Key Takeaways
- Several opportunities exist for qualifying charter schools to finance capital projects, including federal and state programs, as well as revolving loan funds.
- State credit enhancement programs function as a moral obligation or collateralized state fund, providing charter schools access to more favorable debt terms, including lower interest rates.
- While we continue to monitor these programs as they move towards capacity--particularly in Colorado, Idaho, and Utah--new funds are expanding options for charter schools and tempering the limitations of existing enhancement programs.
What Is A Credit Enhancement Program?
U.S. state credit enhancement programs provide opportunities for qualifying charter schools to access the capital markets with higher ratings and to receive facilities financing under more favorable terms, such as lower interest rates. The magnitude and structure of state programs allow them to provide additional security provisions or collateral that a charter school typically can't provide on its own, supporting a higher bond rating for eligible schools through a linkage or de facto exchange of an issue rating on a charter school for that of a rating on a state program.
To date, these state enhancement programs have collectively provided benefits on more than $6 billion in charter school bond transactions, saving schools more than $1 billion in debt service expenses (see "Charter School Bond Issuance: A Complete History, Vol. 4," Local Initiatives Support Corp., Dec. 31, 2022), and with no known defaults, demonstrating just how beneficial enhancement programs can be for qualifying charter schools.
While credit enhancement programs exist in many states as well as at the federal level, not all programs are open to charter schools. Many states do offer separate financing mechanisms, such as revolving loan funds, to help finance charter school projects, but currently only six jurisdictions have legislated a state-funded charter enhancement program, and only five of those programs are actively implemented.
The five active programs function under one of two structures: a moral obligation pledge or through a collateralized state fund. Each program uses a range of requirements to evaluate potential participants, which can include certain academic and operational benchmarks or even necessitate an underlying investment-grade rating on the charter school bond issue. Both programs enhance the credit rating on charter schools, typically to a notch below a state rating but higher than the rating a charter school would receive on its own. As a result, these programs provide charter schools access to much lower interest rates and greatly reduced annual debt service costs.
Moral obligation programs
For state moral obligation programs, the state has the authority to, and pledges to, consider originating an appropriation out of general revenues to pay debt service or replenish the issuer's debt service reserve fund in the event the issuer is unable to meet debt service payments or has defaulted and has drawn on the fund. However, the state is not required to make this appropriation; accordingly, the moral obligation is intended to supplement the primary security feature--which, for charter schools, is generally its general revenue pledge.
S&P Global Ratings analysts assign state moral obligation program ratings based on its "Issue Credit Ratings Linked To U.S. Public Finance Obligors' Creditworthiness" criteria, published Nov. 20, 2019.
Table 1
| Moral obligation programs | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| State | First accessed | Total par issuance statistics* | Estimated savings for participating schools (%)* | Program rating** | Eligibility requirements | Total charter school ratings in state** | ||||||||
| CO | 2003 | 77 issuances: > $1 billion | 12% | A+/Stable | Schools must: •Obtain an underlying investment-grade credit rating from a rating agency. | 26 | ||||||||
| UT | 2012 | 31 issuances: > $525 million | 19% | AA/Stable | Schools must: •Obtain an underlying investment-grade credit rating from a rating agency, except in specific cases; •Be in compliance with all chartering requirements; •Include specific legal stipulations in the bond documents, including granting a first-lien mortgage on facilities related to proceeds; •Must maintain insurance on facilities, etc.; and •Meet other eligibility requirements covering enrollment, financial standing, academics, and more. | 26 | ||||||||
| ID | 2020 | 10 issuances: $93 million | 25% | A+/Stable | Schools must: •Obtain a credit rating (not limited to investment-grade); •Remain in good standing with its authorizer; •Provide historical evidence of good financial operations and pro forma projections confirming the school will support a debt service coverage ratio > 1.2x and days’ cash on hand of 60+ days, showing that project operations will not exceed 20% of operating revenues each year; and •Meet other eligibility requirements covering enrollment, academics, audit opinions, letters of commitment, and more. | 8 | ||||||||
| *Estimated savings on debt service expenses over the life of the bonds. Per "Charter School Bond Issuance: A Complete History," vol. 4, LISC. **S&P Global Ratings-calculated. | ||||||||||||||
| Source: S&P Global Ratings. | ||||||||||||||
Collateralized state fund programs
A collateralized or funded state program pledges its assets to guarantee payments on the debt service for approved issuer bonds if the issuer cannot make these payments. The guarantee payments are made out of a funded debt service reserve account, which is financed through varying sources, including seed appropriations, gains from managed funds, and one-time and recurring fees from participating issuers.
