The legal battles over funding between Pennsylvania's distressed Chester Upland School District and its charter schools have triggered debate over investor risk.
"The risk level for investors involved in charter school financings is among the highest in the municipal bond sector," said Tom Kozlik, managing director and municipal strategist at PNC Capital Markets in Philadelphia, after a Delaware County judge denied a request by Gov. Tom Wolf and district officials to cut the district's allocation for special education to charters by about half, or nearly $21 million.
The requested cuts to special education and cyber charters were part of an amended financial recovery plan before Court of Common Pleas Judge Chad Kenney.
More than half the students in the district attend charter schools. The district, about 17 miles southwest of Philadelphia and one of Pennsylvania's poorest, serves the city of Chester, Chester Township and Upland borough.
The district's 2015-16 budget has a structural deficit that exceeds $22 million. According to Wolf, that shortfall could rise to more than $46 million without intervention.
Chester Upland enrolled in the state-sponsored Act 141 program for distressed districts in 2012. It was first classified as such in 1994.
Despite the nearly two-month-old impasse over the state's $30 billion budget for fiscal 2016, the commonwealth is working with distressed districts such as Chester Upland and Philadelphia to ensure the payments of debt service on enhanced bonds, according to Alan Schankel, a managing director with Janney Capital Markets in Philadelphia.
"Based on Pennsylvania's strong intercept program and a history of proactivity on the part of the Department of Education, we expect no interruption of debt-service payments for state school districts," said Schankel.
Improvement at Chester Upland is long overdue, said David Fiorenza, Villanova School of Business professor and former chief financial officer of Radnor Township, Pa.
"There is an opportunity for taxpayers in the commonwealth to see where how their money is being spent in the form of receivership. It has been almost three years and there should be signs of a turnaround at this point," said David Fiorenza, Villanova School of Business professor and former chief financial officer of Radnor Township, Pa.
Fiorenza said the Chester Upland saga provides "another opportunity for the Wolf administration to revisit all school districts and municipalities under the supervision of state receivership."
Attorneys for the district told Kenney that reducing payments they considered unreasonable would "make the allocation of funds more equitable for all students in the geographical area, regardless of which school they attend."
Kenney, though, ruled Tuesday that the cuts would unfairly impose givebacks on charter schools that the district already owes $8 million. He noted that the district may run out of money again as early as April.
"This does not once and for all fix the problem; it insures it will persist into the future," he said.
According to Kozlik, Political risk can often greatly affect these investments.
"Sometimes the politics go in favor of charters. Other times the politics works against charters," he said. "In this case the politics did not win out [for now], but it is an important event Pennsylvania charter school investors should be paying attention to, nonetheless."
Kenney did approve other components of the recovery plan, including a forensic audit, a financial turnaround specialist and restructuring a loan agreement with the state Department of Education.
"All of these actions are imperative in putting Chester Upland on solid financial footing," Wolf said in a statement. "But Judge Kenney's decision to reject necessary reforms to the special education rates paid by the school district to its charter schools will unfortunately allow a decades-old problem to persist, and the district's massive budget deficit will only worsen."