Bloomberg News reports that charter schools are borrowing money at a record pace, relying on state guarantees to improve their credit ratings.
On their own, charters would be considered junk bond status. But state guarantees allow them to issue bonds with higher ratings.
U.S. charter schools are issuing a record amount of municipal debt, with Texas leading the charge as borrowers rated close to junk tap a program that gives their bonds top credit grades.
The institutions, privately run with public funding, have sold $1.6 billion of securities in 2014, data compiled by Bloomberg show. That’s more than all of last year and the most in Bloomberg data beginning in 2007. About $464 million has come from Texas, which for the first time in April backed a charter-school deal with its Permanent School Fund. The state-run pool guarantees bonds, lending the debt the AAA grade that Standard & Poor’s accords Texas.
Charter schools, which enroll 4.2 percent of U.S. public school students, are building a presence in the bond market as more parents seek academic options without paying private-school tuition. In Texas, the number of institutions tripled from 2000 to 2012 and enrollment jumped to 190,000 from 26,000, according to the National Center for Education Statistics.
“The backing of the Permanent School Fund is critical to the growth of charter schools” given the savings it generates, said David Dunn, executive director of the Austin-based Texas Charter Schools Association. “There’s still a lot of room to go. We’re still not meeting the demand.”
Texas’s Growth
The growth in charter issuance contrasts with a slowdown in the $3.7 trillion municipal market as states and cities still recovering from the recession hesitate to borrow even as yields approach generational lows. Muni sales are down 7 percent from last year’s pace, Bloomberg data show.
Yet in Texas, home to seven of the 15 fastest-growing U.S. cities, municipalities are borrowing the most since 2008 as a swelling population fuels infrastructure investment. Charter schools have the same need, with enrollment growing about 15 percent annually in the last six years, Dunn said.
Life School, which has more than 4,500 students on campuses in Dallas County and Ellis County to the south, in April became the state’s first charter to issue debt backed by the School Fund.
Tax-exempt bonds maturing in August 2044 priced to yield 4.13 percent, or about 0.5 percentage point more than benchmark 30-year munis.
Without the guarantee from the fund, created in 1854, the school has a BBB- rating from S&P, the lowest level of investment grade. Institutions need to earn an above-junk rank on their own to get the backing.
Republican Governor Rick Perry has said more of the institutions should be permitted. The state guarantee has won over investors.
“It’s a state where you clearly see that they’re supportive,” said John Flahive, Boston-based director of fixed income at BNY Mellon Wealth Management, which oversees about $20 billion in munis and has bought debt of Texas charter schools.
“It’s a tricky sector,” he said. “Politics play a role in whether you can really see it working out for the life of the bond.”
Colorado and Utah also help boost the grades of schools in those states, said Wendy Berry at Charter School Advisors, which is based in Albany, New York, and counsels the institutions.
Great Hearts
Arizona ranks second behind Texas in issuance in 2014. Phoenix’s industrial development agency this month sold about $80 million of tax-free bonds for Great Hearts Academies in the state’s largest charter-school borrowing this year. The deal refinanced securities and paid for new facilities. S&P rated the debt BB+, one step below investment grade.
Diane Ravitch's blog 
Reblogged this on David R. Taylor-Thoughts on Texas Education.
LikeLike
If these are tax-free securities, then they are for capital outlays?
Also is there any information of default rates?
LikeLike
Next thing you know, Wall Street will be packaging up these loans and selling them to unsuspecting state pension planners. So states will get it coming and going.
“The Bubble Game”
Liar’s loan
Charter’s cheat
Bubbles blown
Raider’s repeat
LikeLike
Got it. I am not as clever or quick. Slice and dice and bury the damage by reselling it. Mortgage loans under water, chains of schools under water, bailouts required and so on. Nothing learned.
LikeLike
One clarification here: the statement that “charter schools are borrowing money at a record pace, relying on state guarantees to improve their credit ratings” suggests that charter schools have been using state guarantees to borrow record amounts of money. The article only mentions one charter school that has used a state guarantee, and says that it’s the first charter school in Texas ever to do so. So it would appear that the boom in charter school bonds has largely and perhaps entirely happened *without* state guarantees.
Whether charter schools can get state guarantees for bond issuances is a state-by-state issue. It looks like Texas’s legislature made the decision to allow this a couple years ago, but that no school had taken advantage of it until this year. One would expect that many more to follow, unless there’s a downside to obtaining a state guarantee not discussed in this article.
