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Charter School Brief: New Jersey

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Charter School Brief: New Jersey

As of June 28, 2021, S&P Global Ratings maintains seven public ratings on New Jersey charter schools. The state adopted charter school legislation in 1996, with the first school opening the following year. Based on the State of New Jersey Department of Education (DOE), more than 55,000 students (approximately 3.8% of the state's kindergarten through 12th-grade population) are enrolled in more than 87 charter schools across 40 cities with an additional waitlist of 36,000 students. Charter schools are concentrated in urban districts such as Newark, Jersey City, Paterson, Camden, Trenton, and Plainfield.

Chart 1

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Since the first charter schools opened their doors more than 20 years ago, charter and renaissance schools (a hybrid of public and charter schools that were signed into law under the Urban Hope Act in 2021) have grown to serve nearly one in six students in New Jersey's most impoverished communities. S&P Global Ratings does not rate any New Jersey renaissance schools.

Approximately 43% of our New Jersey charter schools are investment grade, in line with 42% of the entire rated sector based on our latest available, fiscal 2020 medians (see chart 1). The ratings distribution is generally characterized by a steady market position bolstered by healthy demand, superior academic performance compared with local school district peers, and favorable finances, offset by a weak statutory framework with somewhat variable per-pupil funding based on the local tax base, underfunded pension programs compared with other states, and political pressures evidenced by recent litigation challenging the renewal of certain charter school networks.

The highest concentration of our rated schools (three of seven) are located in Essex County, which has a sizable minor population of about 260,000 and contains the City of Newark. However, the U.S. Bureau of Labor and Statistics projects the minor population to decline by a modest 3.2% through 2026, which could lead to enrollment pressures. We note that all rated charter schools in New Jersey have experienced enrollment growth in the past year (despite the pandemic), reflecting stable market positions that could withstand enrollment competition and projected school age demographic trends (see chart 2).

Chart 2

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In New Jersey, the commissioner of education approves charter schools to operate. Charter school enrollment has grown in each of the past 15 years, while statewide district public school enrollment has stayed relatively flat. Moreover, in 2020 the governor approved about 3,400 additional seats at New Jersey charter schools, almost exclusively through the expansion of existing charter schools, according to the state. Additionally, the DOE authorized about 1,400 seats to be added over the next five years. As a result, we expect charter enrollment growth to continue through the medium term, though we understand that political pressures and recent litigation may pressure growth.

Near-Term Funding And COVID-19 Effects

The fiscal 2021 school year commenced with New Jersey charter schools offering virtual, in-person, and hybrid models following relevant health and safety guidelines. New Jersey State Learning Assessment testing for a majority of assessments was canceled for spring 2021 with expectations that the DOE would administer state-issued "Start Strong" diagnostic assessments in fall 2021. The governor announced expectations that all kindergarten through 12th-grade schools would fully open with in-person learning in fall 2021, in accordance with declining pandemic effects.

The DOE has managed the process of allocating COVID-related funds to charter schools as well as district schools on an individual school basis, basing funding on such factors as enrollment base and socioeconomic campus profile (see chart 3). To date, all rated New Jersey schools have received notification of Elementary, Secondary School Emergency Relief (ESSER) I allocation payments.

According to the DOE, kindergarten through 12th-grade schools have received, or are expected to receive, the following federal stimulus funding:

  • $280 million through ESSER I Funding, part of the federal CARES Act available to schools, based on Title I community need;
  • $1.2 billion in ESSER II funds, including grant opportunities dedicated to learning acceleration and mental health supports; and
  • $2.8 billion in federal pandemic aid for public schools as part of ESSER III and the American Rescue Plan, intended to strengthen districts' resources for various support and services during and after the pandemic.

Chart 3

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Authorizer Framework

  • The DOE is the sole charter school authorizer in New Jersey. It holds all New Jersey charter schools accountable for providing a high-quality public education.
  • The role of the authorizer is to ensure that the schools that it authorizes fulfill the purposes for public schools and the agreed-upon terms of the charter contract, through oversight of performance. In our opinion, the DOE has clear performance, renewal, and closure processes. Within the performance framework, the academic component carries the most weight in decisions such as expansion, renewal, replication, and revocation.
  • When the department receives a charter renewal request, it conducts a site visit and structured interviews with each charter school's board of trustees, school administrators, teachers, and other school representatives. It also evaluates state assessment results, annual reports, the renewal application, monitoring reports, public comments, financial reports, and other relevant evidence, to render a decision about the renewal of a charter.
  • The state recently adjusted its charter renewal process to include a contract between the DOE and each charter school. The charter renewal process includes benchmarks for each charter school that, if not met, could result in the charter's revocation at the end of its term.
  • In the coming months, results are expected to be released from a comprehensive review of public charter schools in New Jersey, announced by the DOE, that commenced in late 2018. The purpose of the review is to inform the public on the overall progress of charter schools in the state.
  • Per the state commissioner of education, 49 charter schools have, since 1996, had their charter revoked, surrendered, or not renewed, one of which was by Lady Liberty Charter School, although the rating was withdrawn prior to the closing. Of these closures, most were due to a school's not meeting the standards set forth in its charter agreement or the state's performance framework.

