Education & Workforce Development and Environment

City ups charter aid: Loan program to help schools land financing for facilities

April 18, 2005

Indianapolis leaders are lending a helping hand-and the city's strong credit rating-to charter school operators intent on building a different kind of educational environment, often from scratch.

Charters receive tuition support payments from the state, but unlike other public schools, they do not get any tax revenue for their buildings.

"The facility issue is a big issue," said Mayor Bart Peterson, the only municipal leader in the country with the power to grant charters. "If we are committed to seeing growth in charter schools, it is important to find a way to get past that."

Enter the Indianapolis Bond Bank, which will administer the loan program. Backed by $2 million in private guarantees and the heft of the city's pledge, it will set up a $20 million line of credit with Bank One and make loans to individual charter schools.

"This is a godsend," said Reid Litwack, board president at KIPP Indianapolis, a charter school that will apply for a loan to add onto its rented space in an Indianapolis Housing Agency community center. "If we didn't have this program, I honestly don't know what we'd do."

Schools can borrow up to $750,000, and repay the loans with interest over five to seven years. They also will contribute to two reserve funds, creating a self-perpetuating safeguard against default.

Baltimore-based Annie E. Casey Foundation and New York-based Local Initiatives Support Corp. are starting the first reserve with a pair of 10-year, $1 million guarantees. Money will change hands only if a loan is not repaid.

"We hope we don't ever have to draw on that," said city charter schools Director David Harris. "We want to be conservative ... so there won't be defaults."

Schools will be required to deposit one year's worth of payments into the first reserve over a period of years. They will contribute the same amount to the second reserve when the loan is closed.

Indianapolis' loan guarantee is essentially the back-up plan to the back-up plan's backup plan. The City-County Council would be asked for an appropriation to repay the debt only if the two reserves are depleted.

Still, that pledge was key to getting the program off the ground, Harris said, because it lowered interest rates and made the program more affordable.

Facility financing is a challenge for charter schools nationwide, as new-often grass-roots-organizations mobilize to find new ways to deliver education. Their startup status poses a problem for many schools, and the fact that state funding doesn't start flowing right away complicates matters.

"Facilities are the most significant problem facing charter schools around the country," said Greg Richmond, president of the Virginia-based National Association of Charter School Authorizers. "And it is the one most outside the control of the folks trying to start the school. ... If you have to use everything you have just to stay afloat, you're probably not going to be able to get money for a building."

Time solved the problem for Irvington Community School, a Ball State Universitysponsored school that welcomed its first students in 2002 in space borrowed from a neighborhood church.

In January, it moved into a $4.2 million facility on almost four acres-thanks to a loan from Old National Bank backed by LISC and a Massachusetts-based charter support organization.

"Two years ago, we would have been laughed out of the [bank]," said school President Tim Ehrgott. "We had no history, no credit. But we've been able to get to the point where people took us seriously."

Others have had more difficulty.

Mayor-sponsored Charles A. Tindley Accelerated School delayed opening for a year after its plans to lease a former Cub Foods store in the Meadows fell through.

"When you're starting a new school ... you're a new entity with zero credit," said Marcus Robinson, Tindley's principal and CEO. "People are hesitant to even lease you space without collateral."

Tindley found a savior in Health & Hospital Corporation of Marion County, which floated a $4 million municipal bond to help the school acquire and renovate the one-time grocery store. It opened last year.

The city's loan program will provide a similar lifeline for those who aren't as lucky, Robinson said.

Indiana charters can borrow money from the state's Common School Fund to cover initial operating expenses, but not capital costs. Lawmakers considered a measure this year that would have allowed the state to use the fund's interest balance to match federal facility grants, but the bill didn't get far.

NACSA's Richmond called Indianapolis' solution "very creative."

"Authorizers usually have not played significant roles in solving the facility financing issue," he said. "But it looks like the attitude toward that is starting to change."

Indeed, Harris hopes the loan program is imitated elsewhere as the charter movement continues to pick up steam.

"This is a way to break down barriers and get more schools open," the city charter director said. "We'd like to create a climate that is more hospitable for charters."

Harris and others have been working-with the help of a $1.6 million grant from the Richard M. Fairbanks Foundation-to encourage successful charters to replicate their programs in Indianapolis. Finding an answer to the facility question helps, he said.

"The growth of charters has been on a good pace," concurred Peterson, who has authorized a dozen schools since 2001. "It's likely to drop off if the facility issue isn't addressed."
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