Charter Schools: Limited Access to Facility Financing (Letter Report,
09/12/2000, GAO/HEHS-00-163).

Pursuant to a congressional request, GAO provided information on the
financing of facilities for charter schools, focusing on: (1) the degree
to which charter schools have access to traditional public school
facility financing; (2) whether alternative sources of facility
financing are available to charter schools; and (3) potential options
generally available to the federal government if it were to assume a
larger role in character school facility financing.

GAO noted that: (1) charter schools generally do not have access to the
most common source of facility financing for public schools--muncipal
bonds; (2) charter schools are frequently not part of a local school
district and generally have no authority to raise taxes or issue
tax-exempt bonds; (3) charter schools that are a part of a local school
district might not share in local or state school construction funds
because they must compete with other public schools that have their own
construction or renovation needs, and local opposition to charter
schools sometimes hinders the sharing of funds; (4) state charter school
laws vary, and few of them address facility financing or provide funding
for constructing, renovating, purchasing, or leasing buildings for use
by charter schools; (5) several sources of facility financing exist for
charter schools, including the allocation of education funds from the
state, loans, and private donations; (6) however, these sources may not
be be adequate to cover costs or are not widely available to charter
schools; (7) the most frequently used source of facility financing for
charter schools is the per pupil funding allocation that a state or
school district provides for operating public schools (including charter
schools); (8) loans are not easily accessible or frequently available to
charter schools for facility financing; (9) most charter schools are
considered credit risks because they have poor cash flows, lack a long
credit history, have short-term charters, or lack business skills; (10)
few charter schools have been successful in obtaining a facility from a
private donor and surplus buildings that can be made available by local
districts free or at reduced rent either need expensive renovations or
simply do not exist; (11) if the federal government decides to assume a
broader role in financing charter schools facilities, various mechanisms
are available; (12) they include grants, direct loans, loan guarantees,
loan pools, tax-exempt bonds, and tax credits, each of which could have
different fiscal and programmatic implications for the federal
government; (13) regardless of the funding mechanism used, all will
require federal expenditures and most would add to the role that the
federal government has indirectly played in public school construction
through the tax code; and (14) moreover, increased federal assistance
would change the nature of the federal government's relationship with
traditional and charter schools as well as with the local and state
governments that are primarily responsible for purchasing, constructing,
renovating, and leasing school buildings.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-00-163
     TITLE:  Charter Schools: Limited Access to Facility Financing
      DATE:  09/12/2000
   SUBJECT:  State/local relations
	     Charter schools
	     Educational facilities
	     School districts
	     Aid for education
	     Loans
IDENTIFIER:  Dept. of Education Public Charter Schools Grants Program
	     Arizona
	     California
	     Treasury Qualified Zone Academy Bond Program
	     Colorado
	     Florida
	     Michigan
	     Minnesota

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GAO/HEHS-00-163

Report to Congressional Requesters

September 2000 CHARTER SCHOOLS Limited Access to Facility Financing

GAO/HEHS-00-163

Letter 3 Appendixes Appendix I: A Comparison of State Legislation on Charter
School

Independence 22 Appendix II: A Summary of State Legislation on How Charter

Schools Obtain Facilities 24 Appendix III: Comments From the Department of
Education 26

Related GAO Products 28 Table Table 1: States We Reviewed That Provide
Facility Financing

Assistance for Charter Schools, August 2000 12 Figure Figure 1: States With
and Without Charter School Legislation 6

Abbreviations

IRS Internal Revenue Service NCES National Center for Education Statistics
PCSP Public Charter Schools Grants Program QZAB Qualified Zone Academy Bond
RHS Rural Housing Service

Health, Education, and Human Services Division

Lett er

B- 284442 September 12, 2000 The Honorable William F. Goodling Chairman,
Committee on Education and the Workforce House of Representatives

The Honorable Heather Wilson House of Representatives

Since the first charter school legislation was passed in Minnesota in 1991,
the charter school movement has grown to include more than 1, 600 schools,
and 36 states, the District of Columbia, and Puerto Rico currently have
charter school legislation. Charter schools are public schools that are
exempt from a variety of local and state regulations but that are held
accountable for improving pupil outcomes. They were created to address
concerns about educational quality, parental choice in schools, and the
perceived burdens of school bureaucracies. These schools have enjoyed
bipartisan support in the Congress. Specifically, in 1994, the Congress
authorized funding for start- up costs through the Public Charter Schools
Grants Program (PCSP). In addition, President Clinton has announced the goal
of supporting the creation of 3, 000 charter schools. Although the number of
charter schools continues to increase, some policymakers are concerned that
difficulties in obtaining funding to construct, lease, or renovate
facilities may hinder the growth of these schools.

You asked us to (1) determine the degree to which charter schools have
access to traditional public school facility financing, (2) determine
whether alternative sources of facility financing are available to charter
schools, and (3) discuss potential options generally available to the
federal government if it were to assume a larger role in charter school
facility financing. To answer these questions, we reviewed state charter
school laws and reports by various federal, state, and private entities that
provided information on charter schools nationwide, including The State of
Charter Schools 2000issued by the Department of Education. We interviewed
experts who have a national perspective on these issues. To obtain more
detailed information about how charter schools finance their facilities, we
also interviewed officials in eight states- Arizona, California, Colorado,
Florida, Michigan, Minnesota, North Carolina, and Texas- that account for
more than 60 percent of all charter schools. In addition, we interviewed
federal officials, private lending companies, and major credit rating

agencies about facility financing options for charter schools. We did our
work in accordance with generally accepted government auditing standards
between January and September 2000.

