There are many unique characteristics of the charter school sector, with charter authorization risk a primary consideration within our rating criteria. A charter school requires a charter agreement to operate, and its ability to maintain uninterrupted approval to do so through consecutive contract renewal periods is imperative. Within our rated universe, the charter renewal framework for authorizers in the Commonwealth of Pennsylvania is a notable outlier. While many of our ratedPennsylvania schools continue to exhibit healthier demand and financial metrics than peers and medians at respective rating levels, the operating environment in Pennsylvania commonly constrains Pennsylvania charter school ratings in comparison with other states.

Chart 1

For over a decade, we have noted concerns with the operating and authorizing environment for charter schools within the commonwealth, particularly within the SDP. Some of the factors contributing to the complexity of the authorizer relationships over time include the rate of charter enrollment growth, demographic shifts, state funding volatility, and the SDP's budget pressures (including its distressed financial position, which resulted in state control from 2001-2018). While some of the challenges of the operating environment related to legislation and funding are endemic to the commonwealth, much of our concerns about charter standing rest with Philadelphia-based charter schools. Additionally, Philadelphia is distinct when it comes to charter renewals, given that there is a long history of charter schools operating with unsigned charter agreements for varying reasons. We understand most schools are working in collaboration with the SDP toward finalizing their respective charter agreements and expect to achieve resolution in the near term. However, in the past, many of these negotiation proceedings have extended over multiple years. Moreover, these discussions can be prolonged, depending on the level of discord around the contract terms. Because of these factors, this commentary primarily focuses on charter schools in Philadelphia that are authorized by the SDP.

Statutory Framework

Pennsylvania charter framework

• In Pennsylvania, local school districts act as the authorizer for brick-and-mortar charter schools, while cyber/virtual charter schools are authorized directly by the Pennsylvania Department of Education (PDE).
• Charter schools in Pennsylvania receive per-pupil revenues from the local school districts based on the per-pupil subsidy formula funded by the state for that particular school district.
• Kindergarten-through-grade 12 (K-12) funding follows the student, which means that the district must remit funding at the same level for students living within its jurisdiction, regardless of where the student attends school.
• In our view, relationships between authorizers and charter schools vary greatly, with some supportive and some severely restrictive or antagonistic, given the inherent conflict of interest for school districts that compete for the same students and the related per-pupil revenue.
• For more information on the statutory framework and funding of charter schools in Pennsylvania, please see our most recently published Pennsylvania Charter School Brief here.

Authorization and renewal process: School District of Philadelphia CSO

In chart 2 below, we have mapped out our understanding of the CSO's charter renewal process. Following completion of the renewal application and review by the CSO, an official recommendation is made at the SDP's board meeting during the spring of the renewal year. If a charter school is recommended for renewal, its board is presented a renewal contract to sign. This contract may be granted with or without conditions. These conditions reflect changes to the contract suggested by the authorizer. If signed, the contract enters a pre-execution stage that requires certain additional documentation to be provided by the school to the SDP. Once the SDP determines it has received sufficient documentation, it then moves to execute the contract as early as its next board meeting, schedule permitting. Based on our understanding of the renewal stages, we categorize the charter status of our rated schools as: executed, unsigned, unexecuted, expired, or nonrenewed (see table 1).

Table 1

Chart 2

Though we believe unresolved contracts present elements of risk to credit quality, particularly as schools go into future charter renewal periods, we believe that immediate credit concerns are mitigated by commonwealth statute, which allows schools to continue operating pursuant to their last executed charter agreement as long as they remain in compliance with the contract. In a recent conversation with S&P Global Ratings, the SDP's Charter Schools Office stated it defers to the precedent set by case law, and in our opinion, this is a favorable development from several years ago, when the SDP publicly stated it would not renew charters that were unsigned. Another mitigating factor is that through the charter law, schools may receive funding directly from the commonwealth should there be an interruption to per-pupil funding from the student's resident district. This applies broadly to any form of delayed payment, and schools in our rated universe have used this mechanism successfully in the past.

