Charter Schools Always Face a Financial Struggle

These public schools don't get public money for their facilities.

KEVIN FERRIS

Philadelphia

As I walked the halls of First Philadelphia Charter School for Literacy recently with the school's CEO Stacey Cruise-Clarke, I was struck as she reprimanded a student for "yelling." I hadn't heard a thing.

First Philadelphia Charter

Students at the First Philadelphia Charter School for Literacy.

In the school's cavernous facility there are 30 classrooms, a performance art center, a gym, a literacy center, and nearly 700 students in uniform. It is an oasis in a city that witnesses thousands of assaults in its public schools each year and has engaged in a running debate over whether to arm school security guards. The charter school was founded nearly seven years ago, and is very lucky to own its facilities.

Typically, banks are reluctant to lend to charters because they have little collateral, no long-term funding, and a five-year license to operate that may not be renewed. That is the reality that will confront President Barack Obama if he tries to make good on his promise to expand charter schools. These schools serve a public good, but they are also risky borrowers.

What's more, while charters receive per-pupil funding from the state, they aren't given start-up money to buy or lease classroom space -- one of the misguided restrictions put on charters that hamper their growth. The president may want more charters -- see, for example, his March 10 speech, where he called for increasing the number of charters in states that imposed limits -- but is he willing to do more to help charters cover capital costs? At the moment, private organizations step in to fill the void in public funding for these public schools.

First Philadelphia is doing well now. But back in 2002, when its charter was approved only weeks before school was to start, it was no sure thing that the doors would open. The founder, Gerald L. Santilli, and his staff were only able to admit the first class thanks to a loan to lease classroom space from the Reinvestment Fund, a community development financial institution (CDFI) in Philadelphia that has provided $167 million in financing to 54 charter schools.

CDFIs grew out of efforts decades ago by national religious groups -- including Catholic nuns who put up their retirement money -- to pool resources and offer loans to pay for projects that benefit communities. By the 1990s, CDFIs were well-established lenders for affordable housing, supermarkets and small businesses. They also lent money to child-care centers. Initially, these loans were a private, faith-based initiative to help worthwhile organizations. But they are grounded in the economic realities of lending.

"If you're going to borrow retirement money from nuns, first, you better do something important, something with real impact. Second, you better pay them back," says Mark Pinsky, president and CEO of Opportunity Finance Network, a consortium of CDFIs in Philadelphia. Mr. Pinsky told me that the "culture of discipline" these incentives created has resulted in more than $30 billion in lending over the last three decades, with about 1% of overall loans reported as a loss.

The difference between CDFIs and conventional lenders, Mr. Pinsky told me, is "We're profitable, but not profit-maximizing. . . . We'll make a concession on net earnings to ensure a loan succeeds, helping a borrower more than a bank could."

Charters were a natural for this type of hand-holding, almost intrusive, lender. The hand-holding seems to pay off. Fund president Jeremy Nowak reports only a few late payments and no losses in 11 years of charter-school lending. The market became successful enough to start attracting banks -- until two years ago when the bottom fell out with the credit crisis. Mr. Pinsky estimates it could be another five years before banks lend to charter schools again.

His network has supported about $5 billion in lending nationwide over the past two years -- part of that in charters -- but even he expects that he won't hit that number again in the near future. "I don't see liquidity past this year," he told me. "Unless the credit markets loosen up, we'll be constrained in what we do."

With 1.4 million students in 4,600 schools nationwide, charters have proven themselves to be safe, academically sound alternatives to their troubled public-school counterparts. Substantial waiting lists at many charters attest to the demand for more. And with a little help getting started, charters can thrive.

Speeches from Mr. Obama may lend rhetorical support for new charters, but financing these start-up public schools takes money, and that depends on healthy credit markets and willing lenders. First Philadelphia was able to renew its charter in 2007 and, with a credit history it earned over its first five years with an unconventional loan, it has secured regular bank financing. The next First Philadelphia will need similar help.

Mr. Ferris is an assistant editor and columnist at The Philadelphia Inquirer.