Selected readings on US charter schools
Commentary: Lending for innovative education is money well-spent
More dollars could go toward teachers, guidance counselors and books, if only the municipal bond market was prepared to be a ready source of affordable capital. Sadly, underwriters and investors aren’t sure how to assess charter risk profiles. So, they charge a premium for the rare school that does try to tap the bond market — much more than public school districts pay to borrow. That leaves charters with less to spend in the classroom and keeps some schools from opening altogether.
A new survey, for example, found that in New York State charter schools are forced to direct millions of dollars away from classrooms to pay for facilities. If they aren’t housed in school district space, they spend 15% of their budget just on rent or mortgage — even more if they’re operating in New York City. (See: Building Inequality: How the Lack of Facilities Funding Hurts New York’s Public Charter School Students).
This facilities financing problem can be fixed because it is driven mostly by myth and misinformation. Charter schools are not high-risk political footballs…at least not financially. National studies have evaluated more than a decade’s worth of bond data and found that charter schools are strong, reliable borrowers. If we can standardize their underwriting and make them more transparent to investors, we can help schools reach more at-risk kids with top-line facilities offering fresh educational alternatives.
Representatives from leading banks, investors, rating agencies, charter networks and others came together earlier this month to tackle that challenge. They reviewed a study by the Local Initiatives Support Corporation (LISC), the largest national community development nonprofit, which has analyzed every rated and unrated charter school bond issued from 1998-2011.
Attendees at the “Bonds and Blackboards: Investing in Charter Schools Conference” heard a story quite different from the one they thought they knew. They learned about charter organizations with strong and growing net assets, even as public school budgets tighten. They were told about manageable debt levels, strong repayment histories and zero defaults among investment-grade charter school bonds. And the conference made clear that academic results drive financial performance.
Put simply, good schools are good investments. (Complete results are available in LISC’s Charter School Bond History: Volume 2).
This kind of performance should lead the market to identify and finance the best charters in the country. But it doesn’t. Just one in 10 charter schools have ever tapped bond financing for their facilities. For families desperate for better options, we need to find ways to bridge this disconnect.
That’s what the Knowledge Is Power Program (KIPP) did when it set out to expand its reach in Houston, where it began almost 20 years ago. KIPP today is a national network of 125 schools. Though 86% of its student body is low-income, 93% of its middle schoolers graduate high school, and more than 83% of them go on to college. That’s a tremendous track record that flies in the face of conventional thinking about poverty and education.
Back in 2004, KIPP was running 15 schools in Houston — significant, but nowhere near enough to meet local demand. Thousands of kids were languishing on its waiting lists. In response, KIPP laid out plans to grow to 42 schools by 2020 — a formidable target under any circumstances, and made all the more challenging by the contraction in public school funding.
Even with its strong results, KIPP could not access the bond market on affordable terms. So it partnered with the Bill & Melinda Gates Foundation and LISC on a creative credit enhancement fund that helped to raise $67 million in bond financing, allowing KIPP to move forward with the early stages of its expansion. KIPP today serves 9,000 students in Houston through 21 schools, with another 8,000 still on waiting lists.
Yet KIPP’s borrowing experience is the exception, not the rule. There isn’t sufficient philanthropic capital to provide guarantees or to buy down interest rates for all the schools that need facilities financing. Charter school operators need to be able to access the market more efficiently.
At the same time, charter schools need to be smarter borrowers, presenting in-depth data that puts lenders and investors at ease with their prospects. And underwriters need to evaluate that information in light of the real-world performance of these schools. Charters are high-performing assets with strong repayment histories. They are good for families. They are good for communities. And they are good for Wall Street.