Cathy Nehf Lund
Charter School Project Director, Walton Family Foundation
Bryan C. Hassel
Co-director, Public Impact
CEO, New Schools Venture Fund
Ms. Lund: The Walton Family Foundation started funding individual charter schools in 1996, trying to get behind as many high-quality charters as we could, especially in states with strong charter-friendly laws. To date, we’ve invested almost $30 million just in start-up grants to individual schools.
We’re continuing such funding, but we decided a couple years ago to think more strategically about how to bolster the movement over the next 10 years. We think of the first decade of charters as Phase 1, in which the main achievement was getting the schools open. In most states, the movement grew on the back of each individual school, with some help from nonprofit organizations that started up to support charter schools, such as state charter school associations or state charter school resource centers.
Those nonprofits were usually staffed with 1.5 to 2 people; today, most still have only 1.5 to 2 people to help 50 to 100 to several hundred schools in a state. Clearly it will be difficult for the charter movement to sustain itself, protect itself, and grow with such scant resources.
One of our strong initiatives over Phase 2, the next 10 years, will be to build up the capacity of these state organizations so they can support the movement. We have several reasons behind this strategy. First, the political climate in the states is worsening. The state legislators who passed the charter laws are now under much more pressure from the opposition to retract charter laws, re-regulate charters, cap the number of charters, etc.
We want to help the charter community in such states think through how to grow strong associations that can serve, protect, and grow their movements. This likely entails supporting extensive research: how much demand for charters exists in the state, how well are their students performing, and so on. In most states no one has data on these important questions.
Another thing state organizations must do is ramp up their efforts to work with the media, the public, and state legislatures. To protect and grow the movement, they must also figure out how to serve members the way any good trade association would and to make all of the charters more efficient.
In short, the Walton Family Foundation is now investing significant dollars to help build this infrastructure in the states, and we encourage all of you who support the charter movement to think about supporting efforts to build capacity in the states, because for whatever investment you might make in an individual charter school, a similar amount given to a charter school association could really help that state’s movement grow and sustain itself.
Another area we invest in is national groups that aid the movement in the states, especially in states that lack any supporting organization. For example, the Center for Education Reform is moving in that direction, and the Charter Friends National Network may also do so.
Yet another area we’re funding is national support of facilities financing for charters, and so we recently made a grant to the Local Initiatives Support Corporation (LISC). We decided to work through LISC nationally, as opposed to funding individual state efforts, because when we thought about the facilities problem for charters, we realized no one state entity could get to scale for the charter movement quickly. Again, we would encourage all of you to get behind such efforts.
We invested approximately $18 million with LISC to fund a grant program for charters, a finance center at LISC, and a loan pool-a fund LISC will use to attract other funders in order to have a large pool of lending money for charters.
Mr. Hassel: One large barrier to the start-up and success of charter schools has been the facilities challenge. As a rule, charters don’t get a building when they open. They must find one, fix one up, or build one from scratch. In addition, many people who start charter schools, especially educators and parents, have little expertise in facilities development and financing.
Another challenge is the difficulty charters have in finding the financing required for a large capital project. Lenders are nervous because charters, unlike their standard public school counterparts, can be closed if they fail and suddenly stop repaying their loans.
Finally, charter schools usually don’t receive any funding to make loan payments or lease payments if they do manage to get financing for facilities. Charter schools receive operating funds from the public, but those are intended for teachers, textbooks, computers, and the basics of learning, not for bricks and mortar. Many charters have to dig into those funds to pay for facilities.
This problem has several consequences. First, it undermines the growth of the charter movement. Many schools haven’t opened because of the facilities challenge. Second, it diverts much time and resources away from what charters ought to be focusing on-kids and learning. Lastly, there is an equity issue: If only people with deep pockets can start a charter school, poor communities can’t be as involved in this movement as they would like.
