Order Code RL31128
CRS Report for Congress
Received through the CRS Web
Funding for Public Charter School Facilities:
Federal Policy Under the ESEA
Updated February 18, 2005
David P. Smole
Analyst in Social Legislation
Domestic Social Policy Division
Congressional Research Service ˜ The Library of Congress
Funding for Public Charter School Facilities:
Federal Policy Under the ESEA
Summary
A public charter school is a type of public elementary or secondary school that
is exempted from certain rules and regulations otherwise applicable to public schools,
in exchange for a commitment toward attaining positive results in meeting state
content and performance standards in accordance with the terms and conditions of
a charter granted by an authorized public chartering agency. Charter schools may
enroll students who reside within a particular local school district or a geographic
area spanning a number of districts. Chartering agencies may include state, local, and
intermediate boards of education, public and private universities, community
colleges, municipal governments, or other entities authorized by state law.
Depending on how a school is chartered, it may be treated as an independent local
educational agency (LEA), as a school within an LEA, or even as a school within a
school. All but 10 states have charter school laws.
Just as states differ in how they authorize charter schools, they also differ in how
they fund charter schools. States generally require that charter schools be provided
funds for operating expenses on a per-pupil basis. However, only in some states is
a per-pupil allotment provided specifically for facilities or capital expenses. Many
charter school operators report one of their greatest challenges to be obtaining
adequate facilities in which to locate their schools. Specific challenges include:
limited funding for facilities, limited available and affordable space, difficulty in
securing pre-existing public school facilities, and difficulty in obtaining financing for
facilities.
This report examines funding for public charter school facilities, including the
role of states and the federal government in providing financial assistance for public
charter school facilities. Federal support for public charter school facilities is
authorized under ESEA Title V — Public Charter Schools, through the Per-Pupil
Facilities Aid Programs, and Credit Enhancement Initiatives to Assist Charter School
Facility Acquisition, Construction, and Renovation. The Per-Pupil Facilities Aid
Programs authorize competitive grants to states to provide federal matching funds on
a per-pupil basis for public charter schools facilities. Credit Enhancement Initiatives
to Assist Charter School Facility Acquisition, Construction, and Renovation,
authorize competitive grants to entities that might be public, private, or a consortium
of the two, to enhance the availability of loans or bond financing for the acquisition,
construction, or renovation of public charter school facilities.
In FY2005, $17.0 million was appropriated for Per-Pupil Facilities Aid
Programs and $37.0 million was appropriated for Credit Enhancement Initiatives for
Charter School Facilities. For FY2006, the Administration has requested that the
programs be funded at $18.7 million and $37.0 million, respectively.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Charter School Facilities in the States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
State Funding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Access to Available and Affordable Space . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Facilities Financing Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Federal Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Brief History of Federal Assistance for Charter Schools and
Charter School Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Federal Assistance for Charter School Facilities Under ESEA
Title V-B — Public Charter Schools . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Per-Pupil Facilities Aid Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Credit Enhancement Initiatives to Assist Charter School
Facility Acquisition, Construction, and Renovation . . . . . . . . . . . 7
History of Federal Funding for Public Charter Schools . . . . . . . . . . . . . . . . . 8
List of Tables
Table 1. History of Federal Funding for Charter Schools and
Charter School Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Funding for Public Charter School Facilities:
Federal Policy Under the ESEA
Background
Public charter schools are publicly funded elementary or secondary schools that
are operated according to the terms of charters or contracts granted by public
chartering agencies. Charter schools are schools of choice, and thus parents elect to
enroll their children in a charter school rather than in the school to which they would
otherwise be assigned by their LEA. Charter schools typically receive funding
allocated on a per-pupil basis and may or may not receive funds specifically
designated for facilities costs. Among the primary factors affecting charter schools’
success as educational institutions is their ability to provide quality educational
facilities to their students, teachers, and communities. The quality or adequacy of the
facilities that a charter school is able to provide depends largely on available funding
which, in turn, is impacted by such factors as characteristics of its state’s charter
school law, the specific terms of its school charter, state and local economic
conditions, and the interaction of these and other factors.
