S&P Global Ratings' median financial metrics for rated charter schools remain healthy, reflecting the continued favorable funding environment and flexibility provided by federal pandemic relief funds and stable-to-increased state per-pupil revenue. Margins and lease-adjusted maximum annual debt service (MADS) coverage moderated somewhat in fiscal 2022 relative to an extraordinarily strong fiscal 2021, primarily due to inflationary pressures with regard to salaries, contracted services (such as third-party transportation providers), utilities, and supplies. This is evident in median expenses per student increasing 15% year over year. We believe that record strong reserves currently supporting state credit quality (see "U.S. States’ Fiscal 2024 Budgets Expected To Weather Economic Uncertainty," published April 27, 2023, on RatingsDirect) will benefit per-pupil funding in the near term and, coupled with considerable unspent Elementary and Secondary School Emergency Relief (ESSER) III funds available through September 2024, operating and balance-sheet metrics for the sector should remain intact over the next year. 

In fiscal 2022, median financial metrics regressed marginally but were healthy overall, with state per-pupil funding remaining favorable and helping to combat some of the cost pressures being borne by school budgets. Despite this modest regression, we believe fiscal 2022 was more of a return-to-normal situation when compared with medians before fiscal 2021. For many charter schools, fiscal 2021 was an extraordinarily strong year because budgets were not yet affected by inflation to come, and finances were also bolstered by the material and immediate ESSER funding received, forgiveness of Paycheck Protection Program loans, and, to some extent, lingering cost savings from some schools beginning the 2020-2021 school year in a virtual or hybrid educational delivery mode.  

Fall 2021 (fiscal 2022) median enrollment and demand metrics were steady across the sector but do reflect some uneven performance on a state-by-state basis. Waitlists for the most part continue to reflect a multiyear trend of softening, with schools continuing to draw on waitlists to maintain enrollments amid shifting demographic trends and online versus in-person preference, among other competitive forces. Student retention remained steady, and we note this metric has remained remarkably stable over time, with a sectorwide median that has not deviated from the 89%-90% range in the past seven years. Our preliminary fall 2022 demand data (fiscal 2023) indicate continued enrollment growth with steady waitlists and student retention, which we believe well positions our rated charter schools as they head into the next school year. 

The Rated Charter School Universe: Continued Growth With Balanced Rating Activity 

In the past year, our public charter school ratings increased by about 5%, building on 5% growth in the previous year. The range of ratings in the sector remains unchanged, spanning 'A-' to 'D' (default) (see chart 1), with the share of speculative-grade ratings essentially unchanged at about 56%. The 'BBB-' rating level continues to account for the greatest share at 33% of all ratings, with the 'BB+' and 'BBB+' rating categories exhibiting the most annual growth. Reflective of our stable view for the sector, 88% of ratings had a stable outlook as of May 15, 2023, with 6% carrying a negative outlook and about 6% with a positive outlook. (See "Outlook For U.S. Charter Schools: Credit Profiles Hold Steady," published Jan. 24, 2023.)

Chart 1

Over the past 12 months, upgrades accounted for a slight majority of all rating changes at 53%, reflecting more balanced activity compared with the previous year when upgrades outpaced downgrades two to one. We believe the higher proportion of upgrades in 2022 reflects improvement in demand and financial profiles beyond the uncertainties posed by the COVID-19 pandemic in the previous year. With a relatively clearer operating and funding environment in the past year, rating activity normalized. As for rating outlooks, the majority of our outlook revisions were favorable, with more than two-thirds of these actions reflecting an outlook revision to stable (44%) or to positive (25%).  

Chart 2

Despite the largely stable performance of key medians in fiscal 2022, U.S. charter schools continue to face risks inherent to the sector in that they require a charter contract to operate, and nonrenewal or revocations can affect credit quality swiftly. We closely monitor all rated schools' charter contracts and we understand that nearly all that were up for renewal in 2023 have been renewed. The few renewals remaining will be presenting at June board meetings, and we do not anticipate any nonrenewals. No rated schools faced revocation in the past year. 

Notably in 2023 year to date, two schools in our rated universe will experience some form of closure following forbearance agreements with bondholders as a result of financial distress tied to declining enrollment. We began the year with 13 schools rated in the 'B' category (about 4% of our rated charter school universe) and noted in our 2023 sector outlook that lower-rated schools could continue to experience pressure this year. 

We lowered the ratings on River Heights Academy in Michigan and Pointe Schools in Arizona to 'CC' from their respective 'B' category ratings on announcement of the intent of both to miss a scheduled bond payment. Subsequently, we lowered our rating on River Heights Academy to 'D' after the school missed its May 1, 2023, interest payment, and we expect to lower the Pointe Schools rating to 'D' in July once the school forgoes its July 1, 2023, principal payment as planned. River Heights Academy will surrender its charter and close at the end of the current school year; Pointe Schools is transitioning operations for two of its three schools to another charter school and closing its third campus. 

