DOCUMENT RESUME EA 030 742 ED 447 583 Caldwell, Russell B.; Arrington, Barry AUTHOR Colorado Charter Schools Capital Finance Study: Challenges TITLE and Opportunities for the Future. Colorado State Dept. of Education, Denver. INSTITUTION 2000-01-00 PUB DATE NOTE 71p. Non-Classroom (055) Guides PUB TYPE MF01/PC03 Plus Postage. EDRS PRICE *Charter Schools; Educational Administration; Educational DESCRIPTORS Economics; Educational Facilities; *Educational Finance; Elementary Secondary Education; *Financial Needs; Nontraditional Education; Program Implementation; School Policy *Colorado IDENTIFIERS ABSTRACT This report discusses strategies that will help charter schools finance their facilities needs. It outlines the history of the Colorado Charter Schools Act, focusing on the contracting process, on dispute resolution and appeals, on renewal, on employee options, and on revenue allocation. The document also examines issues surrounding school operations under the Charter Schools Act. It looks at financing guidelines, types of facilities in use by Colorado charter schools, the quality of charter-school facilities, how schools acquired their facilities, and tax-exempt bond financing. Some of the roadblocks to successful charter-school capital finance involve revenue streams, limited access to tax-exempt financing, uncertainty regarding public school status, perceptions of risk, and a scarcity of resources. The document provides a general overview of the finance mechanisms used by public schools to obtain capital for their facilities needs, as well as the potential availability of these mechanisms for charter school use, such as conduit financing, loan pools, and credit enhancement. The report closes by making 15 policy recommendations that policymakers should consider as they deal with charter schools' facilities concerns. Three appendices reproduce the Colorado Charter Schools Act and the names and addresses of the 64 charter schools operating in the 1999-2000 school year. (RJM) Reproductions supplied by EDRS are the best that can be made from the original document. EP' we Colorado Department of Education COLORADO CHARTER SCHOOLS CAPITAL FINANCE STUDY: CHALLENGES AND OPPORTUNITIES FOR THE FUTURE PERMISSION TO REPRODUCE AND DISSEMINATE THIS MATERIAL HAS BEEN GRANTED BY TO THE EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC) U.S. DEPARTMENT OF EDUCATION Office of Educational Research and Improvement EDUCATIONAL RESOURCES INFORMATION CENTER (ERIC) his document has been reproduced as received from the person or organization January, 2000 originating it. Minor changes have been made to improve reproduction quality. Points of view or opinions stated in this document do not necessarily represent official OERI position or policy. Prepared By: Russell B. Caldwell Colorado Department of Education For: Bigelow and Company 201 East Colfax Avenue and Denver CO 80203 Barry Arrington http: www.cde. state.co. us Arrington & Rouse, P.C. 2 BEST COPY AVAILABLE COLORADO STATE BOARD OF EDUCATION Kersey Clair Orr, Chairman Fourth Congressional District Leadville Patricia M. Chlouber, Vice Chairman Third Congressional District Montrose Ben L. Alexander Member at Large Colorado Springs John Burnett Fifth Congressional District Littleton Randy De Hoff Sixth Congressional District Broomfield Patti Johnson Second Congressional District Denver Gully Stanford First Congressional District William J. Moloney Commissioner of Education CDE Liaisons Unified Grants Officer William Windier Charter Schools Consultant Denise Mund Colorado Department of Education Organizational Commitment itself to increasing The Colorado Department of Education dedicates all students through comprehensive programs of achievement levels for education reform involving three interlocking elements: A) High Standards for what students must know and be able to do; B) Tough Assessments that honestly measure whether or not students meet standards and tell citizens the truth about how well, our schools serve children; C) Rigorous Accountability to high student Measures that tie the accreditation of school districts achievement. The Colorado Department of Education does not discriminate on the basis of disability, race, color, religion, sex, national origin or age in access to, employment in, or in the provision of any of CDE's programs, benefits or activities. BEST COPY AVAILABLE COLORADO CHARTER SCHOOL CAPITAL FINANCE CHALLENGES AND OPPORTUNITIES FOR THE FUTURE Executive Summary The Colorado Charter Schools Act was enacted in 1993 to provide greater As of the educational choice and diversity in the Colorado public school system. beginning of the 1999-2000 school year 69 charters had been approved, and 64 charter schools were actually in operation with a combined enrollment of 17,472 students. The statute provides for detailed application, contracting and appeals procedures. In the past many However, it is mostly silent on the issue of charter schools facilities. charter schools were paying for their facilities out of operational revenues that amounted to little more than the original statutory minimum of 80% of per pupil operating revenues In 1999 the legislature passed H.B. 99-1113 which provided for a new ("PPOR"). minimum revenue standard of 95% of per pupil revenues ("PPR") and required charter schools to make a mandatory transfer to their capital reserve and risk management funds. The new minimum funding allocation will result in increased funding for many charter schools. The organizers of Colorado's charter schools have shown a high degree of determination and entrepreneurial spirit in achieving solutions to often vexing facilities The solutions they have achieved are as diverse as the problems for their schools. schools themselves, with the schools' occupying every imaginable type of space from refurbished industrial buildings, to strip mall space, to abandoned courthouses, to college Charter school administrators have been able to campuses and numerous other places. make these facilities work for their purposes, even though the space is usually nowhere near the quality of conventional public school space. Most charter schools either rent their facilities through a standard commercial lease or occupy surplus district facilities. However, a growing number of schools are using creative means to acquire suitable space, including donations from colleges and cities and constructing facilities through tax-exempt financing. There are a number of roadblocks, however, to successful charter school capital These include lack of a separate "capital funding" revenue stream like that finance. enjoyed by school districts; TABOR Amendment