growth in measured academic achievement rather than a simple snapshot of average performance. This is not a full-blown value-added model, which would track gains in individual student performance from one year to the next. But it at least roughly controls for a district’s previous performance, rather than effectively selecting districts with favorable demographics.

The improvement approach would first identify a set of K-12 districts that have realized the greatest gains in measured student achievement over a multi-year period. The next step is to identify a spending level somewhat lower than the group average to capture the minimum necessary expenditure as demonstrated by successful districts. In identifying that level, one should keep in mind that some of the lowest spending districts may be outliers whose success would be difficult to replicate. In general, one to two standard deviations below the average among improving districts might be a reasonable benchmark.

Let’s again use Massachusetts as an example to see how this might work in practice. With the state’s index for determining overall progress across grades and subjects as the criterion, 183 of the state’s 207 K-12 districts met their adequate yearly progress targets in 2001-02. Among these districts, 114 also achieved a performance rating of at least “moderate” in both English and math. Of these districts, 46 had improvement rates that were above average. These two sets of improving districts (114 and 46) are still above average in terms of income, but less so than the set of K-12 districts selected by Myers solely on the basis of their performance levels. Incomes in the groups of 114 and 46 districts are 26 percent and 8 percent, respectively, above the state average, while Myers’ districts were 50 percent above the average.

The average per-pupil spending figures for these two sets of improving districts were $7,499 and $7,105, respectively, in 2001-02 (compared with $7,840 for all K-12 districts). One standard deviation below the mean of the improving districts was $6,320 and $6,354. This would imply that the necessary spending level for adequate progress is approximately 80 percent of the K-12 average spending level in Massachusetts. By contrast, the necessary spending levels implied by the plaintiff models discussed above, which are similar to the models used by NCLB’s critics, were well above the average spending level.

Whether districts can continue to meet their adequate yearly progress targets with the current level of spending, right on through NCLB’s ambitious goals for 2014, remains to be seen. It will demand close monitoring at both the state and federal levels. But for now, it would appear that spending in Massachusetts is adequate to achieve the NCLB student achievement mandate.

The National Picture

To illustrate what this analysis might mean nationally, consider Education Week‘s calculation of spending per student, adjusted (albeit imperfectly) for regional cost differences. By Education Week‘s measure, only 11 states have average spending levels below our benchmark for adequacy (in other words, 80 percent of Massachusetts’ per-pupil average). For each of these states, a total fiscal gap can be estimated by multiplying the per-pupil gap by enrollment. Adding these up for the 11 states results in an estimated national fiscal gap of approximately $8 billion (almost half of which is in California). While this $8 billion estimate is not trivial, it is only 5 to 10 percent of the projections claimed by the law’s critics.

To be sure, this estimate carries with it certain caveats. For example, if a state’s average per pupil spending exceeds the adequacy measure, but some of its districts do not, the estimated fiscal gap of zero for that state assumes it will redistribute some of its spending. Progress in Massachusetts is also no doubt attributable in part to the state’s strong system of student accountability, including a universal graduation requirement pegged to the 10th grade statewide test-a provision missing from the NCLB mandate. Other states that spend at levels similar to those in Massachusetts, but without student accountability, may fall short of NCLB goals.

Although NCLB’s critics charge that Washington has not been doing its fair share, especially when compared with the original spending plan authorized by the act, total federal Department of Education appropriations for K-12 education grew by more than 25 percent-almost $8 billion-from 2001 to 2003, despite a sharp drop in federal revenues (see Figure 2). Title I appropriations alone grew by more than $2.9 billion over the same period-a 33 percent increase-and as of this writing are set to grow another $0.7 billion in fiscal year 2004, for a total of a 41 percent increase since NCLB’s enactment.

If this spending increase does not fully cover the fiscal gap, it would appear to come pretty close-especially when combined with state-level spending increases already required under various state laws and court decisions. Given that many states have been slow to implement the statewide assessment and accountability systems required by NCLB, one might even argue that in some instances federal spending growth has overshot the target.

-James Peyser is chairman of the Massachusetts Board of Education. Robert Costrell is a professor of economics at the University of Massachusetts at Amherst (on leave) and currently serves as chief economist in the Massachusetts Executive Office for Administration and Finance. Peyser is a named defendant in the Massachusetts school finance case, and both Peyser and Costrell testified for the defense. An unabridged version of this article is available at www.educationnext.org.

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