When Pennsylvania’s legislature reconvenes in two weeks, pension overhaul, transportation funding and liquor privatization loom as headline grabbers, and charter schools could provide another flashpoint as lawmakers examine issues from funding to transparency.

Two recent hot-button developments provide a backdrop: an 11-count indictment against Pennsylvania Cyber Charter School’s chief executive and his accountant; and a state auditor general’s report that accused the Chester Community Charter School, Pennsylvania’s biggest brick-and-mortar charter, of “significant noncompliance.”

U.S. Attorney David Hickton in Pittsburgh announced charges against Pennsylvania Cyber CEO Nick Trombetta and his accountant, Neal Prence on Aug. 23, alleging they siphoned taxpayer funds out of school accounts for personal use and schemed to avoid federal income tax liabilities. Two days earlier, state Auditor General Eugene DePasquale said Chester Community improperly received $1.3 million for lease payments on its own buildings.

Trombetta and Prince pleaded not guilty, and Chester Community accused DePasquale of harboring an anti-charter agenda.

Tension has long marked the dynamic between public schools and charters in Pennsylvania and elsewhere.

Charters, though public, operate outside traditional school system hierarchies.

Public schools complain that charter school costs are bleeding funds from mainstream schools. They point to crises in cities such as Philadelphia, which needed $50 million in emergency borrowing just for Monday’s scheduled opening of the school year.

Charter school advocates, meanwhile, are lobbying Gov. Tom Corbett to tweak the state’s funding formula in their favor this fall.

Gov. Tom Ridge and the Pennsylvania legislature created charter schools in 1997 as independent public entities. Under the enabling law, school districts must fund charter schools through a per-pupil subsidy of local and state tax dollars — minus seven expenditures that school districts deduct, which include debt.

Sen. Lloyd Smucker, R-Lancaster, has filed legislation to overhaul the 1997 charter school law to reflect 16 years of experience.

“Pennsylvania broke ground with its charter school law, incorporating the best thinking of the time,” he said. “Now we have years of practical experience showing what works and what needs to be fixed.”

Smucker’s bill would force charters to comply with open meetings and open records laws, require more detailed reporting and disclosure, and undergo an annual independent audit.

Charter schools access the municipal bond market, but investors should be careful, said Tom Kozlik, a director at Janney Capital Markets in Philadelphia.

“We think investors should focus on issues with stronger credit fundamentals and consider only charters that regularly publish disclosure,” he said.

The push-pull regarding funding formulas comes as the municipal bond market continues to grasp a maturing asset class amid increased demand for financing.

Kozlik said charter schools can often possess the highest amount of risk among almost all municipal credits, although he expects the sector to mature.

“Many investors, analysts and even the rating agencies believe that charter renewal risk is the greatest risk factor when it comes to charter school-backed revenue bonds,” Kozlik said.

Charter renewal is hard to gauge, given that the lengths of initial charter terms varies widely across state lines. Typically, a school will need charter renewal more than once through the lifecycle of the outstanding bonds.

But other factors are also at play, Kozlik said.

“There are many potential roadblocks often out of the control of the schools themselves. There is the potential for an isolated event, or even a rumor, to cause parents to remove their kids from these schools. In most cases just a small case such as this could create financial hardship for charter school issuers,” Kozlik said. “There are not many other issues in the municipal sector that have the potential to deteriorate so quickly without much notice. It should be noted, however, that this does not happen to my knowledge, at least very often.”

For charter schools to reach a scale akin to other specialized municipal sectors such as health care or higher education, “there needs to be general agreement among market participants regarding credit criteria and underwriting standards,” the Local Initiatives Support Corp., a New York-based community development support organization, wrote in a 2012 report that chronicled the history of charter school bond issuance.

Nationally, Concord Academy of Petoskey, Mich., issued the first charter school financing in 1998, when it sold $1.3 million of unrated debt. Since then, according to Local Initiatives report co-author Wendy Berry, charter schools have engaged in roughly 715 transactions for a combined $7.6 billion. Excluding refundings, about 570 are now outstanding, reflecting more than $6.5 billion of par.

Interest rates vary widely, according to Berry. “The actual range of rates continues to be a story,” she said on a web seminar that The Bond Buyer co-hosted with law firm Orrick, Herrington & Sutcliffe LLP.

At the low end, she said, a 30-year, $24 million bond deal by Bronx Charter School for Excellence in New York City in late April – which Standard & Poor’s rated BBB-minus – had a yield of 4.25%. At about the same time, she added, a BB-minus Michigan school went at a 10% yield for 15-year paper representing a Municipal Market Data spread of 923 basis points.

Higher-rated issues often feature some kind of credit enhancement. In Colorado, for instance, most charters have an A rating because the state provides a moral obligation backing.

Fitch Ratings in March, citing updated criteria, downgraded 23 charters, leaving most of its ratings junk-level. Twenty are below BBB-minus. Fitch noted rapid deterioration in fundamental credit quality. “This rapid decline … illustrates the volatility inherent in most charter school financing and is one factor limiting the ratings for the sector,” analysts Eric Kim and Joanne Ferrigan wrote.

Local Initiatives said the majority of defaults pertain to academic performance. “It drives enrollment, strength and charter renewal,” the organization said.

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