As of Oct. 21, 2019, S&P Global Ratings maintains nine public ratings on Florida charter schools. Florida adopted charter school legislation in 1996, with the first school opening in that year. In the 2018-2019 school year, the Florida Department of Education (FLDOE) data shows over 313,000 students were enrolled in more than 658 charter schools in 47 Florida districts (out of 67 school districts). Charter school enrollment constitutes approximately 11% of the state's kindergarten through 12th grade (K-12) public student enrollment. While the FLDOE data indicates that charter school enrollment in the state has more than doubled over the past decade, the growth rate has slowed recently, which mirrors national trends. According to the National Alliance for Public Charter Schools' recent records, the state has the third-highest number of charter schools and enrollment, after California and Texas.
The majority (78%) of our Florida charter school ratings are investment grade compared with only 44% for the rated sector as a whole. We believe the stronger ratings distribution stems from these schools' relative credit strengths, generally characterized by enrollment increases sustained by healthy high school demographics, good academic performance, solid authorizer relationships, favorable operating margins, positive state funding trends given a growing state economy, a comparatively lower debt burden, and sound liquidity. Our rated Florida charter schools are geographically dispersed across the state.
State statute does not impose any caps on charter school growth in Florida, following the elimination of limits on the number of charters in each school district in 2003. According to the FLDOE, since 1998, despite new schools opening, over 350 charter schools with varying lengths of operating history have closed, for a myriad of reasons, including academics, missed enrollment targets and distressed finances. In our view, this reflects some of the inherent volatility of the sector, but also a fairly active oversight process within the state, with a law that requires charter revocation for any school operating for more than five years that receives a grade of 'F' for two consecutive years.
- Under Florida law, state universities and community college district boards of trustees can serve as authorizers for specific school types, but in practice, local school districts essentially authorize charter schools. Under House Bill (HB) 7069, a "School of Hope" program was instituted for students in consistently low academically performing areas. A School of Hope operator is designated by the State Board of Education (SBOE) and is not required to have its application approved by a local school board and is the only exception to the above. In other states, charter authorizers include state education agencies, independent boards, universities, mayors and municipalities, and non-profit organizations.
- There are 48 school district authorizers in the state, and all of our rated charter schools are authorized by boards of school districts in which they operate. In our view, the prevalence of school district authorizers typically comes with an inherent conflict of interest and tension due to competition for students and the associated per pupil state funding. However, most of our rated charter schools in Florida report a good working relationship with their respective authorizers and some benefit from good authorizer support in the form of financial backing for capital projects and equipment purchases in the form of millage levies.
- In 2018, the Florida Supreme Court removed from the November 2018 ballot a constitutional amendment (Amendment 8) that would have established a statewide charter school authorizer in the form of a state board. If approved, new charter school applicants could have sought approval from this state board instead of their local school district boards, which might have alleviated potential conflicts of interest inherent between charter schools and their authorizers, and possibly boosted growth of charter schools in the state. We will continue to monitor any future efforts by the state legislature to create a statewide charter school authorizer as this could impact our rated entities.
- The FLDOE provides clear guidance on the process for authorization, renewal, revocation and appeals, which we view positively. A statewide authorizer process established by the FLDOE includes model applications and contracts that charter schools must submit in addition to school district-specific requirements. School district authorizer websites vary in how transparently they provide information on the authorization, monitoring process, and their specific requirements.
- Florida law dictates the maximum length of renewal contracts to 15 years, with an initial term of five years. Pursuant to Florida House Bill 1546 (enacted in 2011), high-performing charter schools with three years of operating history and compliant with stipulated academic and financial standards are eligible to receive automatic 15-year charter renewals. Within our rated universe, we have seen charter contract terms ranging from two years to the maximum possible 15 years. Of our rated Florida charter schools, the vast majority (eight out of the nine) of their schools are high performing with automatic 15-year charter renewal terms.
- Per pupil funding is based on enrollment and distributed by the state in equal installments each month or twice a month, beginning with the start of the district school board's fiscal year. Authorizers make timely payments, with no history of delayed or missed payments to date. Authorizers typically retain a 2% to 5% management fee from per-pupil funding flowing through the districts to the charter schools. Certain high performing charter schools we rate pay a lower authorizer fee than the typical 5% due to their status.
- Florida charter schools are not allowed to apply to transfer or receive a new contract from an alternative authorizer, which we view unfavorably as it constrains flexibility for schools if their charter is denied or revoked. The decision to revoke a charter contract is at the discretion of the local school district authorizer. However, all decisions can be appealed to the Charter School Appeal Commission, a body formed to assist the Commissioner of Education and the SBOE in reviewing appeals for denied, non-reviewed, and revoked charters, which partly mitigates this risk in our view.
|Fiscal 2018 Florida Charter School Medians|
|Waiting List as (%) of enrollment||45.1||31.5||41.3|
|Student retention rate (%)||94.8||98.5||88|
|Lease adjusted maximum annual debt service (MADS) coverage (x)||2.1||1.7||1.105|
|Lease adjusted MADS burden (% total revenues)||12.6||14.0||12.8|
|Days unrestricted cash on hand||200.8||178.5||40.5|
|Total revenue ($000)||37,574.0||7,545.0||22,615.0|
About 45% of all Florida charter schools are managed by for-profit companies, or educational management organizations (EMOs) according to the FLDOE 2017-2018 data. Among our rated schools, four contract with EMOs for various support services, while the rest are self-managed. Five of our rated schools are networks with two or more campuses, with the remainder stand-alone operators. This results in median enrollment levels and operating budgets that are larger when compared with medians for the entire sector. Generally, median ratios for our investment-grade Florida charter schools exceed those of schools in other states and across the sector, given the aforementioned credit strengths.
