Overview

As of Feb. 27, 2023, S&P Global Ratings maintains 26 public ratings on Colorado charter schools. Colorado has the fifth-highest number of rated charter schools, after California, Texas, Michigan, and Minnesota. It was the third state in the U.S. to enact a charter school law, and the state's first two charter schools opened their doors in 1993. As of the 2021-2022 school year, Colorado is home to 265 charter schools serving approximately 135,000 charter school students representing 15.3% of all public school students in the state, slightly more than the 15% in the previous school year.

Chart 1

The credit profiles for our rated charter schools in Colorado are generally superior to those of the rest of the sector. About 73% of our Colorado charter school ratings are investment-grade compared with approximately 45% for the sector as a whole, as noted in our 2023 sector outlook for charter schools, published Jan. 24, 2023, on RatingsDirect. We believe the stronger ratings distribution is due to favorable demographic trends and increased demand for charter schools, contributing to strong enrollment growth as well as positive per-pupil funding trends, which have supported healthy operations and growing financial resources.

We also attribute our Colorado charter school ratings distribution to more supportive and transparent state laws for charter schools, compared with those of the rest of the country. These include: the lack of a state charter cap as well as acceptance of qualifying charter schools into the state's recently expanded Moral Obligation Program, which can significantly lower a school's capital costs. Colorado was second in the National Alliance for Public Charter Schools' 2022 published rankings of state charter school laws. While overall support for charter schools in the state remains steady and relatively positive, we will continue to monitor any potential changes in charter policy or the state's charter law.

Authorizer Framework

• Colorado charter schools are primarily authorized by the local school district for a maximum term of five years, although some authorizers offer longer contracts. The Colorado Department of Education provides clear guidance to district authorizers on the accreditation and appeals process, which we view positively.
• Although competition for students can create an inherent conflict of interest for these entities, we have found good working relationships between most of our rated Colorado charter schools and the local district. One indication of the strength of the relationship is whether the authorizer returns its 5% per-pupil-revenue authorizer fee back to the charter school, which seems to be standard practice for some authorizers with high-performing charter schools.
• The Colorado Charter School Institute (CCSI) is the state's only non-district authorizer. CCSI can accept applications from schools in districts that do not have exclusive chartering authority or from schools in districts that have exclusive authority but give permission to CCSI to act as authorizer. The institute has a clear application, renewal, and revocation process with clear benchmarks and milestones, which we also view positively. We note CCSI is the authorizer for approximately 8% of our rated charter schools.

Credit Fundamentals

Many Colorado charter schools are single-site operators. None of our 26 rated schools in Colorado meet our definition of a charter network and this results in median enrollment levels and operating budgets that are significantly smaller when compared with medians for the entire sector, which somewhat limits financial flexibility. However, we note Colorado charter schools continue to have significant financial flexibility, relative to that of similarly sized peers.

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For the past few years, median days' cash on hand increased across all rating categories to 186 days at fiscal year-end 2022, which is up slightly from 178 days' in fiscal 2021, supported by federal relief funds, an average 10% increase in per-pupil funding in fiscal 2022, and improving enrollment. Across Colorado, enrollment in charter schools grew each year over the past decade, compared with flat-to-declining enrollment across district schools (see chart 3). We note that in the State of Colorado charter school enrollment was up 6.4% from fall 2020 to fall 2022, while traditional school district enrollment was down 4.5% over the same period.

We saw similar trends across our rated universe, where most schools saw flat-to-increasing enrollment from fall 2020 through fall 2022, which speaks to steady demand through the pandemic.

Chart 2

What We're Watching

Population growth.  Denver County's school-age population projections indicate 4.3% growth in the minor-age population over the next five years, which decreases the risk of oversaturation and, in many cases, supports good working relationships between Colorado charter schools and the local school districts.

Funding increases.  For fiscal 2023, the state increased funding by an average of approximately 6%, which is still slightly higher than in pre-pandemic years. Furthermore, the state increased the funding for the charter school capital construction fund by $10 million, or approximately 31%, providing charters with greater access to capital funding. The governor proposed a 9% increase in per-pupil funding for fiscal 2024, to address the increased inflationary environment. While we view these trends favorably, it's uncertain as to how long these funding level increases will continue.

Equalization.   The passage of House Bill 17-1375 initially passed in 2017, which required local school districts to share mill-levy override revenue to the charter schools, benefitted the schools. In fiscal years 2021 and 2022, charter schools received $7 million and $9 million, respectively, from the Mill Levy Equalization Fund, which is increasing by an additional $1 million for fiscal 2023. Furthermore, a 2022 bill, Senate Bill 22-202, provided greater school funding equity, as the bill provides mill-levy equalization to districts (and the charter schools they authorize) in the form of matching state appropriations equivalent to the eligible district's maximum number of override mils.

Pension funding levels.   The School Division Trust Fund, which most Colorado charter schools participate in, is funded at about 74.8% based on the Dec. 31, 2021, measurement date, which is improved significantly from previous years due to strong market returns in 2021, but given moderation in market performance for fiscal 2022 we believe there is still the potential for increases to required contributions in the near term. We view positively schools that are preparing for increases in employer contributions in their multi-year financial plans.

Teacher shortage.   Colorado is no exception to the national teacher shortage. There are over a thousand school positions open statewide across all public schools, which can create pressure on existing teachers and adversely affect students' education quality. Not all schools have been affected by the teacher shortage equally, and we believe a charter school's ability to attract and retain talented faculty is key to the organization achieving its mission.

Midterm election results.  Colorado's current Democratic governor, who founded two charter schools, has long been an advocate for the charter school sector. The governor won reelection to a second term in 2022, and took office with Democratic majorities in both chambers of the general assembly. Therefore, we do not anticipate new legislation that would be considered adverse for charter schools.

Long-term use of one-time funds.  Elementary and Secondary School Emergency Reliefs funds provided significant operating revenue to traditional public and charter schools. Many schools used emergency funding to hire additional full- or part-time staff to address learning loss amid the pandemic. As the wave of federal relief expires in September 2024, schools will need to ensure that current spending is sustainable or prove willing to make cuts down the road.

Testing and learning loss.  There was no state testing required in the 2019-2020 school year and schools' 2021-2021 testing data was not used to evaluate schools in Colorado. Then, the 2021-2022 state testing framework was adjusted for a transitional year due to COVID-19. However, the 2022-2023 state testing accountability frameworks returned to the typical pre-pandemic approach, and we will monitor how authorizers analyze and assess new testing data, given widely reported learning regression. Given the generally healthy academic performance at our rated state charter schools, we do not expect this to be a core risk in the near term.

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