S&P Global Ratings analysts assign program ratings based on its "U.S. Public Finance Long-Term Municipal Pools: Methodology And Assumptions" criteria, published March 19, 2012.
Table 2
| Collateralized state fund programs | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| State | First accessed | Total par issuance statistics | Estimated savings for participating schools (%)* | Program rating** | Eligibility requirements | Total charter school ratings in state** | ||||||||
| TX: Permanent School Fund | 2014 | +120 issuances: $4.5 billion | 19% | AAA/Stable | Schools must: •Obtain an underlying investment-grade rating from a rating agency and a "met standards" charter FIRST rating; •Have been in operations for at least three years, with unmodified or unqualified audit opinions in each; •Be in compliance with academic and operating benchmarks, such as having historical revenue-to-debt service ratio of 1.1x and pro forma projections of 1.2x; and •Meet other eligibility requirements covering accreditation, intervention status, evaluation against the TEA complaints database, and more. | 36 | ||||||||
| AZ: Arizona Public School Credit Enhancement Program | 2017 | 15 issuances: $350 Million | 14% | AA-/Stable | Schools must: •Be part of an "achievement district," meeting academic and operating benchmarks (proof of sustainable finances and high academic outcomes for at least two consecutive years, etc.), though failure to maintain ongoing achievement district school eligibility does not affect the validity or enforceability of the program guarantee; •Include a fully funded debt service reserve equal to at least the maximum amount permitted by federal law in connection with the issuance of tax-exempt obligations in financing; •Identify property being pledged as collateral; •Meet other eligibility requirements, such as providing proposed financing details; and •Have no more than 25% of the pool rated at noninvestment-grade. | 24 | ||||||||
| *Estimated savings on debt service expenses over the life of the bonds. Per "Charter School Bond Issuance: A Complete History," vol. 4, LISC. **S&P Global Ratings-calculated. | ||||||||||||||
| Source: S&P Global Ratings. | ||||||||||||||
What We're Watching
Capacity of enhancement programs
Arizona. The Arizona Public School Credit Enhancement Program currently guarantees a total of $350 million in bonds, or a leverage ratio of 3.2x the enhancement program fund balance as of July 30, 2022. While this ratio is lower than the maximum ratio of 3.5x determining capacity, the most recent issuance was in 2021, and we understand that there's little appetite at the state level to expand the program, though we'll continue to monitor any changes.
Texas. The Texas Permanent School Fund (PSF) reached its previous capacity in early 2023, denying several school districts access to the program and forcing reliance on independent underlying ratings. However, in May 2023, the IRS updated the maximum allowable guarantee, which had previously pegged the 5x ratio subsequent to the PSF's fund balance in 2009 ($117 billion). After eliminating the ratio's basis on 2009's fund balance, the PSF can now guarantee up to 5x its current fund balance, or $220 billion as of Aug. 31, 2023, and charter and public schools can continue applying for enhancement until the new limit is reached.
Colorado, Idaho, Utah. In 2021, the Colorado bond program increased capacity to $750 million, and as of Dec. 31, 2023, only $623 million of that amount is being utilized. Having added only two issuances in fiscal 2023 totaling $43 million, we do not believe this program will reach its limit in the near-term. Although we're not aware of the Idaho and Utah programs significantly nearing capacity (determined by formula, including a quotient of each state's charter enrollment to total public school enrollment), we'll continue to monitor all existing programs and the impact, if any, on new ratings on charter schools.
