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“A-Decade-of-Results:-Charter-School-Loan-and-Operating-Performance,”-Lending-to-Charter-Schools-Pays-Off

Mon, 20 Jun 2011 00:00:00 GMT

A Decade of Results: Charter School Loan and Operating Performance is an industry-wide study of 430 charter school loans, both outstanding and paid off, from 2000-2009. The study, conducted by Ernst & Young LLP and funded by the Bank of America Charitable Foundation, examined loans that totaled $1.2 billion and were made by 15 lenders to 336 schools. The lenders are mostly community development financial institutions (CDFIs) , which are non-profit organizations that provide financing for charter school facilities as part of community development or charter support missions. (In fact, three CDFIs -- the Low Income Investment Fund, The Raza Development Fund and The Reinvestment Fund -- commissioned the study).

The finding that charter schools are good borrowers did not surprise those of us who are closely involved with charter schools. This study, the first and only industry-wide research of charter school loans, is important because it proves that a vast majority of charter school operators manage their finances well and are responsible borrowers despite their relatively small enrollments, limited operating history and limited financial resources. To date, only a handful of lenders and bond investors are invested in charter schools due to the perceived credit risks and newness of the sector. We hope that this research serves as a tool to improve other parties’ understanding of the sector. Private capital investments by banks and investors are critical in the growth of charter schools.

Some of the key findings of the report are:
• Five loans totaling $12 million (or 1 percent) of the total loan amount made during the period ended in foreclosure;
•   Approximately $2 million (or 1 percent) of the foreclosed loans, net of recoveries, were written off as of June 30, 2009 (this figure excludes potential subsequent write-offs of foreclosed properties still held by lenders)
•   3.6 percent of outstanding loans had been delinquent at some point over the 10-year study period for at least 60 days;
•   Strong academic performance is associated with better loan performance; and
•   In determining loan performance, occupancy costs seem to matter more to lenders than per pupil revenue, a message that controlling costs is important.

Sometimes, it is hard to separate noise from facts. When it comes to capital financing, existing and potential lenders and investors, and other charter schools stakeholders, now have this report, which showed that the majority of loans made to charter schools over a ten year period yielded positive results, as a resource when making their decisions.
Click here for more information.

Charter-School-Bond-Deals-Are-Big-News!

Fri, 26 Nov 2010 00:00:00 GMT

Generally speaking, bonds are not the most interesting topic. So, it's understandable that charter school bond issues -- which are only a small part of the municipal bond market -- might go under the radar. But, that changed this month when editors of The Bond Buyer (a very respected and influential media outlet for those of us working in the bond sector) announced the finalists for the newspaper’s Deal of the Year Awards. The announcement recognized some of the most innovative municipal bond deals that closed between October 1, 2009 and September 30, 2010. More than 70 nominations, big and small, from various municipal sectors were considered. Among the finalists are two charter schools: KIPP Inc. in Houston, one of the two winners in the Southwest region; and High Tech High in Chula Vista, Calif., one of two winners in the Far West region. All the regional finalists are in the running for the overall Deal of the Year Award.

This comes at a time when governments and all other tax-exempt borrowers fund their long-term plans while coping with tough budgetary times and a volatile financial market. This has been especially difficult for small and generally low-investment grade issuers like charter schools. In addition to the usual inherent risks of the sector, conventional or commercial credit enhancement providers i.e. bond insurers, are now completely gone resulting in a more challenging financing environment for charter schools.

The $70 million KIPP Inc. Houston transaction was structured and partially enhanced by a $9 million guaranty from the KIPP-related foundation, Philo Houston LLC, $1 million cash from Local Initiatives Support Corporation and a $10 million balance sheet guaranty from the Bill & Melinda Gates Foundation. In the case of High Tech High, the $12 million deal was the first AAA-rated Qualified School Construction Bond. The credit rating was due to the letter of credit provided by City National Bank, wrapped by AAA-rated Federal Home Loan Bank of San Francisco. These are indeed first-of-its-kind innovative financing structures. Both deals were underwritten by RBC Capital Markets.

Bringing these types of deals in the capital market is a tremendous accomplishment, and all parties involved deserve much credit. This is the first time bonds issued by charter schools have received this type of national recognition from the financial press, a significant step towards making charter school financing mainstream. The outcome should be better acceptance from institutional and other investors, increased market access and eventually, relatively lower cost of capital. We still have a long way to go, but this is a big step forward. The Deal of the Year Award will be announced in New York City on December 9th.

Click here for more information.

Charter-School-Bond-History:-Looking-Back-and-Looking-Ahead

Tue, 18 Oct 2011 00:00:00 GMT

The Charter School Bond Issuance: A Complete History, published by the Local Initiatives Support Corporation (LISC), provides a comprehensive analysis of the more than $5 billion in tax-exempt bond transactions undertaken by roughly 400 public charter schools, from the first bond offering in 1998 through 2010.

