S&P Global Ratings' median financial metrics for rated charter schools remained healthy in fiscal 2024, reflecting the sector's total revenue strengthening due to state per-pupil funding growth and increasing enrollment across the sector. That being said, schools in our rated universe are expected to have spent all their remaining ESSER funds within the fiscal 2025 deadline, and therefore, we anticipate operating performance will likely continue to soften, such as through compression in excess income margins, as costs have remained high due to rising compensation and other operating expenses. In fiscal 2024, debt issuances and associated debt service costs also rose, which pressured excess income margins, although lease-adjusted maximum annual debt service (MADS) coverage remained stable compared with last year. In terms of liquidity, median unrestricted reserves across the sector have remained elevated during the past four years, which we believe could provide a cushion for operators as their budgetary flexibility becomes more limited.

Chart 1

Chart 2

The Rated Charter School Universe: Continued Sector Growth, With Lingering Pressure

Our public charter school rating universe has continued to grow, with an almost 5% increase in rated entities year-over-year. Speculative-grade ratings have been steadily increasing during the last three years, and now constitute about 59% of the rated charter school universe. As of May 15, 2025, approximately 83% of the sector has ratings with a stable outlook and approximately 90 ratings have been maintained, which supports our stable view of the sector (see "U.S. Charter Schools 2025 Outlook: Stability For Now, With Pockets of Pressure," published Jan. 22, 2025, on RatingsDirect). From Jan. 1-May 15, S&P Global Ratings changed 17 ratings in the charter school sector, including four upgrades and 13 downgrades. The primary drivers of the positive rating actions were strengthening in operating performance and growth in liquidity metrics. Conversely, the primary drivers of the negative rating actions were operating challenges and the management teams' inability to balance the budget as ESSER funding expires and expenses remain high. Also, while the sector's median enrollment has increased, trends have varied by state, with some facing declining student-aged population rates and intensifying competition, which has added operating performance stress. Overall, the negative rating actions represent only a fraction of the sector, and most of our rated universe has maintained steady operating metrics, supported by healthy state funding increases and solid demand trends.

Chart 3

Sectorwide Trends: Strong Revenue Growth And Positive Enrollment

On a sectorwide basis, our rated charter schools displayed rising enrollment and revenue trends. Fall 2023 (fiscal 2024) median enrollment increased by about 5% relative to the prior year. Growing enrollment, combined with a 10-year high increase in state per-pupil revenue, supported healthy growth in median revenue across the sector. Despite this revenue growth, excess margins moderated as expenses--such as wages and instruction costs--remained high and increased. Our preliminary fall 2024 demand data (fiscal 2025) indicates a stable enrollment trend, which we believe should support many charter school operators, but we note that rising expense pressures and the expiration of ESSER funding will likely pressure operations overall.

Table 1

Medians Show Increased Variation Across Rating Levels

We saw the most movement into the speculative rating category, with an additional 12 ratings in the 'BB' rating category, of which a majority were new issuers added during the last 12 months. In general, financial performance and liquidity remained stable. For schools with ratings at the highest end of our rating distribution, we observed a more positive operating trend as these schools typically have diligent financial management practices, brand reputations, and steadier operations. At the 'BB' and below rating levels, we saw an increase in debt per student, indicating additional leverage on schools' balance sheets, coupled with varying degrees of enrollment declines. At the 'B' rating level, our lowest category, schools continue to display the most volatility and remain the most susceptible to operating pressure. In this category, the median enrollment level declined materially, with several schools facing pressure from unfavorable demographic trends and heightened competition.

Table 2

Medians By State Analysis: Performance Varies by State

During the past 12 months, we added the state of Louisiana to our rated universe, bringing the total number of states with ratings to 28, including the District of Columbia. Table 3 lists medians for states with 10 or more public ratings. Some host large charter school networks, with multiple schools supporting a single rating, which can result in higher median enrollment and total revenue. Additionally, some metrics with material variances from last year--such as the change in median rating for New Jersey and Florida, increased debt per student metric for New York, and growing enrollment in California--have resulted from the addition of rated entities in those states rather than significant changes in existing issuers.

Chart 4

While median financial and enrollment metrics across states remain largely consistent with the previous year's trends, we continue to note emerging and separate credit pressures depending on a state's funding levels, legislative environment, and demographic pressures. We will monitor how these nuances can affect an individual school's credit profile.

Table 3

Demographic trends and school choice expansion have influenced enrollment to varying degrees

Data from the National Alliance for Public Charter Schools (NAPCS) demonstrates that over the last five years, national charter school enrollment has grown while traditional district school enrollment has declined. Another enrollment factor is the overall decline in the total school-age population in several states due to falling birth rates and outmigration (see "U.S. Charter Schools 2025 Outlook: Stability For Now, With Pockets Of Pressure," published Jan. 22, 2025, for an enrollment trend map). When analyzing state medians in our rated universe, we saw mixed enrollment trends, due in part to the varying demographic trends nationwide, heightened competition in certain areas, and new ratings in some states such as New York and Florida.

The NAPCS data also indicates a material, uncaptured gap between enrollment losses at traditional district schools and the growth of enrollment at charter schools, which we believe demonstrates nationwide momentum toward school choice expansion through both the family-level pursuit of alternative schooling options and legislative action favoring universal voucher programs. Texas recently passed a bill that will provide up to $10,000 for families to allocate toward private school tuition, joining similar programs in Arizona, North Carolina, and Florida. We will monitor any enrollment or operations pressure to charter schools in states offering these opportunities, especially in states like Texas and Arizona, which already experienced softening in median days' cash on hand (DCOH) in fiscal 2024.