Since S&P Global Ratings started rating charter school bonds, we have experienced a total of six defaults in the rated sector. Two of those defaults were Florida charter schools in 2015 and 2018. Charter School of Boynton Beach, which we no longer rate, missed payments on its bonds in 2015 after the school closed due to charter revocation by its authorizer. The authorizer cited academic concerns based on Florida state statute that requires the sponsor to terminate a school's charter if the school receives a grade of 'F' for two consecutive years and has been in operation for more than five years, which the school had. ASPIRA of Florida Inc., a network of three schools, entered into a forbearance agreement in October 2018 with its majority bondholders and elected to miss its stipulated debt payments in November 2018 and May 2019. The school had a complete management and board overhaul, experienced rapidly deteriorating credit fundamentals, particularly severe academic underperformance at one of its schools that brought it to the verge of closure, large operating losses, severely inadequate debt service coverage, and worsening liquidity.
Given our ratings distribution and solid financial profiles for the majority of our rated Florida schools, with most ratings in the investment-grade category, we expect defaults to be relatively rare and case-specific, although we actively monitor for any sharp declines in enrollment, academic outcomes, or financial results, and how these may impact the charter.
What we're watching
Favorable population growth and demographics. The school-age population in the largest Florida counties is expected to grow between 1% and 4% over the next five years. This is bolstered by the state's healthy net in-migration and relatively low outmigration trends. This could strengthen enrollment at our rated schools, especially those with solid market positions.
Potential for increased funding. In recent years, per pupil charter school funding has increased roughly between 1% and 2% annually to nearly $7,400 per student in fiscal 2019, and is projected to continue growing at similar rates in the near-term due to a charter supportive state funding environment. However, funding remains below pre-Great Recession levels. There is also sizable capital funding per student of about $600 per student, which is expected to continue. The state's fiscal 2020 budget included the largest capital appropriation for charter schools to date from the state's Public Education Capital Outlay (PECO) trust fund, leaving the smallest proportional share of PECO funding available for traditional public schools. However, given how state funding reliant charter schools are, should state revenue forecasts weaken due to a potential economic downturn or slower growth, it could impair finances at rated entities.
Equalization. State law provides that charter schools are funded on par with other public schools and that charter schools are entitled to their proportionate share of categorical federal and state program funds. Despite statutory provisions, the inequity in funding between charter and public schools persists. This is due to differentials for operational and capital funding between public and charter schools. Florida law also provides a per-pupil charter facilities funding program for eligible charter schools that meet certain requirements. In 2017, Florida passed HB 7069 signed into law by the Governor focused on parity funding. HB 7069 requires local school districts to share capital outlay funds from their discretionary school property taxes with public charter schools. These funds would help shrink charter school facility and rental costs, thereby allowing more operational dollars to be used for other critical operational uses. Recently, Florida's First District Court of Appeal upheld a lower court's ruling in favor of charter schools, in a case brought by a dozen Florida school districts challenging this law. Given almost all school districts were not sharing these capital outlay funds with charter schools prior to this law's passage, we expect this will have a positive impact on charter school revenues and overall financial flexibility.
Teacher recruitment and retention challenges. This is a broader national challenge, with thousands of unfilled teacher positions. Pay and compensation is a heavy contributor, with Florida ranked among the bottom 5% for teacher salaries according to various independent surveys. This teacher shortage issue, which is significant in Florida, has the potential to adversely impact enrollment or academic outcomes for rated charter schools.
Labor relations. Florida law provides that charter schools are exempt from participation in any district collective bargaining agreements. Teachers and staff at the vast majority of Florida charter schools are not unionized and do not work under a collective bargaining agreement, consistent with national trends. We do not expect this to change materially in the near-term, but expect to continue to monitor given recent strikes and growing unionization efforts in the sector. As a public employer, a charter school and its employees may participate in the state's defined benefit pension plan, the Florida Retirement System (FRS), on application and approval as a "covered group." Some charter schools sponsor a defined contribution pension plan that covers all full-time employees that have met certain age and service requirements. Of our rated schools, only one participates in the FRS. Our remaining rated schools typically offer a 401(k) defined-contribution plan, some with a matching component. In our view, rising pension and other postemployment benefit (OPEB) contributions are financially constraining for rated schools that also bear a proportionate share of the state's net pension and OPEB liabilities. The presence of a defined-contribution plan can provide cost flexibility, but can also present risk for teacher recruitment retention as charter school salaries and benefits typically lag those of competing school districts in an era of teacher shortages.
This report does not constitute a rating action.
|Primary Credit Analyst:||Shivani Singh, New York (1) 212-438-3120;|
|Secondary Contacts:||Jessica L Wood, Chicago (1) 312-233-7004;|
|Peter V Murphy, New York (1) 212-438-2065;|
|Research Contributor:||Arpita Ray, CRISIL Global Analytical Center, an S&P affiliate, Mumbai|
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