The report conveys transparency about the charter school sector of the municipal bond market and the current two-tiered system of public school financing—one for school districts, which frequently access the tax-exempt bond market at favorable rates, and another for public charter schools, which have limited access to the market and pay higher rates. The report finds that charter schools have paid an average interest premium of two percentage points more than triple-A rated municipal borrowers. According to the authors, these higher interest rates translate to an additional $90 million in interest payments annually for charter schools.

Charters school bonds’ low credit ratings are generally attributable to the newness of the sector, the absence of taxing authority and the lack of per pupil funding specifically for facilities to secure the bonds. And because low rated bonds carry higher interest rates, facilities become a heavy burden to school operators. If the interest premium could be marginally reduced from the estimated of $90 million per year for the entire charter school sector, it would free up funds that could be used to support instruction rather than to pay interest.

The report contains many other findings about charter school bonds including the upward trajectory of bond issuance that peaked in 2007, the number of schools that received credit enhancement, default rates, and the void left by the collapse of the municipal bond insurers. To request a hard copy of this report, please contact the EFFC at effc@lisc.org.

Now is the time for the public sector to address the two-tiered public school finance system. As stated in the report, short of publicly financing charter school facilities with tax-backed structures, the expansion of state, municipal or federal credit enhancement programs that guarantee charter school debt without any up-front appropriation of monies would be a practical and efficient use of superior government credit in today’s tight fiscal environment. If charter schools could access the capital market with the ease and the lower interest rates of school districts (if not all charters, at least those with demonstrated academic, financial and operational success), the resulting savings would redirect taxpayer dollars to the classroom, while reducing public outlays for public school facilities.
Click here for more information.

Detroit-Public-Schools-Buildings:-Are-They-a-Go-or-No-Go-for-Public-Charter-Schools003F

Wed, 09 Nov 2011 00:00:00 GMT

Providing high quality educational options so that every child has an opportunity to learn is a core mission for the public charter school sector. In cities like Detroit, the need for quality educational options is urgent. For many years, state, local and community leaders have been sounding the alarm that public education in Motor City is in dire need of change. Finally, this year, changes are occurring. City leaders are turning the situation around by inviting national public charter school models to open schools in 2012 and beyond.

To assist this transformation, the National Alliance for Public Charter Schools and the Michigan Association of Public School Academies have partnered in an assessment study of the 50+ school buildings that Detroit Public Schools (DPS) have listed for sale or for lease. Both parties believe that this study can be a catalyst for moving forward, since securing adequate and affordable facilities is a major challenge, and often, an impediment to the growth and success of the charter school movement.

Detroit Public Schools: Available Facilities Report is a high level viability study of the 54 available school buildings in DPS. It is a resource for all public charter schools seeking facilities: those that are already operating in Detroit and national models looking to replicate in Detroit. The report includes a profile of each building as well as a viability ranking on a scale of 1 to 10 (10 being most viable). If a public charter school is interested in particular building, it can engage a more in-depth analysis of the building to determine the investment necessary to make it operational.

Ideally, state laws should require school districts to share unused buildings with public charter schools at minimal or low cost. And, in the absence of such laws, school districts should provide public charter schools access to unused buildings. To learn about the innovative school districts that have affirmative policies and practices in sharing available public facilities to public charter schools, click here.

Click here for more information.

Fitch-publishes-draft-of-charter-school-credit-rating-criteria

Fri, 27 Jul 2012 00:00:00 GMT

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.
Click here for more information.

How-Budget-Sequestration-would-Impact-Federal-Funding-for-Public-Charter-Schools

Thu, 02 Aug 2012 00:00:00 GMT

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.

Click here for more information.

Money-can’t-buy-success.-Or-explain-failure.

Fri, 11 Mar 2011 00:00:00 GMT

I recently suggested to a group of education researchers they should develop some kind of algorithm to inflate charter school test scores according to each state’s gap in public funding between charters and district-run schools. I was kidding, but trying to acknowledge an elephant in the room. Whatever charter schools are accomplishing, they’re doing it on far less than district schools. Yet, because we believe all public school students should be funded equitably, we don’t argue that “we can do more for less” and we avoid blaming chronic underfunding for performance problems.

Not so in the other sector, it seems. For a new Fordham/NSBA study, Rick Hess and Olivia Meeks surveyed school board members and found this: “More than two-thirds of boards report that the budget and funding situation is extremely urgent, and nearly 90 percent think it is extremely or very urgent…By far, board members in this study report that the most significant barrier to improving student achievement is a lack of funding. Over 74 percent indicate that finance/funding is at least a strong barrier to improvement, with 30.2 percent going so far as to label it a total barrier.”

Wow. How long do you think the charter movement would last if nearly a third of our leaders just said nope, no can do, not without more money?

Click here for more information.

Public-Charter-Schools:-Borrowing-with-Tax-Exempt-Bonds

Wed, 11 Jul 2012 00:00:00 GMT

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.

Click here for more information.