restrictions on charter school capital finance; obstacles to obtaining tax-exempt financing, which are especially severe with respect to so-called "direct issue" obligations; uncertainty among local officials regarding charter schools' status as public schools; the perception among many participants in the capital markets that charter schools are risky investments; and the scarcity of appropriate and affordable space in some real estate markets. Historically, public schools have used one of three types of financing mechanisms to fund their capital construction requirements: (1) general obligation bonds; (2) revenue bonds; and (3) lease-purchase financing. Because of the limitations imposed by the Colorado Constitution, the third option is the only option available to Colorado charter In a lease-purchase financing the underlying lease must be clearly subject to schools. year-to-year cancellation by the charter school. In this sense the financing is functionally a "non-recourse" financing, which entails greater risk and is therefore more costly than the "full faith and credit" financing available to school districts. There are a number of mechanisms for providing access to the tax-exempt bond market and also lowering the cost of such financing, including issuing financial obligations through so-called "conduit" issuers, establishing direct loan pools, and providing for credit enhancement. Colorado leads the nation in providing charter schools with access to conduit financing through a statewide bonding authority. Other states, however, have provided their charter schools with greater access to capital funding. Indeed, four states and the District of Columbia provide a distinct separate revenue source with which charter schools are able to fund their capital needs. A few states have also established low- interest direct-loan pools for charter schools and at least one jurisdiction requires public agencies to give charter schools preferential treatment in the sale or rental of their surplus property. Charter school capital finance decisions should be made in the context of agreed upon policy goals, including the goals of a level playing field among all public schools, equal access to innovative opportunities to all students (including those of low or moderate means), and flexibility in funding decisions. With these goals in mind, consideration of the following policy options is recommended to Colorado policymakers: Establish a separate source of facilities revenue for Colorado charter 1. schools. 2 Clarify that as Colorado public schools charter schools have the same 2. flexibility regarding exemption from local zoning and building codes as conventional public schools. Establish a direct loan pool or credit enhancement pool to lower the cost 3. of capital for charter schools. Open the mandatory transfer funds required by H.B. 99-1113 to fund 4. standard commercial leases, because nearly half of charter schools are leasing their facilities in this way. Reduce the risk many investors perceive to be associated with charter 5. schools by making it clear in statute that a school board may not act arbitrarily or capriciously in revoking or non-renewing a charter. Provide incentives for local governments to act as conduits for charter 6. school tax-exempt financing. Seek clarification from the IRS concerning whether charter schools may 7. issue tax-exempt obligations directly. Give colleges and universities specific authority to use their capital 8. resources to build associated charter schools. Establish tax credits for charter school loans. 9. Give charter schools preference in occupying surplus public agency space. 10. Clarify that property occupied by charter schools is exempt from local 11. property taxation the same as any other public school space. Establish tax credits for donations to private direct loan pools or credit 12. enhancement pools. Give local school districts incentives to include charter schools in their 13. bond elections. Work with the congressional delegation to establish a lease-purchase 14. of the federal tax code. program that is exempt from the arbitrage rebate provisions Provide a procedure for establishing special "charter school capital 15. improvements zones" within existing school districts. 6 3 History of the Colorado Charter Schools Act In the 1991 legislative session then Senator Bill Owens introduced the first charter Senator Owens' bill failed, and he school bill in the Colorado General Assembly'. introduced a similar bill in the 1992 session. That bill also failed. However, in 1993 Senator Owens introduced yet another charter school bill, SB 93-183, and with help from his House Sponsor, Representative Peggy Reeves, and David S. D'Evelyn, whom Owens recently called the intellectual father of the Colorado charter school movement,2 Owens was able to pass the Colorado Charter Schools Act, which became effective on June 3, 1993. Within weeks of the effective date of the Act charter school organizers in Douglas County submitted a charter application to the Douglas County School Board. Their application was approved, and Colorado's first operational charter school, Academy Charter School in Castle Rock, opened in the fall of 1993.3 Since that time 69 charters have been approved in Colorado,4 and 17,472 Colorado public school children (over two percent of the total public school population) are now being educated in charter schools.5 This innovative educational option has vastly increased the number of public Moreover, many school school choices available for parents, students and teachers. districts have come to view charter schools and, in a broader sense, all schools of choice, These as key tools in implementing Colorado's standards based education initiative.6 school districts recognize that as academic standards have become more rigorous and the expectation that more students must meet those standards has increased, time, resources, and instructional strategies must be used more flexibly to enable more children to meet the higher standards, and that charter schools can be an important and cost effective means of achieving these goals.? In the nearly six years since the Colorado Charter Schools Act was passed no charter school has had its charter revoked or non-renewed by a local school board, and to date only two charter schools (Denver Public Schools' Clayton Charter School and Summit County's Alpine Charter School) have ceased operations due to a lack of The State Board of Education has reversed the decision of local school enrollment. boards to not grant a charter 14 times.8 Since 1993 the Charter Schools Act has been the subject of a substantial