Overview

As of Oct. 17, 2024, S&P Global Ratings maintains 36 public ratings on Texas charter schools, which, along with California, top its list of states with the most rated charter schools. Texas is home to more than 900 charter schools, serving more than 375,000 students, with another 66,000 students on waitlists statewide. The Texas Legislature enacted its charter school law in 1995, and in fall 1996 the state's first charter schools opened their doors.

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The credit profiles for our rated charter schools in Texas are generally stronger than those across the sector, with 61% of schools achieving investment-grade ratings, compared with just 44% for the sector as a whole, as noted in our "U.S. Charter Schools Sector Fiscal 2023 Medians: Healthy Financial Metrics Amid Looming Fiscal Cliff," published June 25, 2024, on RatingsDirect). We attribute this credit strength to more supportive state laws for charter schools in Texas compared with the rest of the country, including the acceptance of qualifying bonds issued by charter schools into the Texas Permanent School Fund (PSF) Bond Guarantee Program, which can significantly lower a school's cost of capital by serving as a credit enhancement for guaranteed bonds carrying a 'AAA' rating.

Authorizer Framework

• While there are four types of authorizers--the state (Texas Education Agency [TEA]), local school districts, colleges or universities, and home rule districts (charter districts within a school district)--all 36 rated charter schools are authorized by the TEA. Most schools are authorized for terms of five years, but renewals can extend as long as 10 years.
• We view the governance, financial performance, academic reports, and consecutive charter renewals from the state as favorable indications of an acceptable relationship between the TEA, which remains the most prevalent authorizer, and charter schools.
• Not surprisingly, rated charter schools are clustered in major cities across the state, with about 80% of the charter schools we rate based in the Dallas-Fort Worth metropolitan statistical area, or Houston.

Credit Fundamentals

Our ratings on Texas charter schools range from 'A-' to 'B', with a median rating of 'BBB-'. More than half of our rated schools in Texas meet our definition of a charter network and operate multiple campuses. Although many charter schools in the state also operate at just a single site, Texas public schools serve a larger student population than those of their peers across the U.S., given continued school-age population growth across Texas counties. This, combined with the concentration of charter networks, results in median enrollment levels, and in some cases operating budgets, that are significantly higher when compared with medians for the entire sector. Texas is home to one of only two charter schools that we rate 'A-' (IDEA Public Schools: A-/Negative); IDEA is also the largest rated charter network in Texas based on enrollment, with more than 76,000 students enrolled as of fall 2024.

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While Texas charter schools are not allowed to levy a property tax, and they do not receive an allocation of property taxes levied by local traditional school districts as in other states, they continue to receive state funding to cover lease and building facility costs, which we view as favorable.

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Enrollment in charter schools continues to rise, relative to traditional school districts across the state. From school year 2018-2019 through school year 2022-2023, charter school enrollment has increased by over 20% in Texas, and is also among the largest growth seen in charter school enrollment nationwide over that time frame, despite the declining school age population in some of Texas' major counties, particularly Dallas County. Although overall support and demand for charter schools in Texas remain steady and relatively positive, S&P Global Ratings will continue to monitor if pockets of lagging population across the state's largest population centers have an adverse effect on charter enrollment.

What We're Watching

School choice vouchers.   Will school vouchers become an option in the state? Notably, the voucher bill, put forth by the Texas governor, failed to pass in the Texas House in 2023. Since being defeated, however, subsequent runoff elections resulted in a wave of defeats for incumbent Republicans who opposed the bill. This has renewed optimism for the bill's supporters, and state legislative sessions set to begin January 2025 will likely include initiatives to pass the voucher program. Given November's upcoming presidential election, we will continue to gauge if results could affect how Texas elected officials view voucher programs, and if potential implementation results in any shifts in charter school enrollment, funding, policy, or the state's charter laws.

Population growth.   Notwithstanding that certain regions in the state's major counties--namely Dallas County--are experiencing a drop in school-age population, overall, all projections for the school-age population in Texas' other major counties indicate continued growth over the next five years. While this growth could decrease the risk of oversaturation, the state has no numeric or geographic limits on how many charter schools can be opened under its current charter laws. Although most schools we rate have not struggled to meet enrollment targets, in some instances we believe competitive pressure to attract students has presented challenges. Long term, we expect Texas charter schools will need to remain competitive to maintain their market share.

