Overview

California remains the state with the most rated charter schools, with 45 ratings as of March 6, 2025. As of the 2023-24 school year, 709,630 students (12.2% of total California transitional kindergarten-through-grade 12 [TK-12] enrollment) attended one of California's 1,280-plus charter schools (see "Fingertip Facts on Education in California," California Department of Education, published Oct. 25, 2024) and continue to make a growing proportion of the state's total TK-12 enrollment.

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California charter schools are fairly normally distributed, with a median rating of 'BB+'. Credit quality borders speculative- and investment-grade ratings. In California, a third of charter school ratings are 'BBB-' or higher (investment-grade), while about 40% of total California ratings are 'BB+' (one notch below investment-grade). Nationally, as of our most recent outlook, about 44% of all rated charter schools are investment-grade, while about 32% are rated at 'BB+'. (For more information, see "U.S. Charter Schools 2025 Outlook: Stability For Now, With Pockets Of Pressure," published Jan. 22, 2025, on RatingsDirect.)

California's median performance is lower than the overall sector's due to a variety of factors, including a high level of competition and higher capital costs, resulting in more leverage relative to peers. Additionally, the state, with a school-aged population that has decreased for the seventh year in a row, faces demographic challenges that are expected to continue. There are also additional risks, as over 89% of our rated California charter schools are authorized by their local districts, which compete for students within those same districts. Nevertheless, credit quality remains sufficient, with California charter schools exhibiting a trend of positive per-pupil funding, which has been bolstered over the last few years by Elementary and Secondary School Emergency Relief (ESSER) funds.

Authorizer Framework

• Charter schools are typically authorized for up to five years by local school districts, but they can also be authorized by 58 county offices of education or the California State Board of Education, in certain cases. We believe the state outlines a clear process for authorization, renewal, revocation, and appeal of charters, although it is difficult to assess if individual authorizers apply the process consistently or what criteria each uses to monitor adherence to standards during the charter term. State law requires charter schools to meet a minimum level of academic performance before receiving renewals, with annual site visits by the authorizer, which we view positively.
• During the pandemic, Assembly Bill (AB) 130, passed in July 2021, automatically extending by two years the terms of any charter school whose term expires on or between Jan. 1, 2022, and June 30, 2025. Senate Bill 114, passed in July 2023, extended by one additional year all charters statewide, without regard to a specific expiration date. About 16% of our rated universe is up for renewal in 2025, with many schools having received this extension.
• Despite favorable authorization-related extensions, some legislation could pressure charter school renewals. AB 1505, effective July 2020, mandates that charter schools authorized by the State Board of Education seek reauthorization from local school districts or county offices of education upon expiration. If denied, appeals can be made to the county office and then the state. This bill also enables local districts to assess the impact of charter schools on their communities, potentially affecting charter applications and renewals.

Credit Fundamentals

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S&P Global Ratings currently rates 45 charter schools in California, with ratings ranging from 'BBB' to 'B+'. Fiscal 2024 medians suggest that coverage and cash levels across our rated universe moderated relative to fiscal 2023, in part due to ESSER funds rolling off, rising interest rates, and inflationary pressures, although key metrics remain solid.

Median enrollment across California charters grew to 1,939 students, from 1,533 students in our last report, and generally maintains higher median enrollment than charters in other states. Though the proportion of charter school students has grown every year, including in fiscal 2024, we believe the level of growth in our rated California medians can be attributed to a larger proportion of networks, which comprise a majority of our ratings in California and generally have higher levels of enrollment than single-site schools.

The exhaustion of ESSER funding and expense pressures have resulted in thinner operating margins and declines in lease-adjusted maximum annual debt services (MADS) coverage, although this was anticipated. MADS coverage is currently at 1.68x across our rated universe in California, down from 1.9x in our previous report. Cash has also experienced a decline relative to the previous year, declining from 216 days to 192 days, but remains robust. We believe the declines in cash are driven by similar pressures as declines in coverage, but we also note that given a generally higher cost of capital in California, combined with rising interest rates over the last few years, many schools are addressing their capital needs by using different combinations of debt and cash. Overall, median financial metrics are comparable with fiscal 2019 pre-pandemic levels.