The Methodology Behind Our Median Calculations

We produced these medians from fiscal 2022 audited results for charter schools with public ratings based on our charter school criteria. Our ratings reflect the obligated groups supporting rated debt and not the number of schools or networks. For organizations where our group rating methodology applies (see "General Criteria: Group Rating Methodology," July 1, 2019), we have included financials of either the obligated group or the consolidated group, depending on which we believe are more meaningful to the rating outcome based on the relationship between the two groups. We note that an organization could have more than one public rating due to issuing debt via different financing structures; however, for medians calculation purposes, a given organization's metrics are only considered once if the analysis is consistent across the obligated groups. Therefore, the number of rated entities cited in our medians analysis differs from our total charter school ratings.

These medians are not requirements for any particular rating, but rather reflect the sector's general credit trends at the specified levels. As economic conditions and the number of rated schools change so to can the reported medians change over time. We view financial ratio analysis as important in our assessment of a charter school's credit quality; however, it is just one of many factors we assess. Our ratings encompass a variety of enterprise profile and other qualitative factors (demand and competition, academic performance, management and governance, growth plans, local area demographics, state charter frameworks, and charter structure) that are all key to our analysis. We publish these medians as general benchmarks and measures to observe broader industry trends. Credit analysis involves an assessment of many qualitative factors that are beyond the scope of this article. Therefore, these medians should not be considered thresholds to achieve a particular rating.  

Strong Revenue Environment Continues To Provide Flexibility 

Financial medians sectorwide remained strong relative to an extraordinarily strong fiscal 2021 that was boosted by pandemic relief funding. Overall, medians across the sector remain healthy, with fiscal 2022 medians exceeding published medians for each year going back to fiscal 2015 (excluding fiscal 2021). MADS coverage of 1.7x in 2022 was 20% stronger than the pre-pandemic average of 1.4x, while median days' cash on hand (DCOH) increased to an all-time high of 23% above the fiscal 2019 median. 

Although fiscal 2022 operations also benefited from the availability of substantial ESSER funding, publicly available data suggest that charter schools in general have been slow to deploy these funds through fiscal 2022. A recent study published by Edunomics Lab, a Georgetown University research center, shows approximately 70% of ESSER III funding allocated to traditional K-12 school districts--including charter schools--remained unspent at the end of fiscal 2022. Financial performance has stabilized due to increases in per-pupil revenue and higher enrollment, all while schools have yet to fully leverage the potential budgetary benefit offered by ESSER funds. We expect these unspent funds will continue to provide schools with some financial flexibility in the current 2023 fiscal year, in fiscal 2024, and extend further into the first quarter of fiscal 2025.  

Table 1

Medians Exceed Pre-Pandemic Ratios At All Rating Levels 

Looking at the trend line from before the pandemic (fiscal 2019), we observed healthy gains in income margins across rating categories: for example, with 'BB' rated schools improving margins to 4.2% from 2.5% over the four-year period and 'BBB' rated schools improving to 8.0% from 6.9%. More notably, cash reserves have improved and were maintained in fiscal 2022 relative to fiscal 2019 especially at the lower-rated charter schools where, for example, 'BB' rated schools have increased DCOH to 107 days, up from 77 days in fiscal 2019. 

Comparing expenses across rating levels, we see large growth in expenses across all ratings—likely attributable to inflationary pressures and competition for teachers, but also likely reflective of schools allocating pandemic relief funds toward supplemental academic programs to offset learning loss, as well as capital investments such as HVAC upgrades that were eligible for ESSER reimbursement. However, we do see much less pressure at schools rated 'BBB' and higher, likely due to the benefits of their larger size, with a median enrollment of almost 3,000 students, nearly triple the enrollment for the 'BBB-' and 'BB+' rating levels.  

Table 2

Medians By State Analysis: Performance Varies By State

In the past year, the number of states with public charter school ratings remained steady, with ratings in 26 states plus the District of Columbia. California added three ratings (41), maintaining its position as the state with the most publicly rated charter schools. Arizona, Colorado, Michigan, Minnesota, New York, Texas, and Utah all have more than 20 rated schools. For the second year in a row, New York had the most new rating activity by far: We rated six new schools in the state, bringing our total charter school ratings in New York to 20, up from 11 just two years ago.

Chart 3

Table 3 lists medians for states with at least 10 public charter school ratings, which now includes New Jersey. Some states have large charter school networks, with multiple schools supporting a single rating, which can result in higher median enrollment and total revenues.

Table 3

Issuers in Colorado, Florida, New Jersey, Texas, and Utah have the highest median ratings, with common characteristics supporting the relatively stronger credit quality: solid balance-sheet and liquidity metrics with correspondingly low-to-moderate debt metrics. Furthermore, Arizona, Colorado, Idaho, Texas, and Utah have state credit enhancement programs that provide lower costs of financing and, in some cases, require certain minimum underlying credit characteristics to qualify for the enhancement. 

