School fund in­vest­ment idea: char­ter schools

Pro­posal to buy, lease fa­cil­i­ties gets luke­warm re­ac­tion

Austin American-Statesman - - FRONT PAGE - By Kate Alexan­der

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.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.