DALLAS - Continuing its surveillance of the sector, Fitch Ratings today will release a report on the creditworthiness of charter school bonds -- just in time for National Charter School Week.
While Standard & Poor's and Moody's Investors Service have each deemed the debt of several charter schools investment grade, a report released by Fitch last year indicated that its analysts are watching and waiting to see if the schools could reach that level.
According to today's report, the answer is a qualified "yes."
"The laws in Colorado remain the nation's most highly developed, even as legislators consider further refinements," the report stated. "Bonds of Colorado's Bromley East Charter School remain the only charter school security (out of nearly 100 reviewed) to have been assigned a public underlying or unenhanced Fitch investment-grade rating."
Colorado lawmakers, who are nearing the May 8 closing date of their legislative session, are still hammering out an education funding plan. The Democrat-controlled Senate earlier this month stripped a provision from the House's version of the public school budget that would have significantly increased charter school capital funding. Members of the Republican-controlled House, however, vow to replace that proviso in the legislation.
Whatever the outcome, officials say they expect charter schools in Colorado to retain a $322 per-child capital funding appropriation approved by the Legislature in 2001. That gives charter schools in that state some assistance with debt service that other charters don't have.
However, many schools nationwide are gaining in maturity and stability, factors cited by Fitch as necessary components of an investment-grade rating.
"It's a mixed bag, actually," said Fitch analyst Jason Dickerson, who leads the agency's charter school team. "There is a sizeable portion of charter schools that have been open for a while, and they are beginning to have the maturity that would help drive a move, if not to investment grade, then very close to that level."
However, the agency is watching some negative trends as well.
"Defaults are beginning to occur -- if not necessarily in public offerings, in private placements," Dickerson said. "This shouldn't surprise anyone; we expected some failures as the sector began to develop itself."
The analyst stressed that each charter school that succeeds or fails has its own story, but that macro trends such as those discussed in today's report can help investors make key decisions when it comes to investing in charter school debt.
"There are potentially attractive credits out there, they just require a lot of digging and a lot of research to find," Dickerson said.
According to the Fitch report, community demand for alternative educational providers such as charter schools remains strong. The agency expects enrollment in charter schools to grow about 10% in the upcoming school year, meaning that there are more than 620,000 students in the approximately 2,700 U.S. charter schools.
"This growth reflects in part the increasing maturity of a significant percentage of older charter schools, which is occurring at the same time that other schools are beginning to experience significant challenges, including financial default and/or closure," the report said.
Some of the mandates that force charter schools to demonstrate academic and management performance can have massive impacts, especially if they result in a school's closure. More competition from rival schools -- other charters, special programs such as magnet schools belonging to local districts, and private schools -- can also place burdens on a charter's ability to achieve its goals.
"There is also legal precedent to suggest that at some point vouchers may be approved, and that would create significant pressures on charter schools," Dickerson said.
The U.S. Supreme Court is expected to rule in June on the constitutionality of a Cleveland program that would allow publicly funded vouchers to be used to pay tuition at schools with religious affiliations. A court decision in favor of vouchers could drive similar programs in other parts of the country.
Fitch stated in its report that it believed states with strong charter penetration would be most likely to adopt voucher programs, because residents there have already expressed affinities for choice in education.
"Voucher programs would increase competitive pressures in the kindergarten through 12th-grade education market, potentially challenging not only charter schools, but also independent schools and public school districts," the report said.
However, the "diamonds in the rough," as Fitch calls them -- charter schools that are gaining in maturity and have strong curriculums and community support -- are likely to remain strong and could achieve investment-grade credit with continued success. According to Dickerson, these will be the credits to watch as the charter school sector begins to develop into a more recognized market.
