CharterFolk Contributor Eugene Clark-Herrera — Bond Tax-Exemption & Charter Facilities: Federal Tax Bill Could Harm Charter Sector

Good morning, CharterFolk.

Today we are pleased to share a Contributor Column from Eugene Clark-Herrera, who is a Partner at Orrick.

We provide a bio for Eugene below.

Eugene Clark-Herrera is a Partner in Orrick’s San Francisco office, and loves working with clients on novel legal and business issues, blending creativity, two decades of public finance legal experience and mission-oriented passion. His law practice includes serving as bond, disclosure, lender, borrower and underwriter counsel on a range of tax-exempt financing structures (public and private), for projects that include school and college district facilities, public charter school facilities, student and multi-family housing projects, museums and state and local government infrastructure.

Bond Tax-Exemption & Charter Facilities: Federal Tax Bill Could Harm Charter Sector

The December 2025 expiration of several provisions of the Tax Cuts and Jobs Act of 2017 has prompted Congress to undertake a major legislative package that is expected to contain significant changes to federal tax law.  Combined with ongoing federal budget negotiations, legislative proposals have been made to eliminate tax-exempt bonds for local governments and public charities, including public charter schools, across the country.  Congress is expected to adopt a major tax bill later this year.  How could the elimination of tax-exempt bonds affect public charter schools?

Access to Capital:

Since the late 1990s, public charter schools have issued over $40 billion in tax-exempt bonds to finance facilities acquisition and improvements.  Access to this financing tool avoids the uncertainty of applying for grant funding, waiting for governmental appropriations (if any are available), and applying for private loans.  Further, tax-exempt bonds often offer 100% financing of project costs, without need for an equity contribution or subordinate debt.  Currently there is no limit on the amount of tax-exempt bonds that can be issued for public charter school facilities.  Market access depends on the credit profile of the borrower and stability of the public municipal bond market.  Thus, with few exceptions in market history (like the Great Recession), tax-exempt bonds have been a predictable borrowing path enabling public charter schools to obtain permanent facilities.

Higher Borrowing Costs:

The primary consequence of eliminating tax-exempt bonds would be a substantial increase in interest rates that public charter schools would need to offer on their bonds to attract investors, resulting in higher costs for their projects.  Estimates range from 35% to 45% higher interest costs, as compared to taxable bonds.  According to the Government Finance Officers Association, on average tax-exempt bonds result in 2.1% lower borrowing rates (GFOA study).

Most facilities projects are designed to optimize for a variety of factors, including the number of seats or capacity, amenities, tailored classroom design to match curricular needs, and local building costs and land constraints.  Slight changes in cost, or cost of capital, can make or break many projects.  The increased borrowing costs from loss of bond tax-exemption could render a vast majority of projects infeasible, delaying or cancelling many.

Market Volatility:

A sudden change in municipal bond tax status could cause significant market disruption, with potential fluctuations in bond prices as investors adjust their portfolios.  The liquidity (or trading activity) of outstanding charter school bonds would greatly diminish as investors hold on to existing tax-exempt bonds.  This volatility could make market access for new bond issuance more challenging and further increase borrowing costs.

Reduced Demand:

With the income tax-exemption benefit gone, many bond market investors would likely shift to other taxable fixed income investments, reducing demand for public charter school bonds.

Disproportionate Impact:

Smaller borrowers that rely heavily on municipal bond markets could be disproportionately affected due to their limited access to other financing options.  While high-profile, frequent bond issuers such as the multi-state charter school management organizations or those with dozens of campuses across certain states would likely be able to pivot to the taxable bond market, smaller, less-well-known borrowers would see a big spike in borrowing costs or total lockout from the bond market.  Taxable corporate bond investors tend to favor larger issue sizes (over $100 million), and only a few have appetite for or expertise in evaluating smaller deal sizes.

Single site public charter schools moving from start-up space to a permanent building (often a make or break, existential step for such organizations) and small local or regional networks of two to five campuses (needing to accommodate organic enrollment growth) would bear the brunt of the elimination of tax-exemption for bonds.

Advocacy Efforts:

Municipal market participants actively advocate to Congress to preserve the tax-exempt status of municipal bonds, highlighting the potential negative impacts on public infrastructure projects of such changes in law, including the Government Finance Officers Association and the Council of Development Finance Agencies.  The National Alliance for Public Charter Schools has engaged in efforts to educate policymakers and advocate for the preservation of bond tax-exemption, but a broad coalition of support will be required for these efforts to succeed.  While bipartisan support exists in Congress for preserving bond tax-exemption, these voices seem to be in the minority at this stage of the legislative process.

Stakeholders:

Public charter schools join all other nonprofit charitable 501(c)(3) organization issuers of tax-exempt bonds in this circumstance.  The proposed changes in Congress would affect all such entities, including nonprofit hospitals, affordable housing developers, continuing care facilities, private or independent schools, colleges and universities, museums and cultural institutions, and economic development organizations.  Public-private-partnership infrastructure projects would also fall victim.

While certain proposals call only for the elimination of tax-exempt “private activity bonds” (for charitable 501(c)(3) organizations), other proposals call for the elimination of all municipal bond tax-exemption.  Such a broad change in tax law would impact all local governmental financing, including for libraries, parks, sewer and water systems, power transmission, streets, bridges, highways, and traditional district schools.  Public charter school stakeholders should recognize the breadth of this impact and align advocacy efforts with the broadest coalition possible.

Strategic Implications:

For public charter schools, the combination of impacts described above would, at best, slow the growth of the sector, and could, at worst, entirely halt the expansion of high-quality public charter schools in the communities most in need of such options.  Further, as public charter school borrowers that issued bonds many years ago mature and build a stronger credit profile, they often look to refinance their original bonds at lower rates, enabling them to utilize more operating funds “in the classroom” as opposed to paying interest costs on bonds.  The loss of tax-exemption would eliminate most or all such refinancing opportunities.

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