A building need: charter schools in search of good homes - Feature

Education Next, Spring, 2004 by Kim Smith, James Willcox, Julie Landry

THE 1,100 STUDENTS AT E. A. OLLE MIDDLE School in suburban Houston enjoy a relatively new facility, built in 1988 and renovated since, with grounds that include an athletic field and even an amateur radio station. Just a few miles away, their 330 peers at Houston's KIPP Academy, a public charter school, benefit from an even newer facility, built in 2001. But this is the sixth location that KIPP (the "Knowledge Is Power Program") has occupied since 1996. Between 1996 and mid-2001, KIPP's itinerant band of students in grades 5 through 9 had to travel to borrowed or leased space in various venues, including an office complex and the campus of a local university.

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Moreover, while the construction of E. A. Olle was managed by the Houston school district and financed with a mixture of state and local funds, the educators at KIPP had to scrape together funding (from foundations, individual donors, community banks, and other sources during an 18-month capital campaign) to build a permanent facility for their students. Not only were they responsible for their students' learning; they also had to gain expertise in real-estate development.

This tale of two schools illustrates a fundamental challenge faced by the charter school movement. Charter schools are publicly funded, yet privately managed under the terms of a charter with a governing body, whether it be the state, a local authorizing board, a local school district, or a university. Even though charter schools are public schools, and often serve the neediest children in a given area, they rarely receive adequate funding for facilities (see Figure 1). This means that they must use part of their operating funds to lease space--often leaving just 80 percent of their resources available to support instruction. Moreover, charter schools' per-student allocation is typically less than district schools receive for their ongoing instructional and administrative expenses. Consequently, most charter school operators are forced to pay for facilities costs out of an already slim operating budget.

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According to the Center for Education Reform, as of January 2003 there were nearly 2,700 charter schools serving more than 684,000 students in 36 states and the District of Columbia, just a decade after the first charter opened its doors. However, the troubles charter operators face as they struggle to find and finance adequate facilities threaten to retard this growth. Moreover, at the individual school level, instruction can suffer as crucial resources are diverted to solving the real-estate problem.

This situation endangers the basic accountability equation that served as the rationale for creating charter schools in the first place. Under the terms of their charter, which is typically up for renewal every five years, charter schools are expected to deliver improved academic results in return for freedom from many state and local mandates. However, the lack of facilities financing leaves them competing with traditional public schools on an uneven playing field. The principal of a traditional public school is not charged with coaxing capital funds out of voters, scoping out real estate, or overseeing construction. By contrast, charter school leaders often spend significant time trying to secure loans or donations to cover facilities costs as well as managing any construction or renovation.

A number of states and private foundations are working to address this inequity. Their innovative solutions, profiled below, have the potential to provide charter school students with the productive learning environments they deserve.

Improving Access to Capital

To a lender, loaning money to a charter school can look risky, since most charter schools are approved for only a five-year term, can suffer delays in their cash flow due to the quirks of state finance systems, and typically have a limited or nonexistent credit history. Even the small number of mature charter schools that seek to float bonds in order to finance their facilities carry low bond ratings relative to traditional public schools (see Figure 2). This all translates into high interest rates that leave the majority of charter schools--especially individual schools in low-income areas--out of luck. As a result, most charter schools lease their facilities rather than purchase or build their own (see Figure 3). This is encouraged by state policies that frequently provide lease aid rather than capital funding.

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One solution being tried by a range of institutions from the federal government to local community development organizations is to make charter schools look more attractive to lenders by promising to repay the loan should the school default. This is similar to the approach followed in higher education, where federal guarantees ensure that students have access to low-interest loans.

Traditionally, the U.S. Department of Education has steered clear of broad school construction efforts (with the exception of one-time appropriations like the $1.2 billion infusion approved in 2000 for school building renovations and emergency repairs). However, Congress has authorized funding to "test and demonstrate strategies for helping charter schools with varying degrees of creditworthiness gain access to financing for facilities." About $50 million was appropriated in 2001 and 2003, with up to $75 million more waiting to be approved by Congress for the next fiscal year. For example, NCB Development Corporation used its $6.4 million grant to create the Charter School Capital Access Program; the grant dollars comprise a "first loss reserve"--money that serves as a buffer for lenders in case payments fall through--on a $45 million loan pool that NCB and the Reinvestment Fund raised from large financial institutions.