The Charter School Lenders

Despite the controversy surrounding them, charter schools have become a major segment of the CDFI field’s business, requiring new assessment tools to keep the lending mission-focused.

A classroom full of students in a charter school in St. Louis.
City Garden Montessori, a top-performing charter school in St. Louis, Mo. Photo courtesy of IFF

Early charter schools had a facility financing problem. While public school districts can issue tax-exempt bonds to pay for facilities, few states extend public-bonding authority to charter schools, which are typically private enterprises—most nonprofit and some for-profit—run independently from school districts. Only two jurisdictions, New York City and the State of California, require school districts to provide space for charter schools.

As the charter movement was taking off, 15 to 20 years ago, conventional lenders were wary of giving loans that extended 15 or 30 years to organizations that had just been awarded five-year charters. “Traditional banks did not want to lend to charter schools as they were ‘new’ and considered too risky,” says Jane Ellis, director of charter school lending at community lender Self-Help, which is based in Durham, N.C.. Ellis describes its education work as “supporting high-performing charter schools in low-wealth communities.”

So community lenders like Self-Help stepped in, as they have done with small businesses, health clinics, childcare centers, grocery stores, and affordable housing programs. “We saw a gap that needed filling,” says Reena Abraham, a vice president with the nonprofit Local Initiatives Support Corporation (LISC), which has been financing charter schools since 1997.

Since that time, community development financial institutions (CDFIs) have become a go-to source of charter-facilities money. One analysis found that CDFIs received 84 percent of the $205 million in capital awarded between 2002 and 2011 through Credit Enhancement for Charter School Facilities, a U.S. Department of Education program. In recent years, CDFIs have also tapped into other federal funding streams for charter lending, such as Treasury’s CDFI Bond Guarantee Program, begun in 2013.

LISC, like other community lenders that have developed an expertise in charter school lending, wants to be sure that its loans align with its mission: to help low-income neighborhoods. Before extending loans, these lenders perform a detailed analysis of charter applicants. And as long as the loans are in their portfolios, they continue to monitor key school factors such as enrollment, applications and wait lists, test scores, student-teacher ratios, teacher certification, and student and teacher retention.

Tying loans to academic performance makes sense in two crucial ways, Abraham says. “It’s our mission. And it will preserve our capital.”

Academic performance is a proxy for financial success. “An administration that is disciplined about academic outcomes is usually disciplined in their finances,” says Scott Sporte, chief lending officer for Capital Impact Partners, the nation’s leading nonprofit lender to charter schools. In its 30-year history, it has provided $664 million in financing to more than 219 charters, more than the next two CDFIs combined.

Still, across the country, the debate about charter schools is still fiery. Activists—backed by some research—contend that some charter schools often don’t improve scores. Often, they say, charters harm the communities they’re meant to help by siphoning away per-pupil operating stipends from public schools, cherry-picking the best students or forcing out non-performing students, appointing boards that are not elected by or accountable to the public, and hiring cheaper nonunion teachers, who often lack education degrees and certifications. Opening even a high-performing charter isn’t necessarily worth it, they argue, if its existence weakens a school district that still needs to serve the lion’s share of the area’s low-income students.

Charter proponents—citing other research—say that charters often succeed with low-income, minority students in underserved areas where traditional public schools have failed for years. In addition, they say, charter facilities are perfect candidates for CDFI loan portfolios, since they often transform blighted or empty buildings in urban areas badly in need of redevelopment.

For some lenders, charters are a small segment of their portfolios, so the debate is less amplified. “We had the discussion,” says Linda MacFarlane, who heads up the Community Loan Fund of the Capital Region, based in Albany, N.Y., but in the end, the CLFCR has only approved two such loans, to unusual charters that served specific populations such as homeless or highly at-risk students. Though there are many other charters in the region, the CLFCR has not sought out their business. Similarly, Paul Johnson, who heads up The Housing Fund in Nashville, Tenn., says his organization has had conversations with several charters but has only made one facility loan so far, to a charter where 95 percent of students received free or reduced-cost lunches.

No community lender interviewed for this story refuses to finance charters purely on principle, but the ongoing, often divisive debate is no secret to them. “Within our organization, it’s a constant. Not everyone agrees that we should be lending to charter schools,” Ellis says. “That’s why we’re very picky about who we lend to.”

But some lenders may be more “picky” than others, according to a report that Abraham co-wrote earlier this year with the National Association of Charter School Authorizers called Charter Lenders and Charter Authorizers: Can We Talk? “Lenders who simply look at a charter’s mission statement or check the term length are not carrying out adequate due diligence,” the report warned.

The study also found some charters’ lack of transparency problematic. “Lenders . . . expressed frustration about getting needed information about authorizers. Some reported having to file Freedom of Information Act requests for data that should be readily available, such as audited financials and periodic authorizer reports.”

The idea behind the report is that community lenders can only be true to their mission if the charters they finance are high performers. “We focus very much on academic performance—for us, it’s a big part of our mission, to make sure we’re doing right by kids,” Abraham said.

Priming the Pump

The federal designation of “community development financial institution,” and a CDFI Fund to support community lenders that earned CDFI certification, was established in 1994. It moved under the U.S. Department of the Treasury the following year.

A few years before, in 1991, Minnesota had passed the nation’s first charter-school law. Community lenders began getting involved at the early stage of what is now considered an explosion of charter schools. According to Raising the Bar, a Mind Trust–Public Impact report from October 2015, the sector now includes 6,700 charter schools serving 2.9 million students in 43 states plus the District of Columbia. That’s more than 5 percent of the nation’s public school students.

And demand is still higher than supply according to a recent LISC report, which noted that one million children are on charter school waiting lists.