Ultimately, schools that have renewal conditions related to meaningful academic, financial, or governance underperformance continue to face the most immediate risk to their charter operations. While none of our rated schools have been recommended for nonrenewal at this time, upon non-renewal or revocation of a charter, a school may appeal to the PDE's charter school appeal board to seek reinstatement. However, if the appeal is successful, the charter school is likely to continue being authorized by its home district, since the state currently only authorizes cyber charter schools. Additionally, there are only very rare examples of a charter school being authorized by an entity external to the sending district, as in the instance of a school district being under receivership.

Table 2

The ratings and outlooks of our Philadelphia charter schools are unchanged at this time. With the exception of West Philadelphia Achievement Charter Elementary School (WPACES), all of our rated schools authorized by the SDP were recommended for renewal in their most recent renewal period. Table 2 reflects the charter status at each school, based on our discussion with the authorizer and reviews of the individual schools. Of the 10 rated schools, five are currently operating with unsigned charters and seven are ultimately unexecuted, as Global Leadership Academy and KIPP Philadelphia have contracts that are signed but awaiting execution by the SDP board. The schools and the CSO continue to negotiate and partner to reach a resolution. While each school's renewal contract differs to some extent, some common areas of focus include language around enrollment caps, as well as requirements for charter schools to obtain separate legal representation from their management organizations (where applicable).

West Philadelphia Achievement Charter Elementary School (WPACES)

WPACES is unlike other schools with unsigned charters, due to the length of the unsigned charter term (since 2011). We believe WPACES faces operational and financial risk as a result of potential resolution scenarios. For more details, please refer to the most recent summary report.

Other rated Pennsylvania charter schools

Though varied, charter schools outside Philadelphia also face authorizing environment pressures. In addition to the schools authorized by the SDP, we currently rate nine charter schools that are authorized by several other districts within the state (see Table 3). In contrast with Philadelphia, only one school is currently operating with an unsettled charter agreement. Additionally, none of the schools have enrollment caps. However, the relationship between schools and the districts are varied in terms of collegiality and transparency, which has created a more adversarial environment for some schools. While we remain focused on Philadelphia, we believe the relationship structure, with the traditional school district competing directly with the charter schools it authorizes for students and funding, will strain the delicate balance of these relationships regardless of geographic location.

Table 3

Propel Schools--Braddock Hills

Propel is unique in that it has been operating with an expired charter agreement since 2015, despite having completed all of the requirements sufficient for renewal. While the contract is expected to be renewed during the 2022-2023 school year by its authorizer, Woodland Hills School District, the rating remains on negative outlook at this time. For more details, please refer to the most recent full report.

What We're Watching

Chart 3

The chart above highlights what we believe will be the main drivers for credit quality this year and beyond. With the election of a new governor in 2022, there may be shifts in the charter school landscape over the next few years. During his campaign, the governor-elect, Attorney General Joshua Shapiro, favored continued funding increases across education, enhancing funding equity across districts, and expanding school choice options across the commonwealth. These shifts would indicate, at minimum, the maintenance of the status quo for charters, though this will have to play out over a number of years in conversation with other anticipated shifts in the legislature. Locally, the appointment of a new superintendent for SDP in 2022 and an upcoming mayoral election in 2023, which could lead to various shifts in policy and leadership at SDP's board level, are also near-term considerations. Over the longer term, we expect to monitor the statutory environment in Pennsylvania around charter school growth, enrollment caps, authorization, and funding, as broader population and demographic shifts continue, and competition increases in the K-12 market.

Related Research

• Through The ESG Lens 3.0: The Intersection Of ESG Credit Factors And U.S. Public Finance Credit Factors, March 2, 2022
• U.S. Charter Schools Sector Fiscal 2021 Medians: Schools Get A Booster From Pandemic Relief, June 14, 2022
• Charter School Brief: Pennsylvania, April 26, 2019