Can Growing Parent Demand Fix Charter School Financing?

03/09/2015 04:14 pm ET | Updated May 09, 2015

For hundreds of thousands of families in low-income communities, the debate over charter schools is largely over. They're no longer wondering whether independently run public schools belong in their communities. They're asking if quality charters will be able to expand fast enough to move their kids off of waiting lists and into classrooms.

How well we answer that question could go a long way toward easing the high-stakes system of tests and lotteries that leave so many kids behind. More than 1 million charter school applications end up wait-listed every year for lack of space. Operators need better access to affordable private capital if they are to build, upgrade and expand to meet that need.

For even the most successful school networks, financing can be a dicey proposition. Like most public schools, charters run their operations with per pupil funding provided by school districts. But, unlike traditional schools, they have no taxing authority and have limited access to other capital improvement dollars from states and municipalities. They have to tap the private market to raise millions of dollars for new schools and pay the debt service out of operating funds. That's why administrators consistently rank facilities financing as one of their biggest challenges. Too often, they are trapped between the pressure to meet parent demand and concerns about pulling classroom resources to pay expensive financing fees.

A handful of states are taking a creative approach to the problem. Texas, Utah and Colorado have developed programs to extend their strong state tax-exempt bond ratings to charter schools looking to issue debt. It means schools that qualify -- generally, those with stable financials and solid academic track records -- can save tens of thousands of dollars in interest costs every year, translating to millions over the life of the bond, when they issue municipal bonds to raise development capital. Less money for debt service means more resources for art classes, science labs and sports programs, all while helping build up a class of bond investors with a shared stake in the future of education for at-risk kids.

To date, charter schools have raised more than $10.4 billion in debt through the bond market. They've raised another $2.1 billion from nonprofit organizations. That funding has helped double the number of charter schools over the last decade -- a significant jump, even if it is outpaced by demand. Charter schools have also performed well as borrowers, with nonprofit lenders reporting a negligible default rate of just 0.51 percent.

What's most notable about these new programs is that they cost the states next to nothing to concentrate more resources in classrooms. And that is really the trick in all of this -- finding ways for strong charters to reach more children despite constricting public education budgets. Some states have gotten creative -- Colorado, for instance, recently passed legislation to dedicate a portion of the new taxes it raises via medical marijuana to charter school facilities. But, not every jurisdiction has those kinds of options.

In recent years, more and more charters have made use of alternative programs, like the federal New Markets Tax Credit, to finance facilities. It is not an education program, per se, having been created to attract businesses and community facilities to low-income areas. The program is flexible enough to include everything from rehabbed industrial sites and shopping centers to health care facilities, social services centers and arts and entertainment corridors.

Add to that charter schools like YES Prep Public Schools, in Houston. YES Prep is among a growing number of schools partnering with community development organizations to expand their number of schools, while at the same time cleaning up vacant land and crumbling properties in their community.

YES Prep has 13 schools across the city, focusing on some of Houston's most economically challenged areas, and its students significantly beat both state and national numbers for test scores and graduation rates. Though almost all of its students come from disadvantaged backgrounds, it is financially sound and academically strong. It is, by any reasonable measure, a successful school system.

And yet, facilities financing is still a challenge. YES Prep recently opened two expanded 6-12th grade schools in the Northside community and the 5th Ward -- both areas where unemployment and poverty are high and test scores are typically low. YES Prep worked with the national nonprofit Local Initiatives Support Corporation (LISC) and Capital One Bank, which leveraged their New Markets Tax Credits to generate $13.7 million in capital for the build-out of the schools. The advantage, in addition to the capital itself, is the low cost of debt service with this kind of borrowing. YES Prep transformed two crumbling eyesores into bright, bustling schools, but it didn't sacrifice arts programs, science labs or athletics programs to do it.

Beyond the impact on kids, the effect on the community is also important. New schools help edge out crime when they return blighted property to productive use. They create a center of gravity for their communities, hosting everything from neighborhood gatherings to health and financial wellness efforts. Overall, they give a jolt of psychological adrenaline to places that have been plagued with low expectations and low incomes. In that, schools like YES Prep are about both educational attainment for at-risk children and economic development for the communities where they live.

The political debate about charters is not likely to wane anytime soon. But parents can't wait for that to play out. It is past time to end our patchwork system of financing school facilities and make it easier for high-performing charter schools to give more kids a chance to succeed.