The U.S. Department of Education (ED), in The State of Charter Schools 2000:
National Study of Charter Schools — Fourth Year Report, finds charter school
operators reporting that being able to provide adequate facilities ranks high among
the challenges they face in implementing their charters and in establishing or
continuing their education programs. According to ED’s study, three of the top four
issues charter school operators cited most often as challenges in implementing their
programs involved funding: start-up costs, inadequate operating funds, and
inadequate facilities.1 These funding issues often are interrelated in how they apply
to facilities, with the adequacy of charter school facilities often dependent upon the
availability of funds for start-up costs and the level of funding provided for operating
expenses — both of which frequently are used to pay for facilities.
According to ED’s The State of Charter Schools 2000, nearly three-quarters of
public charter schools begin operations as newly created schools. Operators of these
schools must not only implement their new education plans, but also must surmount
the obstacle of acquiring adequate facilities in which to house their schools. In
1 U.S. Department of Education, Office of Educational Research and Improvement, The
State of Charter Schools 2000: National Study of Charter Schools, Fourth-Year Report, by
Beryl Nelson et al, RPP International, Jan. 2000, pp. 44-45. (Hereafter cited as ED, The
State of Charter Schools 2000). The report finds that 48.5% of respondents cited start-up
costs as a challenge, 37.4% cited inadequate operating funds, 34.5% cited lack of planning
time, and 32.0% cited inadequate facilities. In most states, charter school operators must
use operating funds to pay for the cost of facilities.
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addition, many charter schools are designed to be smaller in size than traditional
public schools; and oftentimes, charter schools begin operations with only a few of
their planned eventual grade levels, intending to add an additional grade level each
successive year. These factors often require charter school operators to arrange
initially for temporary facilities as they obtain financing for, and acquire, renovate,
or build, long-term facilities. Specific difficulties charter school operators face in
obtaining adequate facilities include: limited dedicated funds for facilities; lack of
available and affordable space; problems in purchasing, leasing, or occupying pre-
existing public school facilities; an inability to issue bonds or assume debt; and
obtaining adequate facilities financing.
Charter School Facilities in the States
State Funding
States generally provide charter schools with operational funding on a per-pupil
basis — usually a certain percentage of the per-pupil funding provided to other public
schools by the state or LEA. Some states and the federal government also provide
limited funding for charter school start-up costs. According to the General
Accounting Office (GAO), 27 states and the District of Columbia provide charter
schools with facilities funding or other forms of assistance in financing or obtaining
facilities.2
The nature of the support provided varies from state to state. Charter school
laws in 12 states authorize funding for facilities, and laws in 19 states allow charter
schools access to public facilities. Some states provide per-pupil allotments to
charter schools specifically for facilities costs. Some allow charter schools access to
funds obtained through local school tax levies or state bonding authority. In some
states, charter schools are authorized to assume bonded indebtedness. Other states
provide charter schools with access to public buildings or the right of first refusal to
purchase surplus public schools buildings that become available for sale.3
When public charter schools were first being considered as alternatives to
conventional public schools, in some instances, the rationale for their support was the
presumption that charter schools would be able to operate more efficiently and at
lower cost than conventional public schools. Occasionally, it also was presumed that
some of the financial support for public charter schools might be provided through
philanthropy. However, while some schools have been successful in obtaining
funding or the use of space from private donors or the private sector, many
philanthropic organizations have policies prohibiting the use of funds for capital
expenses.
2 United States General Accounting Office, Charter Schools: New Charter Schools Across
the Country and in the District of Columbia Face Similar Start-Up Challenges, GAO-03-
899, Sept. 2003. (Hereafter cited as GAO, Charter Schools.)
3 For summaries of how state charter school laws provide support for facilities, see GAO,
Charter Schools; and Education Commission of the States, Charter School Finance, Apr.