Credit Fundamentals

As the median metrics in table 1 indicate, the majority of rated New Jersey charter schools have sufficient enrollment to buffer against moderate variance in enrollment without severe impairment of creditworthiness. Moreover, approximately half of rated New Jersey charter schools are part of large charter networks which supports more steady demand metrics should individual campuses incur enrollment fluctuations. However, steep and/or prolonged enrollment declines could pressure demand and financial metrics and could cause rating stress, particularly for speculative-grade or single-site schools. For students not included in the district's projected resident enrollment for the school year, the state pays 100% of the amount required for the first year.

Table 1

Fiscal 2020 New Jersey Charter School Medians
BBB/BBB- BB category
Number of ratings 3 4
Enrollment 4,733 1,513
Waitlist as % of enrollment 58.5 42.4
Student retention rate (%) 92.6 95.0
Lease-adjusted MADS coverage (x) 1.86 1.51
Lease-adjusted MADS burden (% of total revenue) 9.8 11.0
Unrestricted cash on hand (days) 112.2 73.6
Total revenue ($000s) 106,195 28,198
MADS--Maximum annual debt service.

New Jersey state law prohibits charter schools from entering into long-term debt that exceeds the value of their property in addition to use of state or local funding to build a new facility. As a result, a majority of charter schools in the state use single-purpose entities or limited liability corporations as borrowers to enter into lease agreements for use of facilities. In our opinion, this limitation poses a challenge for start-up charter schools seeking to obtain sufficient space to operate a school, in that entities are less likely to configure their properties for school use given long-term viability risk. While these barriers to entry might benefit existing charter schools by restricting competition from new entrants, the limited availability of new space could also constrain total enrollment and financial flexibility at existing sites. This is a unique structural aspect for New Jersey charter schools and their associated bond ratings. Because all rated New Jersey charter schools issue debt using related limited liability corporations or single-purpose entities, which can affect the availability and comparability of financial reporting, see our criteria "U.S. Public Finance Charter Schools," published Dec. 20, 2019, on RatingsDirect. The guidance describes S&P Global Ratings' general approach to calculating lease-adjusted maximum annual debt service coverage under some of the most commonly seen structures and reporting presentations.

State Charter School Environment And Recent Legislation

State funding makes up of the majority of charter schools' operating revenue. Similar to traditional public schools, charter schools receive federal and state categorical program funds such as those for special education and low socioeconomic status. By New Jersey state law, charter schools receive 90% of the local tax levy and state equalization aid per pupil of public district counterparts for a given school year. The percentage difference between charter and district schools is meant to support district's administrative costs related to charter schools. Per-pupil funding for charter schools in New Jersey is based on state appropriations and the local tax base. However, because most charter schools are located in lower socioeconomic areas, the majority of funding comes from the state. Therefore, most charter schools depend almost entirely on the state for operating revenue that is subject to annual appropriation by the state legislature. While funding is expected to remain flat in the near term, it is uncertain how the state budget position will affect funding over time. There is no cap on the use of per-pupil funds for debt service, and in general, the state makes payments when due. However, because funding flows through the local school districts, there have been delays in some cases.

As discussed earlier in this brief, recently there has been some political pressure to limit charter school growth, but the authorizing legislation does not cap the number of charter schools that can open. Despite the state's lack of caps on charter schools, the New Jersey Education Assn., the state's largest teachers union, has called for a charter school expansion moratorium. At the same time, several charter schools in the state have closed in the past few years because of failure to perform to state standards, which is not atypical for the charter school sector. In our view, this demonstrates the importance of authorizer accountability and oversight. Moreover, recent hearings in the state supreme court such as those brought on by the Education Law Center have called for overturning existing charter school caps regarding previous expansion approval of seven charter schools in the state, though we understand that court rulings have upheld this expansion. We understand court rulings and litigation outcomes could affect current and future charter school enrollment growth.

What We're Watching

Underfunded pension and OPEBs

New Jersey has a state defined benefit pension system in which all rated schools are required to participate that we view as grossly underfunded. These schools participate in the Public Employees Retirement System (PERS) and Teachers' Pension and Annuity Fund (TPAF), which we consider significantly low funded at 42.9% and 24.6%, respectively, as of June 30, 2020. However, the governor's executive fiscal 2022 budget proposed a $6.4 billion pension payment, which would mark the first time the state has made a full, 100% contribution of the actuarially determined contribution to New Jersey's pension system since fiscal 1996. While we continue to take a favorable view of 100% contributions toward rated charter schools' required payments, we will monitor budget effects on overall state pension funding.