Results in Brief Charter schools generally do not have access to the most
common source of facility financing for public schools- municipal bonds. 1
Charter schools

are frequently not part of a local school district and generally have no
authority to raise taxes or issue tax- exempt bonds. Charter schools that
are part of a local school district might not share in local or state school
construction funds because they must compete with other public schools that
have their own construction or renovation needs, and local opposition to
charter schools sometimes hinders the sharing of funds. State charter school
laws vary, and few of them address facility financing or provide funding for
constructing, renovating, purchasing, or leasing buildings for use by
charter schools.

Several sources of facility financing exist for charter schools, including
the allocation of education funds from the state, loans, and private
donations. However, these sources may not be adequate to cover costs or are
not widely available to charter schools.

Per Pupil Allocation. The most frequently used source of facility financing
for charter schools is the per pupil funding allocation that a state or
school district provides for operating public schools (including charter
schools). Charter schools may receive less than the average allocation for
the schools in the district, depending on the state charter laws or
negotiations with the sponsoring agency. Because charter schools use these
funds to cover teachers' salaries, books, and supplies, this payment may not
be adequate to fully cover costs associated with obtaining a facility,
especially for small charter schools or schools in high- cost areas. Loans.
Loans are not easily accessible or frequently available to charter

schools for facility financing. National studies and experts we interviewed
indicate that most charter schools are considered credit risks because they
often have poor cash flows, lack a long credit history, have short- term
charters that can be terminated by their sponsor, or are administered by
management teams with limited business skills.

1 Municipal bonds are tax- exempt bonds issued by a local government entity
such as a school district, city, or county.

Donations. Few charter schools have been successful in obtaining a facility
from a private donor, and surplus buildings that can be made available by
local districts free or at reduced rent either need expensive renovations or
simply do not exist.

If the federal government decides to assume a broader role in financing
charter school facilities, various mechanisms are available. They include
grants, direct loans, loan guarantees, loan pools, tax- exempt bonds, and
tax credits, each of which could have different fiscal and programmatic
implications for the federal government. Regardless of the funding mechanism
used, all will require federal expenditures and most would add to the role
that the federal government has indirectly played in public school
construction through the tax code. Moreover, increased federal assistance
would change the nature of the federal government's relationship with
traditional and charter schools as well as with the local and state
governments that are primarily responsible for purchasing, constructing,
renovating, and leasing school buildings.

Background Charter schools were created to improve student achievement,
enhance parental and student choice of public schools, and help promote

educational reform. In the 1998- 99 school year, charter schools served
about 250, 000 students in about 1,600 schools. Thirty- six states, the
District of Columbia, and Puerto Rico have charter school legislation, and
31 states, the District of Columbia, and Puerto Rico had operating charter
schools as of September 1999. (See fig. 1 for states with charter schools.)
The charter school population represented about 0. 8 percent of the total
number of public school students in the states with charter schools for
school year 1998- 99.

Figure 1: States With and Without Charter School Legislation

Note: States that have charter school legislation total 36. The District of
Columbia and Puerto Rico also have charter school legislation. Fourteen
states have not enacted charter school legislation.

Charter schools are public schools that have been formed by teachers,
parents, or other community members who enter into a contract (or charter)
with one or more sponsoring entities, such as a school district,

school board, university, or for- profit company. Although state laws vary,
the charter, often in effect for 3 to 5 years, generally

frees a charter school from many state and local laws and policies to which
traditional public schools are subject, requires a charter school to meet
certain student performance and

school management goals, and defines the annual budget and sources of
income.

The sponsoring entity monitors the performance of the charter school and can
renew or revoke the charter, depending on whether the school has met its
goals. All charter schools must meet health and safety regulations and
adhere to federal antidiscrimination laws.

Charter schools are public schools, and often students from any school
district in the state may apply for enrollment, but unlike most other public
schools charter schools can limit enrollment according to the space they
have available. State law or the school's charter determines how students
will be selected to attend, and all schools receiving federal PCSP funds are
required to use a lottery (except converted public schools, which may be
required by state law to serve the students who already attend them). The
median enrollment for all charter schools is 137, compared with 475 for all
traditional public schools. According to Education, charter schools are more
likely to include more grade levels in a single school than are traditional
public schools. Specifically, almost three times as many charter schools
include kindergarten through the 8th grade, and almost four times as many
include kindergarten through the 12th grade, as other public schools.

Charter schools can be established in two ways. An existing public or
private school is converted to a charter school and remains in the same
building, or a new school is started and a building has to be financed. As
the number of charter schools has increased, more charter schools begin
planning their programs without having a building. According to Education,
through the 1994- 95 school year, 53 percent of the charter schools that
opened were new start- ups that had to find a facility to house their
program. By the 1997- 98 school year, the percentage of charter schools in
search of new space had increased to 82.5 percent. As of September 1999, 7
of 10 charter schools were new start- ups. These newly started charter
schools operate in a variety of facilities, including leased mall space;
surplus school buildings; space shared with other groups, such as the

YMCA; and converted commercial space. Charter schools also exist as home
schools and distance learning facilities.

Education currently offers start- up assistance to charter schools through
PCSP, under which grants are available competitively to state education
agencies in states that have charter school laws. The states then make
subgrants to sponsors in partnership with developers of charter schools. If
an eligible state chooses not to participate in the program or if its
application for funding is not approved, Education can make grants directly
to eligible charter schools. Grantees may use the funds for a variety of
activities such as informing the community about the charter school and
acquiring necessary equipment, material, and supplies and covering other
start- up operational costs that cannot be met from state and local sources.
The funds may be used for limited facility costs such as planning and
analyzing facility needs, making minor renovations and repairs, and
offsetting lease or rent expenses. In fiscal year 2000, the program was
funded at $145 million.

