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COMMENTS

Charter School Brief: Utah


Charter School Brief: Utah

As of Aug. 12, 2019, S&P Global Ratings maintains 30 public ratings on Utah charter schools. The state legislature authorized four charter schools to open in 1998 as part of an initial pilot program. By the fall of 2003, eight charter schools had been authorized and opened, and in 2004, lawmakers created a statewide authorizer, the Utah State Charter School Board. Today, there are about 140 charter schools in the state serving about 79,000 students, or approximately 10% of the state's kindergarten through grade 12 (K-12) population.

Over two-thirds (72%) of our Utah charter school ratings are investment-grade compared with only 44% for the sector as a whole, and none of our Utah charter school ratings is 'BB-' or lower. We believe the stronger ratings distribution stems from very supportive state laws for charter schools, including evergreen charter terms and the acceptance of qualifying charter schools into the state moral obligation program, which can significantly lower a school's cost of capital. In addition, Utah charter schools have benefitted from years of healthy authorizer support, a thriving economy, a favorable funding environment, and enrollment growth, all of which have supported generally positive operating results and good financial profiles for our rated schools in the state.

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While the state does not cap the number of charter schools that can open, the authorizers do set enrollment capacity limits within each charter. As a result, the number of charter schools has been increasing year-over-year, with seven new charters and expansions planned by school year 2021. Unlike most of the charter sector, Utah charter terms do not have an expiration date, but authorizers must review a charter school once every five years and schools must submit to annual state performance reviews. According to the Utah State Charter School Board, only six charter schools have closed over the past decade. In our view, mechanisms the state has developed for charter schools have enabled Utah schools of choice to perform well from both an accountability and financial standpoint.

Authorizer Framework

  • In Utah, all 30 of our rated charter schools and about 90% of the universe of Utah charter schools, are authorized by the Utah State Charter School Board. The state board is composed of seven members who are appointed by the governor, and approved by the senate, for four-year terms. This is a high proportion of schools to be authorized by a central state authorizer, which we view favorably given the independent oversight provided.
  • In accordance with state statute, the Utah State Charter School Board, a local school board, or a board of trustees of a higher education institution can authorize the establishment of a charter school. Currently, we believe only six school boards and two higher education institutions serve as authorizers absent the universe authorized by the state board. In our view, due to the absence of school district authorizers among our rated charter schools, the inherent conflict of interest that could arise when local school districts serve as authorizers and are competing for students and funding has been avoided among those charter schools.
  • Charter contracts in Utah perpetuate indefinitely unless rescinded or terminated. Therefore, the law does not set forth requirements, criteria, processes, or other guidance for renewal or non-renewal. However, the law sets forth general grounds for rescission of a charter, which include failure to meet charter requirements or acceptable fiscal management standards, violations of law, and failure to meet academic performance standards. The authorizer conducts reviews on a periodic basis. Termination of a charter requires the Utah State Charter School Board to give the school a reasonable time to remedy problems (unless the health and safety and welfare of students is threatened, in which case the charter may be terminated immediately). In addition to termination, the board could remove board members, or the finance director, and appoint an interim director or mentor to work with the charter school. There is an appeal process for charter non-renewal or revocation, although revocations in Utah are rare.
  • Most of our rated schools report a good working relationship with the Utah State Charter School Board, and benefit from some authorizer support, in the form of training, oversight, and facilitation of advisory sessions with other charter schools.

Credit Fundamentals

Fiscal 2018 Utah Charter School Medians
BBB/BBB- BB+/BB
Enrollment 1,010.5 667.0
Waitlist as % of Enrollment 34.6 38.4
Student retention rate (%) 87.5 87.0
Lease-adjusted MADS Coverage (x) 1.7 1.4
Lease-adjusted MADS burden (% total revenues) 13.6 13.4
Days unrestricted cash on hand 160.7 80.0
Total revenue ($000) 7,254.5 5,030.0
MADS--Maximum annual debt service.

Generally, Utah charter schools do not operate large systems, although many contract with management organizations to provide a full range of support services. All of our rated schools are stand-alone operators, with the exception of one (Utah Charter Academies). This results in median enrollment levels and operating budgets that are significantly smaller when compared with medians for the entire sector. Generally, median ratios for our rated Utah charter schools mirror those of schools in other states and across the sector, except per pupil funding, but the state's cost of living is lower than the U.S. average. Public education is one of the largest recipients of tax dollars in the state, yet, Utah as a whole consistently lags the U.S. in education dollars on a per-pupil basis due to high number of pupils in the state. Utah leads the nation in fertility rates, which has resulted in a disproportionate gap between school-aged children and the working-age population who fund public education. This causes Utah's per pupil funding to fall behind other states due smaller tax base relative to minor aged population.

