Bill & Melinda Gates Foundation

A Teaching Moment for the Financial Markets

February 12, 2013

As a classroom teacher, vice principal and principal the bond market seemed a faraway place. Certainly not anything I thought about as I planned Language Arts lessons, constructed schedules or designed professional development for my staff. Bonds were the purview of my friends who chose careers in banking, finance, real estate and the like. Even as a school district superintendent I saw the bond market as a burdensome and necessary step to assist education but certainly not a significant factor in helping the students in my care achieve their aspirations.

Then in 1998 I co-founded the first charter management organization and my naiveté was on public display. I was completely wrong about the importance of bonds. Here’s the deal: 

Those of us who care about education in charter schools have to care about things like debt ratings and spreads. In 2001 I couldn’t meet the demand of 4000 students on the waiting lists for Aspire Public Schools and today we can’t meet the needs of the more than 600,000 kids (yes that’s right, “600,000 kids”) on waiting lists for these innovative public schools without a robust market for charter school bonds. And, right now, it doesn’t exist, even though charters, particularly those that have consistently raised student achievement, have long-since proven themselves both as educational institutions and as borrowers.  For low-income children and communities, the impact is particularly damaging because municipal bonds could be an extremely low-cost and stable way for high-performing charter schools to serve more children, and right now they are not

The truth is Wall Street doesn’t fully understand charters. They view charter schools as too young, too unstable and at the end of the day too risky. Rating agencies point to the tough budget environment.  Investors assume stormy political threats. Both extrapolate from isolated school failures.  They put all of that together and assume charters are on shaky financial ground despite a default rate by the highest performers of less than one half of one percent. That’s right. One-half of 1 percent. Yet still,   that perception of uncertainty makes borrowing through the bond market prohibitively expensive for many schools and that in turn leaves charter operators to cobble together financing from banks and other lending institutions at rates that far exceed those given to traditional school districts

But the market’s assumptions are off-balance.  And, now, there is data to prove it.

A recent study by the Local Initiatives Support Corporation (LISC) evaluates the 15-year history of charter school borrowing through the municipal bond market  

(LISC is a national nonprofit that drives the recovery of low-income communities with grants, loans and equity investments—including financing 68,000 charter school seats across the country.)

What LISC found is pretty convincing.  Charter school bond issuers, as a whole, beat market expectations. Their assets are growing.  Their debt is manageable.  They are, in fact, financially sound.

And this to me is a central point of the findings: academic performance is a leading indicator of charter school financial strength.  

That shouldn’t come as a surprise—it makes sense that high-performing academics attract a steady flow of students, funding, community support and political backing.  Academically strong schools do, in fact, tend to be well-managed.  But, to have proof behind the premise is important.  

I won’t go into all the details of the study.  Like most information about financial instruments, it is complex.  But what’s obvious is the need for standardized analysis so that more schools can access the private capital they need. If charter bonds received a triple AAA rating – similar to what traditional school districts receive – they would have an additional $120 million per year to invest in academics.  Instead, those publicly financed dollars go to private investors.   As it is, only 10 percent of charters have financed facilities through bonds.

The LISC study should help educate the market about charter school opportunities.  It should help make charter borrowing more predictable. And it should provide a framework for analysis that helps bring down the cost of capital.

Schools need to do their part, too.  They need to be transparent about their financials and their academic performance.  They need to understand what level of detail investors require in order to be comfortable with charter financing. And, they need to be as sophisticated about raising money as they are about raising test scores.

Charters are changing public education.  We need better access to private capital to keep that momentum.

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