Charters borrow nearly $500 million on taxpayers' dime

Three Franklin Plaza, a bow-shaped eight-story building at 16th and Vine streets, once hummed with 1,700 GlaxoSmithKline white-collar workers.

Today, it is empty more than three months out of the year, a lone security guard watching over the corporate art still hanging in the lobby.

From September to June, a charter school called String Theory occupies half the floors. The school acquired and renovated this premier office tower in 2013 as part of a $55 million tax-exempt bond deal, arranged with help from the city’s biggest economic development agency.

It was the largest bond deal of its kind in city history.

It is also the most conspicuous example yet of a risky, expensive, and fast-growing financial scheme underpinning the rapid expansion of Philadelphia charters — a market now worth nearly $500 million. But the bond financing behind the mountain of money gets little scrutiny on whether the debt is a smart use of Pennsylvania’s limited educational dollars.

The lack of transparency can translate into deals that may be unsustainable. Shortly after moving into its flashy high rise, String Theory posted its first operating deficit. After revealing they were $500,000 in the red from paying out millions annually to bondholders, administrators told parents they were cutting certain classes and suspending bus service as cost-saving measures.

On the plus side, if the String Theory board members who indirectly own the Center City skyscraper sell it, there could be a big profit. But is this the way charters should operate? String Theory is hardly alone. As the number of privately administered public schools has grown from 55 to 83 over the last decade, more schools have pursued high-stakes bond deals.

Charter schools used to inhabit repurposed supermarkets or old storefronts, but a Philly.com analysis of bond documents showed that an increasing number — one out of three charters today — have bought or constructed newer and larger school buildings with tax-exempt bonds, paying millions in debt and fees to consultants along the way.

Bonds — school debt sold to investors who are gradually paid back with interest — have become popular among charters because they allow lower borrowing costs than standard commercial loans.

Bonds are commonly floated by governments and school districts to get upfront money for infrastructure projects, but charters were long considered too risky an investment because they can be abruptly shut down.

As charter schools became more established, investment prospects improved. But the bonds that charter schools have tapped are still riskier and come with “junk” ratings, carrying high interest rates.

“They’re getting bond ratings that have an eight or eight-and-a-half percent interest rate, whereas a school district getting [government] bonds to finance a project can get much lower interest rates,” said Bruce Baker, a Rutgers education professor.

This leaves charters spending more educational dollars on interest payments — $78 million over 30 years on top of String Theory’s $55 million bond, for instance — at rates that are double or triple what the district pays.

The financing process and real estate transactions themselves also entail millions in consulting and legal fees. Schools like String Theory can become enmeshed in complex and costly deals for marquee buildings that are difficult to sustain.

“There’s no real scrutiny of these deals, and charters end up saddled with big fixed costs,” said Michael Masch, former chief financial officer for the School District of Philadelphia. “They’re saying,‘Look at this really prestigious building we have, that’ll attract people.‘ But it’s a ridiculous amount of money to be spending on the facilities side.”

Today, an increasing number of charters are spending more of their budgets paying down debt than on actual instruction. In the case of String Theory, which enrolls 1,400 students, the school now spends nearly one third — $5.5 million — of its $16 million budget just to occupy the half-empty 228,000-square-foot high rise, along with two older, smaller schools in South Philadelphia. That figure is more than String Theory spends on teachers’ wages — $5.3 million.

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