Overview

As of Sept. 22, 2023, S&P Global Ratings maintains 35 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 almost 900 charter schools, serving 375,000 students, with another 66,000 students on waitlists statewide. The Texas legislature enacted its charter school law in 1995, and in fall 1996 the state's first charter schools opened their doors.

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The credit profiles for our rated charter schools in Texas are slightly stronger than those across the sector, with 60% of schools achieving investment-grade ratings, compared with just 45% for the sector as a whole. We attribute this credit strength to more-supportive state laws for charter schools in Texas than in the rest of the country, including 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

• While there are four types of authorizers--the state (TEA), local school districts, colleges or universities, and home rule districts (charter districts within a school district), all 35 rated charter schools are authorized by the TEA. Most schools are authorized for terms of five years, but renewals can extend as long as 10 years.
• 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 area is home to the majority of the charter schools that we rate (54%), followed by Houston, with about a quarter of our ratings.

Credit Fundamentals

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More than half of our rated schools in Texas meet our definition of a charter network and operate 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 those of 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.

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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%, while school districts' enrollment dropped by 2.9%.

What We're Watching

School choice vouchers.   The question remains whether school vouchers will become an option in the state. So far this year, 10 states have implemented or expanded voucher programs, bringing the nationwide total with vouchers or similar programs to 32 states and the District of Columbia. Notably, the voucher bill, a signature of Governor Greg Abbott's agenda, failed to pass in the Texas House, primarily because of opposition from Democrats and rural Republicans. Governor Abbott is expected to call a special session this fall that will include asking the legislature to pass a voucher program. We will continue to monitor how Texas views voucher programs and if their potential implementation results in any shifts in charter school funding or enrollment trends.

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

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 demographics of the 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 by nearly 20% to $6,160 from $5,140. We will continue to monitor the state legislature for any potential funding changes and whether those changes are tied to a potential voucher bill.

Teacher shortage.   Schools across the country are facing challenges related to teacher shortages, and Texas is no stranger to these pressures. With over 370,000 teachers as of 2021-2022, Texas has the largest teacher workforce of any state. Texas also has teacher attrition above the national average; for the past decade, nearly 10% of teachers left the profession each year. Anecdotally, our rated schools have indicated using Elementary and Secondary School Emergency Relief (ESSER) funds to support compensation increases and have been exploring new strategies for teacher recruitment pipelines. 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.

Four-day school weeks.   We have heard from several charter schools across the state that are implementing or exploring a four-day week for the 2023-2024 school year. Most typically, this is cited as a teacher recruitment and retention tool, with minimal cost savings realized. Anecdotally, applications by teachers to schools with four-day weeks are at all-time highs, and applications from students have not decreased. We will be monitoring this trend to see if it gains momentum and how it affects academic performance and demand.

Long-term use of one-time funds.   ESSER funds have provided a significant amount of operating revenue for 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 further cuts. In Texas, some charter schools have already incorporated those staffing cuts into their current fiscal 2024 budgets.

Texas PSF capacity.   In May 2023, the Internal Revenue Service increased the school bond guarantee program capacity to $218 billion, from $117.3 billion. The Texas PSF had approached the previous capacity level, causing some concern that the program limit would be reached. However, the new limit allows the program to continue guaranteeing the bonds of all eligible schools, including charters, for the foreseeable future. (For more information about the PSF guarantee, see our report on the Texas PSF, published Nov. 23, 2022, on RatingsDirect.)

Pension funding levels.   All public school employees in Texas, including charter school teachers, must participate in the Teacher Retirement System of Texas, which is adequately funded, in our view, at 75.6% for the year ending Aug. 31, 2022. We believe that should there continue to be support of current system funding levels, without a material adverse effect on charter school margins over our outlook horizon, we will continue to view the funded status and 100% contribution rate of charter district participants favorably.

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