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What's Behind Our Sector View

Our sector view is stable, in part due to states' steady fiscal position.   U.S. charter schools benefit from steady per-pupil revenue in most states, but the financial cushion provided by federal stimulus money is now gone. For schools that used these funds for one-time needs only, the budgetary transition has been relatively smooth, but those that relied on emergency money for regular and recurring expenses are now facing a "fiscal cliff" with significant operating pressures. Demand remains generally healthy across the sector, although competition for students has intensified in some areas of the country, attendance nationwide is falling, and not all charter schools have been able to sustain or increase enrollment. At the same time, despite moderating inflation, general expense pressures tied to salaries and benefits, coupled with labor shortages, will continue to present a budgetary dilemma for most schools. Still, we don't anticipate that operations will be materially stressed sectorwide unless states meaningfully cut per-pupil funding.

Liquidity generally remains sound, but fiscal 2025 will be the first year for some schools without federal emergency funds and financial performance metrics will likely start to return to pre-pandemic levels. The majority of rated schools are faring well and sustaining credit strength, with solid management teams and healthy liquidity. However, for those at the lower end of the ratings scale or those still trying to improve and steady their cash flow and fill gaps caused by nonrecurring revenue recognized in recent years, we believe there's less rating flexibility. (For more, see "U.S. States 2025 Outlook: Eyes on Washington, Focus on Budgets," published Jan. 7, 2025, on Ratings Direct.)

Competition for K-12 students is rising, while demographic pressures deepen--reducing rating flexibility for some.   S&P Global Ratings rates a broad mix of charter schools, from a single-site school of 200 students, to multiple-site school networks of over 70,000 students, that span the ratings scale. Enrollment is a leading credit indicator, and while we expect general enrollment momentum will continue, greater competition from homeschooling, online, or private schools, given expanding school choice voucher programs--remains a risk, especially in areas facing demographic challenges. In addition, as attendance nationally has declined since the onset of the pandemic, this remains an area we're monitoring, especially for charter schools in states where funding is based on daily attendance.

Outlooks and rating actions point to general stability in 2025, with pockets of pressure.   During 2024, the overall distribution of stable outlooks dipped to 82% as of Dec. 31, 2024; this is lower than it was during the past two years. However, these years also benefited from material federal emergency funds and state funding increases. We made 2x more downgrades (14) than upgrades (seven), as enrollment and budgetary struggles affected some schools more than others across the sector. Credit quality also widened across the sector, as larger networks continue to expand, while some smaller, less competitive schools struggle amid intensifying competition for students. As of Dec. 31, 2024, ratings on 39 schools (about 11%) have negative outlooks and a smaller number (25, about 7%) have positive outlooks. We expect this trend will continue in 2025.

Sector Top Trends

Moderation in economic activity could translate to state budget pressures, but for now, states remain in stable fiscal condition.   S&P Global Ratings Economics forecasts that U.S. GDP growth will likely come in at 2.0% in each of the next two years, down from 2.7% growth in 2024. However, states' credit fundamentals are sound, providing headroom to navigate potential tough budgetary conditions.

For charter schools, per-pupil funding has been steady or rising, but history shows that, should state budgets become materially squeezed in 2026 or beyond, reductions to K-12 funding could follow. Per-pupil funding levels differ by state; however, in most states where we rate charter schools, per-pupil funding is generally steady to rising heading into calendar 2025. Although federal sources provided meaningful flexibility, with those emergency funds exhausted, state funding resilience remains critical, given schools' high reliance on these revenues for operations.

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Elevated expenses and operating pressures persist in 2025.   Inflation has eased, but higher expenses and labor shortages still hamper school budgets, creating greater operating difficulties for schools with less financial adaptability. Attracting and retaining qualified teaching staff remains a key challenge and priority for the entire K-12 education sector, but especially for charter schools, which typically receive less funding and, therefore, often can't pay teachers as much as traditional school districts pay. The focus on teacher wages, benefits, and working conditions continues, with schools raising teachers' salaries and bonuses to meet the rising cost of living. Also contributing to margin compression are increasing expenses for insurance, including property and environmental risk insurance and cyber security.

Since the extraordinary federal money has been exhausted, it has been critical for schools to budget and plan accordingly to avoid any sharp drops in services and staffing. During 2024, operating pressures at smaller schools with lean management oversight led to some negative rating actions and a handful of the schools we rate reported a breach in financial covenant resulting in a technical event of default; most implemented corrective action plans to avoid future covenant breaches. Although more covenant violations could occur, particularly at smaller schools and those facing leadership transitions and enrollment struggles, we believe networks and other large operators are better positioned due to greater oversight from management teams and other benefits that come from scale.

Based on our conversations with management teams, we expect fiscal 2025 financial performance will see further compression from fiscal 2024 operating margins, given increasing costs of investments in salaries and academic support in some states, coupled with more modest per-pupil funding. Although we expect slowing economic growth in 2025, we anticipate steady creditworthiness for schools with uninterrupted demand, good operations, and healthy cash flow, which, in our opinion, have cushion at the current ratings to withstand a moderate degree of financial pressure and mitigate credit risks.

