Innovations in Education: Making Charter School Facilities More Affordable: State-driven Policy Approaches
December 2008
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PART II Ability to Borrow Money

When public funds are not available or are insufficient for charter school facilities, operators who need an infusion of capital, whether to buy a building or to improve facilities they own or lease, typically have to borrow the funds. Yet, absent state policy support, several inherent and overlapping characteristics of charter schools can make it difficult for them to access low-cost financing.

Lack of tax base. Traditional public schools typically rely on their school district, local government, or some combination of both, to cover facility-related costs, using funds generated by local property taxes. If needed, a district or local government can borrow against future tax revenue and, in some instances, can use the ballot box to ask voters for additional funds, often in the form of general obligation bonds-a designation meaning the bonds are backed by the credit or taxing power of the issuing jurisdiction. In contrast, charter schools have no direct access to this public revenue stream. Even if they did, there would be the question of whom to tax, because charter schools typically have no geographic boundaries. Without a taxpayer pledge of fiscal support over a defined period of time, which would provide a source of consistent revenue to pay off a loan, charter schools are less appealing to lenders who, if willing to loan at all, are likely to demand a higher interest rate.

Higher risk. Unlike traditional public schools, charter schools have the potential to go out of business (e.g., lose their charter and, thus, their per-student funding, or declare bankruptcy), which is a key reason lenders tend to view the schools as relatively risky borrowers.24 Compounding this are perceived risks associated with charter schools' lack of regular tax revenue to repay loans. As a result, the interest rate charter schools pay on loans is typically higher than it would be for a traditional school district using general obligation bond financing.

Limitations on access to tax-exempt bonding. Because charter schools lack a tax base, their ability to raise money through bonds is significantly limited compared to that of a traditional school district. The bonds that traditional school districts often issue, directly or indirectly, to finance school facilities are attractive to some investors because the bonds offer the safety of what is effectively a government guarantee of the investment (as well as, typically, tax exemption on their interest earnings). In turn, these investors are willing to accept a lower interest rate. Yet this relatively low-cost financing strategy is not readily accessible to all charter schools.25

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Last Modified: 02/05/2009