For-Profit Arizona Charters Lose Federal Funds

Published September 1, 2005

The U.S. Department of Education has ruled that Arizona’s for-profit charter schools are not eligible for federal funds as far as the Individuals with Disabilities Education Act (IDEA) and Title I of the Elementary and Secondary Education Act are concerned. The March ruling was unwelcome news to the state’s 52 for-profit charters, which are considered public schools under state law and must provide services mandated by Title I and IDEA.

Arizona officials said the state’s for-profit charter schools, which enroll approximately 12,000 students, will have to provide required services out of their own funds, and face a loss of about $3.6 million for the 2005-06 school year.

Arizona’s for-profit charters have been threatened with a loss of federal funding since the Department of Education released an audit in 2003 that determined they were ineligible to receive money under Title I or IDEA because they do not qualify as local education agencies. To qualify, the ruling determined, a for-profit school had to be controlled either by a public agency or a nonprofit organization. In Arizona, however, for-profit schools receive charters directly.

“The issue is that some charters are actually held by for-profit organizations,” explained Department of Education spokesperson Samara Yudof. “In many other states, a nonprofit organization holds the charter but is permitted to contract with a for-profit to run the school.”

In 2004, Arizona appealed the Department of Education’s 2003 ruling, but this past March the federal government reaffirmed its determination.

Filing Suit

The U.S. House of Representatives and the state of Arizona have moved to turn back the Department of Education ruling.

Arizona has responded to the ruling on two fronts. On June 15, the state’s Board of Charter Schools, along with 11 for-profit schools, filed suit against the Department of Education in U.S. District Court. Arizona alleges it was “singled out” for the audit by the federal government.

The other front was opened June 24 in Congress, where an amendment barring the Department of Education from withholding the charters’ funds was supported unanimously by the Arizona delegation and attached to an appropriations bill. The entire bill (H.R. 3010) passed the House later that day.

Arizona Superintendent of Public Instruction Tom Horne applauded the move in Congress, stating in a news release, “I am hopeful that the U.S. Senate will adopt this language in its version of the appropriations bill and that it will be signed into law by President Bush. … It is important to ensure that all schools be treated equally under the law.”

Reading the Law

Even if H.R. 3010 is enacted, the affected schools likely would lose their 2005-06 federal funding because the amendment would not become effective until this October, after Congress has appropriated funds for the 2005 fiscal year.

Before this incident, the Bush administration was considered to be friendly toward charter schools. When asked if the Department of Education’s stance on Arizona’s for-profit charters signaled a change in that outlook, Yudof said it did not, explaining, “the Department strongly supports charters … this is not a shift in policy but rather a legal determination.”

Nelson Smith, president of the Charter School Leadership Council in Washington, DC, agreed. “I don’t think [this] signals any kind of shift in the Department’s attitude,” he said, adding he believes the Department of Education simply has been “reading the law that is in plain black and white.”

To resolve the situation, Smith said he suspects either the federal laws or Arizona’s charter statutes will have to change. But in almost every charter case not involving for-profit schools, he noted, federal statutes “defer to state laws.”

Neal McCluskey ([email protected]) is a policy analyst at the Cato Institute’s Center for Educational Freedom.

For more information …

See “Hawaii Withholding Funds from Charters,” School Reform News, April 2005, available online at

“Charters as Role Models,” published in the June 2005 issue of Education Next, is available through PolicyBot™, The Heartland Institute’s free online research database. Point your Web browser to, click on the PolicyBot™ button, and search for document #17403.