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Liquidity generally remains sound, but fiscal 2025 will be the first year for many schools without federal emergency funds. Across our rated universe, median unrestricted days' cash on hand increased 33% in six years, to 145 days in fiscal 2023 from 109 days in fiscal 2017, spurred not only by federal support but also stronger operations from rising enrollment and favorable state funding. In the next year, healthier liquidity will keep playing a key role in credit stability, especially given increased leverage, sectorwide.

As costs associated with construction projects have climbed, and schools have looked to acquire and/or expand permanent facilities, the size of new-money debt issuances increased in both 2023 and 2024. Our median debt per student ratio rose meaningfully by 19% in the past two years to $18,214 in fiscal 2023 from $15,321 in fiscal 2021. While most schools were able to absorb additional debt and debt service within the rating, for some, this resulted in a lower rating, as many issued debt at higher costs of capital. S&P Global Ratings continues to monitor operations and cash flows, particularly at lower-rated schools, to see how the additional spending, and potentially debt, could influence liquidity and credit quality.

Demand remains healthy for charter schools, but K-12 competition is heating up.   Demand increased across the charter school sector during the past five years, with enrollment up by 11.7% between fall 2019 and fall 2024, while traditional public school enrollment dropped by 3.9% over the same period. For most of the charter schools we rate, enrollment was stable or higher in fall 2024, continuing this trend, but some schools are facing shrinking enrollment. Enrollment varies widely across the sector, depending on the type of school, location, and overall credit quality, with many smaller schools in competitive markets finding it tough to compete for students in the current environment. We expect general enrollment momentum will continue, but rising competition remains a risk, especially in areas facing dwindling populations.

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The disparity in population trends across states is striking and will continue to affect the competitive landscape for charter schools. In many states, the general school-age population is dropping due to falling birth rates and outmigration. Charter school operators in these states will need to keep gaining market share to hold enrollment steady as they compete for a shrinking number of students. We believe these markets are also likely to experience additional strain from traditional school districts (which often act as authorizers) and other charter school operators as competition grows. In contrast, markets in other states, such as Arizona, Florida, Idaho, Nevada, and Texas, enjoy more favorable population trends, with expected student-age population growth largely reflecting multiplying job prospects and more affordable housing. We expect favorable demographics will support enrollment at rated charter schools in these areas of the country, despite heightened competition.

Management response remains key, especially with increasing frequency of event risk.   While academic performance has improved overall, significant learning gaps remain. We're watching for impacts to academic performance, state accountability, and charter standing, as many schools might need to reallocate budgets to sustain programming aimed at tackling learning loss. Charter renewal risk appears heightened, as some schools have been reporting shorter-than-maximum charter extensions.

Beyond charter nonrenewal or revocation, additional event risks continue to affect the sector. Cyber security breaches, management turnover, governance scandals, or weather events can also constrain schools' operating flexibility. While some schools have broad tools to address environmental, social, and governance risks, smaller or less-sophisticated management teams can lack the financial resources or expertise to implement comprehensive risk management strategies to insulate operations from these evolving risks. We anticipate management will remain focused on preserving or augmenting reserves to improve balance-sheet flexibility due to likely weaker cash flow and capital spending needs. Over the next year, liquidity and unrestricted funds will continue to play a key role in credit stability, especially at the lower end of the ratings scale.

Political momentum for charter schools remains strong, with possible federal policy changes coming.   During 2024, the legislative environment for charter schools was favorable, as charter school advocates made legislative gains in statehouses across the country, demonstrating that bipartisan support for charter schools endures. The new administration is in the early stages of crafting its education policies and much remains uncertain at the moment. Nevertheless, President Trump's first term, campaign priorities, and early cabinet appointments suggest that material changes may be forthcoming, in particular for education policies. We'll be watching to see if there are any credit impacts from changes made to the Department of Education, school choice expansion, the child tax credit, and many social issues in education that were discussed throughout the campaign. In terms of anticipated changes to immigration policy, lower enrollment related to a drop in the immigrant, or overall international, student population at schools could lead to budgetary pressure. That said, a charter school's success largely hinges on state and local policies, and we'll keep monitoring legislative changes state by state.

Ratings Performance

As of Dec. 31, 2024, S&P Global Ratings maintained ratings on over 350 U.S. charter schools. As of year-end 2024, we had lowered 14 ratings, raised seven, and assigned 21 new ratings.

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Related Research

• U.S. Charter School Rating Actions, Fourth-Quarter 2024, Jan. 17, 2025
• U.S. States 2025 Outlook: Eyes On Washington, Focus On Budgets, Jan. 7, 2025
• Economic Outlook U.S. Q1 2025: Steady Growth, Significant Policy Uncertainty, Nov. 26, 2024
• U.S. Charter Schools Rating Actions, Third-Quarter 2024, Oct. 18, 2024
• U.S. Charter Schools Rating Actions, Second-Quarter 2024, July 16, 2024
• U.S. Charter Schools Sector Fiscal 2023 Medians: Healthy Financial Metrics Amid Looming Fiscal Cliff, June 25, 2024
• U.S. State Enhancement Programs And Their Impact On Charter Schools, May 7, 2024
• U.S. Charter School Rating Actions, First-Quarter 2024, April 15, 2024