Can Opportunity Zone Tax Breaks Be a Boon for Charter Schools?

Originally published in CityLab on April 23, 2019.

For the fourth consecutive year, the growth of charter schools—publicly funded and privately managed schools that educate nearly 3.2 million students across the country—has slowed. Between 2017 and 2018, charter schools grew nationally by 1 percent, an all-time low for the sector.

Charter industry leaders are debating the exact reasons behind the slowdown. Some say it’s rooted in school districts’ financial woes, which make leaders less inclined to open new schools that could strain budgets further. Others blame shifting political winds—fiercer backlash from charter opponents and less robust support from Democratic officials. But there’s one factor nearly everyone in the charter universe agrees on: Accessing and affording sites for these schools is a huge barrier. Many charters, denied access to public facilities, rent their buildings, opening the door to rent disputes and self-dealing scandals. Finding adequate spaces to open new schools, or to expand to bigger buildings if the charter operator wants to increase its student enrollment, remains an elusive and expensive challenge for charter leaders in virtually every state.

To help slake the movement’s thirst for new facilities, charter supporters have been eyeing a new pot of money with growing interest—Opportunity Zones.

These are low-income, high-poverty regions of the country that, thanks to a provision of the 2017 Federal Tax Cuts and Jobs Act, have been tapped to receive new investments. The Investing in Opportunity Act gives major tax breaks to those willing to direct resources into economically struggling urban and rural communities. Just who should count as “economically struggling,” and whether this kind of program is likely to boost such communities or just steer investment toward places that are already on the upswing, has been a hot topic in urban economic development circles since the program was first announced.

Many experts who have studied similar kinds of place-based tax breaks, from the Enterprise Zones of the Reagan administration to the Empowerment Zones of the Clinton years, argue that they boast a poor track record of actually improving the low-income areas they’re supposed to help. In some cases, researchers have found, the tax schemes actually hurt cities overall, distributing large portions of the tax benefit to industry professionals as transaction costs. “These policies almost inevitably result in tax giveaways for investment that would have occurred anyway,” concluded Timothy Weaver, an urban policy and politics professor at the Rockefeller College of Public Affairs & Policy at the University at Albany, in a recent CityLab post.

Throwing charter schools into this mix is unlikely to settle any of these arguments.

According to a December report produced by the National Charter School Resource Center—a division of the education consulting firm Safal Partners—charter schools in 44 states might be able to access financing through the Qualified Opportunity Zone tax breaks. The report authors estimate that between 1,078 and 2,079 schools could be eligible for, or be interested in, tapping into this financing stream over the next five years to pay for new buildings or to finance renovations.

And the interest is there. In January, Nina Rees, the president of the National Alliance of Public Charter Schools, and Chad Aldis, a vice president at the Ohio-based Thomas B. Fordham Institute, wrote an op-ed detailing the challenges Ohio charter schools face in accessing facilities. In addition to recommending state-level reforms, they suggested investors try to leverage private capital through Opportunity Zones to build new schools. Ohio has designated 320 tracts as Opportunity Zones.

Aaron Churchill, the Ohio research director at the Thomas B. Fordham Institute, told CityLab that while he sees Opportunity Zones as a great opportunity for his state to support new charter facilities, he’s “not really sure it’s far along yet” and “doesn’t know if charter networks have given it a lot of thought.”

National charter organizations are trying to put this new financing opportunity on more groups’ radars. In February, the Charter School Facility Center at the National Alliance for Public Charter Schools hosted a webinar on how Opportunity Zone investments could reduce facility financing costs for schools. Former Republican House Speaker Paul Ryan has also touted charter schools a possibility for Opportunity Zone investment.

Here’s how such financing would work: Individuals or groups can establish “Opportunity Funds,” which require that at least 90 percent of the fund’s assets to go into designated Opportunity Zone census tracts. Investors can then delay paying federal taxes on the capital gains derived from the Opportunity Fund. If they hold their investment for seven years, they can reduce their tax burden by 15 percent. If they hold it for 10 years, the investor would have no capital gains tax at all on the profits from a sale of an Opportunity Fund investment.

Adam Peshek is vice-president of advocacy at ExcelinEd, a national organization founded by Jeb Bush that supports charters, vouchers, and other education-reform staples. Peshek said it’s a “no-brainer” for a lot of philanthropic groups to move some of the money they’re already spending on school facilities towards Opportunity Zone investments, where their dollars could stretch further. He said he has been talking with national charter groups and philanthropies about this and many are deliberating whether they want to create their own Opportunity Funds to generate investment or focus on encouraging private citizens to invest in existing funds.

John Bailey, a fellow at the right-leaning American Enterprise Institute who has written on this topic, has said, “One could imagine groups such as the Charter School Growth Fund or NewSchools Venture Fund creating charter-specific Opportunity Funds to scale new schools to high-needs areas.”

That’s not happening yet: Peshek said there hasn’t been a huge rush yet to seize on Opportunity Zone financing for charter schools, unlike apartments and other commercial real estate. But he says he could envision charters being integrated in the construction of new multi-use real estate developments. “Having a school in the middle of a multi-use area is always a good draw for people who want to live there,” he said.

The amount of money that could be tapped by Opportunity Zone financing could dwarf the amount that charter advocates have be able to receive from other federal financing programs, like the New Market Tax Credit. Peshek, writing in 2018, noted that if just one-tenth of 1 percent of the estimated $6 trillion in unrealized capital gains in the U.S. goes towards charter school development projects, that would amount to “nearly three times the amount of investment that the NMTC spurred over more than a decade.”

Some states are looking at other ways the Opportunity Zone designation could help grow charter schools. In Florida, Republican Governor Ron DeSantis has said he hopes to leverage the tax incentive to launch a five-fold expansion of charter schools in his state. DeSantis’s plan would effectively link an existing state program called Schools of Hope to Florida’s designated Opportunity Zone areas. This could then boost the number of schools eligible for the Schools of Hope funding from 47 schools to 247.

Supporters of traditional public schools also see potential opportunity in Opportunity Zones. Mary Filardo, the executive director of the nonprofit 21st Century School Fund, which advocates for improved school facilities, told CityLab there are some 13,000 traditional public schools located in Opportunity Zones, predominately serving low-income and non-white students.

While charters are better positioned to leverage Opportunity Zone financing (since in many cases the school is already in a privately held building), Filardo said her group has been working with school districts “which really have far more need” for school modernization to figure out if they might be able to access some of this funding too.

One idea, she said, is to use Opportunity Zones to help break the political gridlock on school infrastructure funding. Polls may show bipartisan support for federal investment in school facilities, but on Capitol Hill, she said, a bill to make that happen has only garnered Democratic co-sponsors.

“The issue has become completely partisan in Congress, and one of the things we’ve been interested in is if we can convince Republicans to agree to direct federal funding for public school facilities located in the Opportunity Zones,” she said. “The rationale would be your other business investments—like your senior living retirement complexes or your tourism—would do better if the public infrastructure were in good shape.”

There’s considerable evidence that investing in capital assets like school facilities is an effective way to boost local wealth, in ways that differ from simply adding new high-end housing, retail, or restaurants, Filardo said. Having better school buildings also helps retain teachers and local businesses and attract new families.

But she also acknowledges that there’s a lot of skepticism surrounding these types of tax breaks and whether they generate true revitalization. Adding schools, whether charter or traditional public ones, to that story could be a novel twist. “School facilities,” she said, “just have not been past focuses of Enterprise and Empowerment Zone investments.”


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