2003. Available at [http://www.ecs.org/clearinghouse/24/13/2413.htm].
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Access to Available and Affordable Space
Obtaining access to adequate and affordable space has been a challenge to many
public charter schools. As the nation’s school age population continues to grow,
there continues to be an increasing demand for education facilities. According to the
National Center for Education Statistics (NCES), billions of dollars are needed to
fund the construction of new schools and large numbers of existing schools are badly
in need of repair.4 The facility needs of charter schools are not dissimilar to those of
conventional public schools, with the level of need often varying according to
geopolitical and socioeconomic factors. A majority of charter schools are
concentrated in high growth states or in cities with troubled urban school districts.
In high growth states, there is an overall shortage of public school facilities. In these
locations, both charter schools and conventional public schools are struggling to
obtain new or expanded facilities. Often conventional school districts welcome the
arrival of charter schools because they relieve some of the pressure for building new
facilities. In urban school districts, it is more likely that existing educational
facilities are underutilized; however, often they also are in need of repair or
renovation. While charter school operators can sometimes acquire excess facilities
in which to operate a charter school, often they must bear the cost of renovation.
In general, the limited amount of funds allocated specifically for facilities and
capital expenses has resulted in some charter school operators experiencing difficulty
in obtaining adequate school space in which to educate their students, resulting, at
least initially, in charter schools being housed in non-conventional or less than
desirable facilities.5 Examples of non-conventional charter school facilities include
churches, museums, movie theaters, and former commercial or industrial buildings
— places where charter school operators have been able to obtain space at affordable
rates while they work to secure more adequate facilities. Other charter school
facilities include space formerly used by private schools or organizations such as
YMCAs and recreation centers.
Depending on characteristics of a state’s charter school law and the size of the
local school age population, some charter schools are able to obtain facilities from
local school districts. Options include converting a pre-existing school to a charter
school and retaining use of the building or occupying excess facilities made available
by a local school district. Some state charter laws require local school districts to
provide charter schools access to excess facilities, either at no expense or for a
nominal fee. Other state laws require school districts to offer charter schools the
right of first refusal when existing public school facilities are sold or allow charter
schools to purchase public school facilities at a discount. In many instances, the
4 U.S. Department of Education, Office of Educational Research and Improvement, National
Center for Education Statistics, Condition of America’s Public School Facilities: 1999,
Statistical Analysis Report 2000-032, Washington, D.C., June 2000, p. B-29.
5 While charter schools are relieved of many education rules and regulations in exchange for
increased accountability, under the ESEA Title V Public Charter Schools program they are
required to adhere to Part B of the Individuals with Disabilities Education Act and “all
applicable Federal, State, and local health and safety requirements” (ESEA Title V, Section
5210 (1)(G) & (J)) (20 U.S.C. § 7221i(1)(G) & (J)).
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availability of excess public school facilities is strongly correlated with growth or
decline in the local school age population. In high growth areas, few, if any, excess
school facilities are available and often public school districts are struggling to
provide adequate school facilities for their burgeoning student populations. In areas
with declining school-age populations, excess school facilities often are available, but
may be outmoded or poorly maintained.
Facilities Financing Options
Whereas conventional public schools generally finance the construction or
renovation of facilities through local tax levies or the issuance of municipal bonds,
in most cases such options are not available to public charter schools. However, in
most states with charter school laws, public charter schools are authorized to assume
debt for purposes of financing facilities, although the entity ultimately responsible for
the debt varies from state to state. In some states, the charter school is fully
responsible for the debt, whereas in others, the local school district or the chartering
authority would become responsible should the charter school become unable to
retire the debt. In a number of states, bonding authorities have been established to
issue securities to finance charter school facilities. Access to state or local bonding
authority is important because federal tax exemption of interest earned on state and
local bonds6 supports the ability of bonding authorities to issue bonds at a lower
interest rate than purchasers otherwise might accept if their interest earned were
taxable.
In instances where charter schools are not able to assume debt under state or
local bonding authority, a variety of factors make obtaining financing difficult.
Lenders decide whether to provide financing, and if so, set the interest rate at which
they provide financing, based on their perception of risk. Financial institutions have
tended to regard charter schools as risky ventures because of their novelty and
uncertainty about their long-term viability. Charter schools still are a relatively new
concept in education and lenders do not have much experience working with them.
