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Securities Law

What NFMA Wants From Charter Schools

WASHINGTON – The National Federation of Municipal Analysts released revised best practices for charter schools on Monday that suggest issuers' disclosure documents can link to detailed bond-related information on websites rather than repeating it.

The group added the suggestion about linking to websites in response to comments made on the group's draft recommended best practice (RBP) on charter school debt offerings. The RBP is meant to help investors, issuers, charter schools, underwriters and their counsel, as well as other industry participants, understand what disclosure items are helpful for municipal charter school offerings, NFMA said. The document was released in draft form in September of last year and was open for public comment until Nov. 30.

Gilbert Southwell, vice president at Wells Capital Management, and Dean Lewallen, vice president and senior analyst at AllianceBernstein L.P., co-chaired the NFMA disclosure subcommittee that worked on the paper. Southwell said at the time the draft version was released that the RBP "is educational for our membership but also helps to establish our disclosure expectations when we're looking at deals."

The document's recommendations start with the key bond financing terms and document disclosures that should go into a charter school's preliminary official statement (POS).

NFMA recommends that the POS have a wide array of information including details about: the structure of the asset financing; the sources and uses of bond funds; a description of any pledged revenues; reserve fund requirements; financial and insurance covenants; and default provisions and remedies. A POS should also include information about things like facility leases and mortgages, NFMA said.

The RBP notes that "if relevant documents are voluminous, excerpting only the material provisions of such documents in an appendix or having a link to the documents can be appropriate disclosure."

Additionally, a POS should contain information about a school's charter, including: the status of the existing charter; the charter renewal and termination process; and any state, authorizer, or regulatory requirements about the school's proposed financing and pledged revenues or state aid.

The RBP also lists the necessary disclosures related to academic performance as well as school management and operation, noting that a charter school's academic performance is "an especially important factor in charter school long-term stability and success."

Such disclosures should include information about regulatory authorities that have jurisdiction over the charter school as well as the school's curriculum and education programs at varying grade levels and how those programs satisfy applicable educational standards. Information on how the school tests students to measure academic growth as well as how recent school data stacks up against historic measurements should be presented in an easily accessible way for investors, NFMA said.

In terms of school staff and management, an effective POS should provide detailed information in nine key areas, according to NFMA. These include: charter board membership, compensation, and tenure; information available on the school's website; management qualification, experience, and compensation; third-party manager control, compensation, and replacement; as well as charter school teaching faculty, classroom ratios, and teachers' union affiliation.

Additionally, the POS should have information regarding teacher and staff compensation, including retirement benefits, any complaints and claims the school is facing, as well as operating and funding information related to extracurricular activities.

Facility disclosures are also key to a thorough POS, according to the RBP. These could include: size, capacity and condition of the facility; future capital improvement needs; property and business interruption insurance; transportation, parking, and outdoor facility needs; and information on zoning, the building code, environmental hazards, and property tax exemption.

Part of the POS should include financial and banking disclosures. These should include: audited financial statements and interim financial information; the school's current budget and state aid; financial covenant compliance and future projects; existing banking relationships and cash flow borrowing; as well as endowments, fund drives, contributions, and gifts.

Disclosures that describe a school's location, enrollment, potential competition from other schools in the area, and future projections on location-based information are also important, according to the RBP. NFMA acknowledges that information about the school's service area, local competition, and enrollment numbers could be gathered from a website.

The RBP includes separate but related suggestions for charter schools to consider credit risks and continuing disclosure.

The credit risks could come from charter school acquisition, which NFMA said in its RBP is "often the source of significant investor concerns and risks." NFMA recommends charter schools discuss the suitability and condition of a new facility, the facility acquisition price, appraisals, environmental information, and conflicts of interest in a POS when new facilities are being acquired.

The group also has concerns related to facility construction costs, NFMA said. The RBP lays out several types of information that should be included in a POS, including: whether a facility is design-build with a general contractor or architecturally designed; the history of the general contractor in undertaking timely school constructions; the capitalized interest period; and any back-up sites.

In terms of continuing disclosure considerations for charter schools, NFMA said the Securities and Exchange Commission's Rule 15c2-12 on municipal disclosure partially addresses what should be included but that it would like to see more disclosed. Until fairly recently, most continuing disclosure agreements (CDAs) did not provide for much more investor disclosure than a year-end audit, the group said.

"The NFMA believes that charter school continuing disclosure needs to be far more complete, robust, and timely to reflect credit characteristics and risks specific to the sector," NFMA said.

Continuing disclosures should at a minimum include financial information, covenants, and debt load or leverage, as well as certain data on enrollment, competition, and academics. Schools should also be providing updated information and school governance and charter status, according to the group.

NFMA urges charter schools to hold at least one live conference call per year to discuss data and the school's current status. It also recommends charter schools release quarterly reports with financial and other information between 45 and 60 days after the end of a quarter.

The RBP also includes a section that outlines "special material events" outside of the 14 material events listed in 15c2-12 where event notices should be filed. NFMA said that while the events, like investigations, litigation, and the departure of key school officials, are not technically part of the SEC rule, they are certainly material to investors and should be disclosed within 10 business days.

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