Chart 1

As of Oct. 13, 2023, S&P Global Ratings maintains 20 public ratings on New York charter schools. Since our last brief less than a year ago, we have assigned three new ratings in the state and our New York charter school ratings have almost doubled since the 2020 brief. New York has the eighth-highest number of rated charter schools among the U.S. states. According to the New York State Education Department, 343 charter schools are in operation for the 2023-2024 academic year, with an additional 12 scheduled to open in the current school year or later. New York charter school enrollment in 2022-2023 totaled just under 175,400, or approximately 7% of the state's total kindergarten through 12th grade (K-12) public school enrollment; in New York City, this figure increases to approximately 15%, according to the New York City Charter School Center.

Charter schools in New York City constitute the vast majority (approximately 80%) of total state charter schools, given the heavy demand for academically well-performing schools in areas with high needs or economically disadvantaged populations. The New York City Department of Education's raw charter school enrollment is second only to that of the Los Angeles Unified School District.

Chart 2

Of our New York charter school ratings, 45% are investment-grade ('BBB-' or higher), essentially equal to the 44% for the sector as a whole. None of the New York charter schools we rate are rated below 'BB'. The stronger relative ratings distribution for these schools reflects their relative credit strengths, including long institutional tenures, healthy enrollment and demand metrics, superior academic performance versus that of local school districts, and solid authorizer relationships. Their favorable finances are underpinned by high levels of per-pupil state funds, robust debt service coverage, and solid liquidity profiles.

Almost half of rated New York charter schools are located in New York City, with others dispersed across Erie, Suffolk, Albany, and Westchester counties.

The stand-alone schools we rate are all freestanding (meaning they manage their school operations themselves), while the networks are all managed through nonprofit charter management organizations. In New York, state law prohibits for-profit educational management organizations from operating new charters; thus, there are only nonprofit charter management organizations.

Authorizer Framework

New York has established caps on the number of statewide charters issued. An amendment in 2015 set a limit of 460 on state charter schools and requires that charters be issued on the recommendation of the State University of New York (SUNY) or the state Board of Regents (BOR). A conversion of an existing public school to a charter school is not counted toward the limit, nor are charter renewals.

The 2015 amendment, with additional legislation in 2023, also provides for the reissuance, on the recommendation of the BOR or SUNY, of up to 22 charters that had previously been revoked, terminated, or surrendered, or not renewed after Jan. 1, 2015, but before July 1, 2022. The revival of these previously dormant charter contracts has been cleverly referred to in the media as "zombie charters." No more than 14 of these 22 charters may be issued to charter schools in New York City, and new charters shall not be approved in a New York City geographic district where 55% or more of students are enrolled in charter schools. To date, none of the 22 eligible charters has been reissued. Exclusive of the charters eligible to be reissued, there are 84 additional charters statewide that can be issued outside of New York City.

Key items in the framework are the following:

• Currently, there are four authorizers overseeing state charter schools: SUNY, BOR, the New York City Department of Education, and the Buffalo Board of Education.
• Although local school districts are no longer permitted to authorize new charter schools, two, the Buffalo Board of Education and the New York City Department of Education, preserved their authority to oversee and grant renewals for charter schools previously authorized by them.
• SUNY and the BOR can each grant 230 charters. Charters awarded by local school districts (the Buffalo Board of Education and the New York City Department of Education) are counted against the BOR's total allocated number.
• SUNY is the largest charter school authorizer in the state, the fifth-largest in the U.S., and the largest university charter authorizer in the country. By law, if SUNY approves an application and reasserts approval if the state BOR rejects it, then the state BOR must issue the charter for that school.
• State law limits the length of new and renewal contracts to five years, and there is no differentiation for high-performing charter schools.
• For renewal applications, charter schools must meet the same criteria outlined in the framework governing initial applications. These tenets cover operational and fiscal management, academic performance, and serving at-risk students at comparable levels to the district.
• An authorizer's decision to deny a new charter application is final and not subject to appeal. However, new charters may amend and resubmit their application in this instance. Charter schools facing revocation must be notified of the intent to revoke and given an opportunity to respond and implement corrective action. We understand that under state law the school is entitled to a hearing from the authorizer if a charter is revoked.
• Unlike law in other states, New York state law does not allow charter schools to switch authorizers. In our view, this constrains flexibility for schools if their charter is denied or revoked.
• Of the New York charter schools we rate, 10 are authorized by SUNY, nine by the BOR, and one by the New York City Department of Education.

Credit Fundamentals

Table 1

Stand-alone schools heavily dominate our rated New York charter school universe, and only four are networks. Median enrollment for fall 2022 rose 6% and is comparable with our overall rated universe at 1,042 versus 1,098, respectively. Some of this growth is partially attributable to the addition of several new ratings on schools with larger enrollment. In addition, year-over-year growth at each rated New York charter school was about 6% on average as well.

