Category Listing

The Charter Blog


Sort By: Title   |   Blog Date


Thursday, August 02, 2012

How Budget Sequestration would Impact Federal Funding for Public Charter Schools

After the elections in November and before the end of 2012, Congress will be faced with several major decisions that will impact our nation’s fiscal situation, including funding to support education programs. One of these major decision points is how to deal with automatic funding cuts (called Budget Sequestration) to both military and domestic spending programs that will take place on January 2, 2013. Approximately 8 percent will be automatically cut from federal discretionary programs, including nearly $20 million from the overall allocation to the Federal Charter Schools Program (i.e. state education agency grants, non-state education agency grants, replication and expansion for high-quality charter school grants, credit enhancement for charter school facilities grants, the national leadership activities grants, and the state charter school facilities incentive grants)—assuming these programs otherwise were allocated the same funding as last year in the appropriations process (i.e. $254 million). 

It is important to note that U.S. Department of Education Deputy Secretary Tony Miller issued a memorandum on July 20, 2012 to states to clarify how these reductions would take place in 2013. This memorandum stated that all 2013 cuts would come from funding states receive in July of 2013, and that no sequestration cuts would impact the 2012-2013 school year.

Sequestration is the outgrowth of the creation of a “Super” Committee that Congress created in August of 2011. This Committee was tasked with identifying and approving $1.2 trillion in cuts in federal spending over ten years. The Committee was not able to come to agreement on which cuts to approve, so a process called Budget Sequestration was triggered. 

Budget Sequestration institutes across the board cuts in nearly all federal spending programs of roughly the same amount. Certain programs like Medicare, Pell Grants and child nutrition programs are either exempt from Sequestration or have limits on the percentage of funding that can be reduced. Left unchecked, cuts of $110 billion in federal spending will happen each year, starting with this January, for the next nine years. These cuts will be evenly divided between military spending and non-defense related spending.

Sequestration will have an especially devastating impact on education programs, translating into cuts of about 8 percent each year of this nine-year period. For the Individuals with Disabilities Education Act’s Part B Grants to State program (the main federal program funding special education services in K-12 schools), this will mean a cut of approximately $900 billion nationally in 2013. For Title I (the primary program under the Elementary and Secondary Education Act focused on the education of disadvantaged students), school districts will receive a cut of $1.1 billion nationally in 2013.

What are the options for Congress? If no action is taken, these harmful cuts will be implemented. Congress could also substitute other reductions in spending to meet all or part of the $1.2 trillion that will be cut over the next nine years. At the time of this posting, there is no consensus yet in Congress on how to respond to Sequestration, and a resolution, if one comes, will likely not be determined until after the November elections.

We urge all members of the public charter school community to take note of this situation, and be prepared with contingency plans to address possible funding reductions in the new year.


Posted by: Todd Ziebarth, Vice President of State Advocacy and Support at 6:00 AM
 | permalink

Share



Friday, July 27, 2012

Fitch publishes draft of charter school credit rating criteria
Recently, Fitch Ratings, citing “recent events in the charter school sector,” published a draft of the criteria that outlines changes to the way the agency proposes to analyze public charter schools. The so-called “exposure draft” includes a number of proposed amendments to existing criteria. For example, schools with significant credit strengths could reach investment grade, but will be capped at the ‘BBB’ rating category (the 4th highest possible rating). Fitch also proposes to rate as non-investment grade any schools that have less than five years of audited operating history and no charter renewals. Likewise, if a charter school would use bond financing to accommodate enrollment growth, or if a school had 400 students or less, or less than four grade levels, it could not obtain an investment grade rating.  If applied in the proposed form, the exposure draft would trigger a substantial number of downgrades to existing charter school ratings. 

The suggestion that they may retroactively "downgrade" existing, high-performing charter schools that are fully and faithfully meeting their bond payment obligations to bondholders is quite problematic. The new criteria could have a chilling effect on the public charter school sector by making it more difficult for charter school organizations to obtain investment grade ratings and related lower-cost, tax-exempt bond financing. It would also discourage bond investors from investing in the sector, thus reducing capital supply and liquidity. This is an unfortunate change of course for public charters schools since our sector has never defaulted on a bond with an investment grade rating.

In short, these ratings adjustments will make it more expensive and even harder for charter schools to access tax-exempt bond financing to finance their facilities. 

Fitch Ratings expects the proposed changes will affect ratings on nearly all charter schools. The agency currently rates 22 charter school transactions “investment grade” and expects most, if not all, of these ratings would be downgraded to non-investment grade under the proposed criteria. The vulnerability of charter schools, which Fitch Ratings views as inherently non-investment grade due to their typically high leverage, renewal uncertainty and lack of operational and financial flexibility, demonstrates the need for wider access for financially-sound public charter schools to state-backed bond guarantees. In states like Texas, where public charter schools can utilize the state’s credit rating to finance facilities, charter schools will be able to finance growth at costs that are level with traditional public schools.  Elsewhere, significant facilities finance issues will remain, or get worse.

Fitch Ratings invites comments on the exposure draft through August 20, 2012. You can click the following links to view the full Fitch Ratings report and the main proposal areas for feedback.

Posted by: NAPCS Pressroom at 6:00 AM
 | permalink

Share



Wednesday, July 11, 2012

Public Charter Schools: Borrowing with Tax-Exempt Bonds
Despite the growing body of evidence suggesting public charter schools are making a difference for our least served students, the challenge of securing affordable facilities continues to confront nearly every charter school. The landscape of solutions now includes government-sponsored, private sector, and collaborative programs that provide facilities or facilities financing. Borrowing through the issuance of tax-exempt bonds has emerged as an effective option to obtain low-cost facilities financing.

Nonprofit corporations have borrowed money using tax-exempt bonds for decades. As the tax-exempt bond market has experienced a substantial expansion in the types of nonprofits using such financing (previously dominated by hospitals and universities), individual public charter schools and groups of commonly managed public charter schools are borrowing on a tax-exempt basis. Since 1998, over 400 public charter schools have borrowed over $5 billion using tax-exempt bonds. Bond market access has been spurred by increasing demand for facilities, better understanding of the benefits of tax-exempt financing, and greater market acceptance of public charter school credit. Not only large, established public charter school management organizations (CMOs) with substantial financial resources need apply, but also relatively small, even start-up, public charter schools with limited credit history may be financeable under certain circumstances.

A newly released publication, Public Charter Schools: Borrowing with Tax-Exempt Bonds, is a valuable resource for charter schools that are seeking long-term, low cost capital to finance their facility needs. The purpose of this booklet is two-fold: first, to provide public charter schools that might not have previously considered or fully understood tax-exempt financing with relevant information about the benefits of, their eligibility for, and the procedures associated with such financing; and second, to offer public charter schools guidance and best practices to follow so that they are well positioned to access the bond market if desired. Highlights of this book were presented by the authors at the NAPCS National Charter Schools Conference in Minneapolis.

Posted by: NAPCS Pressroom at 6:00 AM
 | permalink

Share