Per-pupil funding, which is dictated by the Local Control Funding Formula (LCFF), is expected to increase modestly by 2.43% for the 2025-26 school year. In many ways, trends in funding and financial metrics mirror the budget for the state of California, which continues to maintain strong reserves, albeit at thinner levels than in recent years.

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The population of school-aged students (K-12) in California has seen its seventh consecutive year of decreases, and declined by about 0.25% over the last year. Future projections for the K-12 student population are more dire, with a 10% decline in total K-12 enrollment expected over the next decade, according to California Department of Finance data. Should these projections hold, we expect competition for students will increase and that the authorization process for schools will see a higher level of scrutiny, whether academic, financial, or otherwise. Given that many county school districts authorize charters, we could see growing conflicts of interest for both students and funding.

What We're Watching

Demographic pressure.  Demographic projections by the California Department of Finance indicate a potential decline of about 10% in total K-12 enrollment over the next decade. While the growth of charter schools has coincided with decreasing public school populations, suggesting that charters are outcompeting local school districts for students at a growing rate, we expect that competition between charters and traditional public schools will increase as the number of students declines.

Charter renewal and authorization risk.  Given expected increases in competition for students, we believe authorization risk will continue to grow. Legislation such as AB 1505 allows local school districts to evaluate the potential impact of charter schools on a local community, then act accordingly relative to charter applications and renewals. Given that funding follows students, leading to reduced resources for traditional public schools, we anticipate increased scrutiny for charter applications and renewals due to heightened competition for students, particularly in areas like Los Angeles, where 44% of the charter schools we rate are authorized by the Los Angeles Unified School District (LAUSD). While we view renewal risk among a majority of our rated California charters as low, the approval process for new charters could become more challenging as competition intensifies for the declining K-12 student population.

Budgetary environment.  We believe that financial management will continue to be an important credit factor. Given the exhaustion of ESSER funding and a return to more normal funding levels, management teams will need to remain focused on managing expense. Additionally, the cost of capital is higher in California than many other states in which we rate charter schools. Generally higher land costs, along with prevailing wage laws and inflation over the last few years, have only made it more costly to fund capital improvements, acquisitions, and new construction. These costs both constrain currently operating charter schools and may serve as a barrier to entry for new charters.

Evolving federal policy.   The federal policy landscape is rapidly changing, with potential impacts remaining uncertain. Charter schools, including those in California, receive the vast majority of funding at the state level, though federal policy changes still have potential to affect California charters. Certain charter schools that operate in communities with high migrant populations could see enrollment pressures, absent a robust waitlist or solid academics to attract students. President Trump also signed an executive order to increase federal support for school choice programs, which could increase competition for K-12 students, depending on the area. Also, the Federal Department of Education (DOE) funds charter school programs (CSP) grants to states toward creating and replicating high-quality charter schools. A press release issued by the DOE on Feb. 20, 2025, notes that the DOE will reduce federal oversight of state CSP grant awards. The DOE has eliminated a requirement for the U.S. Secretary of Education to review how states authorize charter schools through certain entities, such as private colleges and universities, in states where they are already authorizers, which eliminates red tape and could make the CSP grant process easier.

Wildfires & Insurance.   The California wildfires of early 2025 had material effects on Southern California. Many schools in regions with fires were affected through temporary closure rather than outright destruction, though two charter schools (not rated by S&P Global Ratings) were destroyed. Wildfire mitigation is becoming an increasing priority for many schools in California. Proposition 2, passed in November 2024, provides $10 billion in funds for repair, upgrade, and construction of K-12 facilities. Due to the significant damage and destruction faced by several schools in Southern California, these schools are expected to be prioritized for funding through Proposition 2. AB 2968, which was passed prior to the wildfires, mandates school fire safety plans for California public schools. As fire risk continues to increase, fire mitigation is quickly becoming a top priority in California, and as such insurance premiums have risen materially over the last several years and are expected to continue rising. Charter schools that cannot manage these higher insurance costs or explore other insurance alternatives will experience the greatest pressure. We believe these schools will likely compose a higher proportion of single-site operators given their generally smaller size and diminished economies of scale

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