Monday, November 23, 2015

Profiteering off poor kids and new market tax credits...

Reposted from TN Edu-Independent - So I just spent 30 minutes using Google to read up on New Market Tax Credits.  I'm therefore not an expert at all, but it's clear that certain Nashville school members who try to act like experts really have NO CLUE what they are talking about.

You can read a social media post here that somehow is supposed to shed light on how NON-PROFIT public charter schools are making tons and tons of money:

First, it needs to be said that it's incredibly demeaning for a publicly elected official on the school board to say that the people associated with KIPP Nashville - its leaders, board of directors, and teachers - exist to profit off the backs of poor (and minority) children.

Next, it is really quite fascinating how one post can have so many myths and false statements. I won't deal with every one of the crazy claims (I could blog for a month), but I'll write about one aspect - those supposedly lucrative New Market Tax Credits (NMTCs).

From the post:
 there is a lot of money to be made off the backs of poor people This irritated my board colleague...who challenged me to explain how non-profit charter schools make money. I explained that there are many ways non-profit charters make money, including: (1) a 39% federal tax credit that allows investors to double their money in seven years; (2) all sorts of land deals, including using taxpayer money to fund land investments that profit the investor, not the taxpayers; (3) requiring students to purchase materials from board members at marked up prices or charging students high prices for lunches and other necessities; and (4) taking money from classrooms and driving it up to the top by, for example, hiring cheaper, inexperienced, uncertified teachers; by using computers instead of teachers for classroom instruction; or by using uncertified teachers for enrichment like art and music.

Double your money in 7 years! Whoa!!! 39% tax credit!!!! Amaze-HING!!!

Except it's not true!!!  Let's back up a second.

What are New Market Tax Credits? (highlighting and emphasis is mine)

"The New Markets Tax Credit (NMTC) was designed to increase the flow of capital to businesses and low income communities by providing a modest tax incentive to private investors. Over the last ten years, the NMTC has proven to be an effective, targeted and cost-efficient financing tool valued by businesses, communities and investors across the country."

Between 2003 and 2013, $35 billion in direct NMTC investments were made in businesses and these NMTC investments leveraged nearly $70 billion in total capital investment to businesses and revitalization projects in communities with high rates of poverty and unemployment.  Between 2003 and 2012, the NMTC generated about 750,000 jobs, at a cost to the federal government of less than $20,000 per job.  By law, all NMTC investments must be made in economically distressed communities. However, more than 72 percent of all NMTC investments have been in communities exhibiting severe economic distress, including unemployment rates more than 1.5 times the national average, a poverty rate of 30 percent or more, or a median income at or below 60 percent of the area median."

First of all, charter schools represent a teeny tiny, very small amount of this NMTC program. NMTCs can be applied to for-profit businesses and non-profit corporations.

Secondly, I hope people catch the immediate irony of this.

This MNPS School Board member has long identified "poverty" as that which plagues public schools, children and communities from being successful.  So what does she then say about a program that helps provide more affordable capital to invest in low income communities?

#ironic #unbelievable #youhavegottobekiddingme

Feel free to browse a number of projects across America that have used NMTCs to finance projects in low income communities: NMTC at work in Communities Across America.

What are some of the projects that have been financed via NMTCs (that likely otherwise would not have been funded)?

-The construction of a low income health clinic in Memphis, TN:

"MBS Urban Initiatives provided $8.4 million in NMTC financing for the construction of the 45,000 square foot Quimby Plaza building. Located on Poplar Avenue, east of the Memphis Medical District, Quimby Plaza resulted in the creation of 137 construction jobs and 65 permanent jobs and includes a 5,500 square foot community center and management space, as well as 24 units of market-rate rental housing. The building also provides 9,000 square feet of medical office space for Methodist Hospital, a non-profit health care provider that provides low-income residents with access to a full range of medical services."

-The expansion of a food bank in San Antonio, TX:

"When the recession hit in 2008, the demand for SAFB’s food distribution drastically increased, and it expanded food distribution from 35 million pounds in 2009. Demand is to grow to an estimated 60 million pounds in 2014, a 71% overall increase. However, SAFB’s ability to meet this growing demand is constrained by its facility and storage capacity limitations, especially for fresh and healthy food. To help meet this demand, the Texas Mezzanine Fund and National New Markets Fund provided $13 million and $14 million NMTC loans, respectively, to help finance a $28.3 million expansion project. This project will double the overall facility to 204,000 sq. ft., more than double food storage capacity, and triple the cold storage space available for healthy fresh and frozen foods. A new pavilion will be constructed for new community service programs and weekly farmer’s markets"

-The expansion of a school exclusively dedicated to serving homeless youth in San Diego, CA (and is actually a NMTC financed project from a California state based NMTC program, not the federal NMTC program):

"Monarch Schools educates students impacted by homelessness. This transaction allowed Monarch Schools to expand its services from 150 to over 350 children in grades K-12."

