Selected readings on US charter schools
Charter Schools and Qualified School Construction Bonds
The Qualified School Construction Bond (QSCB) program, a federally subsidized borrowing program initiated as part of the 2009 American Recovery and Reinvestment Act, continues to be a source of support for charter school facilities development. A total of $22 billion in QSCBs were authorized nationwide, and some remain unused. For example, New Jersey announced in March 2013 an allocation of $125 million dedicated specifically for charter schools. In 2010, New Jersey made a $30 million allocation for charter schools, all of which was used, according to the New Jersey Economic Development Agency. This feature of the National Charter School Resource Center’s monthly newsletter focuses on the QSCB program and provides information about the New Jersey effort, an explanation of how such debt arrangements work, and resources to further pursue the topic.
Internal Revenue Service (IRS) documents show the allocation of the $22 billion in QSCBs, broken down by state and school district, for 2009 and 2010. In addition to the $22 billion, QSCB allocations totaling $400 million were made to the Bureau of Indian Affairs, according to the IRS. The allocations are not funds to pay for construction projects. The allocations authorize a certain amount of the specialized QSCB debt. The money to pay for facilities projects must be raised from investors who want to buy the bonds. Initially, the federal support offered through the QSCBs was in the form of a federal tax credit for investors that was designed to be a substitute for traditional interest that a borrower pays. However, the Hiring Incentives to Restore Employment Act of 2010 authorized another option in the form of a prescribed direct federal payment to substitute for interest. The intent, according to an IRS notice, was to “facilitate prompt implementation of this borrowing option.”
The QSCB program has not been formally renewed. Any allocations that might now be available are leftovers from 2009 and 2010, according to Dwight Berg, an economist and consultant who has worked with school districts and charter schools to arrange facilities financing involving a variety of federally subsidized debt programs, including QSCBs. “The allocation was specific for fiscal years, but it could be carried over in a way that essentially makes it perpetual until it’s used,” Berg said in an interview with the Resource Center.
Distribution of QSCB Allocations in States
How QSCB allocations have been distributed by states has varied. Texas, for example, received a total state allocation of about $1.1 billion, with additional allocations for school districts in the state. The Houston district, for example, received the largest total allocation, about $189 million, according to the IRS. The Texas Education Agency (TEA) decided to set aside about 20 percent of the allocation to the state to be used by charter schools, according to Gary Marek, who oversaw the TEA’s QSCB program as the Director of School Facilities until he retired in late 2012. “We just wanted to make sure we gave access to charter schools,” Marek said in an interview with the Resource Center. “We were afraid they wouldn’t be as timely getting their applications in,” Marek said, noting that charter schools might lack the depth of resources to compete with districts to go through the process. As a federal initiative, the bonds involved federal rules, but much of the mechanics of distribution was left to the state, according to Marek. The TEA gave a window of about a year for the bonds to be used. “Some districts or charters reached the point where they said, we’re not going to be able to use it, so they let it expire and the state took it back,” Marek said. “We’d go down our waiting list from the original round of applicants and assign it to the next charter or district on the list.” He said the intent was the keep the allocations moving.
In California, the state’s allocation of QSCBs totaled about $1.4 billion, with additional allocations for school districts, according to the IRS. The Los Angeles district, for example, received the largest total allocation, about $608 million. The allocation of QSCBs for charter schools was specified by the Legislature, which set aside a total of about $142 million. The charter school allocation was administered by the California School Finance Authority (CSFA). CSFA officials told the Resource Center in March 2013 that nearly $120 million in QSCBs had been issued for charter school development projects, about $51 million by the CSFA and the rest through other authorized issuers that included school districts. The legislation approved in September 2010 specified requirements for charter schools to apply for the bonds and established priorities for how the bonds would be distributed among applicants.
How Qualified School Construction Bonds Work
The basic advantage of QSCBs for a borrower is the subsidy from the federal government that is intended to take the place of interest a borrower would pay. The U.S. Department of Treasury sets the rate that determines the subsidy and also sets the maximum term for the bond. The financing, IRS rules governing tax preferred bonds, and options for structuring deals can be complex. But essentially, the subsidy is equal to the rate set by Treasury times the amount of the bonds.
For example, with $10 million of QSCBs and a rate of 5 percent, then each year those bonds are outstanding, the investor gets an annual federal subsidy of $500,000. The subsidy can be provided in the form of a tax credit or, since 2010, a direct federal payment. “Most of the deals I work on, they elect to take the cash payment,” Berg said. The rate and the maximum term of the bonds set by Treasury has varied. On March 27, 2013, for example, the rate, called a qualified tax credit bond rate, was 4.56 percent, and the maximum term of the bond was 25 years, according to Treasury’s website.
The QSCB debt arrangements can involve many elements that affect the costs and benefits for borrowers and investors. Berg said that if the bond investor decides a higher return than the prescribed Treasury rate is necessary to justify buying the bonds, the bond can be assigned a lower value, which, in effect, would require the borrower to pay interest in addition to the federal subsidy. For example, if the investor buying the bond required an additional 3 percent interest to go through with the deal, Berg said the borrower in a $10 million bond deal would have to pay $300,000 annually, which would be on top of the $500,000 federal subsidy.
