Pub. 1 2011-2012 Issue 2

20 the nice thing about this is we started early in the process, we brought around the table the people that needed to be there — the bond council, representatives of the State, the State’s financial advisors. I think good public policy comes from having the time to thoughtfully work through an issue, and this is one where we have that. Eric Hunter: We decided to really pin down some of the legal analysis and issues, particularly surrounding moral obligation and constitutional matters, and just kind of reduced to writing some of the ideas that had already been talked about, as well as some of our new ideas. Tell us about the history of charter schools and access to capital? Joel Wright: Our school districts get Utah’s AAA general obligation guarantee, so if Jordan School district defaults on their debt, the State will simply step in and pay it. The school districts pay around 4% interest, while our charter schools pay 7 or 8%. And that percentage is on $10 million in debt. That’s $400,000 a year. That’s the difference of having 30 kids in a classroom and 25 kids in a classroom. That’s a huge difference. Howard Headlee: Charter schools are unencumbered laboratories, where we’re supposed to innovate and find things that work better. Key to that is the marketplace. We’re creatures of the marketplace. People choose to come, people choose not to come. This program will establish a finan- cial standard to which schools can choose to aspire to in order to get a tremendous benefit. Or choose not to. But it’s a market approach to facilitate a greater discipline within a population of schools. It creates a carrot rather than a stick, and beyond just saving money and helping us spend more on educating kids, it has preserved this unencumbered laboratory status of charter schools, while at the same time putting forth a higher financial standard that people will be able to choose to adopt. How does the program work and what measures are in place to protect the State? Jon Bronson: It doesn’t come without risk to the State. Charter schools that meet certain criteria will be able to sell their bonds and attach a moral obligation enhancement from the State of Utah for the comfort of the buyer of the bonds. What the buyer of the bonds will have is the promise that if there is a problem with a charter school debt issue it has this program behind it, then the Governor of the State will approach the Legislature and ask for more money to stand behind the debt of a charter school. It’s not a legal obligation, but is a moral obligation. In other words, if the Legislature doesn’t agree to appropriate the money, there are no legal ramifications from the buyers of the bond back to the charter school or to the State. If it came to that situation, the risk is that if the Legislature were asked to appropriate, and fail to do so, it jeopardizes all of the moral obligation bonds that the State has issued or will issue. What kind of legal obligations will participating schools be faced with? RyanWarburton: One of the baseline crite- ria that they set in Colorado (Colorado has had amoral obligation program since 2003) and something we have here in Utah, is that every charter school that comes to the State needs to receive an investment grade rating. As far as the amount of cash a school needs to hold on hand, the debt service coverage ratio, those covenants are built into the bond documents. We also build in reporting requirements about management, enrollment and other similar items. With this program now in place, there are some safeguards or legal requirements that the Charter School Finance Authority will ask from the charter school. They will need to fund an annual debt service reserve fund, something that’s already in place, as well as a charter school program reserve as a second line of defense that will help secure the State before a moral obligation is drawn upon. The charter schools’ main legal obligations fall under the loan agree- ment and essentially they’re obligated to pay back the State if the State ever has to make a draw. Why does this new program matter for charter schools and what is the long-term benefit? Clint Biesinger: In the current environment, charter schools’ borrowing costs are much higher than their school district counter- parts and frankly are much higher than most participants in borrowing markets. Charter school bonds are not exclusively, but largely sold to high yield bond funds. ...continued from page 18