Overview

As of April 25, 2022, S&P Global Ratings maintains 26 public ratings on Colorado charter schools. Colorado has the fourth-highest number of rated charter schools, after California, Texas, and Michigan. It was the third state in the U.S. to enact a charter school law, and the state's first two charter schools opened their doors in 1993. As of the 2020-2021 school year, Colorado is home to 266 charter schools serving approximately 131,000 charter school students. The students enrolled in public charter schools in Colorado now comprise 15.0% of all public school students statewide, an increase from 13.9% during the previous school year. The credit profiles for our rated charter schools in Colorado are generally superior to those of the rest of the sector, with 73% of schools achieving investment-grade ratings compared with just 43% for the sector as a whole. We believe the relatively stronger ratings distribution is driven by favorable demographic trends and increased demand for charter schools, contributing to strong enrollment growth as well as positive per-pupil funding trends, which have supported healthy operations and growing financial resources.

We also attribute our Colorado charter school ratings distribution to generally more supportive and transparent state laws for charter schools, compared with those of the rest of the country. These include: the lack of a state charter cap as well as acceptance of qualifying charter schools into the state's Moral Obligation Program, which was recently expanded, and can significantly lower a school's capital costs. The National Alliance for Public Charter Schools recently released its 2022 rankings of state charter school laws, and Colorado ranked second on its list. While overall support for charter schools in the state remains steady, we continue to monitor any potential changes in charter policy or the state's charter law. Like several other U.S. states, Colorado introduced a few recent bills that we consider less charter friendly, like House Bill 21-1295 (HB21-1295), which failed to gain traction and has since been withdrawn. HB21-1295 would have limited an entity's ability to appeal an authorizing school board's decisions regarding a charter school.

Chart 1

Authorizer Framework

• Colorado charter schools are primarily authorized by the local school district for a maximum term of five years, although some authorizers offer longer contracts. The Colorado Department of Education provides clear guidance to district authorizers on the accreditation and appeals process, which we view positively.
• Although competition for students can create an inherent conflict of interest for these entities, we have found good working relationships between most of our Colorado rated charter schools and the local district. One indication of the strength of the relationship is whether the authorizer returns its 5% per-pupil-revenue authorizer fee back to the charter school, which seems to be standard practice for some authorizers with high-performing charter schools.
• The Colorado Charter School Institute (CCSI) is the state's only non-district authorizer. CCSI can accept applications from schools in districts that do not have exclusive chartering authority or from schools in districts that have exclusive authority but give permission to CCSI to act as authorizer. The institute has a clear application, renewal, and revocation process with clear benchmarks and milestones, which we also view positively. We note CCSI is the authorizer for approximately 7% of our rated charter schools.

Credit Fundamentals

Many Colorado charter schools are single-site operators. None of our 26 rated schools in Colorado meet our definition of a charter network and this results in median enrollment levels and operating budgets that are significantly smaller when compared with medians for the entire sector, which somewhat limits financial flexibility. However, we note Colorado charter schools continue to have significant financial flexibility, relative to that of similarly sized peers.

Table 1

For the past few years, median days' cash on hand increased across all rating categories to 178 in fiscal 2021. This growth was supported by Elementary and Secondary School Emergency Relief (ESSER) funding, coupled with overall enrollment growth and per-pupil funding increases. However, we note fiscal 2021 per-pupil funding was 5% lower than fiscal 2020 levels, with median per-pupil funding of $8,170 in fiscal 2020. The above factors also led to an increase in lease-adjusted maximum annual debt service (MADS) coverage across all rating categories.

Across Colorado, enrollment in charter schools grew each year over the past decade, compared with flat-to-declining enrollment across district schools (see chart 2). In our rated universe, most schools saw a flat-to-increasing level of enrollment for both fall 2020 and fall 2021, which speaks to steady demand amid the pandemic. Much of the charter growth in fall 2020 stemmed from greater virtual or blended-learning model offerings, given the pandemic and increasing parental concern over attending school in person. Across grade levels, secondary schools saw the greatest increase in enrollment, mostly in grade 12, followed by grade 10 and grade 8. Early Childhood Education (ECE) saw the greatest decreases, with prekindergarten enrollments down almost 25% and half-day kindergarten enrollments down 17%, which is in line with national trends.

Chart 2

What We're Watching

Population growth.  Denver County's school-age population projections indicate 4.3% growth in the minor-age population over the next five years, which decreases the risk of oversaturation and, in many cases, supports good working relationships between Colorado charter schools and the local school districts.

Funding increases.   After several years of 2%-3% growth, per-pupil revenue increased to nearly 6.0% in fiscal 2019 and 4.5% in fiscal 2020. While the state funding was cut by 5% in fiscal 2021 in response to the onset of the COVID-19 pandemic, levels rebounded immediately in fiscal 2022, with average per-pupil revenue increasing by nearly 10%. It is further projected to increase in fiscal 2023 by 6%, which is still slightly higher than in pre-pandemic years.

Equalization.   The passage of HB 17-1375, which required local school districts to share mill levy override revenue to the charter schools, has benefitted the schools. In fiscal 2020-2021, charter schools received $7 million from the Mill Levy Equalization Fund, and it increased to about $9 million in fiscal 2021-22.

Pension funding levels.   The School Division Trust Fund, which most Colorado charter schools participate in, is underfunded at about 67% based on the Dec. 31, 2020, measurement date, which we believe creates the potential for increases to required contributions in the near term. We view positively schools that are preparing for increases in employer contributions in their multi-year financial plans.

Teacher shortage.   There is a teacher shortage in Colorado with thousands of school positions open statewide in all public schools. This shortage creates a pressure on existing teachers and also adversely affects students' education quality. Not all schools have been affected by the teacher shortage equally, and we believe a charter school's ability to attract and retain talented faculty is key to the organization achieving its mission.

Mid-term elections.   Colorado's current Democratic governor, who founded two charter schools, has long been an advocate for charter school issues. Upon election to his first term, the governor-elect took office with Democratic majorities in both chambers of the general assembly. We note the governor is running for reelection to a second term in 2022. We will continue to monitor the outcome of the election and what the potential effects could be for charter schools, particularly if a less charter-friendly governor is elected.

Long-term use of one-time funds.   ESSER funds have provided a significant amount of operating revenue to traditional public and charter schools. Many schools have used emergency funding to hire additional full- or part-time staff to address learning loss amid the pandemic. As the wave of federal relief expires in September 2024, schools will need to ensure that current spending is sustainable or prove willing to make cuts down the road.

Table 2