S&P Drops Boynton, Fla., Charter School 5 Notches to B

BRADENTON, Fla. — Standard & Poor’s has plunged the investment-grade rating of an 11-year-old charter school in Boynton Beach, Fla., well into junk territory.

The rating downgrade to B from BBB-minus comes just a year after $9 million of tax exempt and taxable bonds were sold by the city of Boynton Beach on behalf of the Charter Schools of Boynton Beach. Bond proceeds were used to purchase 2.9 acres of land and a 28,300-square-foot, two-story building in a commercial office park.

The lower rating is due, in part, to a fiscal 2012 operating deficit likely to continue in fiscal 2013 and maximum annual debt service coverage projected to drop below one time, according to S&P analyst Carolyn McLean.

The outlook is negative.

The rating downgrade also takes into account the school’s inability to meet enrollment targets for the 2013-2014 school year, which resulted in the cancellation of classes for grades 10-12, said McLean.

“Management also expects to incur a debt of $7 million to $8 million in the next few years to purchase a leased building,” she said. “We believe the additional debt would further pressure the rating.”

Another negative factor is the school’s below-average academic performance, S&P said.

Charter Schools of Boynton Beach recently received a preliminary grade of F for 2013 from the state Department of Education, which assigns a school grade based primarily upon student results from the Florida Comprehensive Assessment Test. Last year, the school received a D. From 2005 until 2011, the average grade was between B and C.

School officials did not immediately respond to a request for comment about the rating downgrade, other issues cited by S&P, or a disclosure on the Municipal Securities Rulemaking Board’s EMMA system that said the bond trustee, Regions Bank, resigned as of Aug. 15, 2012.

“In our view, declining enrollment, combined with lower revenue expected for fiscal 2014, and a low cash position could cause credit quality to deteriorate to a point where the school would be more in line with a lower rating,” McLean said. “Although the school expects to be compliant with bond covenants based on fiscal 2013 audited results, we believe that measurements will be close to or potentially below covenant thresholds, which is another indicator of a non-investment grade credit.”

Across Florida the number of charter schools continues to grow and so do their deficit fund balances, according to a report from the Florida Auditor General’s office released in August. Florida law requires charter schools to have annual audits performed by certified public accountants, and to submit those audits to the state auditor. Though 514 charter schools operated in fiscal 2012, 499 submitted audits to the state.

The AG’s review of the 499 audits showed that 58 or 12% of charter schools reported deficit fund balances last year. In fiscal 2011, when 445 charter schools were in operation, 25 or 6% reported a deficit.

“The audit reports for 145 charter schools included 273 audit findings addressing weaknesses in internal control, instances of noncompliance with applicable laws or rules, or additional matters that should be addressed by management,” the state auditor said. “These included 25 audit reports that included findings that were considered by the CPAs to be material weaknesses in internal control.”

The increase in deficit fund balances could be attributed, in part, to a decrease in state funding. In fiscal 2012, the state provided $3,479.22 per full-time student, which was a decrease of $144.54 per student from fiscal 2011, according to the Auditor General’s report.

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