Weakening demographics

Charter schools have grown as of late, albeit at a decreasing rate compared with mid-2010s levels. Despite a generally healthy enrollment profile for most rated New Jersey charter schools, the school-age population for their associated counties is projected to meaningfully drop over the next five years. Weak demographic projections for the Northeast in general, and population losses compounded by a high cost of living, steep labor costs, and the impact of the pandemic, have resulted in relocations and out-migration to other parts of the country. Continued population drops could constrain enrollment growth at rated schools, especially those with a weaker market position.

Environmental, social, and governance (ESG) factors

In the short term, our view of charter schools' credit quality in New Jersey incorporates the health and safety social risks posed by the pandemic, which is elevated due to the influence of social distancing on state tax revenue, which is the main source of charter school funding. Over the longer term, we view social risks for the state as elevated because the state and the surrounding region are disproportionately exposed to declining enrollment, affordability concerns, and an aging workforce which could impact demand metrics.

For more information regarding New Jersey government ESG factors, see "ESG U.S. Public Finance Report Card: Tri-State Region Governments And Not-For-Profit Enterprises," published Oct. 28, 2020. For more information regarding New Jersey public schools, see "U.S. Local Governments Credit Brief: New Jersey School Districts," published June 23, 2021.

Teacher shortage

As with some other states in the country, New Jersey is facing a teacher shortage. The state employs roughly 4.33 million people, and the largest job industry is elementary and secondary schools. Despite an overflow of elementary school teacher candidates every year, special education and bilingual education see teacher shortages, as do subjects such as science, math, and career and technical design. The state is offering various options to help end the shortage in the state, and more specifically to retain teachers in lower socioeconomic areas. Because charter schools tend to have higher special education and bilingual education populations, the teacher shortage and high turnover rate could affect the schools' credit profiles. Schools may have to spend more to retain teachers, which could affect their finances, and less focus on these special education students could affect the schools' academic quality.

Labor relations and state

New Jersey law does not require charter schools to participate in collective bargaining agreements in its operating district, with the exception of conversion schools, but traditional schools do participate in collective bargaining, which varies by district. However, the charter school law (and corresponding labor law) includes provisions for charter school members to unionize. Although the majority of teachers do not belong to unions, some rated schools have unionized staff members. We do not expect this to change materially in the near term, but we will monitor effects given growing unionization efforts and recent strikes across the charter school sector.

State funding expectations and disparity

State funding remained flat in fiscal 2020 compared with the previous three fiscal years, and moreover funding is relatively flat for fiscal 2021. Charter schools received notification from the DOE that state funding for fiscal 2021 would be paid based on state enrollment count as of Oct. 15, 2020. The governor's fiscal 2022 budget has proposed a $9.26 billion spending plan for kindergarten through 12th-grade schools, up 7% from fiscal 2021. We will monitor this proposal, as the New Jersey fiscal 2022 budget is expected to begin in September--a shift from a July fiscal year start given the COVID-19 pandemic.

While the median budget increase among districts and charter schools is expected to be about 7%, larger districts on average are expected to receive a larger portion of aid to help offset local property taxes with smaller districts on average receiving less funding or, in some cases, funding cuts. Additionally, as state law designates that charter schools receive 90% of the local tax levy and state equalization aid per pupil of public district schools, charter schools receive on average only 73 cents on the dollar in per-pupil funding when compared with traditional districts, according to New Jersey Public Charter Schools Assn. data. This funding disparity is primarily due to special funding for the state's Abbott districts (high-need districts) awarded to district schools, which charter schools do not receive, in addition to a state law that prohibits charter schools from receiving facilities funding from the state. Although no legislation is expected in the medium term, we will watch state revenue effects on charter schools, especially given year-over-year charter school enrollment growth.

Table 2

New Jersey Charter Schools Rated By S&P Global Ratings As Of June 28, 2021
Rating Outlook Enrollment (fall 2020) Enrollment (fall 2019) State revenue as % of total (2020) Days unrestricted cash on hand (2020) Lease-adjusted MADS coverage (2020)

TEAM Academy Charter School

BBB Negative 5,255 4,770 80.8 97 1.00*

Foundation Academy Charter School

BBB- Stable 1,087 1,067 82.8 126 2.43

North Star Academy Charter School

BBB- Stable 6,201 5,921 79.5 112 1.86

Great Oaks Legacy Charter School

BB+ Stable 1,897 1,675 76.9 89 0.90*

Friends of Teaneck Community Charter School

BB Stable 342 333 77.5 58 1.87

Paterson Charter School for Science & Technology

BB Positive 1,530 1,472 85.3 108 2.02*

LEAP Academy University Charter School

BB- Stable 1,560 1,554 73.2 15 1.15
*--Pro forma. MADS--Maximum annual debt service.

This report does not constitute a rating action.

Primary Credit Analyst:David Holmes, Farmers Branch + 214 871 1427;
david.holmes@spglobal.com
Secondary Contacts:Jessica L Wood, Chicago + 1 (312) 233 7004;
jessica.wood@spglobal.com
Avani K Parikh, New York + 1 (212) 438 1133;
avani.parikh@spglobal.com
Research Contributor:Arpita Ray, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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