The default rate for charter school facilities bonds increased from 2.7% to 3.3% over the past three years according to a forthcoming report by Local Initiatives Support Corporation (LISC) and Charter School Advisors. Unlike traditional public schools, charters receive scant support for facilities and must rely on private alternatives. In Texas, for example, charters receive about $1,000 less per student according to the Texas Charter School Association. Tax-exempt bonds have become an increasingly significant source of financing for charters with bond issuance going up 39% in 2012.
The increased default rate should not be alarming to charter leaders or investors-in fact, there is much reason for optimism. First, the use of robust academic disclosures, including student achievement and waitlist data, is a rather recent phenomenon. Bonds that were previously issued without such information likely included incomplete risk profiles, increasing the chances of malinvestment (i.e. investing in underperforming charters that are more susceptible to losing students).
Michigan’s default rate of 12 percent was the highest amongst all states. Michigan was particularly active in issuing charter school bonds in the early years of charter school bond issuance – which began in 1998 – according to the report, when underwriting criteria had not evolved, it said.
Additionally, in 2012 LISC found that there is a strong link between academic outcomes and default, a finding that is consistent with their new report.
The schools defaulted mainly because the authorizer of the school did not renew their charter due to sub-par academic performance, the report said.
It is encouraging that underperforming charters are being held accountable for outcomes and that investors, not taxpayers, must bear the consequences of their bond defaults. As underwriting criteria continue to evolve investors will become more sophisticated at using key indicators to predict parental demand and, thus, whether charters will default. The result of this is that more money will follow good performance, ultimately benefiting the millions of students who charters serve and are currently funded inequitably.