Facility Financing for Public school districts generally obtain financing
for facilities from issuing

Traditional Public Schools and selling tax- exempt municipal bonds or
directly from local tax

revenues. 2 School districts cover a defined geographic area, and in most
cases, property taxes that residents pay in this geographic area provide the
funds for school construction. Local government entities, including some
school districts, have the authority to sell municipal bonds, using receipts
from property taxes within the district to pay off these bonds over time.
The Internal Revenue Code generally exempts buyers of state and local bonds
from paying federal income taxes on the interest they earn. In addition to
bonds, some school districts have access to revenues from local sales taxes.
For example, Florida allows its school districts to levy a ï¿½ percent sales
tax, subject to voter approval, for school facilities.

In addition to municipal bonds and taxes, many school districts receive
state appropriations for school facilities. In Minnesota, public schools
received state funding per pupil that varies by grade level, average
building age, and the length of the school year. In Florida, $600 million to
$700 million a year in funds for construction and maintenance came from a
state

2 Traditional public schools build or renovate when they need facilities and
usually do not lease buildings as charter schools do. Traditional public
schools may, however, lease portable classrooms or other structures to
supplement primary building space.

tax levied on utilities, with 50 percent going to kindergarten through grade
12 schools. Hawaii (which has a single school district) provides all
facility financing for its schools. In the 1998- 99 school year, 32 states
provided $10.9 billion in aid for school construction. 3 In contrast, 15
states provided little or no support for public school construction, and 3
states could not separate construction funds from their basic support
programs.

Concerns about the poor condition and shortage of school buildings
nationally have increased federal attention on public school facility
financing, although direct federal support for school construction and
renovation has historically been limited. We estimated in a series of
reports issued between 1995 and 1997 that it would take about $112 billion
to bring American school facilities into good overall condition, and
Education has estimated that 2, 400 new public schools will be needed by
2003 to accommodate rising enrollments. 4 In the 106th Congress, several
legislative proposals have been introduced that contain some form of
assistance for public school construction. However, no legislation has yet
been passed. 5

Charter Schools Have Municipal bonds, the traditional source of public
school facilities financing,

Little Access to are generally unavailable to charter schools for several
reasons.

Traditional Facility Financing

Many Charter Schools Are Many of the 36 states with charter school
legislation and the District of

Not Part of a School District Columbia and Puerto Rico require that charter
schools be established as

independent legal entities separate from their local school districts. (See
3 School Facilities: Construction Expenditures Have Grown Significantly in
Recent Years (GAO/ HEHS- 00- 41, Mar. 3, 2000) and Catherine C. Sielke and
others, eds., “ Public School Finance Programs of the United States
and Canada 1998- 99,” draft. 4 See our list of related GAO products at
the end of the report. 5 Potentially, a charter school that qualifies as a
local education agency (see 20 U. S. C. 8801 (18)) could compete for
facility funding under the School Facilities Infrastructure Improvement Act
grant program (see 20 U. S. C. 8501 et seq.) administered by Education.
However, since the program's enactment in 1994, Education reports that no
grants have been awarded to any school because the Congress rescinded all
funding for the program in 1995.

app. I for a listing of state provisions.) The remaining states either
require that charter schools remain part of the school district or allow
them to elect whether they will be independent or part of the school
district. Thus, the charter schools that are not part of the school district
may not be able to take advantage of facility funding as district schools
can. Also, charter school students can come from more than one district.

Charter Schools Generally Generally, municipalities such as cities,
counties, and school districts have

Do Not Raise Taxes and the authority to levy taxes and issue bonds- not
individual public schools.

Issue Bonds Given that many charter schools are independent of a school
district, one

national study entitled Paying for the Charter Schoolhouse: A Policy Agenda
for Charter Schools Facilities Financingstated that although charter schools
are public schools, it is unclear in some states whether they enjoy the same
tax advantages as other public schools. 6 The report also implied that state
laws are sometimes not clear as to whether charter schools themselves may
issue tax- exempt debt or whether other public bodies (such as city and
county governments or special- purpose finance authorities) may issue tax-
exempt bonds on behalf of charter schools. 7 However, at least two states
have passed legislation for the state bonding authority to sell bonds to
finance charter school construction. In Colorado, six schools obtained tax-
exempt financing through the sale of nearly $23 million in bonds to fund the
acquisition of their facilities. In North Carolina, in contrast, the bonding
authority, although authorized to do so, has not issued any bonds on behalf
of a charter school because of its reservations about the soundness and
creditworthiness of the schools seeking assistance.

6 Charter Friends National Network, Paying for the Charter Schoolhouse: A
Policy Agenda for Charter Schools Facilities Financing( Jan. 1999). 7
Depending on state legislation, charter schools may be set up as nonprofit
organizations. Should the schools choose, they may apply for status as tax-
exempt organizations under IRS Section 501 (c)( 3). If they are granted tax-
exempt status, they are generally exempt from paying federal income taxes
and are generally eligible to issue tax- exempt bonds. While we know that
some charter schools have been granted tax- exempt status, we do not know
how many, if any, have received funds from tax- exempt bonds.

