Top 10 Risks of Charter School Bond Defaults – #4 Authorizer Relations

School Improvement Partnership is highlighting the causes or triggers of defaults on municipal high-yield charter school bonds in a weekly series entitled THE TOP TEN TRIGGERS OF CHARTER SCHOOL BOND DEFAULTS. In case you missed it, Risk # 10 was School Safety; Risk # 9, Construction Risk; Risk # 8, Shifting State Support for Charter Schools; Risk # 7, School Leadership, Risk # 6: Poor Management, Risk #5: Student Retention.

The 4th Most Common Risk: Authorizer Relations

Introduction. With charters averaging five years and charter school bonds an average maturity of thirty years, the importance of charter renewals cannot be overstated. It is complicated by the fact that often, the authorizers determining which charters are granted, renewed or revoked are host school districts who are smarting from a family’s decision to leave a district school for a charter school. Certain states have a plethora of authorizers (like Michigan with 44) with little standardization in their reporting and accountability metrics, causing uncertainty for the charter school and its bond investors. Thankfully, the National Association of Charter Authorizers has created some best practices for charter school authorizers, which can have the potential to enhance transparency and accountability for charter schools and their bond investors.

School Districts as Authorizers. Having a school district as the authorizer of charters can be a bit like putting “the fox in charge of the henhouse”. Rather than simply grant or renew charters, school district authorizers often insert charter conditions related to enrollment caps, academic performance minimums and financial performance standards that can create triggers for early charter revocation. A desire of the school district authorizer to try to enforce enrollment caps not permitted under the charter school law led to the demise of Leadership Learning Partners, a K-12 charter school in Philadelphia with 1,289 students at its peak ten years after its opening. Because the school enrolled more students that the district authorizer’s cap allowed, the district revoked the charter on December 31, 2014, leaving scores of students and charter school employees to scramble for a new school in January, and leaving the holders of $10.7 million of bonds with 45 cents on the dollar. These limitations that school district authorizers place on their charter schools are rarely applied to traditional district schools, tipping the odds against the successful growth of charter schools and increasing the risk for bond investors.

 

Choice of Authorizers and Their Metrics. As mentioned earlier, Michigan has an overabundance of charter school authorizers, and the highest rate of charter school bond defaults of any state through December 31, 2016: 18 of 132 transactions, or 13.6%.[1] This decentralized authorizer system complicates reporting and accountability due to little standardization. On the other hand, authorizers that focus on reporting metrics can play a leadership role in saving a struggling charter school. Such was the case for Plymouth Educational Center, a Detroit charter school authorized by Central Michigan University’s Engler Center. The bondholders asked School Improvement Partnership to evaluate key performance metrics at Plymouth in 2017. After reviewing the performance metrics and recommendations in the resulting report, the authorizer required the charter school to expand its Board (unchanged since the bonds were issued in 2005) and bring in a turnaround management company as a condition to charter renewal. With those conditions met, academic and financial performance is improving.  The evaluation by School Improvement Partnership, coupled with the authorizer’s commitment to urban education, allowed a creative solution to be achieved, rather than simply closing the charter school and displacing 500 students and their families with no suitable education alternative.

Best Practices for Authorizers. The National Association of Charter School Authorizers has compiled a list of “The Essential Practices” for charter school authorizers that will enhance transparency in authorizer relations for charter schools and their bondholders.[2] They include: an executed charter for each school (Practice #3); established renewal criteria (Practice #10); and established revocation criteria (Practice #11). Such practices may have prevented the repeal of the charter for schools like Fulton Science Academy High School, which issued $18.5 million of bonds in November 2011, and was downgraded by Fitch to a BB- rating when the local superintendent recommended a non-renewal of the charter due to a deterioration of the authorizer relationship. Due to this rocky relationship, the charter was revoked a year after the bonds were issued.[3]

Conclusions. Astute charter school bondholders will review both the charter school and its authorizer before investing. Transparency and accountability are essential to the growth and health of the high-yield municipal bond market, which had $8 billion of inflows through the first five months of the year, the highest inflows through May since at least 1992, according to Lipper’s data.[4]  Transparency and accountability must be adopted by charter schools and their authorizers so that investors can pro-actively head off challenges before they become charter revocations.

 

[1] “Charter School Default Study”, Berry, Wendy, NewOak Advisors LLC, May 31, 2017, p. 7.

[2] “The Essential Practices: Why They Matter”, National Association of Charter School Authorizers Website, November 14, 2019.

[3] “Red Clay Votes to Close Charter School”, Albright, Matthew, The news Journal, December 16, 2015

[4] “Municipal Bonds are 2019 Hottest Asset, Rabouin, Dion, Axios, May 29, 2019.