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November 02, 2009
Yesterday's Wall Street Journal shared the (mostly) happy story that the market for debt issued by charter schools to finance facilities and other purchases is growing. Institutional investors and banks understand charters—and the risks they have to manage—much better than in past years, and that's translating to lower borrowing costs for schools. (Note in the excerpt below that when bond prices go up, the interest rates paid by borrowers go down—there's an inverse relationship there.)
This is the first chapter in what should turn out to be a long story. Relatively few investment firms and banks are active in lending to charter schools, and not all lenders understand this market. Because of this, charter schools in areas that are not well-served by sophisticated lenders are probably paying more than they should to borrow money.
The quality of the charter law, authorizers, and the schools themselves matters a lot, too, however. The article notes that 3.91 percent of bonds issued by charters were in default, compared to less than 0.1 percent of bonds issued by district schools. The more that authorizers and legislatures focus on quality, the easier it will be for promising schools to finance their facilities.
Policymakers should also look for creative ways to incentivize banks to enter the market and learn to underwrite loans to public charters. The Department of Education's Credit Enhancement Program has jump-started this process in a number of states, and the USDA's Community Facilities Program has helped smooth the way for rural schools.
The growth in capital available to schools from private investors is an underrated success story for the charter movement. Money is available to more organizations earlier than ever before. Good policy and smart, forward-thinking finance professionals should continue to play a key role in making money available to high-quality schools that need it.