Overview

As of March 12, 2024, S&P Global Ratings maintains 44 public ratings on California charter schools. California has the highest number of rated charters schools, just ahead of Texas. In 1992, California became the second U.S. state to enact a charter school law. Today, it is home to about 1,300 charter schools that serve approximately 10% of the state's kindergarten through 12th-grade (K-12) students.

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Overall, 38.6% of California charter school ratings are investment grade compared with 45% for the sector, as noted in our 2024 sector outlook for charter schools, published Jan. 17, 2024, on RatingsDirect. However, the modal rating is 'BB+', just one notch from investment grade, and accounting for 15, or 34% of ratings. We believe the slightly weaker rating profile for California charter schools compared with the sector as a whole stems from the prevalence of district-authorized schools (86% of all charter schools in the state), shifting demographic trends , higher leverage, and other case-by-case factors.

Authorizer Framework

• In most cases, charter schools in California are authorized by the local school district for a maximum term of five years. The state's 40 county school boards and the state board of education may also authorize charter schools. Authorizers receive an oversight fee of up to 1% of revenue. Proposition 39 requires school districts to provide reasonably equivalent facilities to charter schools.
• We believe the state outlines a clear process for authorization, renewal, revocation, and appeal of charters, although it is more difficult to assess if individual local education agencies apply the process consistently or what criteria each uses to monitor adherence to standards during the charter term. State law requires charter schools to meet a minimum level of academic performance before receiving renewals, and annual site visits by the authorizer, which we view positively.
• Almost half of the charter schools we rate (21) are authorized by the Los Angeles Unified School District (LAUSD), the second-biggest public school district and largest district charter school authorizer in the nation.

Credit Fundamentals

California charter schools' credit profiles are characterized by ratings ranging from 'B+' to 'BBB', with a median rating of 'BB+'. The majority (38) of our 44 rated charter schools are networks with more than one campus, supporting the comparatively higher median enrollment across the rating levels. The largest rated network, Aspire Public Schools (BBB/Stable), serves more than 15,400 students.

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For rated charter schools in California, median days' cash on hand in fiscal 2023 increased to 215 days from 162 days in fiscal 2022, continuing a trend of improvement. Days' cash has increased by 2.5x, from about 87 days in fiscal 2017. This growth in liquidity has been supported by Elementary and Secondary School Emergency Relief (ESSER) funding (which totaled $26.4 billion for all public K-12 schools across California) and by state per-pupil funding increases in recent years. Although schools' total debt and debt per student is often elevated in California due to higher capital and real estate costs, the medians show that stronger revenues help keep the lease-adjusted maximum annual debt service (MADS) burden somewhat in check at 8.1%.

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After a long run of healthy annual enrollment growth, the 2021-2022 school year represented the first year of charter enrollment decline in decades (see chart 2), reflecting a combination of pandemic pressures and broader demographic trends within the state. We saw a similar trend among charter schools we rate, with a median year-over-year decline of 1.7% in fall 2021 but rebounding by 3.1% in fall 2022. Meanwhile, all public elementary and secondary school enrollment across the state has declined each year from 2019 to 2023. For the rated charter schools, preliminary data for the fall of 2023 indicate that, as observed for fall 2022 data, slightly more schools experienced enrollment growth than experienced enrollment decline. In aggregate, for the schools with increases, the average rate of growth was about the same as in the previous year, whereas for schools with declining enrollment, the losses have moderated.

What We're Watching

Charter renewal risk.   In fiscal 2023, 12 charter schools closed across the state; all voluntarily. However, in the two previous fiscal years, three schools closed due to charter revocation or not meeting conditions of approval (none of these schools were rated by S&P Global Ratings), underscoring the risk. Assembly Bill 130, passed in July 2021, automatically extended by two years the terms of any charter school whose term expires on or between Jan. 1, 2022 and June 30, 2025; and Senate Bill 114, passed in July 2023, extended by one additional year all charters statewide, without regard to a specific expiration date. While these measures temporarily mitigate renewal risk, ongoing authorizer support in future renewal discussions will remain paramount in the coming years.

Funding increases.   California charter schools have benefited from historic funding levels in recent years, and Proposition 98 funding (which establishes the minimum funding level for schools and community colleges) reached an all-time high in fiscal 2023. Then, the state's fiscal 2024 enacted budget reflected another year of increased funding, including an 8.22% increase to the Local Control Funding Formula (LCFF). The state's fiscal 2025 budget proposal indicates a budget gap of $37.9 billion and the use of one-time funds to address the shortfall. Although the governor is not proposing any mid-year cuts, deferrals, or program rollbacks, we believe that per-pupil funding will likely moderate from the highs of the past couple of years due to the softened economy and the state's depressed tax collections through fiscal 2023. In addition to LCCF revenue, charter schools and district schools are entitled to supplemental grant increases equal to 20% of the adjusted base grant for the percentage of enrolled students who are English learners, eligible for free or reduced-price meals program, or in foster care. The 2023-2024 budget includes $30 million in one-time Proposition 98 funding to support eligible facilities costs for the Charter School Facility Grant Program, which provides funding to offset facilities costs.

Enrollment trends.   California's K-12 total elementary and secondary school enrollment has fallen for five straight years, due to declining birth rates and other demographic factors such as outmigration. Longer term, the state has estimated that if current fertility and migration trends hold, enrollment statewide could decline by more than 10% by 2033. Although we are seeing stable demand for most rated charter schools as of fall 2023, we will continue to monitor the state's K-12 enrollment trends and charter schools' ability to maintain their momentum in the competition for a shrinking number of students.

Political environment.   Increased competition for a declining school-age population and the revenue associated with each student can increase tensions between authorizing school districts and charter schools. Proposals of legislation that could be deemed anti-charter occur regularly. Assembly Bill (AB) 1505, passed in 2019, has made it more difficult for new or expanding charter schools to get approval from authorizers, and for high-performing charter schools it can mean longer renewal terms or a more streamlined application process.

In February 2024, LAUSD narrowly adopted a co-location policy related to how it complies with Proposition 39, which governs how school districts make space available to charter schools. LAUSD has indicated that the new policy is an additional consideration when assessing Proposition 39 co-locations on its black student achievement program schools, priority schools, and community schools. Although it is still too early to determine any negative impacts from the implementation of the policy, there are concerns that charter schools currently leasing space in LAUSD facilities or those that would seek such space in the future, could have less access to shared campuses. While most of the charter schools authorized by LAUSD operate on their own campuses, about 50 campuses are shared. We will monitor developments for any charter schools that are co-located.

Labor challenges.   We continue to monitor the influence of inflationary pressures on labor costs and labor shortages, which could pressure school faculty operations. California, Nevada, and Utah are among the states facing the most pressure to fill vacancies. 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.

Long-term use of one-time funds.   ESSER 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.

Pension funding levels.   We view credit risks related to pension and other postemployment benefit (OPEB) as manageable in the near term, given the state's funding progress. For fiscal 2024, the governor did not propose any additional funding for the California State Teachers Retirement System (CalSTRS) or California Public Employee Retirement System (CalPERS). Based on current assumptions, CalPERS employer contributions increased to 26.68% in fiscal 2024 from 25.37% , while CalSTRS employer contribution rates were unchanged from the previous year at 19.1%. We will continue to assess the state's assumptions and schools' contributions, and how schools manage rising fixed costs. For more information on the State of California's pension and OPEB plans, see "Pension Spotlight: California," published Oct. 17, 2023, on RatingsDirect.

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