Michigan schools continue to have the lowest median ratings, supported by comparatively low medians for enrollment and waitlists, limited unrestricted cash, and high debt per student. The two charter schools we currently rate at 'D' are located in Michigan. Somewhat offsetting these weaknesses, Michigan statute limits the use of per-pupil funding for debt service to 20%, which somewhat curbs the impact of debt service on the operating budget. Many of the charter schools in the state are relatively small and serve high-needs students in low socioeconomic areas with dwindling school-age populations. 

Median enrollment was up in fall 2021 for the broader sector; however, enrollment trends were mixed when viewed on a state-by-state basis. An increase in median enrollment was evident across most states, led by large increases in Florida  (up 21.5% year over year) and Arizona (up 9.2%). Some states, on the other hand, have experienced declining trends. Most notably, California median enrollment was down 9.1% from fall 2020, which mirrors national migration trends; we should note this is slightly less than the 10% decline in traditional public school enrollment in that state. 

Liquidity remains strong across the sector as we head toward fiscal year-end 2023. Fiscal 2021 liquidity trends set a record high, as schools benefited from extraordinary federal funding, which lessened in fiscal 2022. Therefore, year-over-year liquidity trends were more mixed, with improvements in Arizona, California, Colorado, and Utah, while Florida, Michigan, Minnesota, New York, Pennsylvania, and Texas medians experienced declines. Still, the multiyear trend from fiscal 2019, before the pandemic and the infusion of stimulus funds, is positive, with most schools able to improve their balance sheets over the period.  

Our data suggest that schools have experienced a sharp uptick in costs post-pandemic, as evidenced by the large increase in expenses per student across all states. However, this increase has not yet had a negative effect on credit quality as state support has also increased across the board. On average, many of our rated charter schools were able to lower their debt service costs over the 2020-2022 period, due to refinancing activities, which, when coupled with increased revenue, has led to lighter lease-adjusted MADS burdens across all of the largest states. 

Large Networks Are Better Equipped For Rising Costs 

Because of their size, large charter school networks continued to benefit from their economies of scale compared with their small single-site counterparts. Expenses at single-site charters with fewer than 500 students, as measured by expense per student, have increased by about 25% year over year and a blistering 38.9% compared with fiscal 2020 (when schools closed or went remote). Large charter school networks, those with 10 or more campuses, have also seen expenses rise; however, their total costs are up only about 15% since 2020. Large networks had higher median expenses in fiscal 2020, at about $12,000 per student compared with just under $11,000 per student for smaller schools. Nevertheless, fiscal 2022 median expenses for smaller schools are about 10% higher than those for large networks. 

Table 4

This divergence is also seen in the debt per student medians, which are up considerably more at small schools. In addition, small schools now have fewer DCOH than in fiscal 2020, at 132 DCOH compared with 140 DCOH, possibly due to the sharper increase in expenses. Large schools have also given back some of the liquidity growth that occurred in fiscal 2021, but the fiscal 2022 median of 129 DCOH is still up from about 112 DCOH in fiscal 2020.  

Finally, large networks have been able to increase their overall enrollment by more than 20% from 2020 while smaller, single-site schools typically have less available capacity and have seen flat enrollment over the period. Overall, networks seem to be better positioned in terms of growing enrollment, increased demand, and healthier financial profiles, while smaller schools have been operating at their full capacity for some time now and those with weaker demand profiles are starting to show signs of financial stress.  

What We're Watching

Most charter schools entered 2023 with good financial flexibility and liquidity levels and 88% of our rated universe maintains a stable outlook as of May 15, 2023. Unless we see significant state budget pressure and cuts to K-12 funding, we expect the credit position for charter schools will remain stable through the end of the year and into 2024. Demand has been growing for charter schools and we will look to fall 2023 enrollment metrics to see if this trend continues. Our rated universe increasingly reflects more established charter schools, which generally have completed several successful charter renewals, maintain steady academics, and experience less credit volatility than newer schools. However, while we anticipate general stability across the sector, credit stress among lower-rated issuers could continue, as operating pressures mount due to rising costs, which could cause liquidity and bond covenant challenges for some. Since 2022, we've been monitoring an increase in charter school impairments for both rated and unrated debt and we believe that strong enterprise and financial risk profiles drive credit quality. Event risks such as cyber risks, management turnover, governance scandals, and even weather events can also constrain operating flexibility.

Table 5

Table 6

Related Research

• U.S. States’ Fiscal 2024 Budgets Expected To Weather Economic Uncertainty, April 27, 2023
• Outlook For U.S. Charter Schools: Credit Profiles Hold Steady, Jan. 24, 2023