School Districts Allowed to Although many school districts can share their
facility funds with charter

Share Local Facility schools, often they choose not to do this. Many local
school districts are

Financing With Charter struggling to meet their own facility needs and are
unwilling to share their

Schools Often Do Not limited school facility financing with charter schools.
In the eight states we

reviewed (which are home to approximately 60 percent of the nation's charter
schools), only a few districts had made money available. State officials
said that little or none of this financing has been made available to
charter schools because of local school district opposition to using the
funds for these schools.

Charter school authorizing legislation in many of the 36 states, the
District of Columbia, and Puerto Rico does not address financing facilities;
some allows school districts to provide buildings under various conditions.
(See app. II for a listing of state provisions.) The officials we
interviewed in the states that do provide money to charter schools for
facilities said they establish separate funding streams for this purpose.

Five of the eight states we reviewed- Arizona, California, Colorado,
Florida, and Minnesota- provide assistance for facility financing costs to
their charter schools. A few other states and the District of Columbia also
provide financial assistance. Four of the states we reviewed provide
assistance on a per pupil basis, while one provides interest- free loans
from a revolving fund, as shown in table 1.

Table 1: States We Reviewed That Provide Facility Financing Assistance for
Charter Schools, August 2000

Number of charter

Amount of funding per State

schools Type of assistance year

Arizona 348 Per pupil payment for $450 per pupil facilities California 234
Revolving loan pool a $25 million for renovations

with a $250, 000 cap per school, 5- year term, interest free

Colorado 69 Per pupil payment for capital $234 per pupil expenses and tax-
exempt bonds

Florida 123 Per pupil payment for 1/ 15 of a student station, facilities
projected in 2000- 2001 to

be $825, $946, and $1, 252 for elementary, middle, and high schools,
respectively

Minnesota 53 Per pupil payment for 90% of lease costs up to leasing $1,500
per pupil a Loans may be used for facilities from the time the charter is
approved until the end of the first year of school operation. The pool is
not used explicitly or exclusively for facilities. It is often used as
interim funding until regular state funds are received.

Alternative Financing Unlike the five states discussed above, most
localities and states do not

Is Available for Charter directly provide funding specifically for facility
financing for charter

schools, so they must turn to other sources. These include the charter
Schools but Obstacles

school per pupil allocation from states and local governments, loans, Limit
Access

donations from private organizations, and local school district resources.
However, these sources are often limited or not easily accessible.

Per Pupil Allocations Are Charter schools receive annual allocations from a
school district, a state, or

Used for Facility Financing both to cover instructional and noninstructional
costs such as teacher

salaries, books, supplies, facility maintenance, and curriculum materials.
This allocation is (1) based on a state or school district average per pupil
expenditure or negotiations between the charter school and its sponsoring
agency and (2) awarded for each student enrolled in a school. According to
Education's National Center for Education Statistics (NCES), the national

per pupil expenditure averaged $6, 189 in school year 1997- 98, and state
averages ranged from $3,969 to $9,643.

Although many charter schools use this per pupil allocation to help pay
their facility costs (typically rent and renovation expenses), the
literature indicates that the allocation often does not fully cover these
costs for several reasons. First, charter schools in many states receive
less than 100 percent of the allocation that school districts or states give
to traditional public schools. Allocations for charter schools range from 75
to 100 percent of what other schools receive. For example, in one county in
Colorado, traditional public schools received an annual allocation of $4,
555.66 per pupil for operations in school year 1998- 99. In contrast,
charter schools in that county received 85 percent of the per pupil
allocation, or $3, 873.21.

Second, because of their small enrollments, charter schools often cannot
take advantage of the economies of scale that larger traditional public
schools realize. The allocation is based on enrollment, and most charter
schools are small. Education reported in 1998 that 34.8 percent of all
charter schools and 36.5 percent of new start- ups had enrollments of less
than 100 students, while only 8. 6 percent of traditional public schools had
fewer than 100 students enrolled.

Finally, the per pupil allocation is based on the average cost per student
for operating expenses and does not include costs for financing a facility.
For example, in the Colorado county discussed above, traditional public
schools received $717 per student for facilities from municipal bonds and
$223 for facilities and insurance from the state, in addition to their $4,
555.66 per pupil allocation, for a total of $5,495.66 from the state in
199899. The county's charter schools received no facility payment along with
the $3,873. 21 per pupil allocation they were awarded. Effective July 1,
2000, Colorado charter schools began receiving an additional $234 per pupil
from the state to assist with facility costs.

Thus, the literature and our interviews indicate that the per pupil
allocation can be insufficient to cover both the operating and the facility
costs charter schools incur. This is an especially difficult problem for
charter schools in high- cost areas where leased space is costly or in cases
where expensive renovations are needed to transform a building into an
acceptable school facility. However, some charter schools can realize cost
savings that offset lower per pupil allocations because these schools are
exempt from certain regulations. For example, depending on their charter
terms, charter

schools may not be required to hire unionized staff, provide transportation
or hot lunches for students, or adhere to certain public school building
codes that traditional public schools must adhere to.

