Sector View: Stable
Overall, our stable sector view reflects a balance of opportunities and risks in 2022. The opportunities are primarily driven by generally growing charter school demand, economic recovery, and the disbursement of meaningful federal stimulus funds to states and also directly to public schools, providing financial support for operations and growth in reserves. We expect continued credit stability for states and therefore at least stable per-pupil funding trends. But while financial flexibility has improved, risks remain, such as inflation, coronavirus variants, and mid-term elections. Schools with relatively strong enrollment and reserves are likely to continue to fare better, while schools struggling with enrollment declines will have less operating flexibility.
While there are credit risks inherent to the charter school sector, such as failure to meet authorizer standards, charter nonrenewal or revocation due to academic failures or enrollment shortfalls, overall, our stable outlook on the sector for 2022 reflects a growing number of opportunities. COVID-19 federal relief monies will support schools' operations for the next few fiscal years. However, since these are one-time funds, we will be watching how schools deploy these resources in a sustainable way. We believe that schools have the opportunity to successfully leverage federal support and increasing per-pupil funding through strategic spending to better position themselves to meet organizational goals as the economy continues to recover.
At the same time, demand for charter schools continues to rise; the majority of our rated charter schools saw enrollment stability or growth during the pandemic. We expect enrollment momentum to continue, though increased competition from home-schooling, online, or traditional options remains a risk. The 2022 midterm elections will see some leadership change and given the key role that state leaders play in education, there could be implications for charter schools.
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Questions That Matter
1. Why is the charter school sector view stable for 2022?
Throughout the pandemic, most charter schools have experienced growing enrollments while state per-pupil funding remained stable to increasing. At the same time, federal stimulus funding has been significant, creating increased financial flexibility. These positive trends are offset somewhat by highly leveraged balance sheets and uncertainty about inflation and potential staffing issues. We begin 2022 with 87% of our charter school ratings on stable outlook, 3% positive and 10% negative.
How this will shape 2022
Charter schools enter 2022 in a good credit position. Most schools ended fiscal 2021 with positive operating results and at all-time high levels of liquidity; however, these results can at least partly be attributed to one-time stimulus funding or formal recognition of federal Paycheck Protection Program (PPP) funding, and we will be monitoring how schools deploy these resources.
Economic growth not seen in a decade will continue. The 5.5% U.S. GDP growth expected in 2021 was the strongest seen in over three decades. Even the 3.9% S&P Global Economics forecast for 2022 will exceed any growth in the past 10 years. This should allow state revenues to come in close to target for fiscal 2022, which bodes well for continued per-pupil funding stability. (See "Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude", published Nov. 29, 2021, on RatingsDirect, for more information on the economic outlook.)
Still, some recessionary driven pressures remain. Inflationary challenges, supply chain bottlenecks, staffing shortages, and volatile markets reacting to pandemic swings could pressure state revenues, which in turn could cause funding cuts to charter schools. However, strengthened liquidity positions and expected stable-to-growing enrollments will allow the sector to remain stable in the face of the continuing economic uncertainties.
What we think and why
Meaningful federal stimulus funds provide flexibility. With generous federal emergency funding, and since state funding was not impaired (contrary to initial expectations), many of our rated charter schools expect positive results for fiscal 2022. About 25% of our rated charter schools received loans under PPP and the vast majority of these loans have already been forgiven. The amount of emergency funding, coupled with the flexibility in timing and usage of the third round of federal funds, bolster our rated schools' unrestricted liquidity and operations.
State stability means school revenue stability. While federal sources have been key to supporting charter school operations and providing flexibility, the $204 billion provided to states as part of the American Rescue Plan Act (ARPA) bill has played the most critical role for public schools. Stronger results at the state level meant better per-pupil funding, a key indicator of renewed fiscal stability for charter schools highly reliant on state revenues. Of course, not all states are created equal and per-pupil-funding levels differ materially by state for fiscal 2022 and beyond – however, we expect the year will bring general stability in funding.
