The Philadelphia School District’s planned transition back to local control after 16 years of state control could add credit pressure the city’s 13 charter schools, according to S&P Global Ratings.

The School Reform Commission, a state-devised board that has governed the junk-rated district since December 2001, voted to dissolve itself on Nov. 16 in a move toward a mayoral-appointed school board by July 1, 2018. The SRC, which formed when the Commonwealth of Pennsylvania took control of the city’s school system, has also provided oversight for Philadelphia’s charter schools. The end of this relationship will create funding uncertainty for these entities, S&P credit analyst Bobbi Gajwani said in a Dec. 6 report.

The Philadelphia School District
The Philadelphia School District is slated to regain local control on July 1, 2018. WikiCommons

“The extent to which this change translates into negative credit pressure will depend on the governance and policy direction of the new school board and more broadly on general state funding trends as well as individual school credit characteristics,” Gajwani said. “While it might seem that restoring oversight of charters to the local school district is credit negative for charter schools, we believe it is too early to tell and will depend on many factors, the most important of which are statutory framework, enrollment and funding.”

Charter school students comprise about 32% of Philadelphia’s public school population, which Gajwani said is among the highest ratios of cities nationwide. S&P’s 13 rated charter schools are mostly rated in the double-B category. Gajwani said the charter school sector is viewed as “vulnerable” nationally due largely to funding obstacles.

The Philadelphia School District lacks taxing authority and receives all of its funding from the state and city. Gajwani said that while increased money to the district probably including more funds for charter schools, the extent of future budget help from the state and city is unknown. State revenue currently accounts for about 50% of the school district's budget compared with 42% from the city.

“If funding from the school district is reduced as a result of lower state or city funds, charter schools have limited revenue raising flexibility and could [face] weakened operations and financial flexibility,” Gajwani said.

Enrollment stability with flexibility to grow will play a crucial role in future Philadelphia charter school ratings, according to Gajwani. Due to financial difficulties, the SRC went seven years without accepting new charter applications, before approving three in both 2016 and 2017. The Pennsylvania Supreme Court ruled this past August that the Philadelphia School District was allowed to enforce caps on charter school enrollment.

“Although this recent ruling makes it difficult for charter schools to increase enrollment without the consent of the local school district, it mostly poses a credit concern for schools whose enrollment exceeds the enrollment cap stipulated by the charter,” Gajwani said. “However, schools can appeal to the charter school board for non-renewal or rejections of new charters.”

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