Yet today, the larger, more established charter networks are seen as reliable investments by conventional lenders. “We showed conventional lenders that this is a good space to be in,” Abraham said.

Abraham is happy to see conventional lenders making loans to some charters because it means that those charters will secure lower interest rates, allowing the schools to allot more resources to the classroom, she said.

Ellis noted that the shift has also changed the portfolios of community lenders, which are much more likely to lend to newer, less-established charters.

But not everyone is pleased with the current trajectory. Jerry Carrier reads CDFI applications as a Minnesota-based consultant. He is a big fan of most of what CDFIs do—their work with affordable or senior housing or their quest to end food deserts by adding grocery stores in unserved areas. But he is concerned about the CDFI emphasis on charters.

“I don’t think that the U.S. Treasury should be playing a role in destroying public schools, especially in low-income areas,” Carrier says, noting that well-funded charters can drive the closure of other schools in some communities. “The effect is even more so in low-income communities because they don’t have the tax base to support public schools,” he said.

Carrier is not a knee-jerk charter opponent. He and his two sisters once helped to start a charter school for children with special needs in Anoka, Minn., though the school wasn’t successful and eventually closed.

Lender Oversight

In the late 1990s, Self-Help began financing charters as an extension of its work financing childcare providers, where it was considered a pioneer, with a particular focus on the women business owners who serve low-income communities. Children emerged ready for kindergarten from the high-quality childcare and pre-schools Self-Help had financed, “but then kids would backtrack because the school system wasn’t ready for them,” Ellis says. As a result, Self-Help jumped in on the first round of charters allowed by North Carolina, in the late 1990s.

Over the past 18 years, Self-Help has learned to compile careful, detailed data about schools, including a pre-loan academic appraisal that Self-Help pays for. “The bar is high,” Ellis said. “When people bring me good prospects, I say, ‘Show me the academics.’”

After the loans are made, Self-Help hires a contractor to submit yearly assessments of all schools in its portfolio, zooming in on data about how special needs students and other subpopulations are being served, in addition to more commonly reported data about finances, enrollment, and test scores. “If you’re not a good school, you shouldn’t be out there,” Ellis says.

For start-up schools, Self-Help also provides technical assistance. “Sometimes a good school needs some financial or organizational hand-holding,” Ellis says. “I’ve done board training and I’ve helped a school’s back office put together dashboards so that the board doesn’t have to go through the checkbook to understand where they stand each month.”

Those who do the most charter business also seem to do the most checking. Self-Help and LISC, for instance, have their own educational arms and staff dedicated specifically to charter school facilities lending. IFF (formerly Illinois Facilities Fund) also has underwriting staff assigned to making and overseeing charter-school loans. “For us, it’s become some of the most important work we do,” says Jose Cerda, IFF’s vice president of corporate communications and public affairs.

IFF is also well-known for its assistance to school districts in the 10 Midwestern states in which it works. To date, the CFDI has helped to guide school reform in Chicago, St. Louis, Milwaukee, Kansas City, Denver, Indianapolis, and Washington, D.C. “Our mantra is quality schools,” Cerda says. IFF believes that no single school model can address all existing educational needs. So IFF works with all kinds of schools—charters, district schools, and even some completely private institutions.

In 2003, IFF began helping districts determine which neighborhoods most need high-quality school seats. Then IFF staffers work with districts and charter authorizers to set priorities that expand access to students within those neighborhoods. That can mean closing poorly performing schools and opening new ones that are more likely to meet or exceed state standards, or it can mean investing in top performing schools located in poor facilities, or identifying schools set in newer facilities that need to improve academic performance. For example, for the high-needs Glenville neighborhood in Cleveland, IFF found that the majority of school buildings were in excellent condition, yet 15 were rated D or F. As a result, IFF recommended “a long-term bifurcated strategy focused on improving program quality.”

At this point, IFF’s work seems like a rarity. For example, Sporte says that Capital Impact doesn’t work with traditional public schools because districts can issue bonds themselves to improve facilities.

Cerda says that IFF, which also established itself early on as a lender for adequate and affordable childcare centers, has crafted a model of its own. “We don’t just finance projects but engage in related policy and research as well as the building and developing of projects,” he said.

Other lenders are eagerly watching another aspect of IFF’s work: the implementation of a standardized assessment tool that could help other groups ascertain the viability of the charters they fund. Lenders will be able to enter pertinent school performance data and then pull up digital dashboards that show how the proposed borrower compares with key benchmarks and standards. Abraham believes that widespread use of these tools will create “a resource shift from low-performance [schools] to high.”

The new and improved buildings may also help to ramp up academic performance for charters that receive facilities financing. School buildings with specialized spaces such as science labs, libraries, and dedicated art and music rooms are associated with stronger student performance. Improved acoustics, temperature control, and fresh air intake also boost academic achievement.

“Reversing the Cycle of Deterioration in the Nation’s Public School Buildings” a 2014 report by the Council of Great City Schools, cites research showing that “students in deteriorating school buildings score between 5 and 11 percentage points lower on standardized achievement tests than students in modern buildings, after controlling for income level.”

The main source of financing for new schools has always been the districts themselves. As a result, poor communities were limited to the modest school facilities they could afford while affluent communities spent much more on their schools. From 1995 to 2004, about $4,800 per pupil was spent on school buildings serving the nation’s neediest students—roughly half the amount allocated to schools in wealthier areas, which received $9,361 per student, according to the 21st Century School Fund.

CDFI facility lending could help mitigate these longtime inequities by bringing capital investments to schools that serve low-income communities. The next challenge may be finding ways to bring the same sort of infusion of capital to the often-dilapidated public schools serving those same communities.

[Editor’s note: For a different perspective on this financing trend, see this article from the same issue.]

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