State awards first loan guarantees to privately owned charter schools

PHOENIX – The state has awarded the first two loan guarantees to privately owned charter schools in a program that has raised questions about its legality.

That Academy of Math and Sciences is getting $24.8 million in what Gov. Doug Ducey is calling “credit enhancements.” That will allow them to borrow money at lower rates to expand existing campuses in west Phoenix and South Tucson.

And the Arizona Agribusiness and Equine Center is getting $17 million to expand an existing campus west of Phoenix and to build a new campus in Mesa.

The awards are the first since the legislature agreed last year to set aside $100 million to help privately run charter schools borrow money at lower interest rates. That's because the state is effectively guaranteeing that lenders will not miss payments.

The idea has been to give these schools – all with an A rating by the Department of Education – a chance to expand with below-market borrowing costs. Put simply, if the state agrees to make payments if the borrower defaults, the lenders are more likely to demand lower interest rates.

But Tim Hogan, attorney with the Arizona Center for Law in the Public Interest, told Capitol Media Services he sees a real problem in what the state is doing.

The Arizona Constitution says it is illegal for the state to “ever give or loan its credit in the aid of ... any individual, association or corporation.”

“I think it's a pretty straight-forward application of the literal language of the constitution,” Hogan said.

“The constitution is quite clear,” he continued. “Period. End of story.”

Now that the state has actually extended its credit, that creates the grounds for litigation. Hogan said he intends to study the issue further before deciding what to do.

Hogan isn't the only one with questions.

Sen. Steve Farley, D-Tucson, said he also believes that what the state is doing runs afoul of the constitution.

And it's not like this is the first time someone raised the legal issue.

When the legislation was first being proposed a year ago, Richard Stavneak, staff director of the Joint Legislative Budget Committee, was asked about the constitutional provision.

“That's a sort of open legal question,” he said at the time.

Gubernatorial press aide Daniel Scarpinato said the loan guarantees are available to both traditional public schools as well as charter schools.

The latter are technically public schools because they cannot charge tuition and are not supposed to discriminate in who attends.

But they are exempt from many regulations that apply to traditional schools. And charter schools are privately owned and even can be operated as for-profit corporations.

But Stavneak told Capitol Media Services at the time that regular public schools don't need the guarantees because any money they borrow is backed by a tax on residents. So they already get good bond ratings and the lower interest rates that follow.

Ducey himself made no mention of any potential constitutional questions in his prepared statement touting the first two loan guarantee awards, saying he wants helping high-performing schools have access to the capital they need to expand.

"Through this program, we are broadening access to in-demand high-performing schools and giving students and their families more public school options in their neighborhoods, he said.''

Scarpinato brushed aside the possibility that taxpayers could be on the financial hook if a charter school defaulted on its state-backed loan.

"We're starting with the cream of the crop of schools,'' he said.

"In order to even qualify you have to academically A-rated,'' Scarpinato said. "And there's a high correlation between schools that are exceptional from an academic standpoint and are financially on solid footing.''

And if there were a default?

"We don't envision the hypothetical situation you're outlining happening,'' he responded. But if it did, Scarpinato said there would be a lien against the property which then would be sold off or transferred to another charter school operator.

In the interim, the state would make the payments. Only after that sale would proceeds be used to repay the fund.

Still, Scarpinato dismissed the idea the state would ever have to dip into the fund, saying schools are required to have collateral or a financial "cushion'' pledged against the amount borrowed.

"So we don't think there's risk to the state at all financially from this,'' he said.

That still leaves the state as the guarantor of the loan, putting it, as Hogan said, in the position of lending its credit to help the charter school get a lower interest rate.

Scarpinato sniffed at the legal questions.

"You're not going to like this answer, but these are public schools,'' he said. "We think the state has an obligation to educate students.''

And he said if no one defaults "we've got a pool of dollars that just sit there and gain interest.''

Joe Thomas, president of the Arizona Education Association, said his organization has some of the same legal questions.

"We certainly want to review it,'' he said. "We want to keep our eyes on it.''

But he said questions about the program go beyond the constitutional issues.

"It's another example of special legislation being written to favor charters over district schools,'' he said, pointing out that district schools really would get no financial benefit from such a guarantee.

The awarding of the loan guarantees to help charter schools expand comes as traditional public schools are set to file suit Monday against the state for failing to meet its constitutional obligations to provide adequate dollars for building construction and maintenance.