DALLAS – Detroit-based Hope Academy's $8.6 million of revenue bonds fell deeper into junk territory this week as the charter school struggles with many of the same woes facing public schools.
Fitch Ratings lowered the series 2011 bonds issued by the Michigan Finance Authority on behalf of the charter by two notches to B from BB-minus. The rating outlook is negative.
"Hope's negative fiscal 2015 operating performance, in conjunction with two years of enrollment declines, weak balance sheet, high debt burden, and weak academic ranking, all drive the rating downgrade," Fitch wrote in its Wednesday report.
Those pressures are straining the school's ability to cover debt service payments. According to Fitch, Hope did not meet it fiscal 2015 maximum annual debt service requirements although it had met or slightly exceeded the ratio at 1.1 times in six out of the last seven fiscal years.
The rating agency last downgraded the bonds in February 2015.
The charter school, which opened in 1998, continues to struggle with declining enrollment and low academic performance. For the 2015-2016 school year, Hope is ranked with a 'priority school' designation – the weakest academic ranking relative to all Michigan schools.
In each of the last four academic years, the school has failed to achieve state academic targets. The school has been classified as an underperforming institution in the last three years and ranks among the lowest 5% of all Michigan state schools counting both public and charter schools.
The low ranking impacted the term of Hope's most recent charter renewal. Renewals are typically done on five-year terms but in 2013 the school was renewed for a three-year term to June 2016. Fitch views Hope's charter renewal risk as heightened although the school's state authorizer – Eastern Michigan University – has indicated academic progress.
Enrollment is on a downward trend falling 15% this fall to 520 students. That followed a 13% drop in fall 2014 to 615. The declines came after six years of enrollment growth. Hope operates in a former public school building with a capacity for about 700 students.
"Hope had previously realized several years of growth," said Fitch. "The recent enrollment trend is partly due to Detroit area population losses and resulting higher competition."
Detroit schools are grappling with rightsizing a district that has an excess of both public and charter school seats. Michigan is unique in that it allows parents the choice between public schools, charter schools and schools in neighboring districts.
Schools statewide are struggling. Moody's Investors Service downgraded 44 Michigan school districts in 2015, many due to enrollment troubles. Of the 145 Michigan school districts with more than $25 million of outstanding debt, 114 experienced enrollment declines between 2009 and 2013.
Hope's series 2011 bonds are secured by a pledge of up to 20% of state allocated per-pupil foundation allowance, and all other legally available, unrestricted funds.