Overview

As of Oct. 14, 2024, S&P Global Ratings maintains 23 public ratings on New York charter schools. Since our last brief published Oct. 16, 2023, we added three new ratings in the state; since our 2020 brief, the number of our New York charter school ratings has tripled. According to the New York State Education Department, 343 charter schools were in operation for the 2023-2024 academic year, with an additional 17 scheduled to open in the current school year or later. In 2023-2024, New York charter school enrollment totaled just above 181,300, or approximately 7% of the state's total kindergarten through 12th grade (K-12) public school enrollment. In New York City, this figure rises to approximately 15%, according to the New York City Charter School Center. Charter schools in New York City constitute the vast majority (approximately 80%) of total state charter schools, given the high demand for academically well-performing schools in areas with high needs or economically disadvantaged populations. New York City Department of Education's charter school enrollment has historically been second only to that of Los Angeles Unified School District.

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Of our New York charter school ratings, 39% are investment-grade ('BBB-' or higher), slightly trailing 44% for the sector as a whole; for more information, see our fiscal 2023 medians report on charter schools, published June 25, 2024, on RatingsDirect. However, the modal rating is 'BB+', just one notch below investment-grade, and accounts for seven, or 30%, of ratings. We believe the slightly weaker rating profile for New York charter schools compared with the sector stems from comparatively unfavorable school-age population trends, leading to increased competition from public schools, as well as higher debt and leverage metrics.

Almost half of rated New York charter schools are in New York City, and the rest are dispersed across Albany, Erie, Suffolk, and Westchester counties.

The stand-alone schools we rate are all freestanding (meaning they manage their school operations themselves), while the networks are all managed through nonprofit charter management organizations (CMOs). In New York, state law prohibits for-profit educational management organizations from operating new charters; thus, it has only nonprofit CMOs.

Authorizer Framework

• Four authorizers oversee state charter schools: Board Of Regents (BOR), the Buffalo Board of Education, the New York City Department of Education, and the State University of New York (SUNY).
• Although local school districts are no longer permitted to authorize new charter schools, two, the Buffalo Board of Education and the New York City Department of Education, preserved their authority to oversee and grant renewals for charter schools they previously authorized.
• SUNY is the largest charter school authorizer in the state, and the largest university charter authorizer in the country. By law, if SUNY approves an application or reasserts approval after initially being rejected by the BOR, then the BOR must issue the charter for that school.
• New York has established caps on the number of statewide charters issued; a conversion of an existing public school to a charter school is not counted toward the limit, nor are charter renewals. Statewide, 84 charters remain that can be issued outside of New York City.
• Legislation in 2023 provided for the reissuance, on the recommendation of the BOR or SUNY, of up to 22 charters that had previously been revoked, terminated, surrendered, or not renewed during a certain time frame (known informally as "zombie charters"). To date, 14 of the 22 eligible charters have been reissued, with none of the remaining zombie charters eligible to be issued in New York City.
• Unlike law in other states, New York state law does not allow charter schools to switch authorizers. In our view, this constrains flexibility for schools if their charter is denied or revoked.
• State law limits the length of new and renewal contracts to five years, and there is no differentiation for high-performing charter schools.

Credit Fundamentals

Stand-alone schools dominate our rated New York charter school universe, and only six are networks. Median enrollment for fall 2023 rose 1.9% and is comparable with our overall rated universe at 1,151 versus 1,175, respectively. Schools in the 'BB+' category displayed the most growth, due to the addition of several newly rated schools at that rating with comparatively larger enrollment.

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Rated charter schools in New York have historically had stronger financial metrics than our sectorwide medians. While balance-sheet metrics in investment-grade categories still exhibit this trend, speculative-grade medians weakened in 2023 relative to 2022 and had a dampening effect on statewide medians for both days' unrestricted cash on hand and unrestricted cash and investments to debt. On a positive note, median lease-adjusted maximum annual debt service (MADS) coverage was largely flat year-over-year for all rating categories.

Although state costs of living and compensation expenses are higher than national averages, particularly in New York City, rated schools have largely witnessed rising demand and greater state per-pupil funding and have sufficient reserves to buffer potential short-term volatility in key revenue streams. Lease-adjusted MADS measured as a percentage of total revenue continues to exceed that of the overall rated universe at 12.4% versus 9.2%. This is due to higher debt burdens related to construction and facility building costs that tend to exceed those in many parts of the country. This is further evidenced by statewide median debt per student of $37,504, which is twice the fiscal 2023 sectorwide median.

