Philadelphia charter schools face growing credit risks, Standard & Poor's reports.

Financial pressure at the Philadelphia School District is spreading to the city's charter schools, said S&P credit analyst Sharon Gigante.

The Philadelphia School District has been in distressed status since 2001, Gigante said. The district's GO debt now has underlying ratings of BB from Fitch Ratings and Ba2 from Moody's Investors Service. The debt is protected by the Pennsylvania State Aid Intercept Program. With the state support factored in, the debt is rated AA-minus by Fitch, Aa3 by Moody's, and A-plus by S&P.

"Recent actions and public statements of the school district, we believe, have contributed to heightened uncertainty and volatility related to charter authorization, which has the potential to threaten operations and erode financial margins and liquidity, particularly for those [charter] schools currently operating with an unsigned charter or enrolling students above the charter cap granted by the school district," Gigante said.

Pennsylvania normally bases its state aid to schools on their number of pupils.

The school district has been losing substantial numbers of pupils to the city's charter schools in the last few years. Due to the school district's financial pressures, it has announced that it has suspended the granting of enrollment increases to charter schools so as to reduce the outflow of funding to the schools. Many of the charter schools are responding by refusing to sign their charters.

Many of the charter schools have ignored the enrollment caps and have applied directly to the state for funding. The state has so far responded by ignoring the caps and funding according to the number of pupils.

"State funding for this purpose is not part of the routine funding distribution, so we view it as a potential risk in the future," Gigante said.

The school district is delaying charter renewal for charter schools up for renewal in 2013 unless they withdraw requests for additional students.

"We believe that if the charters remain unsigned, the schools could be at risk for losing their charters at expiration because the school district has indicated publicly that it would not renew these charters if they are unsigned," Gigante said.

Gigante said she viewed the charter schools that are enrolling students above their cap and with unsigned charters as being generally at the most risk.

Of the 14 Philadelphia charter schools rated by S&P, MaST Community Charter School is the highest rated at BBB-plus with a negative outlook. The Philadelphia Performing Arts Charter School with a BB-minus rating, stable outlook, is the lowest rated.

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.