amount of litigation in both the state and federal courts. The result of this litigation has been that the Act has survived two constitutional challenges and a number of its provisions and their legal importance have been clarified by the courts. The Act survived its first constitutional challenge early on when the United States District Court held in the 1994 case of Villanueva v. Carere9 that the Act does not violate the United States Constitution, because Colorado has a legitimate governmental interest in encouraging innovation in education. Recently, the Colorado Supreme Court upheld key provisions of the Act against a challenge brought under the Colorado Constitution in the case of Board of Education of School District No. 1 v. Booth.1° In the Booth case the Supreme Court upheld a vital provision of the Act allowing charter applicants to appeal local school boards' charter decisions to the State Board of Education against a challenge that the appeal procedure violated the local control of education provisions of the Colorado Constitution. In addition to these constitutional cases, the courts have decided two other cases or great importance to Colorado charter schools. The first case, King v. United States,11 involved the application of the Colorado Governmental Immunity Act to charter schools. The United States District Court held that a charter school, as an agency, instrumentality and political subdivision of its chartering district, is a public entity entitled to the protections of the Governmental Immunity Act. In the second case Academy of Charter Schools v. Adams County School District No. 12.12 the Colorado Court of Appeals held that a Colorado Charter School does not have the right to sue its chartering district when the district breaches the charter school contract. Summary of the Colorado Charter Schools Act Purpose of Act The Colorado Charter Schools Act declares that its purpose is to (a) improve pupil learning by creating schools with high, rigorous standards for pupil performance; (b) increase learning opportunities for all students, especially those with low levels of academic achievement; (c) encourage diverse approaches to education; (d) allow the development of innovative forms of measuring student performance; (e) create new professional opportunities for teachers; (f) provide parents and pupils with increased educational choice; and (g) encourage parental involvement in public schools.13 General Provisions Under the Charter Schools Act a Colorado charter school a public, is nonsectarian, non-religious, non-home-based school which operates within a school district. A charter school is a public school within the school district that grants its charter and is accountable to the district's board of education and is subject to all federal and state laws and constitutional provisions prohibiting discrimination on the basis of disability, race, creed, color, gender, national origin, religion, ancestry, or need for special educational services. Enrollment must be open to any child who resides within the school district, except a charter school is not required to alter the structure or arrangement of its facility except as required by state or federal law. Private schools and home-based schools may not be converted into charter schools, and a majority of the charter school's students must live in the chartering district or contiguous districts.'4 A charter school is administered and governed by a governing body in a manner agreed by the charter school applicant and the local board of education. A charter school may, but is not required to, organize as a nonprofit corporation under the Colorado Nonprofit Corporation Act, which does not effect its status as a public school for any purpose under Colorado law. A charter school may not charge tuition for K-12 programs and services, but can charge for before- and after-school services or pre-kindergarten classes.'5 Pursuant to its contract with the chartering district, a charter school may operate free from specified school district policies and state regulations. A local board of education may waive the application of its regulations without seeking approval of the 9 6 State Board of Education, and the State Board of Education may waive state statutory requirements and rules promulgated by the state board. A charter school is authorized to offer any educational program that may be offered by a school district unless expressly A charter school is responsible for its own prohibited by its charter or state law. operations including, but not limited to, preparation of a budget, contracting for services and personnel matters.16 A charter school, at its discretion, may contract with the school district for the direct purchase of district services in addition to those included in central administrative to, food services, including but not limited services, custodial overhead costs, The amount to be paid by a maintenance, curriculum, media services, and libraries. charter school in purchasing any district service is determined by dividing the cost of providing the service for the entire school district, as specified in the school district's budget, by the number of students enrolled in the school district and multiplying that amount by the number of students enrolled in the charter schoo1.17 Charter School Contracting Process Under the Charter Schools Act an approved charter application serves as the basis for a contract between the charter school and the local board of education. The contract between the charter school and the district reflects all agreements regarding the waiver of school district policies and requests for waivers from State Board of Education regulations and state statutes.18 An application for a charter must include information concerning the mission of the school; its goals and objectives and pupil performance standards; evidence of support; plan for evaluating pupil a description of the school's proposed educational program and performance; a proposed budget; a description of the school's governance structure; plans for employee relations; an agreement regarding liability and insurance coverage; a transportation plan, if any; and a proposed dispute resolution process.I9 Charter school applications must be filed with the local board of education by October 1 to be eligible for consideration for the following school year. Applications are reviewed by the local district's accountability committee prior to consideration by the board of education. The local board is required to hold community meetings on the proposed charter, after which the board must rule on the application within 75 days of 7 10 L