A new AEI report argues that private schools have a problem: They need more space. As more states use vouchers, tuition tax credits, and education savings accounts to help families access private education, schools will need to scale up and create new seats for incoming students. And the best way to do this, writes author Michael McShane, is to explore new funding mechanisms that will give the schools the necessary resources to handle growing enrollments.
One solution is for private schools to seek bond financing to help offset expansion costs. Public school districts already tap these financial instruments for capital projects because they expose investors to very little risk and the district itself pays less in interest than if it were to get a loan for the same amount from the bank (such financing for educational organizations is often tax-exempt). In 2012, the Colorado Educational and Cultural Facilities Authority (CECFA) gave $9 million to the Catholic Educational Capital Corporation, which then offered it to Iona Prep, an all-boys high school in New York, to help purchase real estate that would allow it to open an elementary school. CECFA is not a state agency, but it is able to provide bond financing for educational and nonprofit organizations both inside and outside of Colorado. So far, it has offered more than $6 billion in bonds to museums, sports facilities, charter schools, alternative high schools, and performance spaces.
Venture financing is also an option. Charter schools receive a significant amount of venture capital from organizations like New Schools Venture Fund and the Charter Schools Growth Fund. But private schools have yet to fully tap this well. The Drexel Fund, a venture funding organization for private and particularly faith-based schools, has pledged to “concentrate near-term investments in six states that provide the most advantageous environment for new, high-quality, financially sustainable private schools.” Private schools have an opportunity to partner with organizations like the Drexel Fund to replicate successful school models and test new initiatives.
McShane also recommends involving the private sector. He points out that benefits corporations (“B-Corps”) could be especially helpful to schools that are legally required to advance a social mission. In this sense, a B-Corp is a sort of nonprofit/for-profit hybrid, able to support private schools via fundraising, real estate purchases, and lease agreements. One notable example is AltSchool, a private model specializing in personalized learning that has raised over $100 million to create “micro-schools” (a class of schools that combines elements of traditional schoolhouses, blended learning, home schooling, and private schooling).
Above all, we need more and better schools. Unfortunately, school creation can be daunting and financially risky. And the current funding arrangement for private schools doesn’t allow for sufficient creation and expansion of high-quality schools. The demand is here, but as McShane puts it, there is a “kink in the supply hose.” Schools grappling with funding issues will need to pursue creative solutions if there is any hope of unraveling the kinks in the current supply chain.
SOURCE: Michael Q. McShane, “Funding Growth, Expanding Opportunity: Novel Funding Mechanisms for Schools of Choice,” American Enterprise Institute (September 2015).