Healthy demand continues for charter schools. Despite challenges, charter schools had a more successful transition to remote learning and have fared better throughout the pandemic than many traditional public schools. Demand has increased across the sector, with enrollment up by 7.1% between fall 2019 and fall 2020, while at the same time non-charter public school enrollment dropped 3.3%. The pandemic, online classes, teacher fatigue, and student disengagement have taken their toll in the public sector, causing parents to move their children to charter schools, private schools, and home school options. Most charter schools have been open in-person for the fiscal 2022 year as vaccination rollout and COVID containment contributed to safer onsite learning, but the omicron variant and employment shortages present some uncertainty as to whether this mode of operations will continue in 2022 for the public K-12 sector.
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2. How will regional pandemic responses, politics, and demographic differences continue to affect charter schools?
Differences from economic strength to political environment determine much of the statutory framework, since critical decisions affecting charter schools-- from authorization to funding mechanisms and levels--are determined at the state level. During the past two years, varying responses to the pandemic and rates of economic recovery have exacerbated state by state differences.
How this will this shape 2022
Vaccination rates could continue to influence school preferences. Vaccination successes continue, although the U.S. still lags most of the developed countries in rate of vaccination: currently 74% of the population has received at least one dose but these figures differ significantly state by state. In certain parts of the country (for example, Colorado and Utah), local demand preferences have shifted toward home-school options, particularly at the lower grade levels, contributing to enrollment drops amid the spread of more contagious virus variants. We expect these trends to continue in 2022.
This year's midterm elections could affect the sector. Midterm election changes can sometimes cause a shift in state and local charter support. This happened in 2018 and as a result we saw increased support for less-favorable charter laws, including proposals for charter school moratoriums and caps or limitations on expansion, some of which resulted in unfavorable legislation. Education reform continues to be a hot topic, as seen in the recent Virginia gubernatorial election. We anticipate that school closures and education policy issues will be a central debate in the midterm elections, which could have influence on charter schools' operating environment.
What we think and why
Per-pupil funding levels vary. As the table below highlights, expectations around per-pupil-funding differ materially by state. However, across our rated universe, we expect at least stable to growing per-pupil funding in fiscal 2022.
Table 1
| State Snapshot | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating/Outlook | Rated charter schools | State revenues per student, FY2021 ($) | Median DCOH, FY2020 | Median lease-adjusted MADS coverage, FY2020 | FY2022 (and beyond) per-pupil funding | Avg charter term | ||||||||||
| California | AA-/Positive | 37 | 11,098 | 139.1 | 1.45 | Strong increases in state revenues, translating to a 5% increase for the LCFF, plus elimination of deferrals. | 5 years | |||||||||
| Texas | AAA/Stable | 34 | 9,606 | 118.2 | 1.65 | Basic PPF allotment will remain stable through FY 2023, most schools expect to receive a modest increase once other funding factors are considered. | Initial term of charter is 5 years; charters are renewed for 10-year terms. | |||||||||
| Michigan | AA/Stable | 29 | 8,111 | 74.1 | 1.30 | 7% increase in base PPF. State statute limits the use of per pupil funding to no more than 20% of debt service. | Varies, one to seven years | |||||||||
| Minnesota | AAA/Stable | 28 | 10,378 | 108.8 | 1.22 | Governor's revised biennium budget for FY 2022 and FY 2023 includes a modest increase of about 2.5% PPF. | Maximum 5 years | |||||||||
| Colorado | AA/Stable | 27 | 7,918 | 197.1 | 1.87 | Over 10% increase in base PPF and a proposed 5.8% increase in FY 2023 provides growth in line with years pre-pandemic. | 5 years | |||||||||
| Utah | AAA/Stable | 25 | 7,501 | 158.5 | 1.60 | Continued improvement of historically below average PPF when compared to other states. Funding will increase almost 6%, up from the 1.8% increase in FY 2021. | Evergreen charter | |||||||||
