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Bridges Fall 2011

Bridges Fall 2011

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Categories:Topics, Art & Design
Published by: Federal Reserve Bank of St. Louis on Jan 27, 2012
Copyright:Attribution Non-commercial


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By Ian Galloway
very year, 1.2 mil-lion students drop outo high school in theUnited States. A clear moraland policy ailure, this ongo-ing crisis is also an economicdisaster. Over their lietimes,dropouts cost the govern-ment, on average, $292,000in lost tax revenue, publicassistance and incarcerationexpense, and earn $700,000less than they would witha diploma. The dropoutproblem is particularly acutein low-income communities,where it is six times morecommon than in middle- andupper-income communi-ties. This perpetuates incomeinequality and has caused U.S.Education Secretary Arne Dun-can to declare that “educationis our path out o poverty.”
Charter Schools as a Solution
Some communities haveturned to charter schools toaddress the academic achieve-ment gap. By design, charterschools are public schoolsthat operate outside thenormal public school gover-nance structure and have thereedom to experiment withmany aspects o the educationdelivery model.There are currently morethan 4,900 charter schoolsserving 1.6 million childrenin 39 states. These charterstake a variety o orms; manyincorporate novel educationelements in their curriculaand provide wrap-aroundsocial services as needed. Among the most well-known charter schools arethose operated by the HarlemChildren’s Zone (HCZ), whichtakes a more holistic approachto education. Named “one o the biggest social experimentso our time” by Paul Tough at
The New York Times
, the HCZprovides program participantswith a continual pipeline o reinorcing social and edu-cational services throughoutchildhood. The pipelinebegins with Baby College,targeting children up to age 3,
Replicating the Harlem Children’s Zone:
How a Charter School Tax Credit Could Bring Human Capital Investment to Scale
continued on Page 2
4 6
Collaboration Is Key inSouth Central IllinoisCommunityMidtownRenaissanceCommunity-Based RuralRedevelopment throughSimple, Local Actions
Charter schools have the potential to provide new and better services to students.
      I      N      D      E      X
and continues with in-school,ater-school, social-service,health and community-build-ing programs.Successul charters, likethose run by the HCZ, di-er dramatically in type andapproach. Accordingly, it isdicult to identiy a singleor combination o variablesin any one charter that, i replicated, would producethe same results across thepublic school system. As aresult, a number o promisingstrategies have simply becomeone-o success stories. Thisinability to deliver replicableinnovation has locked thecharter movement in a per-petual cycle o experimen-tation which, in turn, hasled to policy inertia. A newpolicy approach is needed;specically, one that can scalesuccess without sacricinginnovation.
 A Model that Works: The Low Income Housing  Tax Credit
Such a policy approachalready exists in the aordablehousing eld. Passed as parto the Tax Reorm Act o 1986,the Low Income Housing TaxCredit (LIHTC) is a dollar-or-dollar investment tax credit (onedollar o tax credits reduces onedollar o tax liability) designedto und the construction andrehabilitation o aordable,multiamily rental housing.The credit, which acts as a “cou-pon” or uture taxes owed, isallocated to state authorities ona per capita basis and awardedto aordable housing developersaccording to a scoring systemthat takes project viability andsocial impact into account. I awarded a tax credit allocation,developers sell the credits toinvestors (mostly corporations)in exchange or project equity.The credits are sold at marketvalue based on a range o ac-tors, including credit recapturerisk. Recapture occurs when aproject alls out o complianceat any point in the rst 15 yearso its operation, resulting in asignicant nancial loss to itsinvestors. Compliance is tieddirectly to project completion,nancial viability and ongoingrent aordability.The LIHTC program isinstructive because it demon-strates how the ederal govern-ment can successully bring itssubstantial nancial resourcesto bear on a decentralized,locally based system o serviceproviders. A similar policytool could be used to grow anetwork o high-achieving,high-poverty charter schoolscapable o meeting the indi-vidual needs o a diverse set o disadvantaged students.
Charter School Tax Credit