That’s the bad news. The good news is we can solve this problem. In fact, the contours of solutions are emerging. They will require focus, investment, and some public policy changes we already know of. It’s simply a matter of having the will.
Let me lay out the emerging solutions and the role philanthropy can play in moving them ahead. Part of the solution involves public policy. More states must fund facilities for charter schools. A few states already do; Minnesota and Washington, D.C., are the most generous. They essentially provide the full capital funding regular schools receive. Florida provides funding along these lines as well. Less-generous programs exist in California and Colorado, but most states still don’t fund facilities.
Some places are beginning to buy buildings or pay for the construction of buildings for charter schools-or at least to think about doing so. The 2002 California election has a bond issue on the ballot for school facilities, with part of the funds to be set aside for charter schools. The same day, Los Angeles voters will consider a local bond issue that sets aside $50 million for charter schools. [Both measures passed-Ed.] Many states have given charter schools access to tax-exempt bonds. With tax-exempt bonds, investors accept a lower rate of return, which lowers the interest rate charters pay.
So various public policies are helping. At the same time, there’s much entrepreneurial activity on the private side. Various resource centers and associations exist to help charters with things like facilities challenges. I’m involved in a national effort with the Charter Friends National Network and the National Cooperative Bank Development Corporation to build charter schools’ capacity on this issue. We published, for example, a resource guide on how to develop and finance charter facilities.
Mainstream financial players are gradually moving into charter school financing. Local banks are becoming more comfortable with charters, large institutional investors are more willing to purchase the bonds of charter schools that have some track record. Agencies that rate public debt now rate charter schools’ bond issues-a sign they’ve moved toward the mainstream.
Then there’s the emergence of organizations that focus on charter school financing. Some of these are community development financial institutions; for example, the one Cathy mentioned, LISC, a national community development organization that decided to help people build charter facilities. The National Cooperative Bank Development Corporation is another national entity. My state, North Carolina, has the Center for Community Self-Help, which has lent over $20 million to charters and can now make loans nationwide, and the Raza Development Fund, affiliated with the National Council of La Raza.
Interesting public-private partnerships are also emerging. The U.S. Department of Education has set up a demonstration program to figure out how to use a bit of public money to leverage a lot of private financing for charters. The Department has made grants to five organizations, which are going to use their $5 million, plus or minus, to try to get $20 million to $40 million of private financing for charters. And Congress has approved the New Markets Tax Credit, which gives investors tax credits if they invest in qualified community development organizations, which can use the money for many purposes, including supporting charters.
So much is happening, but it’s not enough. It’s a drop in the bucket compared to the financing needed, which I’d estimate around $400 million to $500 million per year. Philanthropy can play a big role in moving us to the next stage. Here are some suggestions: first, leverage. Philanthropists must think, “How can I make a relatively small investment that brings a lot more in private financing?” The main tool will be “credit enhancement”-providing funds that reassure lenders they’ll be paid back even if charter schools struggle. Another key tool is pooling, with philanthropists and perhaps public agencies combining money into pools that help not just one charter, but many. Pooling spreads the risk over multiple schools and also aggregates costs together so that deals are not as expensive to do.
Lots of exotic financial structures can make this possible; let me give a few more examples. First, the Walton Foundation’s large-scale investment in LISC, the national community development organization. This has several components that will let LISC and its affiliates provide technical assistance to schools, allow them to make grants to schools for the early costs of facilities development and financing, and also provide a large investment to LISC which it will then lend to charters. This will leverage private financing several ways. It will attract matching funds from other philanthropists, but more importantly it will reassure mainstream financial players they’ll get their money back if they lend to a charter. LISC will provide a small portion of the financing for a school, which assures the private investor taking the main risk that even if a problem arises, a cushion is in place. That’s a very promising model, and it’s a nationwide one.
A second example comes from the Casey Foundation, which is considering investing funds in a similar way in Indianapolis and perhaps Oakland. The basic idea is to make an investment or even just set aside funds in a way that reassures investors that if problems arise, funding is available to tide investors over until the problem is worked out or even to deal with a default. Another example: The Rodel Foundation has established a loan guarantee pool for Delaware schools.
