Over the past decade, the demand has grown for high-performing public charter schools in cities across the country. However, one hurdle charter schools face to meet the demand for their schools is financing and managing facilities.
Afton Partners spoke to the Chief Financial Officers at two high-performing charter management organizations (CMOs) – John Murphy at KIPP Houston Public Schools and Delphine Sherman at Aspire Public Schools– who have successfully found creative financing solutions to secure facilities and address their growing waitlists.
Founded in 1995, KIPP Houston Public Schools (KHPS) experienced significant growth from 2005 through 2016. Currently, KHPS educates 12,500 students from educationally underserved communities and is on track to serve nearly 18,000 students in the near future. Aspire Public Schools opened its first school in 1998 and is now serving 15,000 students in 38 schools throughout California and Memphis, Tennessee.
But regardless of school size or location, charter leaders share that facilities remain one of the biggest challenges in addressing growth for a variety of reasons, including: funding, access to capital, real estate availability, zoning and development requirements, maintenance, the political climate, and many other reasons. This pushes charter leaders to be as innovative in their facility planning as they are in their educational program to find creative solutions to meet their needs.
As an example, KIPP Houston Public Schools has integrated various types of real estate solutions, including: modular buildings, permanent structures, office buildings, shopping centers, hospitals, green field developments, leased district buildings, and space in churches and other temporary locations. Aspire’s situation in California is much different. Aspire found in the markets it was serving that buildings were in short supply. In order to support growth, building new facilities, especially for secondary schools, was their best option.
Because of different market circumstances, the needs of the two CMOs led to different facility planning and debt structures to support their growth plans. In 2010, Aspire issued one of the largest charter school bonds at the time – $93M for seven campuses and 10 schools. It included two schools buying out an operating lease, one refinance, and the rest were new construction. A new entity was established to separate ownership of the building from the CMO, allowing the CMO to receive SB740 funds, which are charter school grants for the purpose of paying for lease costs. The charter school financing sector was not mature at the time – and a guarantee from foundations was a critical component to make the deal attractive.
To support its various types of school facilities, KIPP Houston Public Schools has closed on a variety of different financing options, including: traditional long-term (30 year+) tax-exempt bonds, Qualified School Construction Bonds (“QSCB”), Qualified Zone Academy Bonds (“QZAB”), commercial paper, real estate/construction bridge loans, and LOC’s. At this time, KHPS has been fortunate to access capital at a lower rate – their current average borrowing cost is 2.7%. KHPS’ “Q” deals are particularly notable. They required creativity and persistence and their rates were approximately 0.30%.
Demand for seats in high-performing charter schools is growing across the country. Afton Partners shares five lessons from KIPP Houston Public Schools and Aspire Public Schools on facility planning and financing to meet their growth plans.
- As always, lead with the academic plan
Strong academic curriculum is the backbone of any high-performing school system. It’s critical not only for the students served, but the academic flywheel ensures the financial stability of the organization. John points out that strong academics creates student demand and waitlists at KIPP Houston Public Schools, which leads to charter renewals and strong financial performance. This translates to an even more successful organization all around, which resonates with lenders and funders.
- As growth plans evolve, so should the debt structure
With the help of consultants, such as Afton Partners, Delphine shares that Aspire was able to make more informed decisions on prioritizing schools with debt service challenges that needed to be addressed. This allowed Aspire to focus on building reserves and pay down specific debt over time, so they could eventually refinance and move schools into a more sustainable financial circumstance.
KIPP Houston Public Schools notes that its 2009 transaction was ironically one of the more expensive transactions from a rate standpoint. However, it is considered one of their best transactions as they were honored as a Bond Buyer Deal of the Year finalist. This transaction recapitalized their separate 501c3 corporation, and it may have helped unfreeze the capital markets for public charter school operators nationally. KHPS worked with the Bill & Melinda Gates Foundation and the separate 501c3 entity to create a guarantee program that allowed the CMO to issue and recapitalize. This was also the period when they transitioned toward more modular campuses in response to the upcoming state funding reductions that challenged all schools in Texas. KIPP’s adage of “Find a way or make one” was tested during the 2008 – 2012 timeframe, and they successfully navigated through those challenges.
- Understand the consequences of debt covenants
State funding reductions and deferrals cause enormous pressure on organizations and schools. Delphine shared some context about the state financial crisis in California (2008 – 2012) and how that crisis became even more challenging due to Aspire’s debt covenants at the time. Aspire’s debt covenants were organization-wide, which meant all schools had to participate in meeting the debt service coverage requirements and not just the schools for which the debt was issued. This meant that every school needed to contribute to a targeted budget surplus, even during a time when state funding was cut 20-30%. The debt covenants forced changes at some Aspire schools that would have otherwise not been made, such as spending cuts to enrichment programs and staff raises.
- Focus on flexibility and conservatism in long-term planning
As John says, plans and models are guides and not set in stone. Things change and you must be flexible to be successful. In Texas, where land is available for new construction, KIPP Houston Public Schools took a bottom-up approach by identifying capital needs based on “model” school development costs, which addressed real estate estimates and construction estimates based on a “model” campus footprint. KHPS built in operating models for each school (existing and planned new schools) and developed a capital and operating fundraising program based on those assumptions. However, a struggle exists between modular and permanent solutions. In the short-term, charter schools can grow faster and build more campuses with modular buildings but the cost of cycling through modular units is more expensive in the long-run. Unfortunately, charters are challenged with these types of questions continually.
Delphine reiterates the importance of flexibility and being conservative as charter schools expand into new terrain. She shares as Aspire expanded into higher-grade levels – a new experience – it became difficult to achieve enrollment targets in the early years. This puts more pressure on the finances and spreads the debt burden over fewer students with lesser funding.
Furthermore, as it relates to planning and conservatism, John shares there is a growing focus for CMO’s to maintain higher levels of cash on hand and urges charter school leaders to focus on reserves early by establishing internal goals. This is counterintuitive to the mission of our organizations, which is to push more dollars into the schools, but a rainy day fund is necessary for every organization. KHPS is keenly focused on their investment grade rating and the new financial ratings the state of Texas recently adopted. These two areas are critical to long-term sustainability goals because of the impact it can have on charter renewal and the cost of capital.
- Build relationships with the investor community
As charter schools grow their presence in the investor community, both John and Delphine recommend that CMOs do more to build credibility and educate investors. Building a good package and telling your story is important. KHPS and Aspire both focus on consistently meeting or exceeding financial results. To do this, Delphine advises schools to be smart and disclose as much information to investors upfront. John adds that accurate and timely reporting is critical. Do not underestimate the value of consistent historical information and the ability to compare apples-to-apples information. He shares that developing relationships with underwriters has been important because they are invested in the success of charter schools both locally and nationally. In Texas, underwriters, bond attorneys and the financial advisor community worked together with CMO’s and the Texas Charter School Association to develop facility solutions. The most notable recent success is the PSF Guarantee. This guarantee, allows investment grade charters to utilize a state-backed guarantee, which increases the bond rating to AAA, reduces interest costs and puts more money into the classrooms.
No matter where CMOs are in their growth plans, smart and creative facilities planning and financing will continue to be a critical component to success. As schools adopt more innovative strategies and find solutions, it’s important to highlight what’s working, replicate best practices, and share the challenges so more schools across the country have the opportunity to meet their facilities needs.