S&P Global Ratings' median financial metrics for rated charter schools remained healthy in fiscal 2023, reflecting flexibility provided by federal pandemic relief funds and stable-to-increased state per-pupil revenue. Spurred by extraordinary growth in enrollment levels across the rated charter school universe in fall 2022, both margins and lease-adjusted maximum annual debt service (MADS) coverage showed growth after moderating in fiscal 2022. Further supporting this improvement was the growth in state per-pupil funding, increasing in states with rated schools by a median 6% in fiscal 2023 after rising by only 3% in fiscal 2022, along with the moderating rate of expense growth, which increased by a slightly more modest 10% in fiscal 2023 after rising by 15% in fiscal 2022. These two trends, combined with the financial cushion provided by federal stimulus money, led to better financial results in fiscal 2023. However, ESSER funds must be spent by September of this calendar year, and in many cases have already been exhausted.  

In our view, the budgetary transition post federal funding 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 significant operating pressures in the form of a "fiscal cliff." These pressures could continue to hamper schools with leaner management teams, less oversight, and weaker operating flexibility. Overall, reserves have remained elevated for the past three years, which could provide some cushion once one-time funds are depleted.  At the state level, we believe that record strong reserves currently supporting state credit quality (See "U.S. States’ Fiscal 2025 Budgets Navigate Evolving Risks As Economic Growth Prospects Wane," published May 28, 2024, on RatingsDirect) will support per-pupil funding in the near term, though increases might be more modest than recent years. We anticipate operating and balance-sheet metrics for the sector should remain largely intact through fiscal 2024, with some weakening at the lower end of the ratings distribution.  

By The Numbers

Chart 1

Our public charter school ratings have grown 12.5% since fiscal 2020, but interestingly the share of speculative-grade ratings is unchanged at 56%. The 'BBB-' rating level continues to account for the greatest share at 32% of all ratings, with the 'BB' rating level exhibiting the most growth year over year. Reflective of our stable sector view for 2024, 84% of ratings had a stable outlook as of May 15, 2024, with 10% having a negative outlook and about 6% with a positive outlook. (See "U.S. Charter Schools 2024 Outlook: Credit Stability, For Now," published Jan. 17, 2024.)

Chart 2

U.S. charter schools face risks inherent to the sector in that they require a charter contract to operate, and nonrenewal or revocations can affect credit quality swiftly. We closely monitor all rated schools' charter contracts, and we understand that nearly all that were up for renewal in 2024 have been renewed. The few renewals remaining will be presented at June board meetings and we do not anticipate any current ratings will have renewal issues based on our conversations with management teams and authorizers.

The Methodology Behind Our Median Calculations   

We produced these medians from fiscal 2023 audited results for charter schools with public ratings based on our charter school criteria. Our ratings reflect the obligated groups supporting rated debt and not the number of schools or networks. For organizations where our group rating methodology applies (see "General Criteria: Group Rating Methodology," July 1, 2019), we have included financials of either the obligated group or the consolidated group, depending on which we believe are more meaningful to the rating outcome based on the relationship between the two groups. An organization could have more than one public rating due to issuing debt via different financing structures; however, for medians calculation purposes, a given organization's metrics are only considered once if the analysis is consistent across the obligated groups. Therefore, the number of rated entities cited in our medians analysis differs from our total charter school ratings. 

These medians are not requirements for any particular rating, but rather reflect the sector's general credit trends at the specified levels. As economic conditions and the number of rated schools change, so too can the reported medians change over time. We view financial ratio analysis as important in our assessment of a charter school's credit quality, but it's just one of many factors we assess. Our ratings encompass a variety of enterprise profile and other qualitative factors (demand and competition, academic performance, management and governance, growth plans, local area demographics, state charter frameworks, and charter structure) that are all key to our analysis. We publish these medians as general benchmarks and measures to observe broader industry trends. Credit analysis involves an assessment of many qualitative factors that are beyond the scope of this article. Therefore, these medians should not be considered thresholds to achieve a particular rating.  

Enrollment surges amid steady financial performance 

On a sectorwide basis, our rated charter school universe experienced the largest jump in median enrollment in the past decade, while financial medians remained healthy with stable-to-improving metrics relative to fiscal 2022. 

Fall 2022 (fiscal 2023) median enrollment increased to 1,175 from 1,098 in fall 2021. Waitlists also expanded after seven consecutive years of decline, which should support favorable demand in the near term. Student retention remained steady, and we note this metric has remained remarkably stable over time, with a sectorwide median that has not deviated from the 89%-90% range in the past eight years. Our preliminary fall 2023 demand data (fiscal 2024) indicates stable enrollment year over year, which we believe positions our rated charter schools well as they head into the next school year. 

