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Thinking Outside the Box on Construction Costs: Pay for Success and Facilities Funding

In our recent blog on the Legacy Early College project, we detailed some of the attributes which make the Legacy school in Greenville, SC a unique opportunity for PFS – namely, its focus on college readiness even beginning in early elementary and a whole-child commitment with a particular focus on health and fitness.

This project also faced one challenge that is unfortunately not unique: securing financing to create high-quality learning facilities. Financing early childhood facilities can often be difficult no matter the sector, as a recent Bipartisan Policy Center report outlined. Charter schools face additional challenges linked to their unique funding structure.

There are two key items to consider here: how charter schools currently finance their facilities, and how the PFS field handles construction projects.

Charter Facilities Landscape

In South Carolina, as in many states, charter schools do not receive specific facilities funding; rather, charter schools must pay for facilities (construction, renovation, occupancy, repairs, etc.) from other sources. School leaders in South Carolina report on annual needs surveys that facilities funding is the single largest challenge they face to operations.

More than 70% of South Carolina charter schools used operating funds to pay for facilities. In charters that own their own buildings (as Legacy does), a median of $646 per pupil is spent for facilitieswhich leaves less money on the table for staff salaries, classroom enhancements, and student services.

The same study consulted with school facilities experts to compare South Carolina charter schools to “best practice” school facilities, based on research. They found that charter school classrooms, buildings, and sites in South Carolina are generally smaller than the ideal for a high-quality learning environment:

SC Charter Schools standing

Legacy’s current facilities have overcome these challenges, particularly given its commitment to a healthy lifestyle. School buildings have a kitchen/lunch room meeting federal standards for reimbursement, in which healthy, fresh meals are prepared daily. Legacy is the only elementary school in South Carolina providing daily physical education, with gymnasium and outdoor space to accommodate this. The planned child development center has been designed to meet similarly high standards, aligning with best practices in early childhood facilities.

Considering PFS for Facilities

To date, no existing PFS project in the United States has used PFS financing to fund the construction portion of its operations.[1] None of the current early childhood PFS projects (Chicago and Utah) had significant construction needs, as classrooms were added in existing facilities.

As charter construction and PFS both have unique opportunities and constraints, ICS explored the question of whether PFS financing could help further the construction of Legacy’s new facility. The lack of current PFS projects funding construction does not mean the idea is impossible, though it does offer some considerations. Our interviews and research revealed some key barriers and opportunities:

  • Investors are cautious about investing in a facility that will long outlast the project. ICS generally recommends choosing outcomes that can be measured within 4-7 years of service provision as this seems to be the most palatable timeframe for investors. There is a perception that constructing a facility creates an additional level of risk for an investor—if a project fails to deliver outcomes, investors not only face not getting repaid, but with a customized building that may be difficult to sell to recoup losses.
  • It is also difficult to draw a straight line between construction costs and outcomes—obviously, outcomes cannot be achieved without a place for learning to happen, but including upfront construction costs in addition to services may throw off the cost-benefit analysis.
  • Philanthropic support can be helpful in securing more conventional financing. Banks and CDFIs may be more interested in investing in a project if we can tell them up front about a philanthropic entity guaranteeing a specific amount as subordinate debt. Even if a foundation cannot support the full cost of construction, this support can help leverage other financing mechanisms.

For our team, the takeaways from this project were two-fold. One, charter school conversations generally focus on governance related to these entities and the impact they have on outcomes. As is true in all educational programs, though, we must also focus on the process quality and the experience of students and staff within these schools – and ensuring quality learning spaces is a key part of that.

Secondly, physical construction is an area of concern in future PFS projects. Several projects have incorporated physical construction or renovation as part of their projects, separately funded, as in the case of supportive housing projects. PFS participants and stakeholders must engage in collaborative conversation to share lessons learned from these experiences so future projects can benefit. The unique nature of each PFS project has tempered the growth of these projects, but as has been true in terms of contract negotiations and financing structures as well, the more we can openly share about the experience of accessing funds for physical capital, the more future projects can avoid bumps in the road and learn from these experiences.

[1] Supportive housing projects funded by PFS funds do usually have a physical space component, but this is covered by funds not included in the PFS investment/repayment pool. For example, in Denver, housing was constructed using $2.7M in Low-Income Housing Tax Credits and $3.2M in gap funding from city/state; occupancy is funded on an ongoing basis using $10.8 million in existing housing vouchers.

Megan Carolan

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