Rated charter schools in New York have historically had stronger financial metrics than our sectorwide medians, and while balance-sheet metrics continue to exhibit this trend, median lease-adjusted maximum annual debt service (MADS) coverage fell below that of the broader sector as several of the newly rated and existing schools reported less than 1x coverage of pro forma MADS in fiscal 2022. This reflects schools that are in the course of executing on expansion plans and are not yet benefitting from the higher enrollment and resultant revenue base, and therefore, are not yet covering pro forma debt service obligations. Therefore, S&P Global Ratings believes the drop in median coverage is more a function of the new ratings it has assigned in New York in the past year as opposed to weakening financial metrics.

Although state costs of living and compensation expenses are elevated compared with national averages, particularly in New York City, rated schools have witnessed growing demand and increased state per-pupil funding and have sufficient reserves to buffer potential short-term volatility in key revenue streams. Lease-adjusted MADS measured as a percentage of total revenues continues to exceed that of the overall rated universe at 12.3% versus 9.6%, respectively. This is due to higher debt levels related to construction and facility building costs that tend to exceed those in many parts of the country. This is apparent in the 'BB' rating category metrics, wherein the debt per student figure is still almost double the fiscal 2022 sectorwide median.

Chart 3

Somewhat offsetting New York's comparatively high cost structure for labor and overhead is one of the highest rates of per-pupil funding in the country, with additional generous provisions for special education. New York charter schools receive per-pupil funding based on the residential location of individual students and the corresponding district per-pupil allocation. These payments are tied to enrollment and disbursed in six installments through the year. Funding disparities between charter schools and their school district counterparts persist, which is not uncommon for the sector. In the past 10 years, funding has trended positively, up 7% in the past three following a slight dip in fiscal 2020, and up 2.4% for the current fiscal year ending 2024.

Historically, charter schools were not granted additional funding for facilities expenses. In 2014, state legislation was passed that provides additional rental support for eligible new and expanding charter schools in New York City. In the event the New York City Department of Education determines that there is no adequate co-location public school district space available for eligible charter schools, the schools may qualify for rental assistance. The charter school receives the lesser of 30% of basic tuition or general education per-pupil funding multiplied by current or additional enrollment numbers, or actual rental costs. The additional per-pupil funding helps to equalize the costs associated with operating outside of co-located facilities. The New York City Charter School Center estimates approximately 53% of city charter schools are in private (that is, non-New York City Department of Education) space, although presumably not all these schools qualify for rental assistance. The balance of charter schools not receiving rental assistance benefit from co-location with other public schools in buildings either owned or leased by the New York City Department of Education.

Chart 4

The charter school sector in New York has expanded over time, with enrollment more than doubling since 2012-2013. Traditional school district enrollment in the state continued its long-term annual decline in 2022-2023, falling 1% year over year and averaging negative 1.3% per year in the past decade. This compared unfavorably with charter school enrollment, which gained 1.1% for the year and averaged 8.5% annual growth in the past decade. More recently, since 2019, traditional public school enrollment is down 6.9%, while charter school enrollment is up 10%. While the magnitude of charter enrollment gains varies across states, these recent trends generally mirror broader nationwide patterns.

What We're Watching

New academic testing.   The spring 2023 English Language Arts and mathematics tests for grades 3-8 were the first state assessments to measure the New York State Next Generation Learning Standards. As these are new tests measuring new standards, achievement standards for performance on each of the tests will also be new. Testing data for spring 2023 with state comparative data is not yet available, but likely will be released soon. We will monitor how authorizers analyze the new testing data and associated achievement standards, and will assess any impact on schools' operations or charter renewals.

Labor challenges.   We're monitoring the influence of rising expenses on labor costs and labor shortages, which could pressure school faculty operations. 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. About 7% of New York City charter schools currently have collective bargaining agreements according to the New York City Charter School Center, slightly below the estimated national average of approximately 10%. We're watching labor relations with rated schools for possible unionization efforts that could present operational or budgetary implications over time.

Funding trends.   Conversations with school budget officers generally indicate schools are expecting per-pupil funding to remain positive in the near term. This narrative seems consistent with a state budget that increased education funding in the 2023-2024 fiscal year with additional deposits to its reserve funds that may provide a cushion against any revenue shortfalls in upcoming budget cycles that could otherwise pressure the state to cut general spending to balance the budget.

K-12 population trends.   School-age population projections for each of the primary counties where rated charter schools operate, the New York City metro area, Buffalo, and Albany indicate a decrease in the next five years. While some growth could occur from students leaving district schools, we expect a general population drop could spell flat-to-depressed enrollment trends in the medium term for charter schools.

Long-term use of one-time funds.   Elementary and Secondary School Emergency Relief (ESSER) flooded traditional and charter schools with cash. Many schools 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. According to Edunomics Lab, a Georgetown University research center, charter schools have spent only 50% of their ESSER money, on average, as of June 30, 2023.

Table 2