Operating performance and debt metrics are trending weaker in some states

The majority of charter school funding comes from the states, and in fiscal 2024, healthy state funding increases carried most charter schools through the continued phase-out of federal pandemic relief funds. For many, this was the last fiscal year with pandemic-relief funds, and we anticipate that state funding environments will re-capture a larger role in schools' financial health in fiscal 2025 and beyond. However, we have seen per-pupil funding increases moderate across several states. In particular, we are watching ratings in states that have faced more material funding cuts or stagnation in the past--like Minnesota, Michigan, New York, Texas, and California--which are also where median lease-adjusted MADS coverage and operating margins have been thin or decreasing, and median lease-adjusted MADS has increased significantly. Lease-adjusted MADS for Michigan charter schools is an exception, though we note that the state's continued overall depressed liquidity (due to the timing of state receivables) continues to pose unique cash-flow issues for several issuers. In the case of New York, we also note the significant jump in debt per student in conjunction with a decrease in median DCOH. This was partly driven by the addition of multiple networks in the state to our rated universe, but overall, we believe it highlights the larger financial burden required to cover high construction and facility acquisition costs in a state facing demographic declines.

State enhancement programs provide benefits in some states

Colorado, Texas, Arizona, Utah, and Idaho have state credit enhancement programs that provide lower financing costs and, in some cases, require certain minimum underlying credit characteristics to qualify for the enhancement (see "U.S. State Enhancement Programs And Their Impact On Charter Schools," published May 7, 2024). In turn, these programs may enhance the median rating for the state, or reflect a somewhat self-selecting range of charter schools, rather than indicating an inherent funding or enrollment trend that is overwhelmingly favorable to these states, as we noted with Texas.

Large Networks Remain Better Positioned To Weather Budgetary Challenges

In recent years, we have noted that large charter school networks typically benefit from their economies of scale compared with their smaller, single-site counterparts. In fiscal 2023 medians, that distinction was not as apparent given that smaller schools recognized higher margins and DCOH than larger schools. This was primarily due to pandemic relief funding constituting a larger percentage of total operations, which indicated the results were a reflection of single-site schools operating with lower expenses while receiving excess one-time funds rather than indicating that these schools had significantly improved their operations compared with larger networks. In fiscal 2024, we saw a resurgence of the benefits of economies of scale as total revenue increased at a higher rate for large networks resulting in smaller excess margin compression relative to single-site schools.

Even though excess margins compressed for both, lease-adjusted MADS coverage for networks improved slightly to 2.0x in fiscal 2024 from 1.9x in fiscal 2023 but declined for small single-site schools to 1.5x in fiscal 2024 from 1.7x in fiscal 2023. This divergence speaks to the greater financial flexibility afforded to large networks and their resilience to withstand fluctuations in revenue streams and enrollment without substantially depressing operating performance. Despite softening median financial performance, single-site schools maintain greater DCOH in fiscal 2024. This is partly due to their smaller expense bases, but also partly because many single-site management teams (that are already operating near their capacity levels) have been building reserves to support potential budgetary gaps.

In fiscal 2024, median enrollment for both large networks and single-site schools declined. For large networks, the declining trend could be a result of shifting demographic trends, such as the declining student-aged populations seen in some states, particularly in some of the country's largest population centers, where network schools tend to be concentrated. For single-site schools, the enrollment dip could be a result of having less available space to add students because their current operations already function near capacity, which is consistent with a longer-term theme we have observed across smaller schools where enrollment tends to be more static relative to nationwide medians.

Overall, networks seem to be better positioned in the medium term to weather the budgetary challenges presented to management teams in fiscal 2025 as they continue to operate with larger bases and generate healthier financial profiles relative to single-site operators.

Table 4

What We're Watching

Chart 4

As we approach the close of fiscal 2025, we anticipate some pressure on financial operations across the sector. In our view, the budgetary transition from the exhaustion of federal pandemic relief funding should be relatively smooth for schools that have spent the funds for one-time uses only. However, those that have relied on the pandemic relief funds for recurring operating expenses could face significant budgetary pressure in the form of a "fiscal cliff." We believe schools on the lower end of the ratings distribution, which typically have leaner management teams, less oversight, and less budget flexibility, are most likely to rely on their reserves to fill budgetary gaps in the near term.

Many schools in our rated universe receive federal funds for special programming, such as Title I (which supports schools serving economically disadvantaged students) and special education. While we understand that these funds are currently flowing regularly, changes in federal policies could pressure funding levels for these programs or the distribution timing of funds. Additionally, federal policy shifts could influence state budget strategy, potentially leading to changes in funding formulas for public education providers. Currently, we have not observed cuts in funding for these programs for schools in our rated universe, but we will continue to monitor funding levels for fiscal 2026.

While median financial results have remained healthy, some schools in our rated universe have faced operating stress during the last several years, and additional anticipated near-term financial pressures could materially strain their operations and lead to liquidity and bond covenant challenges. This could become a significant issue if breached covenants lead to collateral postings or an acceleration of debt. During the last 12 months, only one rated school defaulted on its debt service payments. Year-to-date in 2025, there have been no schools in our rated universe that have defaulted. In 2024, we lowered one rating in the sector--EdKey Inc., Ariz.--to 'D' due to a missed interest payment under an informal agreement with bondholders. As of May 15, 2025, 4% (or 14) of the rated charter school universe were in the 'B' category, and as previously noted, we expect lower-rated schools' operations and finances could remain pressured in the near term.

Table 5

Appendix

The methodology behind our median calculations

We generated these medians from fiscal 2024 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," published July 1, 2019), we have included the financials of either the obligated group or the consolidated group, depending on which we believe is more meaningful to the rating outcome, based on the relationship between the two groups. An organization could have more than one public rating because it issued 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. 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 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. However, 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.