Charter schools now serve five percent of all public school students and continue to grow in popularity. There are an astounding one million students on waitlists nationwide. Despite this demand most charters receive scant support for facilities funding, creating significant obstacles to expansion. However, tax-exempt bonds have become an increasingly significant source of financing. This market-oriented solution provides substantial benefits to students, charters and investors alike.
Facilities support for charters varies by jurisdiction. Of the 43 jurisdictions with a charter law, nine provide public school facilities access, 14 provide a dedicated per-pupil allotment, and only two do both. Charters might also receive other forms of support through various federal, state and philanthropic programs. Regardless of jurisdiction, however, most charters lack the resources of neighborhood schools and must pursue creative and often sub-optimal options such as leasing space in vacant churches. It is not uncommon for a charter to have gym class in its cafeteria or for its classrooms to be composed entirely of trailers.
In recent years, tax-exempt bonds have helped alleviate this problem for established charters. Charter school facilities bond issuance went up 39 percent in 2012 and set a single-year record in 2013 with $1.3 billion in financing. Behind this growth is Local Initiatives Support Corporation’s 2012 Charter School Bond Issuance study, which found that poor academic performance was a primary cause of at least 73 percent of defaults, nearly half of which did not include academic disclosures.
Prior to LISC’s report academic disclosures were used with varying degrees of quality and charter bonds were viewed as somewhat risky investments. Unlike traditional school districts, charters don’t have taxing authority and must rely primarily on parental demand to service debt obligations. Generally, positive student outcomes result in increased demand and vice versa. Thus, charters with poor academic outcomes are likely to lose students and the revenue attached to them. In this scenario a traditional school district can continue taxing residents to service its debt obligations, whereas a charter has no such ability and ultimately defaults.
The link between academic outcomes and default exposed a significant market opportunity with numerous benefits. To illustrate, it is useful to examine a case study of effective academic disclosure.
Great Hearts Academies (GHA) in Arizona devoted much attention to academics in its recent bond disclosure, which sought over $80 million to pay for facilities and construction upgrades for its schools.
First, enrollment and waitlist data were included for all of GHA’s Arizona campuses. In aggregate 10,620 students are waitlisted, outnumbering their total population of 9,321 students. This signals to investors that GHA’s current supply (i.e. the number of students it can enroll given its facilities, staffing, etc.) cannot maintain pace with current demand (i.e. parents who want to enroll their children at GHA schools). Similarly, annual student persistence rates were included to demonstrate how well GHA schools are at retaining students, indicating the level of parental satisfaction at each of their campuses. From a perspective of financial risk, these factors identify the charter schools as a solid investment.
Additionally, GHA provided robust student-achievement data, including college-readiness indicators such as SAT and ACT scores. This helps investors gauge GHA’s effectiveness in delivering quality instruction and ensuring graduates’ preparedness for life beyond high school. Similarly, comprehensive state accountability ratings compared each GHA school with its respective neighborhood schools, providing benchmarks that investors can use as a competitor analysis of sorts. GHA’s academic disclosure also included data on its school-level operations, including student-to-faculty ratios, salary ranges and staffing numbers, which lend insight into GHA’s organizational efficiency.
The effects of transparency are significant. Academic disclosure helps investors more effectively assess a charter’s risk profile. Impressive outcomes help assure investors that demand for a charter’s services will likely persist in the future, making the school a more reliable borrower. In turn, charters might receive more favorable terms, allowing them to keep resources in the classroom that otherwise would have been spent on debt service. Such savings are critical. Without facilities funding charters already must spend about 15 percent to 20 percent of their classroom money on facilities, whereas traditional schools can devote these funds entirely to operations. Most importantly, transparency helps ensure that scarce resources are invested in high-performing schools. This allows charters to offer quality education to more students and expand opportunities for students already enrolled.
It is important to note that even with academic transparency some charters will still default on their debt obligations. In this case, however, taxpayers aren’t forced to continue subsidizing the interest payments of failing schools as they are with general obligation bonds for traditional districts. Instead, charters are allowed to fail and investors suffer the losses, not the public. Charters have an organic form of accountability that most public schools are immune to.
The use of academic disclosure in facilities bonds incentivizes quality and plays in important role in ensuring that more students are given the opportunity to attend high-performing schools. Over one million students eagerly await their opportunity.
Aaron Smith is an education policy analyst at Reason Foundation.