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New York's comparatively high-cost structure for labor and overhead is somewhat offset by one of the highest rates of per-pupil funding in the country, with additional provisions for special education. New York charter schools receive per-pupil funding based on individual students' place of residence and the corresponding district per-pupil allocation. These payments are tied to enrollment and disbursed in six installments through the year. Funding disparities between charter schools and their school district counterparts persist, which is not uncommon in the sector. In the past 10 years, funding has trended positively, up approximately 8% in the past three years as it recovered from a slight dip in fiscal 2020, and up 3.1% for the current fiscal year ending 2025.

Historically, charter schools were not granted additional funding for facilities expenses. But in 2014, the state passed the Facilities Access Law, informally referred to as facility rental assistance. This law provides additional rental support for eligible new and expanding charter schools in New York City. If New York City Department of Education determines that there is no adequate co-location public school district space available for eligible charter schools, the schools may qualify for rental assistance. The charter school receives the lesser of 30% of basic tuition or general education per-pupil funding multiplied by current or additional enrollment numbers, or actual rental costs. The additional per-pupil funding helps to equalize the costs associated with operating outside of co-located facilities. In the 2024-2025 school year, the New York City Charter School Center estimates approximately 58% of city charter schools are in private (that is, non-New York City Department of Education) space, although presumably not all these schools qualify for rental assistance. The balance of charter schools not receiving rental assistance benefit from co-location with other public schools in buildings either owned or leased by the New York City Department of Education.

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The charter school sector in New York has expanded over time, with enrollment more than doubling since 2012-2013 and eclipsing 180,000 for the first time in the 2023-2024 school year. Traditional school district enrollment in the state was largely stable year over year in 2023-2024, ending its longer-term trend of annual decline that averaged 1.2% per year during the past decade. This compared unfavorably with charter school enrollment, which gained 3.4% for the year and averaged 8.1% annual growth in the past decade. More recently, since the 2019-2020 school year, traditional public school enrollment is down 6.9%, while charter school enrollment is up 13.9%. Although the magnitude of charter school enrollment gains varies across states, these recent trends generally mirror broader nationwide patterns.

What We're Watching

Shrinking K-12 population.   School-age population projections for counties comprising the New York City, Albany, and Buffalo metro areas indicate a decrease in the next five years. Although some growth could occur from students leaving district schools, we expect a general population drop in school-age children could spell flat-to-depressed enrollment trends and greater competition in the medium term for charter schools.

Facility rental assistance payments.   Disputes are ongoing between the New York City Department of Education and certain charter schools over facility rental assistance payments, which have resulted in some--not all--schools receiving less than the full amount required pursuant to the law and, in some cases, not receiving any payment at all. At least three New York City charter schools have filed petitions with the New York State Education Department to compel full payment of the payments, and we understand the Commissioner of Education's ruling in favor of charter schools has since been challenged in New York State Supreme Court. A resolution to this matter could potentially span multiple budget cycles and the ultimate impact to charter schools in New York City will vary on a case-by-case basis depending on the composition of the school's portfolio of facilities, the budgetary adjustments taken by management teams to offset the lost revenue in the interim, and the general financial flexibility and liquidity profile of the school as the matter is adjudicated.

Favorable funding trends.   Conversations with school budget officers generally indicate schools expect per-pupil funding will remain positive in the near term regardless of the school district they operate in. This narrative seems consistent with a state budget that increased education funding in fiscal 2024-2025 with additional deposits to its reserve funds. These deposits may provide a cushion against any revenue shortfalls in upcoming budget cycles that could otherwise pressure the state to cut general spending to balance the budget.

Labor challenges.   We're monitoring the influence of rising expenses on labor costs and labor shortages, which could pressure school faculty operations. 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. According to the New York City Charter School Center, about 7% of New York City charter schools have collective bargaining agreements, slightly below the estimated national average of approximately 10%. We're watching labor relations with rated schools for possible unionization efforts that could present operational or budgetary implications over time.

Long-term use of one-time funds.   Elementary and Secondary School Emergency Relief funds provided significant operating revenue to traditional public and charter schools. Many 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 pressures.

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