| Arizona | AA/Stable | 25 | 7,738 | 107.1 | 1.30 | Budget includes a PPF increase of 2.6%, with additional increases in Prop 301 Funding which has been extended to 2041. | Initial term of charter is 15 years; maximum length of renewal contracts is 20 years. | |||||||||
| Pennsylvania | A+/Stable | 22 | 16,415 | 113.5 | 1.58 | Overall increase to education funding. Specific %’s are based on the allotments to public school districts. | 5 years | |||||||||
| New York | AA+/Stable | 13 | 17,355 | 276.5 | 2.11 | New York currently spends 2x the national average on public education on a per pupil basis and expects an average 2% increase in FY2022. | 5 years | |||||||||
| Florida | AAA/Stable | 12 | 7,811 | 180.7 | 1.30 | 3% increase in the base PPF compared with fiscal 2021. | Initital term of charter is 5 years; maximum length of renewal contracts is 15 years. | |||||||||
| DCOH--days' cash on hand. MADS --maximum annual debt service. Table includes ten states with the most charter school ratings. | ||||||||||||||||
Striking disparity in birth rates and demographics. While demand for charter schools continues to grow, changing demographics intensify competition in certain regions. In some cases, charter schools are authorized by the school district, and the relationship between the charter school and the authorizer can be restrictive, given the inherent conflict of competing for the same students and the related per-pupil revenue. Enrollment in public K-12 schools is projected to increase very modestly during the next few years, but there are notable differences in certain states and counties. In some areas with very limited growth expectations, the struggle for students will be more palpable.
Employment challenges will continue as the Great Resignation ages. The national unemployment rate has returned to 4.2%, a level reflective of a robust economy, and yet over 10 million positions remain open. Employment decisions made by workers seeking higher wages or more satisfying roles will continue in the new year. For charter schools within our rated universe, we have not seen notable teacher shortages, though there has been a greater level of transition in the current school year, and we have heard that some schools are struggling with bus driver and janitorial staff shortages. If this continues, schools could see higher expenses if they have to pay more to attract and retain staff or possible programmatic impacts over time.
Academic testing resumes amid varying rates of learning loss. K-12 students have experienced many challenges throughout the pandemic, creating learning gaps, though charter schools overall are reporting better results resulting from more in-person instruction as compared to traditional school district counterparts. While many schools have made investments in intervention programs to mitigate learning loss, as well as efforts around emotional and social health, schools will fare differently as testing resumes. Federal funding should offset cost implications associated with these programs, but there could be longer term demand or expense effects should the need for these resources increase. We expect schools with less financial flexibility and academic challenges prior to the pandemic may face exacerbated pressures.
Fixed costs from pension contributions can stress budgets. Most charter schools participate in their respective state's pension plan and as the burden of unfunded pension and other postemployment benefit liabilities increases, the cost is passed on to them (along with participating school districts). Therefore, in states with low funded ratios, schools see increasing required pension and other post retirement contributions. While we expect funded ratios could improve for many plans in fiscal 2021, given generally strong market returns, we will continue to watch for escalating pension and retirement obligation costs for schools, particularly in those states with low funded ratios. For more on fixed costs, please see "U.S. States Weigh Risk Reduction In Managing Pension And OPEB Liabilities," Sept. 20, 2021.
3. What additional factors are likely to affect the charter school sector in 2022 and beyond?
The charter school sector has been recognized for its swift and successful transitions in modes of instruction and continued investments in academics during the pandemic. It is not surprising that demand for these schools has been growing. Recently, there have also been sizeable gifts and grants bestowed upon charter schools, creating additional momentum and opportunity for the sector heading into 2022.