At the end of the bond term, the borrower is responsible for paying back the entire $10 million principal. Depending on how the debt repayment is structured, Berg said, the borrowers can benefit by making principal payments over the term of the bond into a “sinking fund,” which can earn interest. Treasury prescribes the maximum rate for the “sinking fund,” which was 2.9 percent on March 27, 2013.
New Jersey Ramps up Allocation of QSCBs for Charter Schools
From 2009 to 2010, New Jersey received QSCB allocations totaling about $440 million, and Newark received about $53 million, according to the IRS. The state’s March 2013 announcement of a $125 million allocation of QSCBs for charter schools in the state follows a $30 million allocation of QSCBs in 2010 for charter schools. According to the state Economic Development Agency (EDA), the 2010 allocation was used to support five charter school projects in three cities, Camden, Plainfield, and Newark.
Part of the charter school allocation went to Discovery Charter School in Newark as part of Teachers Village, a new development in the city that involves two other charter schools, apartments to be marketed to teachers, and retail establishments.
Barbara Weiland cofounded Discovery Charter School in Newark, New Jersey, in 1999, a Grades 4–8 school with an enrollment of 75 students and one of the three charter schools included in the Teachers Village development. Weiland, in an interview with the Resource Center, said she could see the new development going up about two blocks from her current site. A Newark public school district teacher for 28 years before starting the charter school, Weiland said the development represents a “great opportunity” for the school, especially given the school’s size. The development project also facilitates collaborative work with the other schools.
Weiland expressed confidence in the developer, who she said had seen a presentation about the school’s approach and been impressed. “They will give the little person a chance,” Weiland said. “We’re tiny. We’re not backed by any foundation.” Space for the school will go from about 9,000 square feet to about 11,000 square feet and will be configured much as the school is now, with a large open area surrounded by specialized rooms but with updated equipment for science, theater, and other projects. Weiland said the school also expects to have access to a gym. The development also will include space for Kids in Business, a nonprofit Weiland started that provides an opportunity for students to learn about entrepreneurship, including by developing and selling their own products. Half of the proceeds go to charities chosen by the students, a quarter are saved with the Community Foundation of New Jersey, and a quarter are reinvested in the organization, according to Weiland.
The school leases its space now and will be leasing its space in the new development, which she said is expected to be completed before June 2013. “I’d like to own my own building some day,” Weiland said. “But that’s not in the offing,” she said. “We know that we can pay our bills, but we need our own equity as well,” Weiland said. “We need our own buildings.”
The arrangement for the new $125 million in QSCBs limits the allocation for a single project to no more than $40 million and requires that applicants for the aid provide requested information by April 3, 2013, that the financing be ready to close by December 31, 2013, and that construction start within 90 days of the closing.
Tight timetables can pose challenges for smaller, independent charter schools, according to Rick Pressler, Director of School Services at the New Jersey Charter Schools Association. “What it sometimes means is that some of the larger schools or CMO [charter management organization]-supported schools are actually in a better position to access those because they’ve got projects that are in the works,” Pressler said in an interview with the Resource Center. Pressler, a charter school founder and governing board member, said he was encouraged that all of the state’s 2010 allocation was used.
Pressler said his association works to inform banks about the nuances of charter schools as borrowers. For example, charter schools in New Jersey are exempt from few regulations and, in many ways, operate like school districts, except with facilities, where charters “actually have much more latitude,” Pressler said. School district facilities must meet minimum square footage standards connected to the number of students enrolled and building plans must be vetted and approved by the state department of education.
“Charter schools don’t need to do that,” Pressler said. There is recognition that many charter buildings are too small, lack gyms and are older parochial or independent school facilities, Pressler said. Charter schools need the flexibility although the buildings still must meet all health and safety codes and undergo state inspection to assure appropriateness of the facility. “Our projects, by their very nature, and our buildings are not at the level of district buildings,” Pressler said, adding that charter schools have been able to develop facilities “with the right environment for students without spending at the level districts typically spend.”
Pressler said that his own charter school used a type of financing for its building that involved a tax benefit that was “really at the root of the deal for the investors.” Arranging a deal that makes sense for a charter school requires initiative, attentiveness, and money but not necessarily highly specialized knowledge within the charter school’s staff. Large schools and CMOs may have a facilities specialist on staff who can manage the process, but they would be the exception, according to Pressler.
“We did not attempt to master the information,” Pressler said of his own school financing experience and reliance on an outside consultant. “We had to provide information and fill out some forms, but the expertise resided outside the school.”
Still, school leaders are ill advised to outsource their common sense and responsibility to consider the impact on value of elements of a deal such as fees, interest rate, and length of a loan. For example, a loan involving a tax credit might offer a low interest rate but a high upfront expense. “A deal for a higher interest rate may actually serve the organization’s cash flow in a better way,” Pressler said. “Depending on the likelihood of refinancing, you need to look at the overall costs over the period of the financing.”
Source: North Carolina Public Charter Schools Association – by National Charter School Resource Center