New LISC Study Provides First Comprehensive Analysis of Municipal Bond Financing for Charter School Facilities

Strong track record contradicts market risk perception that has raised the cost of borrowing for charter schools and constrained their growth

NEW YORK, June 28, 2011 /PRNewswire-USNewswire/ -- A first-ever comprehensive study of charter school tax-exempt bond issuance finds that public charter schools are a high-performing sector of the municipal market despite their market perception as risky borrowers.  The study, Charter School Bond Issuance: A Complete History, provides increased transparency to this relatively new sector for investors and borrowers alike and raises public policy questions about the efficiency of the current, two-tiered system of facility financing for our nation's public schools.

The study gathers together, for the first time, the universe of 500 rated and unrated charter school facilities transactions through year-end 2010.  It provides cost and pricing information not previously available at scale and examines the repayment performance of charter school borrowers over their 13-year history of issuance.  The study found that no charter school bond assigned an investment grade rating has defaulted, and there has been only one default on bonds assigned a non-investment grade rating at issuance – a default rate of 0.4 percent in terms of the number of rated issues.

"We looked at every one of the nearly 500 transactions closed for charter school facilities since the first bond was issued 13 years ago, and we found that charter schools are strong borrowers," said Elise Balboni, one of the study's authors.  That strong track record was particularly true for rated issues, which have comprised a larger share of the sector in recent years, she noted.  "There was a higher percentage of defaults among unrated deals - 14 of the 251 issues, or 5.6 percent - but many of those defaulted transactions would not be issued today based on current best practices in credit analysis.  This is a young sector and, like any new sector, there was a learning curve in the early days," Balboni noted.

The study was sponsored by the Local Initiatives Support Corporation (LISC).  LISC is a national nonprofit working to revitalize low-income communities, which includes broad efforts around educational programs and facilities.  LISC has long recognized that facility financing challenges negatively affect the ability of even the strongest charter school borrowers to reach additional students and communities.

According to the study, there is a two-tiered structure for public school financing—one for municipal school districts, which frequently access the tax-exempt bond market at favorable rates, and another for public charter schools, which have more costly and limited access.  To date, fewer than 8 percent of the more than 5,000 charter schools now operating have accessed the bond market for permanent facility financing.

"Because charter schools finance their facilities with per pupil operating revenue rather than a general obligation pledge tied to taxing authority, they pay significantly higher interest rates on facility debt than their school district counterparts," the study finds.

But the reality is that both are using public dollars to finance their facilities, raising an important public policy question.  Public charter schools have paid, on average, two full percentage points more in interest than triple-A rated municipal borrowers.  That translates into an additional $90 million in interest annually, which is born by taxpayers.  This market penalty for weaker credits has increased recently, meaning that these additional outlays of public dollars will continue to grow, further discouraging charter schools from accessing the bond market, the report notes.

Part of the solution, according to Balboni, is to expand government credit enhancement programs that reduce borrowing costs for charter schools. "The resulting savings would be invaluable, leaving more operating dollars in the classroom and reducing aggregate public outlays for public school facilities in a difficult fiscal environment," she said.

"Given the pressure to improve educational outcomes, this market is only going to grow," Balboni continued.  "Now we have the data we need to really understand charter schools as borrowers and think about how the market could be more efficient for these public schools and the students they serve, as well as for investors and for taxpayers."

The study is available at http://www.lisc.org/effc/bondhistory.

About LISC

LISC combines corporate, government and philanthropic resources to help nonprofit community development corporations revitalize distressed neighborhoods. Since 1980, LISC has raised $11.1 billion to build or rehab 277,000 affordable homes and develop 44 million square feet of retail, community and educational space nationwide.  Since 1997, LISC has provided $100 million in grants, loans and guarantees for 140 charter schools across the country. LISC support has leveraged nearly $33.9 billion in total development activity.  For more information, visit www.lisc.org.

Contact:
Elise Balboni, LISC Educational Facilities Financing Center
917.698.9960 or [email protected]

SOURCE Local Initiatives Support Corporation