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Global Credit Research - 15 Oct 2013
New York, October 15, 2013 -- The dramatic rise in charter school enrollments over the past decade is
likely to create negative credit pressure on school districts in economically
weak urban areas, says Moody's Investors Service in a new
report. Charter schools tend to proliferate in areas where school
districts already show a degree of underlying economic and demographic
stress, says Moody's in the report "Charter Schools
Pose Growing Risks for Urban Public Schools."
"While the vast majority of traditional public districts are managing
through the rise of charter schools without a negative credit impact,
a small but growing number face financial stress due to the movement of
students to charters," says Michael D'Arcy, one
of two authors of the report.
Charter schools can pull students and revenues away from districts faster
than the districts can reduce their costs, says Moody's.
As some of these districts trim costs to balance out declining revenues,
cuts in programs and services will further drive students to seek alternative
institutions including charter schools.
Many older, urban areas that have experienced population and tax
base losses, creating stress for their local school districts,
have also been areas where charter schools have proliferated, says
Moody's. Among the cities where over a fifth of the students
are enrolled in charter schools are Cleveland, Detroit, Kansas
City, St. Louis, and Washington, D.C.
Nationwide about one in 20 students is in a charter school.
One of the four risk factors Moody's identifies as making a school
district vulnerable to charter school growth is that the school district
is already financially pressured and grappling with weak demographics.
A second factor is having a limited ability to adjust operations in response
to a loss of enrolment to charter schools.
"Shifts in student enrollment from district schools to charters,
while resulting in a transfer of a portion of district revenues to charter
schools, do not typically result in a full shift of operating costs
away from district public schools," says Moody's Tiphany
Lee-Allen, the Moody's Associate Analyst who co-authored
the report. "Districts may face institutional barriers to
cutting staff levels, capital footprints and benefit costs over
the short term given the intricacies of collective bargaining contracts
- leaving them with underutilized buildings and ongoing growth
in personnel costs."
A third risk factor for a school district is being in a state with a statutory
framework promoting a high degree of educational choice and has a relatively
liberal approval process for new charters and few limits on their growth,
as well as generous funding.
For example in Michigan, the statutory framework emphasizes educational
choice, and there are multiple charter authorizers to help promote
charter school growth. In Michigan, Detroit Public Schools
(B2 negative), Clintondale Community Schools (Ba3 negative),
Mount Clemens Community School District (Ba3 negative) and Ypsilanti School
District (Ba3) have all experienced significant fiscal strain related
to charter enrollment growth, which has also been a contributing
factor to their speculative grade status.
A final risk factor is when a school district is not integrated into a
healthier local government, as such integration can lead to greater
diversity in revenues and more flexibility in balance sheets, positioning
the district to better handle operating and financial changes.
For more information, Moody's research subscribers can access
this report at https://www.moodys.com/research/Charter-Schools-Pose-Growing-Risks-for-Urban-Public-School-Districts--PBM_PBM158801.
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Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
Naomi G Richman
MD - Public Finance
Structured Finance Group
Moody's: Charter schools pose greatest credit challenge to school districts in economically weak urban areas
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
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