Charter Schools Have Charter schools generally have limited access to loans
from private lenders

Limited Access to Private because they are perceived to be poor credit
risks. According to the

Loans literature and experts we interviewed, lenders view charter schools as

credit risks for several reasons. Limited cash flow tied to enrollment.
Because the annual per pupil

allocation is the primary source of funding for most charter schools,
enrollment changes can significantly affect the amount of cash available. In
addition, charter schools use the per pupil allocation to pay for operating
expenses as well as facilities. Thus, without evidence of a steady and
growing enrollment, lenders may have concerns about whether a charter school
will have a steady source of funding to repay borrowed funds. Limited credit
history. A charter school that is just opening or that has

been in operation for only a year or two generally has an insufficient
credit history to qualify for a loan. Without a proven record of acceptable
performance as a borrower, many charter schools appear to be risky to
potential lenders. Inexperienced management teams. In many cases, charter
schools are

begun and operated by teachers, parents, and others who want an alternative
to the existing public school system. While these education entrepreneurs
have a vision for the academic programs they want to create, they may not
have the financial and managerial experience necessary to convince potential
lenders that they can provide the management skills necessary to
successfully run a school. Short- term charters. Charter schools are subject
to periodic evaluations

that determine whether their charters- usually in effect for 3 to 5 years-
will be renewed. Loans for large- scale building and renovation projects are
generally amortized over a 15- to- 30- year term. Thus, lenders are wary of
charter schools because their charters may expire or be revoked before a
loan matures. Most often, the reasons for revoking or not renewing charters
are based on a school's failure to achieve certain educational objectives,
although financial mismanagement has also resulted in several charter
revocations.

The lenders we interviewed have attempted to provide facility financing to
charter schools through programs designed to aid underserved

communities or persons. These programs often had less stringent loan
qualification requirements but usually carried higher interest rates because
of perceived risks. Moreover, even with more lenient loan qualification
criteria, some charter schools have had to pool their resources in order to
acquire private sector funding. One of the two credit rating agencies we
interviewed has given an investment grade bond rating to a pool of seven
schools that applied together in order to qualify. 8 In addition to the
pool, five individual charter schools have been awarded an investment grade
bond rating by the two credit rating agencies we interviewed. One agency
noted that all the schools that were rated had been in existence for several
years and had demonstrated some success. The credit rating agency told us
that the ratings would not likely be available to new charter schools
without some kind of additional financial support, such as a loan guarantee.
Officials representing the lenders and credit rating agencies stated,
however, that they see charter schools as a growing market and that they
expect that over time, as more charter schools succeed, become more
experienced, and develop a reputation as good business investments, more
private sector financing will open up to them.

Federal Assistance for Two federal programs- the Department of Agriculture's
Rural Housing

Charter Schools Facility Service (RHS) and the Qualified Zone Academy Bond
(QZAB) program

Financing Is Limited administered by the Department of the Treasury- have
provided some

assistance to charter schools needing facility financing. RHS makes loans to
develop rural community facilities in areas with populations up to 20, 000.
In order to qualify for these loans, applicants must be unable to obtain
funds from community sources at reasonable rates and terms. Interest rates
for these direct loans are based on current market yields for municipal bond
obligations. Through this program, RHS has loaned $3.32 million to 4 charter
schools in two states. One additional application in another state for $5
million is under consideration.

The QZAB program has provided financial assistance to at least one
California charter school. However, QZAB assistance is available only for
renovations, not for new construction. 9 In addition, a school qualifies for
these bonds only if it is located in an empowerment zone or enterprise

8 Credit rating agencies assess credit risks on bonds and other financial
instruments. Such ratings help investors, such as bond buyers, manage their
credit risks. 9 The President's school modernization proposal would expand
this program to include new construction.

community or if it has at least 35 percent of its students eligible for free
or reduced- price school lunches.

Private Donations Are While private donors have provided both buildings and
funding for facilities

Limited to charter schools, the number of such donations appears to be
small.

Although Education does not maintain data on the numbers of donated
buildings, officials told us that access to private donations is limited. In
addition, none of the states we reviewed except Colorado could provide
information on the number of donated buildings, but most state officials
said the numbers were small. A Colorado study identified five donated
buildings among 64 schools. One private lender identified three charter
schools that had received private monetary donations that were used to
secure loans. We were also told that some charter schools join with
educational management companies that may provide or lease facilities to
charter schools. 10

Limited Use of Surplus, Some states require that all surplus buildings in
local school districts be

Low- Rent, or Free Buildings made available rent- free or at a reduced rate
to charter schools, although

most state officials we spoke to said this option has not provided many
buildings for charter schools. A Colorado study identified 19 of 64 schools
operating in rent- free district facilities. 11 Another state official
pointed out that with the current boom in school enrollment, it is unlikely
that surplus buildings will be available.

A Number of Options If the federal government decides that it wants to
support activities to

Would Be Available If increase charter schools' access to facility funding,
it can choose a number

of financing mechanisms to do so. The mechanisms include providing the
Federal

direct assistance through grants and loans and encouraging private sources
Government Increased

of funds through loan guarantees, loan pools, tax exempt bonds, and tax Its
Role

credits. The federal government currently uses these financing mechanisms to
subsidize a wide variety of activities such as the

10 Education management companies are for- profit organizations that can
offer a range of services for schools from a small contract for
administrative assistance in starting and running a complete charter school.

11 Colorado Department of Education, Charter Schools Capital Finance Study:
Challenges and Opportunities for the Future( Jan. 2000).

construction of low- income housing and the development of enterprise zones.
These mechanisms have different characteristics that may affect how charter
schools are assisted, and they would have different fiscal effects for the
federal government. The following section is not intended to be an
exhaustive discussion of federal financing mechanisms or tools; rather, it
highlights a few general characteristics about each of them as they relate
to charter schools facility financing.

