Bond firms take sides in Texas fight between charter schools and traditional districts

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DALLAS – Some Texas public finance firms are choosing sides in the escalating battle between traditional public school districts and charter schools.

Earlier this year, Hilltop Securities, the state’s perennial leader among municipal advisers, dropped nine charter school clients to demonstrate its support for traditional districts.

“Initially, we saw assisting charter schools as the firm enhancing our long history of support [for] primary/secondary education,” Hilltop chairman Hill Feinberg wrote in a Jan. 24 letter to Keller Independent School District Chief Financial Officer Mark Youngs. “Hilltop Securities will continue to honor our commitment to those relationships with Texas Independent School Districts by no longer representing charter schools in Texas as advisor, underwriter, placement agent or investment advisor.”

Hilltop’s decision led to the March departure of veteran banker Drew Masterson, who formed his own financial advisory firm in Houston to represent charter schools, including Yes Prep, a charter district he once served on a pro-bono basis, as well as clients in other sectors.

Eight other employees left Hilltop’s Houston office to join Masterson, with Senior Vice President Julie Peak and managing directors Anthea Moran and Debbie Shelton joining Masterson Advisors as specialists in municipal utility districts.

While the many MUDs in the Houston area are expected to make up the bulk of Masterson’s business, he said his reason for leaving the firm after 22 years was Hilltop’s decision to drop charter schools.

“I don’t want to leave any indication of negativity toward Hilltop,” Masterson said. “They just made a business decision that happened to fall on my shoulders. Hilltop has been extremely helpful with the charter school transition.”

Hilltop senior vice president Terrell Palmer also left Hilltop’s Houston office after 22 years to become president of his own firm, Post Oak Municipal Advisors, at the same time Masterson left. Hilltop Director Francine Stefano moved to Post Oak with the same title.

Palmer’s firm is representing traditional school districts, including former Hilltop clients Humble ISD, Lamar Consolidated ISD, Spring Branch ISD, but he said Masterson's departure prompted his.

“That was certainly a factor in that Drew was a partner of mine for 25 years,” Palmer said. “I was upset in the way Hilltop handled that situation.”

Masterson, Palmer and Peak worked for the firm Masterson Moreland Sauer Whisman Inc. when it was acquired by First Southwest Co., now Hilltop, in 1996.

Palmer advised the Houston ISD for Hilltop before he left the firm. The state’s largest school district remains a Hilltop client as it deals with a crisis in funding and a possible takeover by the state.

While Masterson took Hilltop's charter clients as Palmer took traditional schools, Palmer said the conflict between charters and ISDs has not been as intense around Houston as it has been in the Dallas-Fort Worth area.

"I haven’t felt that animosity as much in my area," Palmer said. "But it may be a growing trend."

Though charter schools have become significant bond issuers in Texas and benefit from triple-A guarantees on $3.2 billion of bonds from the Texas Permanent School Fund, the debt they issue is a fraction of the volume from traditional school districts.

Joining Hilltop in choosing traditional districts over charters is BOK Financial Securities, a major player in school finance. Recently, BOK has offered a marketing program to help traditional districts explain their value proposition versus “open enrollment” charter schools that have sprung up, sometimes on short notice, within some of the state’s major school districts.

In a booklet describing the program, BOK notes that 272,835 students currently attend Texas charter schools and that the goal of the Texas Charter School Association is to have a million students in charter schools by year 2025.

While state law limits the number of charters, it does not limit the number of charter students or the number of charter campuses, BOK wrote.

“At this time, 7 charter operators enroll 52% of all charter students and the growth of these operators has been 799% over the last 10 years,” BOK wrote.

The BOK booklet says that “charter schools increase the cost of public education in Texas by over $600 million per year.”

Events leading to Hilltop’s decision to drop charter schools began with an email from Youngs, the CFO at Keller ISD. The district serves Fort Worth’s growing northern suburbs.

“There has been a clear desire to move to vendors who do not assist charters in competing with us,” Youngs wrote in the email to other district financial officers. “I am even aware of some firms who are marketing themselves to ISD’s claiming they do not do business with charters but in fact do. All this caused me to review a number of our vendor relationships including our FA.”

Youngs said his district did not ever make a decision to begin screening bond underwriters, advisors or counsel to exclude those that worked for charter operators.

“It was purely serendipitous,” Youngs said of Hilltop’s decision to drop charter operators.

“We view charter schools as competition, and Keller ISD feels like we can compete well,” Youngs told The Bond Buyer. “We are asking for 18 months’ notice before a new charter opens so that we can analyze potential impact to our budget and adjust accordingly.”

Currently, a charter can pop up in Youngs’ district with 90 days' notice, he said.

“We can compete academically,” Youngs said. “But when we lose 300 or 400 kids, it matters to us. When you lose 500, that’s $2.5 million.”

Districts have backed off the idea of screening firms that work with charters after the Texas Association of School Boards sent an email citing their attorney’s opinion that the practice would violate state law.

“We are writing to let you know that (the Texas Education Agency) has informally indicated that the exclusion of vendors from consideration in RFPs or RFQs based on the vendor’s doing business with charter schools would violate the state’s education code,” Sarah Orman, an attorney with TASB, wrote in the email.

Youngs said that Keller ISD plans to follow TASB’s interpretation of the statute.

The battle between traditional schools and charters has been particularly sharp in the Houston ISD, the state’s largest district, which is threatened with a state takeover unless it turns over 10 underperforming schools to a charter operator.

Facing an April 30 deadline to surrender the schools, the HISD trustees earlier this month proposed allowing Energized for STEM, a charter network authorized by HISD and operating four schools, to take on the management, budget, curriculum and turnaround efforts. But at an emotional meeting last week, the board rejected turning over the schools and took Mayor Sylvester Turner’s advice to challenge the state’s decision.

Under Texas law, HISD can hand over the schools to outside partners, which could include a charter operator, nonprofit, university or city. The district must send any partnership contracts and agreements to the Texas Education Agency.

To allow HISD to continue operating the 10 schools, TEA Commissioner Mike Morath must issue a reprieve from state accountability measures called for in a 2015 law.

Morath has said that many districts and schools affected by Hurricane Harvey in 2017 will receive accountability waivers, but he is not expected to announce a decision on any reprieves until June.

The HISD crisis comes as the district plans to eliminate up to 250 teaching positions to deal with a $115 million budget shortfall. The district attributed the shortfall to the state’s taking of property from the district to redistribute to other districts and falling property values in the wake of last year's hurricane.

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