Expanding financing opportunities for charter schools
Legislative momentum across the country is pushing more jurisdictions to join the dozen or so states that offer charter-specific financing mechanisms. Most recently, Nevada and New Jersey have established revolving loan funds.
Nevada Facilities Fund (NVFF), State Infrastructure Bank. The NVFF is the product of a public-private partnership that has gathered $100 million in funding to support charter capital access. From this funding, $80 million is supplied by the Equitable Facilities Fund, which established the similar Texas Facilities Fund (TFF) in 2022 to provide financing options for charter schools that have not yet reached participation eligibility for the Texas PSF (S&P Global Ratings currently rates three TFF-financed schools).
New Jersey Charter School and Renaissance School Facilities Loan Program, Economic Development Authority. In the case of New Jersey's program, charter schools in New Jersey Economic Development Authority districts can secure loans at interest rates significantly below market rate--at the lower of 1.75% or half of the 'AAA' bond rate available on the date of loan approval--highlighting the extraordinary benefit that participating schools receive, especially in economic conditions such as currently, in which interest rates have been slow to stabilize and deflate from recent highs. However, unlike with the NVFF, funds have yet to be appropriated for the New Jersey program.
Although these funds do not provide guarantees like moral obligation or funded state programs, they will offer qualifying charter schools low-interest financing for facilities acquisition, construction, or renovation. In our view, these indicate growing legislative support and expanding state-based opportunities for charter schools to access facilities funding, despite proposed cuts to similar funding at the federal level in fiscal 2025.
What happens if a participating school loses the investment-grade rating or other requirements?
Many of these programs require schools to receive investment-grade ratings and comprehensive rating analyses, and an in-depth, historical look is taken at schools' holistic performance before its participation in the program is approved. While approval and an investment-grade rating on schools indicate an expectation of steady creditworthiness, enrollment and financial metrics can change over time. Issuers are responsible for communicating any shortfalls requiring detailed re-evaluation to their programs, which will decide an appropriate course of action. For example, if an enhanced charter school in Utah fails to meet its debt service coverage covenant, it must report to the governing body and may have to pay a larger annual fee into the program fund.
Over time, a handful of S&P Global Ratings-rated charter schools operating under enhancement programs requiring an investment-grade rating have been downgraded since originally attaining the appropriate rating: one in Utah, two in Colorado, and five in Texas. In those cases, we understand that the schools will no longer be eligible to pursue financing or refinancing under an enhancement for new issuances until they meet the eligibility requirements; however, we understand there are no direct consequences regarding the historically enhanced bonds themselves.
Our charter school outlook for 2024 ("U.S. Charter Schools 2024 Outlook: Credit Stability, For Now," published Jan. 17, 2024) details our expectation that financial performance across the sector will compress in the near term, given increasing costs and depleting one-time funds. We will continue to monitor schools in these programs for potential rating changes and any effects on their future participation in an enhancement program.
Related Research
- U.S. Charter School Rating Actions, First-Quarter 2024, April 15, 2024
- Charter School Brief: Colorado, Feb. 26, 2024
- U.S. Charter Schools 2024 Outlook: Credit Stability, For Now, Jan. 17, 2024
- Texas Permanent School Fund; State Revolving Funds/Pools, Nov. 23, 2022
- Colorado; Appropriations; Charter Schools; General Obligation; Moral Obligation; School State Program, May 19, 2022
- Utah Board of Higher Education; Appropriations; Charter Schools; General Obligation; Moral Obligation; School State Program, Feb. 15, 2022
- Arizona Industrial Development Authority; Charter Schools; School State Program; State Revolving Funds/Pools, March 9, 2021
- Idaho Housing and Finance Association; Appropriations; General Obligation; School State Program, Nov. 12, 2020
This report does not constitute a rating action.
| Primary Credit Analysts: | Sue T Ryu, Chicago +1 3122337041; sue.ryu@spglobal.com |
| Jessica L Wood, Chicago + 1 (312) 233 7004; jessica.wood@spglobal.com | |
| Secondary Contact: | Avani K Parikh, Phoenix + 1 (212) 438 1133; avani.parikh@spglobal.com |
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