Grants Grants are payments from the federal government to state and local
governments, organizations, or individuals to help them finance activities
that fulfill certain federal goals. Grant recipients do not repay funds.
Grants are generally available to a broad group of eligible applicants, but
some grant programs target funding to applicants on the basis of their
demonstrated financial need (for example, the Impact Aid School Construction
Program). Grants can include provisions that encourage state and local
spending on program activities, although most do not. For example, some
grants have matching or maintenance- of- effort requirements that help
ensure that states and localities share the financial support for a program
with the federal government. Grants also have financial, accounting, and
reporting requirements associated with them. The Congress would need to
determine whether states, state authorities, or charter schools should be
the recipients of federal grant funds.

Depending on the size of a grant, this mechanism could fully or partially
fund the facility needs of a charter school with no obligation to repay. In
addition, this option might reduce the need for charter schools to use their
per pupil allocations for facility financing. However, providing charter
schools with grant funds would increase the federal role, and these
expenditures would require additional oversight and administrative
responsibilities and might discourage community involvement and ingenuity in
finding and renovating space. Also, if the grant were designed without a
matching or maintenance- of- effort provision, states and localities that
provide no facility funding to charter schools now may be further
discouraged from providing assistance, while those that provide some funding
may decide to reduce their level of support. For the charter schools, such a
program would require no repayment of funds and might allow the schools to
use federal funds to leverage private sector loans. However, charter schools
might not want to address or be capable of addressing the various fiscal
reporting and oversight responsibilities that grants would be likely to
require.

Direct Loans A direct loan involves the disbursement of funds by the
government under a contract that requires the repayment of the funds with or
without

interest, at or below market interest rates (for example, the Farm Labor
Housing Loan and Grant Program used to construct, repair, or purchase year-
round or seasonal housing for farmworkers). Loan programs are often
selective- allowing as participants only those who are likely to repay the
loans. Like grants, loan programs generally depend on the federal budget and
appropriations process, and qualifying for a loan entails meeting financial
and programmatic requirements. Also, loan programs incur loan servicing and
other costs in addition to routine administrative costs.

A direct loan program could offer the federal government a way to fund
facilities for charter schools, but unlike grants, the amount borrowed could
be recouped as borrowers repay their loans. However, because charter schools
can be closed by the charter- granting entity for not performing according
to the terms of the charter and can have limited cash flow, some loan
defaults are likely, and their associated costs would be borne by the
federal government. For the charter schools, such a loan program might
provide access to funds at below- market interest rates. However, charter
schools would have to repay loans and cover any facility costs a loan did
not finance.

Loan Guarantees A loan guarantee is an agreement by the government to, in
effect, cosign loans on behalf of eligible borrowers. Guarantees are
generally used to increase the credit that is available to finance
activities by encouraging lenders to offer loans to populations considered
risky or to reduce the interest rate and cost of loans (for example, home
loan guarantees provided by the Veterans' Administration). Guarantees are
perceived as a way of accomplishing certain federal goals quickly by using
existing institutions and private sector resources. However, the federal
government would incur administrative costs and would have to include in the
budget an expense that reflects anticipated defaults.

The amount guaranteed by the government can be for the entire loan or some
fraction of it, depending on the risk the government is willing to assume.
The government usually pays program administrative costs and any default
costs in loan guarantee programs. For charter schools, a federal loan
guarantee would mean access to private money at lower interest rates that
might have been previously unavailable to them because of creditworthiness
issues, discussed earlier in this report. However, charter schools would
still have to find a way to repay loans.

Revolving Loan Pool A revolving loan pool allows investors (such as the
federal government, states, and private entities) willing to support an
activity to share the costs

and risks of investing in it. A revolving loan pool is a fund created by a
number of entities to make below- market- rate loans available to eligible
borrowers. The pooled resources earn interest, and eligible applicants are
allowed to borrow from the fund. The interest is reinvested in the fund
along with payments that fund borrowers make (for example, the drinking
water revolving fund of the Environmental Protection Agency that is used to
construct water treatment facilities). If a borrower defaults on a loan from
the pool, the costs associated with the default are paid from the pool, thus
reducing the dollars that can be loaned in the future. The federal
government could decide to provide reserve funds to cover the costs of loan
defaults and other loan pool expenses.

For this option, the federal government would be likely to provide seed
money for the pool or money for the reserves or both. The federal government
could also require or provide incentives for state or other entities to
contribute. The purpose of a loan pool for the federal government would be
to provide funding to charter schools at a lower cost than the private
market could do. An advantage is that the government could share some risks
with the other pool contributors. For the charter school, a revolving loan
pool might mean access to money that has previously been unavailable from
lenders because of the perceived credit risk that charter schools pose. As
with direct and guaranteed loans, charter schools borrowing from a loan pool
would still have to find ways to repay their loans.

Tax- Exempt Bonds The federal government currently supports the acquisition
of public school buildings and other public facilities through tax code
provisions that allow

tax exemptions on the income from municipal bonds as well as other types of
bonds. A bond is a debt instrument bearing a stated rate of interest that
matures on a certain date, at which time a fixed sum of money (the
principal) plus interest is payable to the purchaser of the bond. Although
the federal government collects less revenue because of these tax
expenditures, tax- exempt bonds would provide access to private funds at
lower interest rates than what charter schools would otherwise have to pay
on the open market. Investors are willing to accept a lower interest rate on
tax- exempt bonds because of their reduced tax burden.

