School fund investment idea: charter schools
Proposal to buy, lease facilities gets lukewarm reaction
While education reformers have eagerly embraced charter schools, investment markets have largely shied away from giving the schools money because they are deemed too financially risky.
But the State Board of Education, as overseer of Texas’ $23 billion public school endowment, could soon head down a path other investors have largely avoided.
The board is scheduled to decide this week whether to dedicate a small portion of that endowment, known as the Permanent School Fund, to pay for classrooms and other facilities for Texas charter schools.
The proposal is being pushed by board member David Bradley, R-Beaumont. He says the fund helps traditional public schools pay for their facilities, and charter schools, which are privately managed public schools, should get a similar benefit. But other board members say they have serious concerns about pursuing the untried investment strategy.
“It is unique,” Bradley said. “Why can’t Texas be first?”
Bradley’s proposal calls for an investment of $25 million to $100 million for buying or developing buildings that would be leased to selected charter schools.
“We’re not exposing anything significant,”
Bradley said. “It’s almost a rounding error.”
Details on which schools might benefit from the program have not been worked out. Any investment would probably be a couple of years down the road.
Bradley said the program would help to fill a void left by the Legislature, which has not given charter schools the same funding for facilities as traditional school districts.
The difference amounts to about $1,000 per student per year, according to the Texas Education Agency.
Separately, the school fund guaranties the debt issued by traditional school districts for facilities, which reduces their borrowing costs.
Board Chairwoman Gail Lowe, R-Lampasas, said she is a proponent of charter schools and would like to help them cover their facility costs.
But the assets of the fund, which was established by the state constitution in 1876, have to be invested for the benefit of all Texas schoolchildren for generations to come. Given that mandate, Lowe said, she is not convinced this investment would be in the best interest of the fund, even if only a relatively small amount is dedicated to the program.
“Regardless of what percentage it is, it is still incumbent upon a fiduciary to determine what is in the best interest of the fund,” Lowe said.
Board member Pat Hardy, RWeatherford, said the board’s previous investment adviser warned against such an investment. That adviser, R.V. Kuhns & Associates Inc., was replaced last year in a contentious vote.
“I have more confidence in those wise consultants and in (the Permanent School Fund) staff. They are not on board with it,” Hardy said.
Holland Timmins, the chief investment officer of the Permanent School Fund, declined to comment.
The state constitution requires the fund be invested based on the “prudent person” standard, which generally says an investment should produce a reasonable rate of return commensurate with the risk.
No one has a good sense of what the risk-return balance would be for a charter school investment because it is unlike other investments. And the estimates are all over the map.
The fund’s current investment adviser, NEPC LLC, likened the low return and high volatility of a charter school investment to that of commodities, such as wheat or gold.
Others have said it is more akin to a real estate invest- ment, which tends to have a higher expected return.
That risk-return determination matters because it will factor heavily into the cost of the lease for a charter school: The higher the risk, the higher the expected return and the higher the rent.
Kevin O’Hanlon, a former general counsel at the education agency, said people are overstating the risk of investing in charter schools.
“They’re risky on paper,” said O’Hanlon, who wrote the plan Bradley has been circulating. “It’s not necessarily risky in a purely financial sense.”
Unlike a typical investor, the State Board of Education members understand the political and regulatory risk associated with charter schools because they are in the middle of it, O’Hanlon said.
He added that the risk will be diminished because the fund would have a guaranteed tenant for its tax-free facility.
“There is no reason why you can’t make a pretty good return on investment,” O’Hanlon said.
This investment plan has been years in the making.
O’Hanlon, who has personal and professional ties to several board members, pitched the idea a couple of years ago to board members along with a representative from a real es- tate management firm called Labor-Management Fund Advisors LLC of Troy, Mich.
It didn’t get any traction at the time. The investment adviser at the time, R.V. Kuhns, was reportedly cool to the idea.
Last year, Bradley asked O’Hanlon to revive the proposal. A broad outline of the plan that was distributed at a Permanent School Fund Committee meeting in April lists Labor-Management Fund Ad- visors as its author.
That same firm is in the pool of real estate firms already deemed qualified by the board and, according to the plan, could be tapped to implement the charter school program.
But O’Hanlon said that document was recycled from two years ago and that the firm had no involvement in developing this most recent plan.
The firm did not return a call for comment.
David Bradley Board member is promoting charter plan.
Gail Lowe Chairwoman says she’s not convinced.