Markets In Action

Accessing the Bond Market is a Game Changer for Charter Schools

One of a parent’s most important roles is to provide for their children, an important aspect of which is a sound education. All parents hope that their local schools educate their children well and prepare them for the future and we all can agree on the importance of education and student learning, since today’s students are tomorrow’s leaders. Improvements in education are some of the highest priorities parents have and educational issues typically are prominent in local, state and national elections. Often, in some communities, parents are considering charter schools as an alternative to traditional public schools.

A significant challenge for all schools and school districts is funding. Charter schools historically have had a harder time accessing the outside sources of funding and are beginning to utilize the capital markets. One source of financing for capital improvements is to utilize bonds – a financing tool that has help fund traditional public schools for decades.

A December, 2014 Wall Street Journal article, “Charter Schools Find Smarter Way to Borrow,” highlights two charter schools that have accessed the capital markets to improve their facilities which, in turn, improves the overall educational environment for their students. According to the article, charter schools have issued more than $10 billion in bonds since 1998.

“Investors’ rising appetite for muni bonds is a boost for charters, which are typically nonprofit, publicly funded and run independently from local school districts. Charter schools, which educate about 2.6 million students in the U.S., issued about $1.64 billion of debt this year through Oct. 5, more than the record volumes from all of last year and the year before, according to a report by Charter School Advisors and the LISC (Local Initiatives Support Corporation).”

For example, the state of Texas examined school funding options and worked with stakeholders including the Texas Charter Schools Association and unanimously passed legislation that provided charter schools the same ability as traditional public schools to issue State-guaranteed bonds. The Bond Guarantee Program, designed for school districts with credit ratings lower than AAA, provides a state guarantee on the bonds thereby enhancing the bonds’ credit rating which allows for reduced borrowing costs. The state included certain requirements for the charter schools in order to participate, including being in existence for 3-5 years and having an investment grade rating.

Since nearly four percent of Texas children are enrolled in charter schools, there is a cap of four percent of the funds utilized within the Permanent School Fund (PSF) going to charter schools. The PSF is an endowment instrument that provides financial resources to fund education in Texas. The fund serves the residents in two ways: a distribution is made every year to pay a portion of educational costs in each school district within the state, and the fund provides a guarantee for bonds issued by local school districts. Because of the guarantee, qualified districts are able to pay a lower interest rate when they issue debt.

Many traditional schools have refinanced their existing bonds under the initiative to reduce some of the costs, which allows additional money to be spent where it is needed most, in the classroom. The effort by the state and its stakeholders showed the importance of a collaborative effort in providing educational opportunities for children.

Life School located outside of Dallas, utilized the bond market as well as the bond guarantee through the PSF initiative. Life School is in its 17th year of operation and has an enrollment of over 5,000 students across its six campuses. The school entered the market at an opportune time in that there was significant investor demand for the credit and opportunity to buy the first PSF-guaranteed charter school issuance. A total of over $92 million in bonds were sold nationwide on April 30, 2014; over $85.6 million of the PSF backed bonds were issued through the Arlington Higher Education Finance Corporation for the benefit of Life School and will be used to refund existing debt and the construction of new facilities, including a new high school in Waxahachie to accommodate student growth. Life School also issued $6.5 million in Qualified School Construction Bonds (QSCBs), a federal tax credit bond program, through the Waxahachie Education Finance Corporation for the Waxahachie campus.

These financing options saved the school nearly $13 million for building the new campus in Waxahachie. The 125,000 square foot, state-of-the-art campus will serve approximately 1,000 9th – 12th graders and is scheduled to open in August 2015. The new campus will have science, computer and audiovisual labs, extracurricular activities and athletic fields.

“We commend the State of Texas for providing the PSF guarantee in support of high quality education programs, and appreciate the work of RBC Capital Markets in capturing substantial savings in pricing for this first of its kind bond issue,” stated Brent Wilson, Superintendent of Life School.

Another school that utilized the bond market to improve its facilities was the LEAP Academy University Charter School (LEAP) in Camden, New Jersey. LEAP is a kindergarten through 12th grade charter school. The school promotes small class sizes and strong parent engagement, and has a faculty committed to creating strong investments in student success. The school also partners with Rutgers University and other institutions to allow its students to gain college academic credit. Last year’s high school senior class of 120 students all graduated and was accepted into college programs. The school has had a perfect record of graduating and sending its students on to college.

LEAP accessed the bond market to raise $10 million, underwritten by RBC Capital Markets, which will be used to expand its campus by adding a cafeteria, fitness center, science labs and a health clinic. The process of accessing the bond market, such as receiving a credit rating, helped the school improve its financial management according to Dr. Gloria Bonilla-Santiago, Chairman of the Board of Directors. And as LEAP has grown, its buildings and students have helped breathe new life in the neighborhood around Camden’s Cooper Street, she said.

A quality education is the foundation for future success. Parents across the country expect schools to provide a safe environment and strong curriculum that prepares students for future success. With charter school enrollment growing, accessing the bond market has provided these schools the ability to improve their facilities and programs to better prepare their students for future endeavors. The bond market has saved charter schools significant amounts of money which can be put back where it provides the greatest reward, into the classroom.

As Scott Fuller, the Life School’s chief of staff stated, “to put $13 million back into the classroom for us – it’s a game changer.” And not only a game changer for the Life School students, but for all of us.