As of May 9, 2019, S&P Global Ratings maintains 32 public ratings on charter schools, in the State of Texas, which, along with California, tops our list of states with the most rated charter schools. Today, Texas is home to almost 800 charter schools. The Texas legislature enacted its charter school law in 1995, and in the fall of 1996, the state's first charter schools opened their doors.
The credit profiles for our rated charter schools in Texas are slightly superior to those for the rest of the sector, with 47% of schools achieving investment-grade ratings compared with just 44% for the sector as a whole. We attribute this credit strength to more supportive state laws for charter schools compared to the rest of the country. These include the acceptance of qualifying bonds issued by charter schools into the Texas Permanent School Fund Bond Guarantee Program, which can significantly lower a school's cost of capital by serving as a credit enhancement for guaranteed bonds. In Texas, all charter schools are tuition-free, open-enrollment public schools that can be approved to expand under existing charters, although there is a cap on new charter schools (305 for fiscal 2019) that could temper expansion at some point. With the legislature currently in session, there are proposed bills that have the potential to limit the rate of charter school growth, but at the same time, there are also charter proponents advocating for a bill to prevent municipalities from using permits or zoning to limit charter expansion.
- All 32 rated charter schools in Texas are authorized by the Texas Education Agency (TEA), most for a maximum term of five years; renewals, if approved, can extend as long as 10 years. In accordance with state statute, local school districts, colleges or universities, and home rule districts (charter districts within a school district) may be authorizers as well.
- The TEA provides clear guidance to district authorizers on the accreditation and appeals process, which we view positively. While this can limit the conflict of interest evident where the local district is the authorizer, we believe that their remains an opportunity for the local school district and charter schools to define the nature of their relationship as strongly competitive, which could potentially adversely affect a school's charter renewal.
- We view favorably 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. North Texas, which includes both the Denton and Dallas metropolitan statistical areas, is home to the majority of the charter schools that we rate.
|Fiscal 2017 Texas Charter School Medians|
|BBB+/BBB||BBB-||BB+||BB||BB- and below|
|Waitlist as % of enrollment||71.0||36.0||76.6||67.0||12.0|
|Student retention rate (%)||88.0||87.0||88.0||90.7||77.0|
|Lease-adjusted MADS coverage (x)||1.40||1.61||1.22||0.86||1.06|
|Lease-adjusted MADS burden (% total revenues)||9.4||11.7||15.1||13.8||15.7|
|Days' unrestricted cash on hand (no.)||118.0||148.8||59.0||101.2||27.3|
|Total revenue ($000)||179,507||15,127||12,737||8,604||13,359|
|MADS--Maximum annual debt service.|
While Texas is home to numerous large systems, many Texas charter schools also operate at a single site. More than half of our 32 rated schools in Texas match our definition of a charter network and have multiple campuses. Texas charter schools are not allowed to levy a property tax, and they also do not receive an allocation of property taxes levied by local traditional public school districts as do some Colorado charter schools that are authorized by local traditional public schools.
Generally, Texas public schools serve a larger student population than their peers across the country given Texas counties' continued school-age population growth. This results in median enrollment levels, and in some cases, operating budgets, that are significantly higher when compared with medians for the entire sector. The sectorwide total enrollment median for 'BBB-' rated schools equaled 1,020 in fiscal 2017, compared with more than 1,650 in Texas. The sectorwide total revenue median for 'BBB-' rated schools equaled nearly $9.8 million in fiscal 2017, compared with more than $15.1 million in Texas.
We use a 'BBB-' median because that is the modal rating for Texas charter schools. Nearly half (47%) of the charter schools in Texas are rated investment-grade ('BBB-' or higher) and the state includes two of the six charter schools rated 'BBB+' across the country (IDEA Public Schools and KIPP Texas).
What We're Watching
Population growth. School-age population projections for Texas' four major counties indicate 1%-7% growth over the next five years. We believe that this expected growth will enable both traditional public schools and charters schools to continue to operate in a more favorable demand environment than states that are seeing material declines among their respective school-age population, which we view positively.
Funding increases expected. Charter schools continue to receive substantial state support based on a formula with a base level of funding plus additional funds tied to the demographic population served, which is weighted to benefit those serving economically disadvantaged communities among other challenging characteristics. While overall state funding has experienced steady increases in recent years, to match population growth throughout the state, base funding per student remained flat this decade at about $5,100. The recently passed House Bill 3, which was approved by the Senate, and must now have existing differences negotiated by the Senate and House in a conference committee prior to becoming law, would increase base funding for each student by $890. This would augment charter school funding in coming years and further strengthen a historically positive funding environment.
Equalization. While Texas charter schools, unlike some other states such as Colorado, do not receive a portion of the property tax revenues collected by traditional public schools, they recently began receiving state funding to pay for leasing and maintaining building facilities for the first time in August 2018, via House Bill 21. We believe proposed legislation in the current session is positive overall in relation to the charter school funding environment.
Pension funding levels. Charter school teachers in Texas, as all public school employees, must participate in the Teacher Retirement System of Texas (TRS), which is adequately funded in our view at 73.7%. Proposed Senate Bill 12 would increase how much the state, school districts, and current teachers contribute to the pension fund over the next six years. We believe that this should continue to support current system funding levels without a material adverse effect on charter school margins over our outlook horizon. We continue to view the funded status and 100% contribution rate of charter district participants favorably.
Little threat of teacher strikes. While Texas teachers may voluntarily organize, unlike in many other states across the country, striking is currently illegal for public school employees. As a penalty for breaking this law, educators who strike will have their teaching certificates and their Teacher Retirement System benefits permanently revoked. We believe this statute insulates Texas charter schools to an extent while allowing officials to find means to resolve potential disputes without sacrificing instructional days, which could adversely influence a school's market position and financial performance.
Charter and traditional public school partnerships. The Texas Legislature signed Senate Bill 1882 into effect in 2017 to encourage public school districts to use partnerships with a charter school or another eligible entity to improve student outcomes. To date, this legislation has yielded mixed results, including pending lawsuits, with eight traditional school districts approved or under review for partnerships in 2018. We believe an established partnership that results in consistently and materially improved financial and/or demand metrics could result in favorable credit action for Texas charter schools on a case-by-case basis.
This report does not constitute a rating action.
|Primary Credit Analyst:||Brian J Marshall, Dallas (1) 214-871-1414;|
|Secondary Contacts:||Jessica L Wood, Chicago (1) 312-233-7004;|
|Peter V Murphy, New York (1) 212-438-2065;|
|Research Assistant:||Alix Charles, New York|
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