As of Sept. 22, 2022, S&P Global Ratings maintains 33 public ratings on charter schools, in the State of Texas, which, along with California, tops our list of states with the most rated charter schools. Today, Texas is home to more than 900 charter schools, serving more than 400,000 students. The Texas legislature enacted its charter school law in 1995, and in the fall of 1996, the state's first charter schools opened their doors.

Chart 1

The credit profiles for our rated charter schools in Texas are slightly superior to those for the rest of the sector, with 61% of schools achieving investment-grade ratings compared with just 43% for the sector as a whole. We attribute this credit strength to more supportive state laws for charter schools compared with the rest of the country. These include the acceptance of qualifying bonds issued by charter schools into the Texas Permanent School Fund (PSF) Bond Guarantee Program, which can significantly lower a school's cost of capital by serving as a credit enhancement for guaranteed bonds carrying a 'AAA' rating.

Authorizer Framework

• All 33 rated charter schools in Texas are authorized by the Texas Education Agency (TEA), most for a maximum term of five years; renewals, if approved, can extend as long as 10 years.
• In accordance with state statute, local school districts, colleges or universities, and home rule districts (charter districts within a school district) may be authorizers as well.
• We view the governance, financial performance, academic reports, and consecutive charter renewals from the state as favorable indications of an acceptable relationship between the TEA, which remains the most prevalent authorizer, and charter schools.
• Not surprisingly, rated charter schools are clustered in major cities across the state, and the Dallas-Fort Worth metropolitan statistical area is home to the majority of the charter schools that we rate.

Credit Fundamentals

Table 1

More than half of our rated schools in Texas match our definition of a charter network and have multiple campuses. But while Texas is home to numerous large systems, many charter schools in the state also operate at a single site. The state includes the only 'A' category rated charter school we rate (IDEA Public Schools: A-/Negative).

Generally, Texas public schools serve a larger student population than their peers across the country given continued school-age population growth across counties in the state. This results in median enrollment levels, and in some cases, operating budgets, that are significantly higher when compared with medians for the entire sector. While Texas charter schools are not allowed to levy a property tax, and they do not receive an allocation of property taxes levied by local traditional public school districts as in other states; they do continue to receive state funding to cover lease and building facility costs, which we view as favorable for charters in the state.

Chart 2

Enrollment in charter schools continues to rise, compared with a decline in traditional school districts across the state. During the COVID-19 pandemic, Texas charter schools' enrollment increased by 8.6% and school districts' enrollment dropped by 2.9%.

What We're Watching

Texas PSF capacity.   The Internal Revenue Service (IRS) and the Texas State Board of Education both have requirements that limit the PSF's capacity to guarantee debt; of the two, the IRS ruling is currently the most restrictive, capping the total capacity at $117.3 billion for public and charter schools. The TX PSF is nearing total capacity (currently, total bonds guaranteed by the PSF exceed $104 billion), which could impact charters. Although the program has a capacity limit of $7.78 billion for charter schools, that amount is not reserved exclusively for their use. As per documents governing the Texas PSF, as the limit is approached, the program determines awards in accordance with program rules. Should the IRS increase the limit, the Texas PSF's capacity would increase in accordance with IRS guidance. We will continue to monitor the IRS limit for any potential increases to the cap. (For more information about the PSF guarantee see report on the Texas PSF, published June 25, 2021, on Ratings Direct).

School choice vouchers.   Will school vouchers become an option in the state? Although Texas is not one of the nearly 20 states including districts and territories) offering a voucher program, the conversation surrounding vouchers could change following upcoming elections. We have ratings is about a handful of states and territories that have voucher programs. We will continue to monitor how Texas views voucher programs and the potential for traction and if it results in any shifts in charter school enrollment trends.

Mid-term elections.   In Texas, voters will elect officials for seven statewide seats, including the governor. In addition, voters will elect officials for district-based congressional and legislative offices, the state board of education, and judicial seats. Recent events, such as the tragic mass shooting at a Uvalde elementary school and the U.S. Supreme Court's overturning of Roe v. Wade, have reshaped the final months of the race, making it more competitive between candidates. We will continue to monitor the outcome of the elections and what the potential effects could be for charter schools, particularly if a less charter-friendly governor is elected.

Population growth.   While certain regions in the state's four major counties, namely Dallas, are experiencing school-age population declines, overall, all school-age population projections for Texas' major counties indicate growth of 1% to 11% over the next five years. We believe that this expected growth will enable both traditional public schools and charters schools to continue to operate in a more favorable demand environment than states that are seeing material declines among their respective school-age population, which we view positively.

More charter restrictions.   In Texas, current state law does not require charter officials to host a local public hearing of how their proposed new charter school will affect local community public schools before opening--although traditional public districts might submit projected effects to the TEA about their budgets. The new federal rules would require charters seeking grants to provide a detailed analysis of how the new charter facility would impact surrounding traditional school districts, including demonstrating sufficient student demand via an assessment. We will continue to monitor how these new rules affect the creation of new charters as well as expansion of existing charter organizations.

Steady funding environment.   Charter schools continue to receive substantial state support based on a formula with a base level of funding plus additional funds tied to the demographic population served, which is weighted to benefit those serving economically disadvantaged populations. State funding has been held flat since 2019 when the basic allotment was increased nearly 20% to $6,160 from $5,140. The recently announced $27 billion budget surplus has generated many proposals for how best to use the funds, including many related to school finance. We will continue to monitor the outcome of the 2022 elections for any potential changes in the 2023 legislative session.

Pension funding levels.   All public school employees in Texas, including charter school teachers in , must participate in the Teacher Retirement System of Texas (TRS), which is adequately funded in our view at 88.8%. Proposed Senate Bill 12 would increase how much the state, school districts, and current teachers contribute to the pension fund over the next six years. We believe that this should continue to support current system funding levels without a material adverse effect on charter school margins over our outlook horizon, and we continue to view the funded status and 100% contribution rate of charter district participants favorably.

Teacher shortage.   Schools across the country are facing challenges related to teacher shortages and Texas is no stranger to these pressures. While the state reportedly certified almost 26,000 new teachers in 2020-2021 and the attrition rate hovered about 9% during the school year, reflective of the current climate, attrition has reportedly risen to almost 12% during the 2021-2022 school year. We will continue to monitor how schools approach the challenge of recruiting and retaining quality instructors and the subsequent effects on both classroom performance and respective budgets.

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 be willing to make cuts down the road.

Table 2

Jack Tortora contributed research to this article.