Charter Schools May Hurt Credit Ratings

According to Moody’s, the credit rating agency, charters are hurting urban school systems and threatening to create a negative credit pressure.  The Washington Post and Bloomberg covered the release of the report.  The press release from Moody’s listed an example of towns in Michigan facing credit trouble.

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.

The Washington Post picked up on three factors that are causing these problems.

 1. Demographics and financial shifts.

And some urban districts face a downward spiral driven by population declines. It begins with people leaving the city or district. Then revenue declines, leading to program and service cuts. The cuts lead parents to seek out alternatives, and charters capture more students. As enrollment shifts to charters, public districts lose more revenue, and that can lead to more cuts. Rinse, repeat.

2. Districts can’t adapt quickly.

And then there’s the very nature of the problem. Charter schools don’t suck up enrollment from just one school. They pull from schools across a district, meaning each takes a slight hit while none loses enough students to justify substantial restructuring. “There is no critical mass of empty classrooms or schools,” the Moody’s report authors write. In Philadelphia, cost-cutting began in fiscal 2011, but it wasn’t until this year that a significant number of schools were closed.

3. State policy supports charters.

State policy can dictate not only who can authorize a new charter school, but the pace at which they grow.In Ohio, for example, students in charter schools account for more than 20 percent of total enrollment in five districts, even though state policy limits the pace of charter-school growth. But the impact varies by district. A Columbus district fares well thanks to stable demographics, while districts in Cleveland and Toledo are struggling in the face of population declines.

The credit rating will be something to keep an eye on as Nashville and Memphis open more charters each year. It is also something I believe our state legislators should look at before they take up a revised state charter authorizer bill next year.

For more on Tennessee education politics and policy, follow us @TNEdReport.


 

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