The Internal Revenue Code limits or caps the amount of certain types of tax-
exempt bonds that may be issued in a state. Subject to this cap, states

and their qualified governmental units may authorize nongovernmental persons
to issue these “private activity bonds” to finance activities
that include airports, mass commuting facilities, and sewage facilities, as
well as residences for veterans. To encourage state and private investment
in charter school facility funding, the federal government could decide to
create an additional class of private activity bonds to be used specifically
for charter school facility funding. States could in turn include charter
schools among the other authorities that are allowed to issue tax- exempt
private activity bonds within the state. Such modifications could
necessitate raising the cap on the amount of private activity bonds that
each state may issue or perhaps excluding these new bonds from counting
against the state bond cap. Yet, if such actions are taken and charter
schools issue these bonds, the creditworthiness of most charter schools and
their ability to repay debt will remain a concern for bond raters and
buyers, especially for newly created charter schools. Moreover, charter
schools would still have to use their revenues to cover the costs of issuing
the bonds and their debt service.

Tax Credits Tax credits, another type of tax expenditure, directly reduce a
taxpayer's tax liability. Policymakers use them to provide incentives for
socially

beneficial projects (for example, to encourage public- private investment in
low- income housing construction). If a tax credit is refundable, a taxpayer
receives a payment from the government when the credit exceeds the taxes
owed.

Offering tax credits to lenders could help the federal government aid
charter schools with their facility financing needs by encouraging lenders
to make loans to these schools that they might not otherwise make or by
encouraging donations or grants by private institutions. If the tax subsidy
is too low, it might not provide a strong enough incentive (rate of return)
for lenders to begin or increase lending to charter schools- considered
risky borrowers by many lenders. Nonprofit charter schools cannot take
direct advantage of a tax credit because they have no tax liabilities
against which to apply a credit. However, these charter schools could offer
the tax credit to corporations or for- profit investors with a tax liability
in exchange for cash.

Agency Comments We provided Education with a draft of this report for its
review. In its comments, Education said that the report describes well the
problems that

many charter schools have encountered in obtaining adequate facilities.

Education also provided technical comments that we included in the report as
appropriate. Education's comments are printed in appendix III. IRS reviewed
the draft report for technical accuracy and had no comments.

As we agreed with your staff, unless you publicly announce the report's
contents earlier, we plan no further distribution of it until 30 days from
the date of this letter. We will then send copies to the Honorable Richard
W. Riley, Secretary of the Department of Education, and others who are
interested. We will also make copies available to others on request. If you
or your staff have any questions about this report, please contact me or
Karen Whiten on (202) 512- 7215. Mary Roy, Gillian Martin, and Mitchell
Rachlis made key contributions to this report.

Marnie S. Shaul Associate Director, Education, Workforce, and

Income Security Issue

Appendi xes A Comparison of State Legislation on Charter

Appendi xI

School Independence State How charter schools operate

Alaska “As a school in the local school district” Arizona
Independent; “may contract, sue and be sued” Arkansas
Legislation is silent California May form as nonprofit public benefit
corporations Colorado Public schools are part of the school district (in
practice, many are separate legal entities) Connecticut Independent,
nonprofit entities operated independently of local or regional school
boards, in

accordance with charter and provisions of state charter law Delaware
Independent entities; the board of directors has powers similar to those of
a Reorganized School

District Board of Education, except the power to tax District of Columbia
Must be organized as a District of Columbia nonprofit corporation. They
exercise exclusive

control over instruction, budget, personnel, and administration. They have
Independent Local Education Agency status for federal program purposes

Florida Must organize or be operated by a nonprofit corporation Georgia Must
be nonprofit; all charter schools that were not previously existing public
schools remain

subject to the control and management of the local board of the school
district Hawaii Legislation is not specific Idaho Nonprofit corporations
Illinois Nonprofit organizations Kansas Remain within the public school
system Louisiana All charter schools except those converted from a
preexisting public school must be established

as nonprofit Massachusetts Independent public entities, a body politic, and
corporate with all powers necessary or desirable

for carrying out their charter programs Michigan Corporate entities
independent of local school districts but subject to leadership and general

supervision of the state board over all public education Minnesota
Cooperative or nonprofit corporations under state law Mississippi
Legislation is not specific Missouri Nonprofit corporations Nevada The board
of trustees of a school district in which a charter school is located is
generally

prohibited from interfering with the operation and management of the charter
school New Hampshire Nonprofit organizations New Jersey Independent public
schools managed by their own boards of trustees New Mexico Public schools
authorized by the local district's school board and accountable to that
board New York Independent and autonomous public schools North Carolina Must
be operated by a private nonprofit corporation Ohio Nonprofit corporations
and public schools independent of any school district Oklahoma Legislation
is silent Oregon Legislation is silent

(Continued From Previous Page)

State How charter schools operate

Pennsylvania Public, nonprofit entities and local education agencies Puerto
Rico Have fiscal autonomy that allows them to draft, administer, and control
the budget and purchase

materials, books, and supplies Rhode Island Part of the school district if
initiated by the school district or school personnel; otherwise,

independent entities South Carolina Must be organized as a nonprofit
corporation Texas “Governmental bodies”; immunity language
appears to anticipate a degree of independence Utah Legislation is not
specific Virginia Alternative public schools within a district and managed
by their own management committees Wisconsin May exist as local board-
sponsored schools, may be instrumentalities of the local district, or the

local board may contract with an outside entity to operate the school (local
board decides). Milwaukee charter schools not sponsored by the local board
become independent entities, with one possible exception

Wyoming Legislation is not specific

A Summary of State Legislation on How

Appendi xII

Charter Schools Obtain Facilities State Provisions on acquiring facilities

Alaska Not specified. Law permits operation in existing district facilities
upon approval of district administrative staff

Arizona Law calls for preparing a list of vacant state- owned facilities and
land Arkansas Not specified California School district where charter school
operates must permit free use of district facilities not in use Colorado
Charter schools must be able to use district facilities “deemed
available” at no rent, except for

operations and maintenance Connecticut Not specified. Commissioner of
Education must annually review and report to the General

