Charter School Financing 101
A charter school is an independent public school established and operated under a charter for a fixed period of time. Charter schools have the flexibility to operate free of many of the rules and regulations that govern traditional public schools’ educational program, facilities and operations in exchange for increased accountability and scrutiny. They must be non-sectarian and must admit on a first-come, first-served basis or select from a lottery if demand exceeds capacity.
Unlike district public schools, charter schools do not have direct taxing or bonding authority—two vehicles for financing traditional public school capital expenditures. While a handful of states have begun to create new programs to help charter schools finance capital and other start-up expenditures, most states still require charter schools to finance their start-up and facilities expenditures out of general operating revenues, privately raised funds, or partnerships with other organizations.
Shepherd Capital Funding’s Involvement
Without sufficient public funding for quality facilities, charter schools face considerable uncertainty and instability as they often begin in temporary space not intended for educational purposes and must deal with the disruption of moves to new locations. With the growth in the charter school field, there is clearly a significant need for widely available, reliable capital to finance charter school facilities.
Our ability to successfully structure EB-5 capital raises, provide technical assistance, and incorporate bridge financing as part of a finance package, make Shepherd Capital Funding well equipped to add value to the charter school field to help solve the facilities challenge. As an EB-5 Consultant, specializing in Charter School Development Initiatives, we act as a steward for capital invested in Charter Schools through the USCIS EB-5 Investment Pilot Program. Through the EB-5 Program, the Charter School Industry currently has access to billions of dollars in capital, which we can directly assist you in accessing.
Shepherd Capital has formally incorporated education into its strategic plan, believing that education is a key component in economic mobility and job-growth. We recognize that the demand for quality alternatives to public education in certain neighborhoods is high, and we seek to strategically assist in the financial response to those needs
We have a developed expertise in EB-5 capital market financing, clear knowledge of the charter school market, and effective relationships with professionals and sources which are essential to success in the Funding of Charter Schools.
Funding Charter Schools
Despite the perceived risks of lending to charter schools, which include a limited charter life, uncertainty over public funding, and newness of the market, there is a clear track-record of low loss to investors and bridge lenders, as well as a very low percentage of default for Charter School Bond Issuance. The potential for funding is great for both start-up and existing schools, schools that receive assistance from management companies, and those managed independently. Shepherd Capital Funding (SCF) has first-hand knowledge of the complexity of structuring charter school capital raises.
While there are many other factors to consider than those presented, this discussion focuses on aspects of charter schools with which Charter School Founders and employees may be unaware of.
To begin with, SCF reviews the systems, policies, and procedures that a school has developed to monitor, analyze, and manage its finances. It is important to ensure the quality of financial reports and financial management because of charter schools’ reliance on public funding and accountability. The vast majority of State legislation requires charter schools to produce quarterly financial statements and annual audits.
The highest ratio of charter school revenue is calculated based on average daily attendance (ADA) – not on enrollment. For example, if a school has enrolled 100 students, but only 90 percent ADA, the school will receive funding for 90 students. The vast majority of school revenue comes from public sources. Other programs are only available if the school enrolls low-income students (e.g., federal Title I funding) or applies specifically for that funding (e.g., staff development money). It is important to understand the timing, reliability, and conditions associated with each revenue source.
Because of the relatively low per-pupil funding for charter schools, many schools depend on some level of fundraising. Obviously, if a school is reliant on fundraising, it is important that they demonstrate a strong fundraising track record and pipeline. Schools may also need to attain certain milestones to draw down the funding and adhere to a set schedule by which the funding is released. Finally, SCF asks such schools to prepare a budget showing viability with only committed funds.
Personnel expenses are the single-largest category of expenses for charter schools, often representing 50 to 70 percent of the budget. And although charter schools have more flexibility over public schools since the union and wage scales that affect public schools do not usually apply, personnel budgets must be sufficient to attract talented teachers and administrators and to meet target teacher-student ratios. Other significant expenses include curriculum materials, books, computers, equipment, and supplies, which typically range from five to fifteen percent of a school’s budget. In addition, charter schools often contract with outside companies to manage their financial and operational needs. These fees can range from five to twenty percent of the budget.
