CharterFolk Contributor Chris Reynolds – The Facilities Affordability Gap

Good morning, CharterFolk!

Today we are pleased to share a contributor column from Chris Reynolds, Senior Advisor for New Schools for Alabama (NSFA).

Chris Reynolds, Senior Advisor for New Schools Alabama.

I provide Chris’ bio below.

Chris Reynolds is the Senior Advisor for New Schools for Alabama. Chris is a former CPA with an extensive background in charter school leadership, nonprofit management, and philanthropy. He led multiple high-performing charter school networks and supported the development of a national facilities funding strategy. 

The Facilities Affordability Gap

Alabama’s public charter schools are doing incredible work against tough odds to provide high quality school options for students and communities where good schools are scarce. This is important work and is increasingly difficult due to funding inequities charter schools face in Alabama. Unlike district-run public schools, Alabama’s public charter schools do not currently receive local tax dollars, which are typically used by districts to construct and finance school buildings. 

Absence of Local Tax Revenue

As everyone knows, the two largest expenses in a school are teachers and buildings. Unlike most district schools, Alabama public charter schools have to divert precious dollars from the classroom in order to pay for school buildings, further exacerbating the challenge of providing a quality education in a state where total state funding is near the lowest in the country [1]. In the planning and early years when public charter schools are adding new grades, this is an extraordinary financial challenge. This means charter schools must divert operating dollars to facilities. Thus, public charter school students are paying for the buildings where they attend school rather than the city or county paying for those buildings as they essentially do in many district-run schools.

Lack of Equitable Funding

The market rate for facilities is vastly greater than the available funding under the state foundation formula. This produces what we refer to as the affordability gap. Debt service and facility rental costs can range from $2000 – $3000 per student per year, and the Alabama funding model only provides approximately $1,000 per student per year toward facility costs. This gap is also felt by smaller or rural school districts (and even larger districts) with little local funding beyond the required 10 mil match. Charter schools in Alabama currently receive no local funding whatsoever, so this affordability gap is extreme.

Most public school facilities are financed through local taxes, state-backed bond financing, and from time to time, supplemental funding from the state. In Alabama, local tax funds for schools are not available to public charter school students, and supplemental state funding is only available to pre-existing schools, not new charter schools. Without equitable facilities funding, the work of opening a public charter school becomes even more difficult, requiring philanthropic support and a diversion of operating dollars that would otherwise go towards teaching and learning.

An Example

Imagine a brand new school district like Pike Road (Montgomery County) and a newly approved charter school operating in Montgomery County. Each of these new schools receive equal funding from the state for annual operating expenses and each of these new entities need to provide a facility for their students. In Pike Road’s case, there was the ability to raise taxes to pay the bond financing used to construct a new high school. The project cost for this high school designed to serve up to 1500 students was approximately $55 million ($36,667 per student) and was funded by local tax dollars with at least 30-year repayment terms. 

Now, let’s compare that to LEAD Academy in Montgomery. This school has 700 students, hundreds more on the wait list, and was approved to grow to at least 1,000 students. Unfortunately, it has no access to local funding and has to pay for facilities costs out of its operating budget. This dramatically reduces what the school can spend on instruction, classrooms, and teacher development. For a school designed to serve some of the most vulnerable students in Montgomery, this is a structural inequity and makes it extremely difficult to provide the necessary instructional support students need.

In response, New Schools for Alabama (NSFA) has been assisting many Alabama charter schools to help them negotiate low-cost financing in order to purchase and expand the buildings they are leasing; however, what is really needed is equitable access to resources for all public schools. Again, using LEAD as an example, the school has an opportunity to purchase and expand their leased facilities for an estimated total project cost of $16,000,000 or $16,000 per student, which would usually be considered a very efficient use of funding. Unfortunately LEAD, like all other charter schools, must pay for this by reducing their investment in staffing and instructional costs because they lack access to a reliable source of funding for facilities.