Also, lenders have been reluctant to issue loans for periods exceeding the length of
a school’s approved charter.7 Analysts in public finance have found that over a
nine-year period charter schools experienced a closure rate of 4.0% compared with
a 20-year school district default rate of 0.05%. This represents an 80-to-1 margin
when comparing charter school and public school district risk.8 Higher interest rates
and shorter repayment periods often combine to limit charter schools’ opportunities
for financing facilities.
Some states make funds available to public charter schools through revolving
loan funds. Revolving loan funds may be established by a public or private entity
6 Internal Revenue Code, § 103.
7 Charters in most other states are approved for a period of up to five years, however, they
may be granted for up to 15 years in Arizona, the District of Columbia, and Florida.
8 Jason F. Dickerson, Frederic J. Martucci, and Pamela K. Clayton, Charter Schools:
Growth, Challenges, and Policy Options, Fitch IBCA, Duff & Phelps, May 31, 2001.
Available at [http://www.fitchratings.com].
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and provide capital to charter schools, usually at a lower interest rate than otherwise
might be available. As the loans are repaid, the capital and interest that flow back
into the fund become available to make future loans. Revolving loan funds have
been used to finance charter school facilities and cover start-up costs. Still, along
with all other types of debt, unless a charter school has access to funds specifically
allocated for facilities, it must pay off any debt it incurs with a portion of its revenues
— usually its operating funds.
Federal Policy
Brief History of Federal Assistance for
Charter Schools and Charter School Facilities
For several years prior to the ESEA being amended by the No Child Left Behind
Act (P.L. 107-110), the federal government had established itself as a provider of
financial assistance to public charter schools.9 In response to concerns about charter
school start-up costs and the availability of operating funds, the 103rd Congress
authorized the Federal Public Charter School (PCS) program in 1994 as Title X, Part
C of the Elementary and Secondary Education Act (ESEA). The 105th Congress
amended and expanded the PCS program under the Charter School Expansion Act
of 1998. Under the PCS program, funding has been provided for the design,
implementation, and evaluation of public charter schools since FY1995.
Federal funds for charter school facilities first were authorized and appropriated
by the 106th Congress under the FY2001 Omnibus Appropriations Act (P.L. 106-
554). P.L. 106-554 amended the PCS program with the creation of the Charter
School Facilities Financing Demonstration Program. This program authorized ED
to award a minimum of three competitive grants totaling $100 million to various
entities (e.g., a public entity, private nonprofit entity, or consortium of each) to assist
public charter schools in the acquisition, construction, or renovation of facilities by
enhancing the availability of loans or bond financing. The program was authorized
for one year and $25 million was appropriated. (A history of federal funding for
charter schools is provided in Table 1, at the end of this report.)
In June 2002, ED announced the recipients of the $25 million in Charter School
Facilities Financing Demonstration Grants. Five recipients were awarded grants
ranging from $3 million to $6.4 million to demonstrate credit enhancement initiative
to assist charter schools in leveraging capital for the financing of charter school
facilities.10
9 For more information on how related federal programs apply to public charter schools, see
CRS Report 97-519, Public Charter Schools: State Developments and Federal Policy
Options, by Wayne Riddle and James Stedman, pp. 13-20 (archived report; available from
author: 7-7382).
10 For further information and a listing of grantees, see U.S. Department of Education,
“Paige Announces Charter Schools Facilities Financing Demonstration Grant Recipients,”
News, June 6, 2002, [http://www.ed.gov/news/pressreleases/2002/06/06062002a.html].