Bolstered by enrollment growth, and a 6% increase in median state revenue per student in fiscal 2023, median total revenues have continued to grow. Median excess margin improved to 5.6% in fiscal 2023, up from 5.2% in fiscal 2022 and 4.0% in fiscal 2019 (which, at the time, was a five-year high). Similarly, lease-adjusted MADS coverage is up by 20% compared with fiscal 2019, currently standing at 1.8x, while days' cash on hand (DCOH) remained steady in fiscal 2023 after extraordinary growth in recent years. Fiscal 2024 has experienced a steady per-pupil funding environment, but we plan to continue monitoring if variability in economic factors or moderation in per-pupil funding levels affects schools' operating results in coming years.

We expect fiscal 2024 operating margins will compress somewhat relative to fiscal 2023, given increasing costs associated with investments in salaries and academic support, compounded by the effect of the depletion of ESSER funds. However, unspent funds are significant in some states and could continue to provide some schools with financial flexibility in the current 2024 fiscal year and into fiscal 2025, or potentially beyond if extensions are granted. 

Table 1

Medians Continue To Maintain Improvements Across Rating Levels 

When comparing medians across rating levels we see stable performance relative to fiscal 2022. Key metrics such as enrollment, operating margins, and coverage show steady-to-improved results, with the exception of the lowest rated schools. Our lowest rated, 'B' category schools continue to experience more volatility with year-over-year declines in enrollment, operating margins, coverage, and cash. This remains true even when comparing the 'B' category schools with their pre-pandemic metrics of fiscal 2019. However, across rating levels, the rest of the sector has capitalized on the increasing demand for charter schools since 2019 and has experienced growth in virtually every metric relative to fiscal 2019. 

For fiscal 2023, we see large growth in expenses across all ratings, which we expected considering the increase in wages and inflationary pressures over the period. However, expenses rose unproportionally to historical trends due to ESSER funds, which supported operations and other investments, such as HVAC and technology upgrades, that were, to some extent, induced by the availability of ESSER funds. Schools that had already shown healthy operating performance trends and leveraged ESSER funds well, such that they could build up reserves, have continued to benefit from this period of increased funding, despite the growth in expenses.

Table 2

Medians By State Analysis: Performance Varies By State 

In the past year, the number of states with public charter school ratings remained steady, with ratings in 26 states plus the District of Columbia. California continues to have the most publicly rated charter schools (44) while 10 additional states have 10 or more rated schools. New rating activity over the past year spanned the country, with ratings added in 11 states and the District of Columbia. 

Chart 3

Generally, we have noticed that while median financial metrics have remained healthy across the sector, demand trends are mixed across states, explained in part by variation in demographics and competitive environments. We expect to continue to monitor how demographics, particularly in those states experiencing declining populations, affect a school's credit profile.

Table 3 lists medians for states with at least 10 public charter school ratings, which now includes New Jersey. Some states have large charter school networks, with multiple schools supporting a single rating, which can result in higher median enrollment and total revenues.

Table 3

Median enrollment rose considerably for the sector.   The National Alliance for Public Charter Schools' (NAPCS) most recent report on public school enrollment trends demonstrated that charter school enrollment levels across the country have continued to grow over the past year and did so at a rate higher than non-charter district public schools. Of the 10 states with the highest level of rated charter schools, NAPCS reports growth in charter enrollment of greater than 5% in Florida and Texas, with negative growth rates in only Michigan and Pennsylvania, though the declines in these two states still compared favorably with district public school enrollment trends. 

Liquidity remained healthy.   In fiscal 2023, the use of one-time pandemic relief funds and continued growth in per-pupil funding spurred healthy operating cash flow for many schools. However, we have noticed that changes in median financial ratios vary by state. Specifically, margin compression in states with lower per-pupil funding rate increases led to less significant growth (or decline) in key liquidity ratios. Alternatively, rated charter schools in California were boosted by substantial per-pupil funding increases for fiscal 2023 and saw the highest year-over-year growth in median DCOH and median margins outperforming sectorwide medians. 

Schools in Colorado, Florida, New Jersey, Texas, and Utah have the highest median ratings.   Charter schools in these five states share common characteristics supporting the relatively stronger credit quality: solid balance-sheet and liquidity metrics with correspondingly low-to-moderate debt metrics. Furthermore, Arizona, Colorado, Idaho, Texas, and Utah have state credit enhancement programs that provide lower costs of financing and, in some cases, require certain minimum underlying credit characteristics to qualify for the enhancement, which in turn "enhances" the medians in these states. (See, "U.S. State Enhancement Programs And Their Impact On Charter Schools," published May 7, 2024.) 

Michigan and Minnesota schools continue to have the lowest median ratings.   These two states are constrained by comparatively low medians for enrollment, demand, and liquidity. We lowered the median rating on Minnesota to 'BB' this year from 'BB+' as of our last medians report, which positions the state similarly to Michigan in terms of median rating. Many median metrics for rated schools in Minnesota are comparable year over year, indicating that deterioration in the median rating is likely spurred by individual credit nuances and enrollment challenges, which can be a leading credit indicator, as evidenced by our lowering of five Minnesota charter school ratings from fourth-quarter 2023 to first-quarter 2024; these downgrades primarily cited financial stresses, such as persistent deficits, declining liquidity, and increasing debt burdens. 

