GAO

United States General Accounting Office

Report to Congressional Requesters

September 2000 CHARTER SCHOOLS

Limited Access to

Facility Financing

GAO/HEHS-00-163

Page 1 GAO/HEHS-00-163 Charter Schools

Contents

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
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

Health, Education,

and Human Services Division

B-284442 Letr

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 2000 issued 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
B-284442

Page 4 GAO/HEHS-00-163 Charter Schools

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.
B-284442

Page 5 GAO/HEHS-00-163 Charter Schools

• 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.
B-284442

Page 6 GAO/HEHS-00-163 Charter Schools

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,
B-284442

Page 7 GAO/HEHS-00-163 Charter Schools

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
B-284442

Page 8 GAO/HEHS-00-163 Charter Schools

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

Traditional Public Schools

Public school districts generally obtain financing for facilities from issuing

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 1⁄2

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.
B-284442

Page 9 GAO/HEHS-00-163 Charter Schools

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

Little Access to

Traditional Facility

Financing

Municipal bonds, the traditional source of public school facilities financing,

are generally unavailable to charter schools for several reasons.

Many Charter Schools Are

Not Part of a School District

Many of the 36 states with charter school legislation and the District of

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.
B-284442

Page 10 GAO/HEHS-00-163 Charter Schools

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

Do Not Raise Taxes and

Issue Bonds

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

the authority to levy taxes and issue bonds—not individual public schools.

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 Financing stated 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.
B-284442

Page 11 GAO/HEHS-00-163 Charter Schools

School Districts Allowed to

Share Local Facility

Financing With Charter

Schools Often Do Not

Although many school districts can share their facility funds with charter

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

struggling to meet their own facility needs and are unwilling to share their

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.
B-284442

Page 12 GAO/HEHS-00-163 Charter Schools

Table 1: States We Reviewed That Provide Facility Financing Assistance for Charter

Schools, August 2000

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

Is Available for Charter

Schools but Obstacles

Limit Access

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

directly provide funding specifically for facility financing for charter

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

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

donations from private organizations, and local school district resources.

However, these sources are often limited or not easily accessible.

Per Pupil Allocations Are

Used for Facility Financing

Charter schools receive annual allocations from a school district, a state, or

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

State

Number of

charter

schools Type of assistance

Amount of funding per

year

Arizona 348 Per pupil payment for

facilities

$450 per pupil

California 234 Revolving loan poola $25 million for renovations

with a $250,000 cap per

school, 5-year term, interest

free

Colorado 69 Per pupil payment for capital

expenses and tax-exempt

bonds

$234 per pupil

Florida 123 Per pupil payment for

facilities

1/15 of a student station,

projected in 2000-2001 to

be $825, $946, and $1,252

for elementary, middle, and

high schools, respectively

Minnesota 53 Per pupil payment for

leasing

90% of lease costs up to

$1,500 per pupil
B-284442

Page 13 GAO/HEHS-00-163 Charter Schools

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 1998-

99. 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
B-284442

Page 14 GAO/HEHS-00-163 Charter Schools

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

Limited Access to Private

Loans

Charter schools generally have limited access to loans from private lenders

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

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
B-284442

Page 15 GAO/HEHS-00-163 Charter Schools

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

Charter Schools Facility

Financing Is Limited

Two federal programs—the Department of Agriculture’s Rural Housing

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

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.
B-284442

Page 16 GAO/HEHS-00-163 Charter Schools

community or if it has at least 35 percent of its students eligible for free or

reduced-price school lunches.

Private Donations Are

Limited

While private donors have provided both buildings and funding for facilities

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,

Low-Rent, or Free Buildings

Some states require that all surplus buildings in local school districts be

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

Would Be Available If

the Federal

Government Increased

Its Role

If the federal government decides that it wants to support activities to

increase charter schools’ access to facility funding, it can choose a number

of financing mechanisms to do so. The mechanisms include providing

direct assistance through grants and loans and encouraging private sources

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

credits. The federal government currently uses these financing

mechanisms to subsidize a wide variety of activities such as the

10Education 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.

11Colorado Department of Education, Charter Schools Capital Finance Study: Challenges

and Opportunities for the Future (Jan. 2000).
B-284442

Page 17 GAO/HEHS-00-163 Charter Schools

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.
B-284442

Page 18 GAO/HEHS-00-163 Charter Schools

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.
B-284442

Page 19 GAO/HEHS-00-163 Charter Schools

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
B-284442

Page 20 GAO/HEHS-00-163 Charter Schools

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.
B-284442

Page 21 GAO/HEHS-00-163 Charter Schools

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
Page 22 GAO/HEHS-00-163 Charter Schools

Appendix I

A Comparison of State Legislation on Charter Apendxies

School Independence ApendxiI

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
Appendix I

A Comparison of State Legislation on

Charter School Independence

Page 23 GAO/HEHS-00-163 Charter Schools

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

(Continued From Previous Page)

State How charter schools operate
Page 24 GAO/HEHS-00-163 Charter Schools

Appendix II

A Summary of State Legislation on How

Charter Schools Obtain Facilities ApendxiI

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 space...in 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
Appendix II

A Summary of State Legislation on How

Charter Schools Obtain Facilities

Page 25 GAO/HEHS-00-163 Charter Schools

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

(Continued From Previous Page)

State Provisions on acquiring facilities
Page 26 GAO/HEHS-00-163 Charter Schools

Appendix III

Comments From the Department of

Education ApendxiI
Appendix III

Comments From the Department of

Education

Page 27 GAO/HEHS-00-163 Charter Schools
Page 28 GAO/HEHS-00-163 Charter Schools

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) Letr
Ordering Information The first copy of each GAO report is free. Additional copies of

reports are $2 each. A check or money order should be made out to

the Superintendent of Documents. VISA and MasterCard credit

cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address are

discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

Orders by visiting:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders by phone:

(202) 512-6000

fax: (202) 512-6061

TDD (202) 512-2537

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any list

from the past 30 days, please call (202) 512-6000 using a touchtone

phone. A recorded menu will provide information on how to obtain

these lists.

Orders by Internet:

For information on how to access GAO reports on the Internet,

send an e-mail message with “info” in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web home page at:

http://www.gao.gov

To Report Fraud,

Waste, or Abuse in

Federal Programs

Contact one:

• Web site: http://www.gao.gov/fraudnet/fraudnet.htm

• e-mail: fraudnet@gao.gov

• 1-800-424-5454 (automated answering system)


United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. GI00