SAN FRANCISCO - A California charter school chain tomorrow plans to sell about $12 million of revenue bonds secured by state and local tax revenues it will receive based on the number of students attending a planned new charter middle school.
The California Statewide Community Development Authority will sell the bonds on behalf of Aspire Public Schools, a nonprofit corporation based in San Carlos.
Aspire is one of only a few charter school operators in California to use state and local tax revenue to back debt. It used a similar structure in 2001 when it sold $17.48 million of bonds for charter schools in Lodi and Oakland.
Charter schools are exempt from most laws governing school districts. They are usually sponsored by an existing local school board, or county board of education, which grants a five-year charter that may be renewed.
Founded in 1998, Aspire operates seven charter schools in California. Bond proceeds will finance its eighth -- a middle school in Lodi expected to open in fall 2003.
The majority of funds securing the debt come from the state's per-student allocation, received through Lodi Unified School District. Back-up security includes the 14 acres of property bought for the new school and available gross revenues of the corporation's other obligations.
The bonds will be unrated and uninsured. Two of the major risks related to charter schools are whether a charter will be renewed and whether state funding will remain steady. While it's possible that California's current budget deficit may lead to reduced state appropriations to schools, it is politically unlikely, as lawmakers would have to override a state-mandated minimum funding level.
Many charter school projects, including the one in Lodi, carry risks if construction is not completed. Also, funding is based on enrollment, which can fluctuate by year at any given school.
Aspire plans to build a school for 420 students in grades 6-12. The corporation has two elementary schools in the area, each with about 350 students in K-5 that would feed into the new school, according to Gloria Lee, Aspire's chief operating officer.
Middle-school age children still attending the elementary schools would move to the new school.
"Already the school has plenty of kids who want to go to the new one, and we have a waiting list at both K-5 schools," she said. "We have enough kids between both schools that we may look at doing another school a couple of years down the road."
The school district has yet to grant the charter for the new middle school, but Aspire is confident one will be granted.
"We're working with the district to find out when the right timing for that is," Lee said. "We have charters for both elementary schools and a good relationship with the district. I don't think it will be an issue to get the charter."
One district official sits on Aspire's board of directors, she said.
Because of the many risks involved with charter school debt, underwriter Prager, McCarthy & Sealy will privately place the bonds with approved institutional buyers in minimum denominations of $250,000.
The pool of potential buyers for charter school bonds is limited but growing, said Christopher Cowen, a managing director at the firm. Buyers' interest has increased over his last few bond sales, he said.
"Charter schools are an emerging market nationally, but California is lagging the overall market," he said. "You still find some people not interested in the sector at all, but others that are more willing to consider it. People are getting more comfortable with the credit. Even if they're not to the point of wanting to buy it, at least they're interested in learning about it."
Looking forward, Aspire may explore consolidating the security for its obligations instead of tying the security to a single site. A new state law that takes effect Jan. 1 allows the state to grant a state charter to operate at multiple sites, instead of in a single school district or county.
"I think a state-granted charter would satisfy Aspire's concerns with consolidating its security streams," said John Hartenstein, an attorney at Orrick, Herrington & Sutcliffe, bond counsel on this week's deal. "That would mean the state recognizes that what Aspire is doing cannot be done within a single district or county."
Pending legal clarification, "we presume that having a state charter would allow Aspire to pool all of their resources from all districts to secure all of their debt."
For now, bonds are secured by the enrollment revenue and project property. But the security has been made flexible enough to change in the future without bondholder's consent, Cowen said.
"It would be good for Aspire to be able to do what it wants, and diversification of the revenue stream would have a positive impact on the credit," he said.
