Overview

As of Feb. 26, 2024, S&P Global Ratings maintains 26 public ratings on Colorado charter schools. Colorado has the fifth-highest number of rated charter schools in our rated universe, after California, Texas, Michigan, and Minnesota. It was the third state in the U.S. to enact a charter school law, and the state's first two charter schools opened their doors in 1993. As of the 2022-2023 school year, Colorado is home to 272 charter schools serving approximately 133,000 charter school students representing around 15% of all public school students in the state.

Chart 1

The credit profiles for our rated charter schools in Colorado are generally superior to those of the rest of the sector. About 80% of our Colorado charter school ratings are investment-grade, compared with approximately 45% for the sector, as noted in our 2024 sector outlook for charter schools, published Jan. 17, 2024, on RatingsDirect. We believe the stronger ratings distribution is due to historically favorable demographic trends and increased demand for charter schools in the state, which contribute to strong enrollment growth, as well as positive per-pupil funding trends, which have supported healthy operations and growing financial resources.

We also attribute our Colorado charter school ratings distribution to more supportive and transparent state laws for charter schools, compared with those of the rest of the country. These include the lack of a state charter cap as well as acceptance of qualifying charter schools into the state's Moral Obligation Program, which can significantly lower a school's capital costs. Colorado was second in the National Alliance for Public Charter Schools' 2022 published rankings of state charter school laws. While overall support for charter schools in the state remains steady and relatively positive, we will continue to monitor any potential changes in charter policy or the state's charter law.

Authorizer Framework

• Colorado charter schools are primarily authorized by the local school district for a maximum term of five years, although some authorizers offer longer contracts. The Colorado Department of Education provides clear guidance to district authorizers on the accreditation and appeals process, which we view positively.
• Although competition for students can create an inherent conflict of interest for these entities, we have found good working relationships between most of our rated Colorado charter schools and the local district. One indication of the strength of the relationship is whether the authorizer returns its 5% per-pupil-revenue authorizer fee back to the charter school, which seems to be standard practice for some authorizers with high-performing charter schools.
• The Colorado Charter School Institute (CCSI) is the state's only nondistrict authorizer. CCSI can accept applications from schools in districts that do not have exclusive chartering authority or from schools in districts that have exclusive authority but give permission to CCSI to act as authorizer. The institute has a clear application, renewal, and revocation process with clear benchmarks and milestones, which we also view positively. We note CCSI is the authorizer for approximately 8% of our rated charter schools.

Credit Fundamentals

Many Colorado charter schools are single-site operators, which constrains median enrollment levels and limits operating budgets compared with medians for the entire sector. However, we note Colorado charter schools continue to have significant financial flexibility, relative to that of similarly sized peers, supported by healthy per-pupil funding, mill levy revenue from their local district, and recent federal stimulus.

Table 1

For fiscal 2023, days' cash on hand fell slightly to 182 from 186 the year prior, but remains healthy for our rated universe. The slight dip in schools' reserves in fiscal 2023 likely reflects rising expenses and the spend-down of federal dollars.

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Across Colorado, enrollment in charter schools grew each year over the past decade, compared with flat-to-declining enrollment across district schools (see chart 2). In fiscal 2023, median enrollment grew across all rating categories, except for those rated 'BB', which speaks to steady demand through the pandemic for our higher-rated schools. Enrollment in district schools fell somewhat over the same time period.

What We're Watching

Equalization.  The passage of House Bill 17-1375 in 2017, which required local school districts to share mill-levy override revenue with the charter schools, benefitted all charter schools but favored schools authorized by their district. Recently, the CCSI, Colorado's only statewide charter authorizer, earned an additional $10 million through the Mill Levy Equalization Fund and achieved parity for its 43 authorized schools for the 2024-2025 school year. As of fiscal 2024, CCSI schools can also benefit from the state's hold harmless provision (which takes a four-year-average enrollment to calculate per-pupil funding for the year). As the Colorado market becomes more saturated, we may see more schools authorized by CCSI due, in part, to these equalization measures.

Teacher shortage.  Colorado is no exception to the national teacher shortage. Unfilled teaching positions increased 64% across the state in the 2022-2023 school year, according to state data, reaching 722 open positions. This can create pressure on existing teachers and adversely affect students' education quality in a time when student outcomes struggle to recover from the pandemic. 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.

Demographic shifts.  According to the American Community Survey's latest five-year estimate, Colorado's 0-9 year-old population declined by 18,000 from 2016 to 2021. Dwindling school-age population trends in counties such as Jefferson County have prompted many district closures as well as the planned closing of Denver's first charter school due to low enrollment. Although S&P Global Market Intelligence predicts more modest declines in Denver's school-aged population over the next five years, we will continue to assess the impact that recent school-aged population declines may have on the state's historically charter-friendly environment.

Funding increases.  For fiscal 2023, the state maintained a 6% increase in per-pupil funding, which is still slightly higher than in pre-pandemic years. Fiscal 2024's per-pupil funding increased by roughly 9%, and the governor recently proposed a 6.7% increase to per-pupil funding for fiscal 2025, to help address inflation and support smaller class sizes. While we view these trends favorably, it's uncertain as to how long these funding level increases will continue, especially as the state weighs competing priorities such as addressing the rapidly growing costs of assisting migrants and asylum seekers in the Denver area. (See "Migrants And Asylum Seekers Pose Budgetary Challenges In New York City, Chicago, And Denver," published Feb. 13, 2024.)

Long-term use of one-time funds.  Elementary and Secondary School Emergency Reliefs funds provided significant operating revenue to traditional public and charter schools. 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, the budgetary transition should be relatively smooth for schools that have been using these funds for one-time needs only, but those that have been relying on emergency money for regular and recurring expenses could face a "fiscal cliff" with significant operating pressures. 

Testing and learning loss.  According to the latest Colorado Measures of Academic Success data for the 2022-2023 school year, Colorado test scores are still below 2019 levels in almost every grade level, though they did improve somewhat from the 2021-2022 testing season. Given the generally healthy academic performance at our rated state charter schools, we do not expect this to be a core risk in the near term, though we do know that learning loss can exacerbate and has exacerbated enrollment declines or has soured authorizer relationships in other states.

Pension funding levels.  We view pension and other postemployment benefits liabilities as a potential long-term credit pressure. Funding progress was made in the state during the most recent year, with contributions in excess of static funding, but they were less than our minimum funding progress metric, which we view negatively. In 2018, the state enacted Senate Bill 18-200, which required it to contribute $225 million annually to specific Public Employees' Retirement Assn. Divisions, including the School Division. These contributions have been restored as of fiscal 2022, and we view positively schools that are preparing for increases in employer contributions in their multiyear financial plans.

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