Assembly on the adequacy and availability of suitable facilities for charter
schools Delaware Charter schools have preference in leasing public
buildings; districts are to “make unused

buildings or spaceï¿½in buildings available to a charter school, and shall
bargain in good faith over the cost of rent, services and maintenance
related to such space.” Delaware Department of Education must publish
an annual list of facilities available for charter school use

District of Columbia D. C. government must grant charter schools preference
when leasing or selling former public school facilities

Florida Surplus district facilities must be provided for charter schools and
public schools on equal basis Georgia Legislation is silent Hawaii Not
specified Idaho Not specified Illinois Individual schools determine.
Conversions from public or private schools are not to be charged

rent for available district facilities Louisiana Local school boards must
make vacant facilities available at fair market value. If the facilities

were constructed at no cost to the local school board, such facilities must
be provided to charter schools at no cost

Massachusetts “May own, lease or rent its space” Michigan May
acquire property by purchase, rent, lease, gift, or condemnation Minnesota
Must lease space, preferably from a school board or other nonprofit,
nonsectarian organization;

if it is unable to find appropriate space this way, it can lease from a
private or for- profit organization or, as a last resort, from a state
approved sectarian organization

Mississippi Not specified Missouri Can borrow to finance facilities. A
maximum of 5% of district school buildings may be converted

to charter schools. May not acquire facilities by eminent domain Nevada May
use any public facility within the school district in which they are
located. May use districtowned school buildings only during times that are
not regular school hours and on approval of

the local school board New Hampshire Individual schools determine. They can
lease or buy from anyone New Jersey May not use public funds to construct a
facility New Mexico Not required to pay rent for available school district
facility space, provided that the facilities can

be made available at no cost to the district

(Continued From Previous Page)

State Provisions on acquiring facilities

New York May own, lease, or rent its space. The New York office of general
services must publish an annual list of facilities available for charter
schools' use

North Carolina A local board of education may provide a school facility to a
charter school free of charge; however, the charter school is responsible
for maintaining and insuring the school facility

Ohio May use a district- owned facility under any contract terms that the
school district agrees to Oklahoma Legislation is silent Oregon May enter
into contracts and may lease facilities from the school district or any
person or legal

authority Pennsylvania Can acquire real property by purchase, lease, option
to purchase, or gift. May not construct a

facility with public funds received from the local school district or state
education department Puerto Rico Legislation is silent Rhode Island Public
charter schools not sponsored by a public school district may apply for 30%

reimbursement of school housing cost from the state South Carolina State
department of education and budget and control agency must provide a list of
vacant

public facilities available for rent, lease, or purchase Texas Not specified
Utah Allowed to consult a list of suitable state or school- district- owned
property. The state office of

education must publish an annual list of suitable vacant and unused portions
of buildings Virginia Can locate available school district space and may
contract with third parties. A public charter

school is not required to pay rent for school district facilities Wisconsin
Not specified Wyoming Not specified

Comments From the Department of

Appendi xI II Education

Related GAO Products School Facilities: Construction Expenditures Have Grown
Significantly in Recent Years( GAO/ HEHS- 00- 41, Mar. 3, 2000).

School Facilities: Reported Condition and Costs to Repair Schools Funded by
Bureau of Indian Affairs( GAO/ HEHS- 98- 47, Dec. 31, 1997).

School Facilities: Accessibility for the Disabled Still an Issue( GAO/
HEHS96- 73, Dec. 29, 1996).

School Facilities: Profiles of School Conditions by State( GAO/ HEHS- 96-
148, June 24, 1996).

School Facilities: America's Schools Report Differing Conditions (GAO/ HEHS-
96- 103, June 14, 1996).

School Facilities: States' Financial and Technical Support Varies (GAO/
HEHS- 96- 27, Nov. 28, 1995).

School Facilities: America's Schools Not Designed or Equipped for 21st
Century( GAO/ HEHS- 95- 95, Apr. 4, 1995).

School Facilities: Condition of America's Schools( GAO/ HEHS- 95- 61, Feb.
1, 1995).

(104990) Lett er

GAO United States General Accounting Office

Page 1 GAO/ HEHS- 00- 163 Charter Schools

Contents

Page 2 GAO/ HEHS- 00- 163 Charter Schools

Page 3 GAO/ HEHS- 00- 163 Charter Schools United States General Accounting
Office

Washington, D. C. 20548 Page 3 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 4 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 5 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 6 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 7 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 8 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 9 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 10 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 11 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 12 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 13 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 14 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 15 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 16 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 17 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 18 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 19 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 20 GAO/ HEHS- 00- 163 Charter Schools

B- 284442 Page 21 GAO/ HEHS- 00- 163 Charter Schools

Page 22 GAO/ HEHS- 00- 163 Charter Schools

Appendix I

Appendix I A Comparison of State Legislation on Charter School Independence

Page 23 GAO/ HEHS- 00- 163 Charter Schools

Page 24 GAO/ HEHS- 00- 163 Charter Schools

Appendix II

Appendix II A Summary of State Legislation on How Charter Schools Obtain
Facilities

Page 25 GAO/ HEHS- 00- 163 Charter Schools

Page 26 GAO/ HEHS- 00- 163 Charter Schools

Appendix III

Appendix III Comments From the Department of Education

Page 27 GAO/ HEHS- 00- 163 Charter Schools

Page 28 GAO/ HEHS- 00- 163 Charter Schools

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