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The $25 million for Charter School Facilities Financing Demonstration Grants
was part of a one-time $1.2 billion appropriation for school renovation and repair in
P.L. 106-554. Also included in that appropriation was approximately $823 million
in emergency renovation funds distributed to states, which in turn were required to
award grants on a competitive basis, for school renovation. States were required to
ensure that schools in high poverty and rural LEAs received a proportionate share of
funds. Charter schools classified as separate LEAs were eligible to apply through
their state on a competitive basis for these emergency renovation grants.11
A small number of charter schools have been provided with funding for
facilities financing through the Department of Agriculture’s Rural Housing Service
(RHS) and through Qualified Zone Academy Bonds (QZAB).12 Also, public school
facilities may be constructed by private entities with financing provided through
Qualified Public Education Facility (QPEF) bonds and leased to public charter
schools. QPEF bonds are tax exempt facility bonds designed to encourage private
for-profit entities to enter into partnerships with state educational agencies (SEAs)
or LEAs to construct or renovate public schools.13
Federal Assistance for Charter School Facilities
Under ESEA Title V-B — Public Charter Schools
The ESEA, as amended by the No Child Left Behind Act (P.L. 107-110),
contains two provision under Title V-B — Public Charter Schools (PCS), specifically
aimed at providing financial assistance for public charter school facilities. These are
Per-Pupil Facilities Aid Programs, and Credit Enhancement Initiatives to Assist
Charter School Facility Acquisition, Construction, and Renovation.14
Per-Pupil Facilities Aid Programs. Title V-B-1 — Charter School
Programs (CSP), National Activities, authorizes grants to states to “establish or
enhance, and administer, a per-pupil facilities aid program for charter schools in the
State.”15 Under the Per-Pupil Facilities Aid Programs, the Secretary may award
competitive grants to states that have per-pupil charter school facilities aid programs
specified in state law, and that annually provide financing on a per-pupil basis for
charter school facilities. Grants awarded under the program are authorized to be
provided over a five-year time frame to supplement state and local funding. The
federal share of funding provided through the grant decreases according to a sliding
11 For more information, see CRS Report RS20171, School Facilities Infrastructure:
Background and Legislative Proposals, by Susan Boren.
12 Government Accounting Office, Charter Schools: Limited Access to Facility Financing,
Washington, D.C., Sept. 2000, pp. 15-16. See also CRS Report RS20699, Funding School
Renovation: Qualified Zone Academy Bonds vs. Traditional Tax-Exempt Bonds, by Steven
Maguire.
13 QPEF bonds are authorized under the Internal Revenue Code at § 142(a)(13), and rules
are provided at §142(k).
14 See ESEA Title V-B-1, Section 5205(b) (20 U.S.C. § 7221d(b)); and Title V-B-2,
respectively (20 U.S.C. §§ 7223 through 7223j).
15 ESEA, Title V-B-1, Section 5205(b)(3)(B) (20 U.S.C. § 7221d(b)(3)(B)).
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scale over the five-year period. In the first year of the program, no more than 90%
of its costs may be met with federal funds, declining to no more than 80% in the
second year, 60% in the third year, 40% in the fourth year, and 20% in the fifth year.
The non-federal share must supplement and not supplant state and local funding for
charter schools. Out of funds appropriated for ESEA Title V-B-1, 100% of the first
$100 million appropriated over $200 million is reserved for Per-Pupil Facilities Aid
Programs, as are 50% of any funds appropriated over $300 million. In FY2002 and
FY2003, no funds in excess of $200 million were appropriated for Title V-B-1. In
FY2004, $218.7 million was appropriated, providing $18.7 million for Per-Pupil
Facilities Aid Programs. For FY2005, $17.0 million was appropriated. The
Administration has requested $18.7 million for FY2006.
As noted above, only those states whose charter school laws meet the
requirements of the Act are authorized to compete for grants under the Per-Pupil
Facilities Aid Programs. As reviews of state charter school laws have identified that
not all states with charter school laws provide funding for charter school facilities on
a per-pupil basis, only charter schools in select states are able to benefit from the
program. In FY2004, four states received funding under the program: California, the
District of Columbia, Minnesota, and Utah.16 Awards ranged from $1.0 million for
the District of Columbia to $9.8 million for California.
The prospect of providing states the opportunity to apply for competitive grants
for per-pupil facilities funding might provide encouragement for states to modify
their state charter school laws so that they would meet the requirements of the Per-
Pupil Facilities Aid Programs (i.e., by requiring the provision of per-pupil facilities
funding). However, some states might be reluctant to amend their charter school law
because the costs of providing facilities funding on a per-pupil basis could be greater
than the funding potentially made available under the federal program. Thus, the
structure of the program could be viewed as using the power of the federal purse to
encourage states to adopt policies supportive of charter schools facilities funding.