Consider, too, a couple of hypothetical examples not much tried. One is to invest in some kind of nonprofit intermediary that could purchase facilities or build facilities, fix them up, and then lease or sell them to charters. That puts the expertise problem into the hands of a more specialized entity; it also serves the pooling function and provides lenders a more creditworthy entity.
A similar idea is to invest in nonprofits that create “incubator” facilities-facilities charters can move into when they’re young before they move to a more permanent facility. That takes the burden off their shoulders in the start-up years.
If you’re a funder with national scope, there are lots of national organizations you can invest in that are working in this area. If you’re more local in your targeting, you can still work with a national player. They may want to come to your area and do lending, or you may find local CDFIs or other conventional financing organizations willing to do more financing if you contribute to a pool of credit enhancement.
And don’t forget the New Markets Tax Credit. This isn’t directly relevant to foundations, but you may have individuals or corporations involved in your philanthropy who could invest that way, receive a safe return rate, and make a difference in their communities.
Ms. Smith: Let me first explain the New Schools Venture Fund because we’re unusual. I started this public charity four years ago because after being an education entrepreneur at Teach for America and elsewhere, I realized the nonprofit world needed a new kind of institute-a fund that would operate like a venture capital fund but invest in social entrepreneurs rather than businesses. We believe that to change large, complex systems like the $400 billion-a-year public education system, you have to rely on entrepreneurs as change agents.
We raise funds from individuals and foundations. Our staff of experienced education entrepreneurs makes investments in social entrepreneurs we think are building scalable projects that greatly enhance education. We’re particularly unusual because, on the investment side, we use grants, loans, and equity investments. We believe it’s possible to create effective institutions that are both nonprofit and for profit.
We see two ways to bring the movement into the next phase; one is to support individual schools. That’s been the core of growth for the first ten years and will continue to be important. How do we ensure those schools are high quality and have the necessary support? We need to recruit teachers and leaders into the movement, help finance facilities, and also help with “back office” solutions. If you look at other start-up businesses, they have the option to outsource their back-office work-payroll, finance, insurance, compliance, etc. But charters have fewer such opportunities. We need service providers who understand what a charter has to do.
With our business model, we can spot an opportunity like that, but until we find an entrepreneur ready to build that business, we can only talk about it.
The second way to boost the charter movement is to create organizations that build up the scale of charters. A lot of different players are working in this area. For example, New American School Designs, which can work with any charter in the country that’s looking for a school model. LaRaza, High Tech High, and The Big Picture Company are three networks of schools. Then there are the KIPP schools, a tight nationwide network. They have standards, and if your school stops meeting their quality requirements, you’re out.
Then there are charter management organizations, which hire and fire every school leader centrally. That turns their network of schools into a single unit that will usually be more creditworthy; so over time they should be able to do well with school finances and also provide many benefits to their local schools.
We’re focusing on creating high-quality charter management organizations able to start and run charter schools, as well as be contractors for states or districts who want more choice and more opportunity for new schools in their district or state. The accountability movement is increasing those demands. In states that must take action and tell schools, “You have not improved,” the question arises, what will the states do to intervene? If strong charter management organizations exist, they can tell the states, “We can manage those schools for you.” That did not happen in Philadelphia this past year, which created great difficulty for the state because the only providers initially available were for-profit groups. We would like to see a strong network of nonprofit providers as well, so there is more political maneuvering room and more organizations connected to the community in a different way.
I’d also encourage you to consider buying charter school bonds. Increasingly, as charter school organizations become more sophisticated and can offer tax-exempt bonds, you can purchase them as part of your investment strategy, so even if you’re not ready to do the direct lending yourself, you can at least add charter school bonds to your general investment strategy.
I also support Cathy’s call for more research on charters.