Cashing in on Kids

Charter bonds: What’s the worst that could happen?

Charter school bond finance is a dizzying topic.  The language of bond deals is full of technical terms and financial jargon.  When cities and school districts consider bond issuances, a lot of the details tend to get swept aside, and worst-case scenarios do not end up receiving the attention they deserve.

Complex charter school bond deals are worth paying detailed attention to.  According to the Local Initiatives Support Corporation, there have been over 600 tax-exempt charter bond issuances, totaling over $6.4 billion.  And, in the event that a charter school defaults on its bond, the consequences for the community can be catastrophic.

Just look at what happened with Charter Schools USA in Palm Bay, Florida.

In 2006, the City of Palm Bay issued the $21 million bonds so that Charter Schools USA could fund the construction of new schools.  Palm Bay then loaned the proceeds of the issuance to Patriot Charter School LLC, a subsidiary of Charter Schools USA.  Just three years later, in January 2009, the Charter Schools USA managed schools ceased payments on the bonds after failing to attract enough students to be able to repay the debt. A default notice was eventually issued in May 2012.  Charter Schools USA walked away, and no longer serves as the management organization for the schools.

Who is left repaying the $21 million in bonds?

The taxpayers of Palm Bay.  Part of the bond issuance included an agreement that Palm Bay repay the debts through fixed payments over thirty years.  According to a 2011 audit report, no interest or principal payments were made during the 2011 fiscal year.  To make matters worse, depreciation has knocked nearly $2.5 million off of the value of the property, putting the school "underwater."