Credit Enhancement Initiatives to Assist Charter School Facility
Acquisition, Construction, and Renovation. This program, authorized under
Title V-B-2, succeeded the former Charter School Facilities Financing
Demonstration Program. Under the program, grantees are required to deposit funds
from their grants into a reserve account and use the funds for one or more of the
following purposes:
! Guaranteeing, insuring, and reinsuring bonds, notes, loans, or other
types of debt that will be used to assist charter schools to acquire,
renovate, or construct school facilities that are needed to begin or
continue the operation of these schools.
! Guaranteeing or insuring leases of personal or real property that are
needed to begin or continue the operation of the charter schools.
16 U.S. Department of Education. Office of Innovation and Improvement, State Charter School
Facilities I ncent i ve Grant s Program: 2004 Awards, available at
[http://www.uscharterschools.org/cs/r/query/q/1573?topic=6&type=5&x-title=Facilities].
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! Facilitating financing by potential lenders, encouraging private
lending, and other similar activities that directly promote lending to
or for the benefit of charter schools.
! Facilitating the issuance of bonds by charter schools or other public
entities for the benefit of charter schools, by providing technical,
administrative, and other appropriate assistance designed to obtain
or attract investors (such as retaining bond counsel and underwriters
and consolidating multiple charter school projects into a single bond
issue).17
Since first being authorized in FY2001, funds have been appropriated for the
Credit Enhancements for Charter School Facilities program each year except FY2002
(see Table 1).18 The Administration has requested $37.0 million for the program for
FY2005. ED reports that since June 6, 2002 (when the first grants were awarded
under the program), $87 million in grants made to nine grantees has resulted in $163
million in facilities financing being made available to 49 charter schools, and in $1.1
million in lease guarantees to two charter schools.19
History of Federal Funding for Public Charter Schools
Since FY1995, federal funding has been provided for public charter schools.
However, funding specifically for charter school facilities has been provided only in
FY2001, and FY2003 through FY2005. Historical information on federal funding
for charter schools in general, and for charter school facilities, is provided below in
Table 1.
17 U.S. Department of Education, Credit Enhancement Initiatives to Assist Charter School
Facility Acquisition, Construction, and Renovation, available at [http://www.ed.gov/
programs/charterfacilities/facilitiesguidance2003.pdf].
18 In FY2001, the program was called the Charter Schools Facilities Financing
Demonstration Grant program.
19 Untitled letter from Rod Paige, Secretary, U.S. Department of Education, reporting
information on the Credit Enhancement for Charter School Facilities program, January 3,
2005.
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Table 1. History of Federal Funding for Charter Schools
and Charter School Facilities
(in thousands of dollars)
Public charter schools grants
(including Per-Pupil Facilities
Credit enhancements for
Aid Programs for FY2002 and
charter school facilities
Fiscal year
later)a
President’s
President’s
Appropriation
Appropriation
request
request
FY1995
15,000
6,000
—
—
FY1996
20,000
18,000
—
—
FY1997
40,000
50,987
—
—
FY1998
100,000
80,000
—
—
FY1999
100,000
100,000
—
—
FY2000
130,000
145,000
—
—
FY2001
175,000
190,000
—
$25,000b
FY2002
200,000
200,000
175,000
0
FY2003
200,000
198,700
100,000
24,838
FY2004
220,000
218,702
100,000
37,279
FY2005
218,702
216,952
100,000
36,981
FY2006
218,702
N/A
36,981
N/A
Sources: U.S. Department of Education Budget Service, Department of Education Fiscal Year 2006
President’s Budget, Feb. 7. 2005; and U.S. Department of Education Budget Service, Education
Department Budget History Table: FY1980 — Present, Feb. 5, 2004.
a. For FY2002-FY2007, only in instances where the appropriation exceeds $200 million are funds
reserved for per-pupil facilities aid programs.
b. The program first was authorized in the FY2001 Omnibus Appropriations Act (P.L. 106-554).
N/A. Not applicable