Funding school buildings from an operating budget is extremely difficult to do, and the lack of local funding has presented a challenge for nearly all charters in Alabama. Existing charter schools have relied upon significant philanthropic support, deep partnerships with supportive organizations, and some initial facilities loans provided by unique nonprofit lenders willing to support Alabama’s efforts at educational equity. Unfortunately, these challenges will make expanding opportunities for children who need access to a high-quality school continually difficult.

Other Challenges

Alabama faces significant weather-related risks. Notably, the tragic Enterprise tornado of 2007 understandably resulted in a state law requiring a storm shelter in all new schools located above the identified wind zone line (about two thirds of the entire state). While this is undeniably an important public safety statute, it further increases the funding necessary when building or leasing space and limits viability of leased space as a temporary location for new charter schools. In most states, leased space is a sound strategy for early stage charter schools who often find a permanent location after 2-3 years. In Alabama, it rarely makes sense to invest in a storm shelter, which can cost between $750k – $1.5 million, in a short term, leased space, and landlords are not always willing to support such construction on their property. Further, most charter schools only begin with a few grades and the cost of a storm shelter would equal nearly their entire budget for year one.

Using Old School Buildings Buying or leasing vacant school buildings can be a good option, but it typically requires extensive renovations that are hard to finance from operating budgets when the school is young, and it inevitably requires philanthropic support. Breakthrough Charter School in Perry County has done this successfully, but it required a combination of tolerant lending from a committed nonprofit lender (Blue Hub Capital) and a redirection of startup funding toward facilities costs. The loan we helped them secure was less than $1 million, so this was a very austere plan and was only going to provide enough facility space for the first couple years. Breakthrough has seen incredible demand for seats and now enrolls over 20% of all public school students in Perry County. As a result, they are facing a significant need to expand.

What are We Doing to Address This?

NSFA and its partners understand the tremendous challenge the facilities affordability gap presents to both newly approved schools and schools whose growth and success require additional classrooms and buildings.

1. We have expanded our capacity to provide facility feasibility planning for new and existing schools.

As the total number of charter schools has grown, we have added additional capacity through a partnership with New School Facility Partners [2], a nonprofit charter school facilities support entity. With them we are able to provide best in class support to new and existing public charter schools as they evaluate lease, purchase, and renovation opportunities in Alabama.

2. We have launched a pre-development revolving loan fund.

This fund, generously supported by Bloomberg Philanthropies, will allow us to make short term loans to charter schools early in the planning year so they can access critical expertise from facility planners, architects, attorneys, engineers, and real estate professionals, etc. It will also support schools that need to expand and require careful planning to do so in a cost effective manner.

3. We will continue to partner with Alabama organizations, philanthropic leaders, and others to help schools identify innovative solutions, raise funds, and make strategic investments in facilities that create high quality schools.

  • We are actively supporting partnerships with HBCUs to co-locate charter schools on their campuses to help serve the entire K-16 continuum.
  • We are raising capital to support targeted philanthropic support to public charter schools in Alabama.
  • We have submitted a credit enhancement application to the U. S. Department of Education to help us backstop below-market rate lending to charter schools in Alabama.
  • We continue to provide in-depth technical assistance and financial planning support to charter schools in Alabama.

4. We will continue to advocate fore equitable funding for charter schools.

While Alabama public charter schools are still not able to access local funds, charter schools made notable progress toward the goal of equitable funding. Key legislative successes this year resulted in amendments to the Alabama charter school law that bring us closer to funding equity for public charter schools.

  • The new law clarifies that conversion charter schools must receive the full allocation of state, federal, and local dollars on a per student basis and that the district cannot compel the conversion to forego those dollars in exchange for services. This ensures the conversion school promise of same buildings, same funds, and same students can finally be achieved.
  • In addition, the newly amended law clarifies that startup charter schools shall be funded in their first five years based on anticipated enrollment approved in their application. 
  • Public charter schools still do not have reliable access to local funding, and this will remain a priority going forward. In the meantime, Alabama charter schools will continue to require support from the philanthropic community and community-based lenders willing to provide below market financing terms.