New Markets Tax Credits Aid in the Financing of Charter Schools

On March 22, 2017, Governor Matt Bevin signed into law the Kentucky Charter School bills which empower local Kentucky school boards with the rights and responsibilities of creating and operating charter schools. This legislation came in two parts: House Bill 520 which addressed the operating provisions, and House Bill 471 which contained the funding mechanism. After numerous attempts, the Kentucky legislature finally passed a charter school law which expands the educational options to all families, especially those families whose children are attending underperforming schools. By definition, charter school laws establish the framework for citizens to create schools which (i) are independent in oversight and operations from the traditional school bureaucracies, (ii) receive state and local funding, and (iii) are exempt from most state educational regulations. Today, it is reported that more than 6,700 public schools operate charters in the United States, educating more than 2,000,000 students. While the Kentucky Charter School legislation is lauded by its supporters as a significant advancement in improving Kentucky public education, what is conspicuously absent from the law is the lack of public funding of the school facilities themselves.

Securing a permanent affordable school facility has proven to be a major impediment to the growth of high achieving charter schools. The principal reason for this is that charter schools do not have the authority to assess local taxes or engage in bond financing like local school districts. Kentucky law is no different. Under the new Kentucky law, charter schools will receive state funding based on student attendance, however, they will not receive local public funds for new construction or rehabilitation of existing facilities. Consequently, charter schools in Kentucky must rely, in large part, on private funding and revenues from operations to pay for the construction, renovation, maintenance, and operations of the facilities. The result is inefficient charter school facilities which have a detrimental effect on learning. Enter New Markets Tax Credits.

A desire to bring economic prosperity to low-income communities resulted in the creation of the federal New Markets Tax Credit ("NMTC") program, which was enacted by Congress as part of the Community Renewal Tax Relief Act of 2000. The NMTC Program relies on federal tax credits as an incentive to attract private capital into operating businesses and real estate projects in economically distressed urban and rural low-income communities or projects which focus on targeted populations. Through May 2017, the Community Development Financial Institutions Fund reported that since the inception of the NMTC program, it has awarded approximately $43 billion in NMTCs, and the result of this is that for every $1 invested by the federal government through the NMTC subsidy, another $8 of private capital is co-invested. It is not surprising then that the NMTC program has played a familiar and integral role in financing charter schools. It is reported that from 2004 through 2017, more than $2.2 billion of NMTC allocations have been deployed into charter school projects in the United States.

The practical application of the NMTC subsidy in funding the development of charter school facilities works like this: A charter school intent on building a new $25 million school building receives a $25 million NMTC allocation. At the present time, a $25 million NMTC allocation generates a net cash subsidy to the project of between 20-23% which translates into between $5 million and $5.75 million. Consequently, this means that the charter school will only need to come up with $20 million in order to build its $25 million facility. This is why the NMTC is known as the “gap filler.” The following are real life examples of what the New Markets Tax Credit incentive can do in financing the construction or renovation of charter school facilities:

1. McDonough 42 Elementary School received $10 million in a New Markets Tax Credit allocation to help finance the complete renovation of its historic facility. Located in New Orleans’ Treme neighborhood, the renovated school now provides a high-quality facility for up to 550 Pre-K–8 grade students, supports 50 permanent jobs, and created 200 construction jobs. The renovated school contributes to the revitalization of the neighborhood, where currently 37.2% of families are living in poverty and 13.7% are unemployed.
2. Friends of KIPP Academy Lynn, or KAL, Charter School Foundation, Inc. used a $26 million New Markets Tax Credit financing package to purchase a six-acre site and build a 68,000-square-foot middle and high school. The new facility replaced the 14,000-square-foot space KAL leased from the Boston Archdiocese. The new facility includes 36 classrooms, 16 specialty rooms, a gymnasium with locker rooms and storage, a cafeteria, a library media center, athletic fields, and outdoor recreational space. The project created more than 40 jobs. When at full capacity, the new KAL middle and high school campus serves 750 students in grades 5-12
3. East Harlem Tutorial Program developed a $37 million, 50,000-square-foot facility with the aid of a $9.5 million New Markets Tax Credit allocation. The project provides a permanent home to East Harlem Scholars Academy that serves 500 at-risk students. The new facility includes a gym, stage, space for physical therapy and occupational therapy, library, an outdoor classroom, and special rooms including art, music, science, and robotics. Outside of school time, the building is used for youth programs. The project generated approximately 150 construction jobs and 38 permanent jobs.
4. A $15 million New Markets Tax Credit allocation was used in the renovation of the Charles H. Shaw Technology & Learning Center, a public charter high school that occupies the former Sears power plant in Chicago’s Homan Square. The renovation of this historic structure, which encompasses 95,000-square-feet of classroom and office space, took a rundown building and put it to productive use. Space is also allocated for local community groups and organizations. The school achieved LEED Platinum certification which utilizes an adjacent geothermal field on a former CSX railroad right-of-way for heating and cooling.

As previously stated, the Kentucky Charter School legislation explicitly excludes the use of local funds for the new construction or the renovation of an existing charter school’s facility. As a result, these educational endeavors are forced to look somewhere other than to the Commonwealth to fund their project budgets. Charter schools in Kentucky will need to be flexible and think outside the box to obtain the necessary funding. They will have to partner with lenders, developers, and organizations at the local, state, and federal level and will have to work together to create long-term, integrated solutions for charter school facilities funding. The use of New Markets Tax Credits as an integral part of the overall project financing will provide marginalized families with access to non-traditional education and neighborhoods with improved infrastructure, which will strengthen communities across the Commonwealth for years to come.