Flat funding environment.   Charter schools continue to receive a significant share of their revenues through state support based on a formula, with a base level of funding plus additional funds tied to the demographics of the population served. This support, in turn, is weighted to benefit those schools serving economically disadvantaged populations. For fiscal 2025, state funding remains relatively flat, which has been the case since 2019, when the basic allotment was increased by nearly 20%, to $6,160 from $5,140. Given that Texas operates on a biennium budget and that charter schools' revenue diversity is primarily limited to increases received from the state, grants, and philanthropy, we will continue to monitor updates from the state legislature sessions beginning January 2025 for any potential funding increases, especially given rising expenses in the past few years.

Stale state testing results.   Due to an ongoing lawsuit between several school districts and the TEA, the last accountability ratings to be publicly released are from the 2021-2022 school year. This dispute began when changes were made to the standards used under the State of Texas Assessments of Academic Readiness (STAAR) tests to measure schools' academic performance based on students' performance, graduation rates, and college and career readiness. Districts that were opposed to the revised performance standards felt this retroactive change made it mathematically impossible for them to achieve a high rating. We don't know when this issue will be resolved, but from our perspective, the lack of transparency regarding accountability ratings has made it more difficult to assess academic performance for rated schools, which is a key consideration for our view of a school's market position.

Operating results absent ESSER funds.   Elementary and Secondary School Emergency Relief (ESSER) funds provided significant operating revenue to both local district 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 expired 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 and budgetary pressures. In Texas, charter schools with prudent management teams prepared for this cliff by maintaining underlying operating budgets within reoccurring revenues or by right-sizing staff beginning in fiscal 2024 to account for lower federal funding.

Teacher shortages.   Schools across the U.S. are facing teacher shortages, and Texas is no exception, given that it has the largest teacher workforce of any state, with more than 370,000 teachers working in the pre-kindergarten to grade 12 public school system. Furthermore, its teacher attrition rates are above the national average, with 9% of teachers leaving the profession, and another 11% saying they intend to, based on survey data from the Learning Policy Institute collected since 2022. To address these shortages, we have heard from several Texas charter schools that are implementing or exploring a four-day week as a teacher recruitment and retention tool. Anecdotally, we are hearing that teacher applications to schools with a four-day week are at all-time highs, and applications from students have not decreased. We will see if this trend gains momentum and how it affects labor challenges, academic performance, and demand for charter schools.

Texas PSF capacity.   In May 2023, the Internal Revenue Service increased the school bond guarantee program capacity to $218.0 billion from $117.3 billion. The Texas PSF had approached the previous capacity level, causing some concern that the program limit would be reached. However, the new limit allows the program to continue guaranteeing the bonds of all eligible schools, including charters, for the foreseeable future. The amount of guaranteed school and charter district bonds under the program has been gradually increasing since the effective cap was lifted, and rose to about $120 billion as of the April 2024 disclosure. Bond guarantees designated to charter schools from the total available capacity of the fund are directly tied to the percentage of students enrolled at a charter school, which was 7.2% for the 2022-2023 school year. (For more information about the PSF guarantee, see our report, published July 3, 2024.)

Pension funding levels.   All public school employees in Texas, including charter school teachers, must participate in the Teacher Retirement System of Texas, which is adequately funded, in our view, at 88.8% for the year ended Aug. 31, 2023. We believe that, should there be continued support at current system funding levels, without a material adverse effect on charter school margins over our outlook horizon, we will maintain our favorable view of funded status and contribution rate of charter school participants. However, we will continue to assess the state's assumptions and schools' contributions, and how charter schools manage these rising fixed costs.

Management turnover.   Many charter school management teams have limited depth and breadth so loss of knowledge and industry experience on management benches can affect a school's strategic planning and vision, presenting operational challenges. In a few instances in Texas, significant management changes have led to disruption and the consolidation of charter schools that we rate, which can have adverse effects on a school's credit profile.

Interest rate cuts.   The Federal Reserve looks set to embark on a steady series of interest rate cuts and S&P Global Economics projects policy rates will reach the terminal rate of 3.00%-3.25% by the end of 2025 (see "Economic Outlook U.S. Q4 2024: Growth And Rates Start Shifting To Neutral," published Sept. 24, 2024). If the Fed continues on this path, we anticipate this could lead to an uptick in the number of charter schools coming to market to issue new debt.

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