Yesterday's Wall Street Journal shared the (mostly) happy story that the market for debt issued by charter schools to finance facilities and other purchases is growing. Institutional investors and banks understand charters—and the risks they have to manage—much better than in past years, and that's translating to lower borrowing costs for schools. (Note in the excerpt below that when bond prices go up, the interest rates paid by borrowers go down—there's an inverse relationship there.)
Prices for charter-school bonds have risen this year, according to trading data. Cosmos Foundation Inc., which operates 36 charter-school campuses in Texas, issued $50 million in bonds in 2010, and prices have increased about 12 percent.
IDEA Public Schools, a network of schools that received its charter from the state of Texas in 2000, is gearing up for its biggest bond deal yet. Chief Financial Officer Wyatt Truscheit said IDEA Public is planning a $70 million offering in August.
This is the first chapter in what should turn out to be a long story. Relatively few investment firms and banks are active in lending to charter schools, and not all lenders understand this market. Because of this, charter schools in areas that are not well-served by sophisticated lenders are probably paying more than they should to borrow money.
The more that authorizers and legislatures focus on quality, the easier it will be for promising schools to finance their facilities.
The quality of the charter law, authorizers, and the schools
In our recent documentary on the schools in Sciotoville, OH, you hear a big-dollar word used over and over: facilities. The Tartans of Sciotoville go to class in a building that dates from around 1914. The community would love a new facility—but bricks and mortar don't come cheap. Ohio community schools (that is, charters) get no state and local funds for facilities, meaning they have to scrimp and save out of operating funds or find private dollars to build.
Down the road from Sciotoville Elementary Academy, which is housed in modulars and packed with students, is a brand-new traditional district school built with public funds and under-enrolled. (Many of the kids it was built to serve go to SEA!) Charters across the country suffer from the same disparities.
Maintaining or replacing aging school facilities presents a challenge to many rural communities
Photo by Joe Portnoy.
It's not only charter school pupils who sit in old, dilapidated buildings, though. Some traditional schools have benefited from a boom in new construction, but others have missed out. The high school my mother attended, which was aging when she graduated decades ago, is still open at the ripe age of 91 today. Small-town superintendents across the country who haven't benefited from tobacco settlements or state largesse
Ask almost any leader of a growing urban charter school about their biggest worries, and real estate is likely to be at the top of the list. City-dwelling young parents want schools that are convenient to their homes and—increasingly—public transit. Government has (appropriately) high expectations of school buildings but provides little to no money for charter school facilities in most jurisdictions. Educators and school leaders want all of the above to provide a fantastic experience for their students—without breaking the bank. This is not something the real estate market can provide in most cities.
Cities like Newark, New Jersey are experimenting with creative uses of space to improve education options.
Photo by William F. Yurasko.
To make the problem even more difficult, city centers are redeveloping, with entire neighborhoods gentrifying, building mixed-use housing and innovative commercial spaces. Young professionals who a generation ago might have fled for the ‘burbs as they settled into careers and started having children are now staying. This has resulted in vibrant, revitalized neighborhoods—but the pressure continues to build on large urban school districts to provide high-quality seats to meet the needs created by this cultural shift.
Increased density and the creative reuse of space can help ease the space crunch. Public charter schools have led the way
MBAs are taking on an increasingly visible role in traditional school districts around the country. Large districts are multi-billion dollar enterprises, the argument goes, and business-minded people bring critical skills for managing those organizations efficiently. Many passionate ed-reformer MBAs believe the b-school set can help combat the bureaucracy and mismanagement that hurt districts' effectiveness. As a fellow business school graduate, I'm not so sure.
My first, perhaps obvious, objection is that big organizations with distinctive professional cultures are incredibly hard to turn around. This is especially true if you're trying to effect change from the middle management and special-projects role where many new MBAs find themselves. Traditional school districts need major changes to their business models to be on financially sustainable ground and poised to deliver services in a coming era of increased parental choice and (I hope!) decoupled services. That's primarily a job for school boards and superintendents.
The problem with the "MBAs to the rescue" strategy is the conceit that business-school types are somehow inherently efficiency-minded.
The fundamental problem with the "MBAs to the rescue" strategy, however, is the conceit that business-school types are somehow inherently efficiency-minded. Ludwig von Mises pointed out that what he called "commercial-mindedness" comes from the incentives inherent in running a business--if you fail, it will fail, and with it will go your livelihood. It's a response to incentives, and it goes away if you join a government agency that will continue to exist, and pay you a salary, whether you succeed at your mission (teaching kids, in the case of school districts) or not.
The "commercial-minded" incentives of entrepreneurs are
- Stretching the School Dollar
- Common Core Watch
- Ohio Gadfly Daily
- Board's Eye View
- Choice Words
About the Editor
Bernard Lee Schwartz Policy Fellow
Chris Tessone was a Bernard Lee Schwartz Policy Fellow and the Director of Finance of the Thomas B. Fordham Institute. He has strong interests in governance and education finance, especially teacher compensation and school facilities finance.
May 16, 2013