While Utah's per-pupil funding compared with that of other states is low, state lawmakers have made significant strides compared with other states to provide more equitable funding across Utah's school systems. The state's public education is funded through a weighted pupil unit (WPU), which is primarily derived from state income taxes and funds operations. In addition, every school district is required to collect a base level property tax, primarily to assist with any debt service or capital costs. Since charter schools do not have taxing authority, the local replacement fund (LRF) was created and, over the years, the funding gap was filled by additional state funds or local sources collected by the school district's property tax levy. In some instances, local districts were required to write checks to charter schools to ensure local dollars followed the student. This caused some friction between school districts and charter schools. As a result, in 2016, the legislature created a formula-driven statewide charter school levy that appears on every property tax notice to provide transparent LRF funding to charter schools and supplement the WPU.

In addition to Utah being a leader for equalization, the state allows for qualifying charter schools to obtain favorable financing through the state's Moral Obligation program. By law, the Utah Charter School Finance Authority should consider certain standards, including whether the school has received a stand-alone (underlying) rating that is at least investment-grade when granting eligibility into the program. All of S&P Global Ratings investment-grade Utah charter schools carry the state program rating (AA) on their respective bonds. Our program rating reflects our expectation that the state would assist the authority to restore the amount of the debt service reserve to its requirement, and we base our rating on the backing of the state's moral obligation. See our full analysis on the Utah moral obligation rating, published Jan. 9, 2019, on RatingsDirect.

What We're Watching

Growing economy.  The state continues to experience strong economic growth with little signs of this stopping. Taxable values have grown consistently over the past several years, and unemployment rates are below national averages. While the state's high birth rate has enabled Utah to be one of the fastest growing, the state's positive business climate has also attracted people and businesses from other states, leading to a positive net migration. Continued net migration into Utah could temper the disparity between the school-aged population and the workforce, while additional job creation may better assist education funding (which is primarily funded through state income taxes). We believe that continued economic growth within the state should enable education funding to continue to compound.

Population growth.  Due to high fertility rates and net migration into the state, the school-aged population continues to grow, placing additional operating and capital needs on public schools within Utah. While this growth could decrease the risk of oversaturation, the state has no numeric or geographic limits on the number of charter schools. Although most schools we rate have not struggled to meet enrollment targets, in the long run Utah charter schools will likely need to remain competitive to maintain their market share.

Increased funding.  In recent years, per pupil funding has increased 2%-4% annually and is projected to continue to increase in the near term. During the 2019 session, the legislature considered revising the charter school LRF formula, or the statewide levy to compensate for district property taxes, to calculate the rate based on current year values. Ultimately, the formula, which currently uses a two-year lagging value and results in a loss of revenues given the growing economy, remained the same. Should this measure pass in the future, there would be additional revenue for all public education spending given increasing property values, which we would view positively.

Equalization.  While the state has made significant strides toward equitable funding between charters schools and local school districts, there are still some opportunities for further equalization. For example, Utah charter schools are excluded from transportation laws and the state funds that go with them. This limits the ability to recruit and attract diverse families to school-choice alternatives. We believe that the state's ability to continue to work toward equalization will further strengthen the state's charter school portfolio as additional resources might strengthen a school's overall market position while providing additional financial resources.

Labor relations and increased wages.  Charter schools are exempt from participation in any collective bargaining agreements in Utah. However, the shortage of educators in the state has resulted in a very competitive job market. Over the past four years, some charter schools have seen an increase of as much as 30% in teacher salaries, and we anticipate another 10% increase within the next two years to better align with local district wages. Meanwhile, before the summer, teachers at the Salt Lake City School District led silent protests requesting additional compensation. Given that the job market is already highly competitive, increasing salaries at local school districts could pressure charter schools to attract highly qualified educators without compromising budgets.

Increased transparency and accountability.  All charter schools must provide the same annual reports and transparency as traditional schools, including an annual financial audit and monthly budget report. In addition, the Utah State Board of Education recently passed a bill to end the grade system of A to F. The new system uses five terms for each category in place of grades: exemplary, commendable, typical, developing, or critical needs, and is meant to provide parents, teachers, administrators, and policymakers with more data to make informed decisions. Schools that fall into the critical needs category are eligible for additional state funding and are required to hire an education consultant to improve performance. After three or more years of being designated a critical needs school, the legislation allows for the state to close a school. While only a handful of schools across Utah have ever closed because of state intervention, a charter school entering the "critical needs" turnaround program presents significant risk to its overall credit health. The state board of education also recently enacted a task force responsible for the financial accountability of charter schools that will examine how administrators spend taxpayer money. While the task force is in its infancy, we will continue to monitor how the task force operates, what types of investigations it opens, and how any findings impact the Utah charter school portfolio.

This report does not constitute a rating action.

Primary Credit Analyst:Ann M Richardson, Farmers Branch + 1 (214) 765 5878;
ann.richardson@spglobal.com
Secondary Contact:Peter V Murphy, New York (1) 212-438-2065;
peter.murphy@spglobal.com
Secondary Credit Analyst:Jessica L Wood, Chicago (1) 312-233-7004;
jessica.wood@spglobal.com
Research Assistant:Alix Charles, New York

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