The 2010 Charter School Facility Finance Landscape is an updated mapping survey of private nonprofit and public financing programs for charter school facilities across the nation.   For the first time, this year’s report includes information on charter school financing through the tax-exempt bond market.

The survey was released by the Educational Facilities Financing Center (EFFC) at the Local Initiatives Support Corporation (LISC).

In the interview that follows, Elise Balboni, LISC’s Project Director for the report, explains the factors that differentiate charter schools from traditional public schools, and describes their challenges and triumphs in today’s economic environment.

Maria Sazon, Senior Director of Facilities Initiatives with the National Association for Public Charter Schools, weighs in on the credit quality of charter schools.  “Charter schools are good borrowers despite the limited public support they receive for facilities,” she says.  

“Loan and bond repayment is strong,” she adds, pointing to extremely low overall default rates on both Community Development Finance Institutions loans and rated bond issues, to be discussed later in the interview.

Sazon joins the authors of the Landscape report in emphasizing the importance of charter schools’ overall credit quality, particularly in today’s stressed economic environment in the hope that a better understanding of their performance will increase their borrowing opportunities in the tax-exempt bond market.

MuniNetWhat is a charter school?  Who can attend?

Balboni:  Charter schools are independent public schools that operate with freedom from many of the rules and regulations that govern traditional public schools and that are held accountable for student achievement under the terms of a charter granted for a specific period of time.  Charter schools cannot restrict eligibility; if demand exceeds capacity, charter schools must hold a lottery to determine enrollment.

MuniNet:  Do charter schools fall under the same political jurisdiction as public schools – i.e., can a community offer charter as well as traditional schools within the same public school district?

Balboni:  Many school districts offer both traditional and charter school options.  There are almost 5,000 public charter schools in 40 states and the District of Columbia.  Charter schools tend to be located in low-performing school districts where there is a need for greater choice in quality educational options.

MuniNet:  Are charter schools operated under different guidelines than traditional public schools?

Balboni:  Charter schools are subject to the same educational requirements as other public schools; however, they have greater freedom to innovate with their educational programs and greater control over budgets and personnel.

MuniNetWhat are the biggest challenges for today’s charter schools?

Balboni:  Lack of access to appropriate public facilities or to public funding for facilities is a major challenge for charter schools and one that raises equity issues, as children within the same neighborhood, community and school district receive differing levels of public support for their education.  Unlike traditional school districts, charter schools do not have taxing authority and must rely on limited public capital funds and generally lower per pupil operating revenues to pay for their facilities.  These funding inequities and the added burden of facilities construction and financing have in turn hindered the growth of some of the country’s highest performing public schools.

MuniNet:  Are the same factors taken into account in determining the credit quality of a charter school vs. a traditional public school or school district?

Balboni:  Unlike traditional school district financing, which is generally backed by tax revenues, charter school financing is dependent upon a school’s per pupil revenues.  As such, the quality of the academic program is paramount.  High quality implies both continued student demand and likelihood of charter renewal.  The charter school environment is also important, both in terms of funding parity with traditional district schools and the quality of the charter authorizer. 

MuniNet:  In general, what makes a good charter school borrower?

Balboni:  A good charter school borrower is one which focuses on student results and manages growth, finances and academic curricula in order to achieve those results.  Generally, this means staggered growth, targeting limited financial resources toward academic performance, particularly in the early years, and a focus on academic assessments and continual adjustment of instruction based on such assessments.  Charter schools that manage their growth with an eye toward achievement are more likely to have the management and program necessary to generate cash flow for repayment.  The charter schools that have accessed the tax-exempt bond market on favorable terms to date have tended to be older charter schools that have successfully navigated the early, riskier years and proven themselves in terms of their academic program and/or financial strength due to continued student demand for their program.

MuniNet:  How do newer start-up schools fare in terms of bond ratings compared to the older, more seasoned schools?

Balboni:  Newer start-up schools generally haven’t been able to issue bonds.  They don’t meet the criteria for investment grade credits.  In the past, a younger school could have purchased insurance to “bridge the credit gap” but that option is no longer available.

MuniNet:  How can the municipal market benefit from the findings of the Charter School Facility Finance Landscape report?

Balboni:  The 2010 Landscape includes, for the first time, information on charter school access to the tax-exempt bond market.  It identifies 176 rated bond issues totaling $2.4 billion and includes specific data for each issue, as well as an analysis of ratings and performance.  This performance has been strong to date.  Of the 176 offerings detailed, there was only one payment default that resulted in a loss to bondholders, a default rate of 0.1% in terms of the par originated and 0.6% in terms of the number of issues.  

Also potentially of interest, the Landscape includes loan origination and performance data for 18 major private nonprofit providers of facilities financing that generally serve schools during the earlier, riskier period of their life cycle.  Default rates for these providers are 1% of the dollar amount of loans originated and 1.5% of the number of loans, with write-offs of 0.3% of the dollar amount originated and 1% of the number of loans.

Sazon:  We hope that lenders and municipal investors take comfort in these low loss rates.  The default rate in charter schools’ rated bonds is not that much different from other sectors in the municipal market, including tax-backed issuers. 

MuniNet:  You mention 176 rated bond issues for a universe of approximately 5,000 charter schools.  Does that mean that 176 charter schools have issued bonds?

Balboni:  The report covers 176 rated bond issues; however, several are pooled issues for multiple schools and several are repeat issues for the same school.  In addition, there are an estimated 150-200 unrated bond issues.   In the aggregate, roughly 300 charter schools have accessed the tax-exempt bond market to finance their facilities.  This is significantly smaller than the number of schools because only approximately a third of the 5,000 schools are in their permanent facilities.  Also, as mentioned earlier, bond financing has really only been available to the more mature schools that have grown to full enrollment and been through their first charter renewal.  Since the charter school movement is still relatively young, many schools have not met the criteria used to date.   Part of what the Landscape is trying to show is that charters have in fact been good credits and that access should be expanded more broadly to high-quality schools whose academic program will successfully drive enrollment and thus cash flow for repayment.

About the Expert:

Elise Balboni is a consultant in the area of charter school facility financing.  Previously, she served as Vice President of Education Programs at the Local Initiatives Support Corporation (LISC), where she had responsibility for oversight of LISC’s Educational Facilities Financing Center (EFFC).   The EFFC pools low-interest loan and grant funds and leverages them for investment in local educational facilities funds that help finance charter school facilities in underserved communities.  

Prior to joining LISC, Ms. Balboni served as an Associate in municipal finance at CS First Boston and Cambridge Partners, where she participated in numerous tax-exempt and taxable municipal financings, and as Budget Director for the Massachusetts Senate Committee on Ways and Means, where she oversaw development of the Commonwealth’s budget on behalf of the State Senate. 

Ms. Balboni received her B.A. from Harvard University and her M.B.A. from the Stanford Graduate School of Business.

The opinions expressed in this interview are those of the guest expert, and do not necessarily reflect the views of MuniNet Guide or its publisher, RICIC, LLC.