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An investigation in Philadelphia finds that some charters now spend more on paying down the debt of lavish facilities than they spend on instruction.
“THREE FRANKLIN Plaza, a bow-shaped eight-story building at 16th and Vine streets, once hummed with 1,700 GlaxoSmithKline white-collar workers.
“Today, it is empty more than three months out of the year, a lone security guard watching over the corporate art still hanging in the lobby.
“From September to June, a charter school called String Theory occupies half the floors. The school acquired and began renovating this premier office tower in 2013 as part of a $55 million tax-exempt bond deal, arranged with help from the city’s biggest economic-development agency. It was the largest bond deal of its kind in city history.
“It is also the most conspicuous example yet of a risky, expensive and fast-growing financial scheme underpinning the rapid expansion of Philadelphia charters – a bond market now worth nearly $500 million. But the bond financing behind the mountain of money gets little scrutiny as to whether the debt is a smart use of Pennsylvania’s limited education dollars.
“The lack of transparency can translate into deals that may be unsustainable. Shortly after moving into its flashy high-rise, String Theory posted its first operating deficit. After revealing it was $500,000 in the red from paying out millions annually to bondholders, administrators told parents that they were cutting certain classes and suspending bus service as cost-saving measures.
“On the plus side, if the String Theory board members who indirectly own the Center City high-rise sell it, there could be a big profit. But is this the way charters should operate?”
“Charter schools used to inhabit repurposed supermarkets or old storefronts, but a Philly.com analysis of bond documents showed that an increasing number – one out of three charters today – have bought or constructed newer and larger school buildings with tax-exempt bonds, paying millions in debt and fees to consultants along the way.
“Bonds – school debt sold to investors who are gradually paid back with interest – have become popular among charters because they allow lower borrowing costs than standard commercial loans. Bonds are commonly floated by governments and school districts to get up-front money for infrastructure projects, but charters were long considered too risky an investment because they can be abruptly shut down.
As charter schools became more established, investment prospects improved. But the bonds that charter schools have tapped are still riskier and come with “junk” ratings, carrying high interest rates.
“They’re getting bond ratings that have an 8 or 8 1/2 percent interest rate, whereas a school district getting [government] bonds to finance a project can get much lower interest rates,” said Bruce Baker, a Rutgers education professor.
“This leaves charters spending more education dollars on interest payments – $78 million over 30 years on top of String Theory’s $55 million bond, for instance – at rates that are double or triple what the district pays.
The financing process and real-estate transactions themselves also entail millions in consulting and legal fees. Schools like String Theory can become enmeshed in complex and costly deals for marquee buildings that are difficult to sustain.
“There’s no real scrutiny of these deals, and charters end up saddled with big fixed costs,” said Michael Masch, former chief financial officer for the School District of Philadelphia. “They’re saying, ‘Look at this really prestigious building we have, that’ll attract people.’ But it’s a ridiculous amount of money to be spending on the facilities side.”
“Today, an increasing number of charters are spending more of their budgets paying down debt than on actual instruction. In the case of String Theory, which enrolls 1,400 students, the school now spends nearly one-third – $5.5 million – of its $16 million budget just to occupy the half-empty 228,000-square-foot high-rise, along with two older, smaller schools in South Philadelphia. That figure is more than String Theory spends on teachers’ wages – $5.3 million.”