Here's a "simplified" chart of how NMTCs work.

Here's basically how this program works:
1. An investor puts up an equity investment into a Community Development Entity "CDE."
2. After that, the CDE can make below market rate loans to Qualified low-income community investments "QLICI"s (food bank, school, nonprofit low income health clinic) for projects.  They can make a below market rate loan thanks to the tax credits.
3. The QLICIs pay interest and principal on the loan back to the CDE.
4. An investor receives an equity return on his/her investment from the CDE and can take tax credits based on the amount equal to 39% of the equity amount invested over the 7 year period.

Why does this help low income communities? Basically because it subsidizes the cost of capital on financing projects in low income areas.  If you haven't noticed, access to capital is hard to come by in low-income communities. Banks don't really exist in poor neighborhoods, but payday lenders reign and charge exorbitant interest rates.

"By combining the tax credits with a below-market interest rate, the investor is generally able to obtain a sufficient return on investment to justify the risk associated with investing in a low-income community business. Representatives from one CDE we interviewed said that the CDE can generally offer loans with interest rates between 3.5 and 4.0 percentage points below the standard market rates at a given time and in a given location. Depending on prevailing market interest rates for loans, NMTC loans under the subsidized rate model could be as much or more than 50 percent below market interest rates. For example, if an investor were to offer a loan to a QALICB at a 7 percent interest rate, subsidizing the loan with NMTCs would likely allow the investor to offer the loan at 3.5 percent or 3.0 percent, or about 50 percent to 57 percent below market, resulting in considerable interest savings to the QALICB."

And the supposed "double your money" claim?  Simple arithmetic tells us absolutely no way.  

For starters, the investor's money must stay out for 7 years to get the tax credits.  Not many investors like having their money locked up for 7 years (just to get some tax credits).  The 39% tax credit is also spread over 7 years, so you can get a tax credit of only 5 or 6% per year (that offsets tax liability).

A tax credit of 5 or 6% per year IS NOT a 5 or 6% return of your money per year.

Think about the math in simple terms. QALICBs (nonprofits that benefit from a subsidized loan) are paying a 5-6% interest rate on loans to the CDEs.  Given the fact that inflation is 1-2% per year, there is ABSOLUTELY NO WAY that investors DOUBLE their money (a 100% return) over a 7 year period.

Even when considering the amount of the tax credit + the return of capital from the investment made to the CDE, the CDE that is only loaning that amount out at 5-6% and also taking some cut of that loan paid back as a fee to operate...there is NO WAY that an investor "doubles" their money.

I searched pretty extensively, and the highest investment return for an investor using NMTCs that I could find was 24%...24% is FAR FROM 100%, and also again remember that was after 7 years, and it appeared to be through a leveraged loan financing model and using NMTCs (more complex and higher risk).

In the specific case of KIPP Nashville, their facility at Highland Heights did receive capital funds allocated from the city of Nashville through municipal bond financing, not NMTCs, but it should also be noted that those funds went to revitalizing a historic building (in a low income community in Nashville), adding a park, and creating a community space. There will also be about 800 students there when the high school fills out, not the ridiculous 100 that was claimed. KIPP Academy Nashville does not own their building, and must pay rent to the city.  

Do MNPS district schools have to pay rent to the city or the district? No. KIPP Nashville does.

It should also be noted that KIPP's facility renovation was financed by the City of Nashville through the sale of municipal bonds to investors (at 4-5% interest rate per year, municipal bonds likely make investors more money than a NMTC investor would earn, especially given the tax free nature of municipal bonds for investors).  The City of Nashville (Davidson Co) finances MNPS buildings this way too, through selling municipal bonds to finance capital projects.  This past year, the city approved $141 million in capital projects for district schools.

Guess how much public charters got out of that $141 million?  Zip. Zilch. Nada.

If you went back over the past couple of years, and calculated the totals of capital outlay money allocated to the district from the City of Nashville, it is going to be hundreds of millions of dollars put towards capital projects in district schools, and still Zip, Zilch, Nada for public charter schools.

Is that fair? Hardly. Charter school parents pay taxes too, taxes that are used to pay back the municipal bonds that the city of Nashville sold. Charter school parents pay for district school buildings but don't see any benefit for their kid's buildings.

If MNPS board members don't like the idea that public charter schools governed by UNPAID community volunteers might tap New Market Tax Credits to help finance a school building, then they could solve that problem and start providing facility financing or capital outlay funds to charter schools.

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