How this will shape 2022
Unprecedented gift for charter schools builds momentum. Recently, Michael Bloomberg announced a significant $750 million gift from his foundation to support the success and growth of charter schools; this equals almost double what the federal government spends on charter schools annually. This national five-year effort will create seats for 150,000 more children in 20 metro areas across the country and provide seed capital to open new charter schools and help existing charter schools grow--further broadening the funding options and opportunities for charter schools.
More pooled funds and initiatives for charter schools. In 2021, Equitable Facilities Fund (EFF, the sole member of ESRF) completed its third tranche for the Equitable School Revolving Fund, Del.'s (ESRF) (see our analysis published Sept. 14, 2021), continuing to provide loans to charter schools at a lower cost through its pooled funds. S&P Global Ratings assigned its 'A' rating to this "social bond" loan program under our municipal pool rating methodology. Subsequent to this issuance, EFF announced a $500 million "leaders of color" initiative as part of its missions to transform educational and financial access for communities of color across the U.S; funding will be disbursed by 2026 to provide low-cost loans for school facilities.
What we think and why
Federal funds will last a while, but how they are deployed will be key. The first two stimulus funding bills were timely and helpful in covering COVID related costs, but given limited restrictions on the use of the third round of stimulus (ARPA) schools were able to replenish their reserves, and in most cases still have plan dollars to use for new projects. How charter schools use the one-time revenues will be an important factor for long-term credit stability and ratings. We believe this final round of stimulus supports credit quality for the sector but we will monitor issuers for the longer-term implications of the pandemic.
Online charter schools are growing. There has been an unprecedented shift in students moving to online charter schools due to the convergence of two trends: the aforementioned growth in charter schools; and an increase in overall online learning, which the pandemic has accelerated. We expect to see more personalized online programs that adjust to the student's needs and provide more mobility and overall flexibility. From an enrollment perspective, the impacts on our rated charter schools are twofold. In Arizona, several of our rated schools received authorizer approval to open online schools this past year, which has and is expected to continue to increase their enrollments. At the same time, in other parts of the country, growing online enrollment at traditional school districts has created additional competition for some of our rated schools. Certain states distinguish between funding for online programs while others do not, which could also fuel growth in certain areas of the country versus others.
Charter renewal risk is mitigated, temporarily. Charter nonrenewal or revocations can affect credit quality swiftly and are generally the biggest credit risk for the sector, but in our view, this risk is muted while testing requirements have been paused. We continue to closely monitor all our rated schools' charter contracts, especially those of our rated schools up for renewal in 2022. Despite this intrinsic risk, the majority--87%--of S&P Global Ratings' ratings in the sector carried stable outlooks as of Dec. 31, 2021.
4. What ESG issues will challenge credit quality?
Environmental, social, and governance (ESG) factors continue to contribute to charter school credit discussions. While some organizations have broad tools to address ESG risks, charter schools do not always have the financial resources and personnel expertise to implement comprehensive risk management strategies to insulate operations from the evolving nature of these issues. We expect the focus on these risks to continue to heighten in 2022. We share our ESG views on charter school credit quality in dedicated paragraphs of our individual credit reports, but also through other commentaries.
How this will shape 2022
Disclosure of ESG issues remains in the spotlight. As interest grows in assessing and quantifying ESG risks and how they are being managed, disclosure will continue to be a hot topic in the sector. With the evolving nature of ESG factors, we believe certain risks may be more influential and material to creditworthiness for U.S. public finance issuers in 2022 and could lead to credit pressure.
Chart 3
What we think and why
Proactive management is more important than ever. Pre-COVID, while most schools had not identified a potential "pandemic" explicitly in their enterprise risk management processes, many had crisis plans and procedures in place. This allowed management teams to pivot swiftly and successfully to varied instructional modes throughout the pandemic, highlighting the importance of proactive management and contingency planning. The ability of management teams to forecast, react to events decisively, communicate, and manage expenses through event risk - whether pandemic-related, cybersecurity, labor shortage or unionization, among other areas, remains critical.
