Researchers Urge State, Local Governments to Rethink Existing Financing Model
With little capital funding, most charter schools must spend part of their per pupil funding on facilities, including leases, school renovation and repairs, and mortgages on property, which jeopardize resources available for classroom instruction, according to a new study by New York University’s Institute for Education and Social Policy. As a result of the findings, the Institute’s researchers urge state and local governments to rethink the existing charter school financing model in which charter schools receive little or no funding for facilities.
The authors found that charter schools spent an average of 20 to 25 percent of their instructional revenue on repaying the loans and bonds used to finance capital projects, leasing, purchasing, and maintenance. They note that financiers generally agree that charter schools should not commit more than 12 to 15 percent of their per pupil revenue to debt service.
“The financial strains of facilities financing are grave for charter schools,” said Carol Ascher, the study’s principal investigator. “Most charter schools in our study incur debt initially to make leasehold improvements on their rented space, and later to finance the purchase of land and a facility, or to construct or renovate a building.
“While privatizing facilities financing may lead to greater efficiencies in producing public school facilities, the charter school experience suggests the dangers of privatizing facilities financing when money set aside for classrooms is used for repayment,” she added.
The study, “Nontraditional Funding and Financing of Facilities in Charter and Other Public Schools,” examined 2,091 schools in 14 states and the District of Columbia, a sample that comprises 75 percent of the nation’s charter schools and 79 percent of charter school students. These states were selected because they have laws sanctioning the creation of charter schools as well as high needs for public school facilities caused by student growth and/or facilities repair needs. Over a nine-month period, Institute researchers conducted 95 interviews with representatives of charter schools and charter school advocacy agencies; federal, state, and local public education officials; community development corporations; and representatives of the finance and real estate development communities.
The study was funded by the Bill and Melinda Gates Foundation through the New York City-based Local Initiatives Support Corporation. NYU’s Institute for Education and Social Policy is located within the university’s Steinhardt School of Education and led by core staff from Steinhardt, the Wagner Graduate School of Public Service, and the Faculty of Arts and Science.
“Since charter schools are often in facilities not originally meant for schools, most charter schools make modifications using grants, personal funds, or leasehold improvement loans,” explained Project Director Clyde Cole. “Renovations made with leasehold improvements do not contribute to a charter school’s equity and cannot be taken when the school moves to new quarters, as it generally must do to accommodate growth.”
The researchers also noted that the growing enrollments that characterize charter schools contribute to their need to increase facility space, and so add on to their facility expenditures.
“One charter school operator used the phrase ‘just-in-time building’ to describe how administrators must continuously keep up with growing enrollments,” said Cole. “Most charter schools change their facilities’ configurations or move several times during their first five years.”
Charter schools are further hampered by high interest rates on loans, which are determined by a lender’s perceived risk and available collateral. The researchers point out that since per pupil revenue is based on enrollment, which varies significantly over time, charter schools have generally not scored high marks in standard loan investment measures. They note that the short life of charters-typically only five years-amplifies charter schools’ perceived risk to lenders.
“While several states have lengthened charters to as long as 30 years to make schools more attractive to investors, this shift may work against the performance-based accountability ideals of the charter movement,” added Ascher.
The researchers listed other characteristics of charter schools that diminish their capacity to obtain low-cost financing for capital projects:
- Charter schools must issue revenue bonds, which are repaid through enrollment revenue, and have higher interest rates than do the general obligation bonds public schools may issue to be repaid with property tax revenue.
- Charter schools in most states are not allowed to issue tax-free bonds, which would offer lower interest rates.
- Financiers are reluctant to offer loans to charter schools whose enrollment is under 300 students, even though charter schools were created, in part, to offer small schools. Lenders’ requirement of significant cash reserves means cuts in instructional spending.
- The finance community pressures charter schools to have professional boards with members from insurance, law, real estate, and finance, which represents a challenge to the many charter schools who serve low-income communities.
“Charter school operators have worked hard to secure facilities that would attract and retain students, give teachers security, and be a sign of success to the community,” said Cole. “But because most charter schools used as much as a quarter of their per pupil allocation on their facilities, there was an obvious impact on the quality of instruction they were able to provide their students.”
The Institute’s Jodie Harris and Juan Echazarreta were the report’s other two co-authors.
EDITOR’S NOTE New York University’s Institute for Education and Social Policy works to strengthen public education in New York City and other urban areas nationally and abroad, particularly in low-income neighborhoods and communities of color. Through its policy studies, research, technical assistance and evaluations, it seeks to build capacity for school improvement and reform among policymakers, educators, parents, and community groups. The Institute also works to increase support for urban public schooling, and to expand the school improvement strategies of government agencies and non-profit organizations.
The Steinhardt School of Education is a rich source of groundbreaking scholarship on issues of national and global significance and innovation in research, teaching, practice and performance. The School prepares students to be educators, health professionals, counselors and psychologists, academics, musicians, artists, communication specialists and policy analysts. The Steinhardt School values its location in New York City, where it is engaged in research, partnerships and community service aimed at improving urban life and the city’s institutions.