Facility costs will vary based on factors such as the nature of ownership or lease and the age, location and size of the facility. An ideal school facility provides 75-100 square feet per student; of this amount, about 50 percent should be allocated for classroom space, however, each state has different regulations regarding required space.
Finally, most state law requires districts to charge a administrative fee for services provided to charter schools. It is important to ask whether and what level of operating reserve the school’s charter requires.
Understanding the school’s track record in attracting, retaining, and increasing its enrollment is critical in terms of assessing a school’s ability to repay a loan. Many funders consider 300 to be a minimum enrollment for a school that is seeking to take on financing, although the type and need of the facility and financing will influence that level.
Needless to say, charter schools can benefit from economies of scale with larger enrollments. However, many charter schools open by offering one grade of instruction and gradually increasing enrollment by adding one grade a year until they reach capacity. While this growth pattern has educational advantages and enables the school to build operational capacity slowly, it presents a challenge in structuring a long-term facility loan so that it can be repaid while the school is still increasing enrollment.
When a school budgets for enrollment growth, not only will teacher costs increase, but the school will also have to allow for additional equipment, books, and supplies for the new children. After the school reaches capacity, costs in these areas, on an annual basis, should actually decline, with on-going replacement costs less than start-up costs.
SCF also reviews the marketing plan for attracting new students and families. For example, where will the school advertise, how often, and what are possible feeder schools? It is also important to determine the break even enrollment and ADA, below which a school could no longer service its debt, and how likely it is that projections will fall to those levels.
In addition to strong demand and enrollment, accumulated reserves will also mitigate the repayment risk. However, only schools in their third year or beyond are likely to have much of a cushion built up (unless they have been unusually successful in raising private contributions).
Because of the importance of strong management to oversee the complicated finances of charter schools and to attract and maintain the enrollment that drives loan repayment, SCF places a strong emphasis on this area. SCF analyzes the depth and breadth of management’s experience, the recruitment plan for bringing on new staff, and the school’s hiring and evaluation criteria. It is particularly important to get a sense of management’s track record in operating programs of a similar size. While the experience of the founder is important, it is also critical to ensure that the school has an established management structure in place, with clearly identified roles and responsibilities and, ideally, a clear succession plan.
Some amount of turnover is to be expected, particularly during a school’s first few years. What is important is to ascertain the reasons behind the turnover (e.g., poor recruiting, lack of professional development, weak administration). Another discussion to have with the school surrounds the lessons learned from any turnover and the adjustments made to bring about a more stable environment.
In many cases, strong educators come together to form a school, and then seek to supplement their backgrounds by contracting with a variety of third-party management assistance providers for on-going school management. Services provided range from specific technical assistance with finance, curriculum, or real estate development to a comprehensive approach whereby a school’s founding body contracts out the entire management and operations of the school to a third party.
There is a range of governance structures in charter schools. Charter schools, known legally as “independent” charter schools, function as independent legal entities and are usually governed by or as public benefit (“not-for-profit”) corporations. Still other charter schools form some sort of legal hybrid or “in-between” structure, in which some governance powers remain with the district or county and others rest with the school governing body. The school’s governance structure will be clearly described in the charter, and state law.
School Charter and Design
Since the charter is what allows the school to operate, it is important to carefully review the charter petition and approval documents from the school’s authorizer. A charter school petition includes a description of the school’s educational program, student policies and recruitment, human resources, governance and management structure, financial projections, and clarification of the roles and responsibilities of key parties. The charter-granting agency has the responsibility to ensure that its charter schools are meeting the charter terms, are fiscally managed well, and are in compliance with all applicable laws.
Clearly, quality is an important factor, yet it is often hard to assess. SCF analyzes a school as a business—how will management attract and retain its customers (children and families), what is its competitive advantage, (i.e., what distinguishes it from other schools) and what is its mission?
Since the school will be measured against its student achievement goals, it is important to assess how achievable the goals are: can the school’s curriculum and program not only meet the needs of the surrounding community but also help improve student performance; has the curriculum been used before; and what additional resources will be required, given the needs of the students or the special features of the school?