 A charter school tax creditwould unction much like theLIHTC. Credits would beallocated to the states, which,in turn, would award themto high-perorming charterschools. Upon receivingthe credits, schools wouldsell them to private inves-tors and use the proceeds tound wrap-around servicesor intensive classroom-basedinitiatives. The price paid orthe credits would be based onthe investor’s level o con-dence that those services andinitiatives will deliver theacademic results necessary tostay in program complianceand avoid credit recapture.Compliance requirementswould be specic, measurablegoals demonstrating low-incomestudent achievement. Thesestandards would have the dualbenet o allowing the govern-ment to monitor improvementwhile also allowing the schoolto evaluate its own programsand adjust them as needed. A charter school tax creditwould also ensure that everydollar spent on the programis tied directly to a positive,measurable education out-come. This is a signicantimprovement over the statusquo—investing in schools onthe basis o past perormanceor uture promise, with norecourse should those assess-ments prove to be wrong.This is particularly importantduring periods o scal aus-terity. In commenting aboutthe LIHTC in 1992, the
Los Angeles Times
argued that thetax credit “orms the corner-stone o the numerous public/ private partnerships that areincreasingly the salvation o cash-short cities and states.”Today, as in 1992, budgetdecits are leading to socialprogram cuts. As policymak-ers seek to balance their bud-gets going orward, a charterschool tax credit programcould oer a scally responsi-ble method o unding humancapital development becauseunding would only fow toschools that work. A charter school tax creditprogram would also raise privatecapital to directly support
Harlem Children’s Zone
continued rom Page 1
Dropouts cost the government, onaverage, $292,000 in lost tax reve-nue, public assistance and incarcer-ation expense, and earn $700,000less than they would with a diploma.
A new policy approach isneeded; specically, one thatcan scale success withoutsacricing innovation.
education, a critical need inimpoverished school districts.High-poverty public schooldistricts receive, on aver-age, $773 less per student,per year, than low-povertydistricts. Meanwhile, theschools operating in thesedistricts ace signicantpoverty-related challengesthat their low-povertycounterparts do not ace. Ata minimum, these schoolsshould receive unding parityand, arguably, supplemen-tary unds as well. A char-ter school tax credit woulddeliver these unds, allowingschools to meet local needsand deliver customized edu-cational services contingenton their ability to remain inprogram compliance.There may be ancillarybenets to a charter schooltax credit as well. Low-income student perormanceis infuenced by a host o actors, many outside thedirect purview o school. Asa result, investors may ndcomplementary communityinvestments to be an eec-tive way to protect their taxcredit investment. Theseinvestments, combined withthe unds raised by the taxcredit program, could besucient to transorm entireneighborhoods, as the HCZhas done in New York City. Acharter school tax credit mayalso increase the engagemento other stakeholders in theeducation process, includ-ing, among others, localbusinesses, universities,nonprots and neighbor-hood residents. As with theLIHTC, a charter school taxcredit would create a nan-cial incentive to organizethese community stakehold-ers and leverage their privateinormation. It is also a wayto engage them directly in ashared societal goal: better-equipped and more-produc-tive workers and citizens.Low-income students haveunique needs, both academi-cally and socially, and schoolsthat serve these students needthe operational fexibility tomeet them. Likewise, theunding streams that supportthese schools should allowor adaptive use, contin-gent on success. A charterschool tax credit program, byvirtue o its built-in account-ability checks, is the perectvehicle to deliver this typeo unding. Unlike directexpenditures, which arenot recoverable, tax creditsallow or experimentationwithout exposing the govern-ment to ailure risk. Thisaords schools the reedom toaddress local needs withoutthe oten onerous, and poten-tially restrictive, oversightthat comes with direct publicunding.
Ian Galloway is a senior associ-ate in the Community Develop-ment Department at the FederalReserve Bank o San Francisco.This article is based on a working paper published by the FederalReserve Bank o San Franciscoin December 2010. To read theoriginal paper and view cita-tions, visit www.rbs.org/  publications/community/wpapers.
As policymakers seek to balancetheir budgets going orward, a char-ter school tax credit program couldoer a scally responsible method o  unding human capital developmentbecause unding would only fow toschools that work.
 A charter school tax credit would ensure that every dollar spent on the program is tied toa positive, measurable education out come.
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