Environmental risks heighten by storm headlines, drought, and climate transition risk. On average, annually in each the past five years there have been almost 17 storms with losses of over $1 billion, and the drought in 2021 at one point was affecting two-thirds of the states. These conditions are expected to continue in certain parts of the country and will further bring analytical attention to any schools affected and the actions taken, including associated costs to remediate these catastrophic events. Please see "ESG in U.S. Public Finance Credit Ratings: 2022 Outlook And 2021 Recap,"Nov. 29, 2021, for more information.
Schools remain highly susceptible to cyber threats. Cybersecurity lapses continue to create disruption and drain liquidity throughout public finance. For charter schools, the move to virtual learning and increasing online presence makes them more susceptible to cyber threats. For more on cybersecurity in ratings, please see "ESG Brief: Cyber Risk Management In U.S. Public Finance," June 28, 2021, and "Cyber Risk In A New Era: Are Third-Party Vendors Unwitting Cyber Trojan Horses For U.S. Public Finance?," Oct. 25, 2021.
Rating Distribution And Performance
As of Dec. 31, 2021, S&P Global Ratings had 308 public ratings on charter schools in 26 states (plus the District of Columbia). Certain states such as California and Texas have large charter school networks with multiple schools supporting a single rating. The charts below reflect the number of obligated groups issuing rated debt, and not the number of schools or networks. In 2021, we assigned 28 new public ratings, compared to 24 in 2020.
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While the majority of rated issuers, which continue to mature, are stable, the charter school sector remains susceptible to some unexpected credit profile changes, which could relate to failure to meet authorizer standards, charter nonrenewal due to academics, or enrollment shortfalls. During 2021, we continued to see examples of these credit risks particular to the charter school sector, but we only saw one payment default (failure to make payment of principal and interest as scheduled, per S&P Global Ratings' definition) within our rated universe. COPPA (Children of Promise) ceased operations in June 2020 and defaulted in 2021. Our rating on Plymouth Educational Center Charter School continues to remain at 'D' as the school is operating under a forbearance agreement through June 2024.
Table 2
| Rated Charter Schools Defaults | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Obligor | State | Default date | Rating prior to default | Initial rating | Current status | |||||||
| Bradford Academy | MI | 09/20/2013 | CCC+ | BBB- | NR | |||||||
| North Star Charter School | ID | 06/02/2014 | C | BB | NR | |||||||
| Charter School of Boynton Beach | FL | 08/18/2015 | CC | BBB- | NR | |||||||
| Allen Academy | MI | 01/01/2017 | CC | BB+ | NR | |||||||
| Stride Academy of Minnesota | MN | 04/01/2019 | CC | BB- | NR | |||||||
| ASPIRA of Florida Inc | FL | 07/31/2019 | B | BB | NR | |||||||
| Plymouth Educational Center Charter School of Michigan | MI | 11/01/2019 | D | BBB- | D | |||||||
| Children of Promise | CA | 05/21/2021 | CC | BB+ | NR | |||||||
| NR-not rated. | ||||||||||||
This report does not constitute a rating action.
| Primary Credit Analysts: | Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com |
| Avani K Parikh, New York + 1 (212) 438 1133; avani.parikh@spglobal.com | |
| Secondary Contacts: | Luke J Gildner, Columbia + 1 (303) 721 4124; luke.gildner@spglobal.com |
| Amber L Schafer, Centennial + 1 (303) 721 4238; amber.schafer@spglobal.com | |
| Shivani Singh, New York + 1 (212) 438 3120; shivani.singh@spglobal.com | |
| Research Contributors: | John Miceli, Dallas; john.miceli@spglobal.com |
| Ryan Miller, Dallas; ryan.miller@spglobal.com | |
| Arpita Ray, CRISIL Global Analytical Center, an S&P affiliate, Mumbai | |
| Sue T Ryu, Chicago; sue.ryu@spglobal.com |
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