Large Networks Remain Better-Positioned To Weather Changes 

In fiscal 2022's medians, we noted that the economies of scale more markedly benefited larger networks when comparing their financial growth metrics with those of smaller schools. While the distinction favoring larger networks is not as apparent in fiscal 2023 medians, we believe that larger networks remain better-positioned over time due to their ability to weather changes in funding landscapes and enrollment, and that smaller schools are prone to higher variance, which has benefitted their financial metrics in fiscal 2023.

Table 4

In fiscal 2023, smaller schools recognized higher margins, DCOH, and respective growth rates than larger schools. However, the gap between state revenue increases and total revenue increases for single-site schools could point to a greater receipt and spending of federal pandemic-relief funding, demonstrating less that smaller schools significantly improved organic operations over larger networks, but more the returns of operating with lower denominators, or expense bases, while receiving excess funds. Although lagging in fiscal 2023, larger networks, which could have lower DCOH but higher nominal reserves than smaller schools, could be better-positioned in the medium term to weather the ESSER fiscal cliff and aftershocks. 

While the median enrollment for larger networks dropped 14.2%, this was largely spurred by a handful of networks experiencing declines, especially after pandemic surges, and the addition of smaller networks into the medians. Larger networks, by nature, could be more representative of macroeconomic demographic trends, such as the decline of student-aged populations in some states, or loss of students to varying forms of competition. Smaller schools could be relatively insulated from the implications of these trends whether by way of specialized programs (such as an arts curriculum), with offerings that might be more inelastic or competitive. 

However, of the 35 single-site schools within our rated universe, only 10 are investment-grade, compared with the 19 of 30 network schools that are investment-grade, speaking to the advantage that networks still hold. As one-time benefits taper off, we could once again see more defined and sustained results between the two sizes of schools. We could also begin to see more bifurcation within single-site schools themselves; small, investment-grade schools have already indicated prudent management, financial, or academic trends that support sustainability at a smaller size, while other schools with fewer than 500 students could be faced with unintentional enrollment declines and resulting pressures, as suggested by the nine single-site schools with a negative outlook. 

What We're Watching

There are many factors and challenges that determine the success of charter schools that cannot be captured within size itself, highlighting the importance of more qualitative factors such as reputation, leadership, or even partnership with an experienced charter management organization or education management organization as schools continue to navigate the current environment.  

Most charter schools entered fiscal 2024 with growing demand, good financial flexibility, and healthy liquidity positions. We expect their credit quality will remain stable through the end of the year and into 2025, though we are monitoring state budgets for flat or weakening funding trends that could cause stress beyond 2025, especially as ESSER funds roll off. Our rated universe generally reflects more established charter schools, which tend to have completed several successful charter renewals, maintained steady academics, and experienced less credit volatility than newer schools.

Over the past 12 months, S&P Global Ratings has taken 25 rating actions in this sector, representing a modest 7% of its charter school universe, and generally supporting its stable sector outlook. Of those 25 actions, two-thirds were downgrades, the majority of which have involved non-investment grade schools, potentially signifying the emerging impact of the ESSER fiscal cliff. There could remain credit stress among lower-rated schools, especially for those that began 2024 weaker from an enrollment, academic, or financial standpoint. For some, operating stress has been building for several years, which could cause liquidity and bond covenant problems, particularly if breached covenants lead to collateral postings or acceleration of debt.

At the end of June, Plymouth Educational Center Charter School in Detroit, Mich., will not receive a charter renewal from its authorizer and is expected to close. Plymouth has been rated 'D' since 2019 when the school began missing principal payments under a forbearance agreement with bondholders. Plymouth joins two other schools in our rated universe that have experienced some form of closure following forbearance agreements with bondholders as a result of financial distress tied to declining enrollment. Over the summer of 2023, River Heights Academy in Michigan, and Pointe Schools in Arizona, ceased operations. Both were rated 'B' at the start of 2023 and we lowered them to 'D' (default) before we withdrew our ratings on the schools. River Heights Academy surrendered its charter and closed at the end of the 2022-2023 school year and Pointe Schools transitioned operations for two of its three schools to another charter school and closed its third campus. As of May 15, 2024, about 3% of our schools were rated in the 'B' category (11 schools in total) and, as we noted in our 2024 sector outlook, we expect lower-rated schools could remain pressured this year.

Table 5

Related Research

• U.S. States’ Fiscal 2025 Budgets Navigate Evolving Risks As Economic Growth Prospects Wane, May 28, 2024
• U.S. State Enhancement Programs And Their Impact On Charter Schools, May 7, 2024
• U.S. Charter Schools 2024 Outlook: Credit Stability, For Now, Jan. 17, 2024