LikeLike
Akron newspaper continues their investigative work on Ohio charters:
“The 10 highest performing companies managed schools with above-average revenue, many propped up by private philanthropists who invest in successful academic models. Others got a boost from Cleveland voters, who approved additional local aid (about $1,000 more per pupil) for high-performing charter schools. A similar local levy failed in Columbus. The state offers no financial incentive for top-performers. ”
I’m glad they’re starting to reach the per pupil funding question. It is impossible to tell in Ohio what charter schools spend per pupil. It is easy to tell what public schools spend per pupil.
They can’t keep comparing these two school systems unless charters provide some transparency on per pupil funding from ALL sources. It doesn’t make any sense to replace more public schools with charter schools if we don’t know how much it really costs. It’s not even a valid comparison WITHIN charter schools. You can’t compare Columbus charter schools with Cleveland charter schools if Cleveland charter schools get 1,000 more per pupil that Columbus. That’s an invalid comparison. All of the Ohio numbers are just junk. None of us in this state have enough information to make an informed decision on whether to continue privatizing more and more schools without the funding piece.
http://www.ohio.com/news/local/ohio-s-for-profit-charter-schools-drag-state-into-group-of-nation-s-worst-performers-1.539387?localLinksEnabled=false
LikeLike
The fact that charter bonds would have the lowest investment grade if they were not backed by state guarantees should scare everyone. I cannot understand why a state would want to guarantee such bonds. Doesn’t such a poor rating indicate a substantial amount of risk? Should a state be dabbling in high risk securities?
LikeLike
2old2teach: combine your comments with those of FLERP! above, and expect the usual “monkey see monkey do” of worst business/management practices to repeat and multiple and snowball.
It’s not just that the charterite/privatization “barbarians” are at the gates; they want to take everything that’s inside including the gates themselves! After all, when you’re ‘in it to win’ and ‘you can achieve if you believe it’ and it’s ‘all about the kids’ [= $tudent $ucce$$]—
Think of LAUSD. John Deasy. $1.3 billion iPad fiasco. And top it off with MISIS…
Then consider: the aforementioned may be merely the minor prelude to cage busting world class catastrophe.
And I can’t help but wonder how the minds [¿?] of the bidness-oriented “education reformers” and their enablers and promoters work. They constantly use phony financial arguments like “charters are more efficient and cost effective” and are now ready to turn on the money taps full force, no regulation or oversight to speak of, and point not just schools but perhaps entire communities (and more) to a spot clearly off the edge of the cliff.
Then again, what does thinking and thoughtfulness and sustainability have to do with self-styled “education reform”? When an old dead Greek guy won’t do, an old dead Roman comes in handy:
“For greed all nature is too little.” [Lucius Annaeus Seneca]
😎
LikeLike
Another correction:
“On their own, charters would be considered junk bond status. But state guarantees allow them to issue bonds with higher ratings.”
The article doesn’t purport to say what “charter school” bond ratings are generally (either with or without state credit enhancement). And the one charter school bond issuance the article does discuss would not “be considered junk bond status” without the state guarantee. BBB- is not considered “junk.”
LikeLike
FLERP,
You are wrong. The article says:
“Without the guarantee from the fund, created in 1854, the school has a BBB- rating from S&P, the lowest level of investment grade. Institutions need to earn an above-junk rank on their own to get the backing.”
The charter uses the State’s AAA rating instead of its own BBB- rating. Most charters are risky investments because they open and close with frequency.
A rating of BB or lower is considered a junk bond:
http://www.investopedia.com/terms/j/junkbond.asp
BBB- is lower than BB.
LikeLike
BBB- is higher than BB, Diane.
LikeLike
Also, “investment grade” means non-junk. BBB- (under S&P’s system) is the lowest possible rating that a bond can have and still be considered investment grade. That’s why the article notes that the school’s BBB- rating without the state guarantee is “the lowest level of investment grade,” and that “[i]nstitutions need to earn an above-junk rank on their own to get the [state] backing.” The charter school discussed in the article earned an “above-junk” rating when it was rated BBB-, because BBB- is not “junk.” It’s investment grade.
LikeLike
And no one is talking about how the state of Texas got a report from the US Dept. of Education as being one of the 4 states that needed intensive intervention in providing for special education for its population. I doubt one charter school opening is addressing those needs ( a civil rights violation) and schools are going to have to start and fight this fight soon as funds dry up and go to charter school. The US department of Ed is talking about taking over schools on this matter. Things are about to get real interesting.
LikeLike
2old: the states will be the only ones gullible or corrupt enough to touch these things. Yes, we are seeing the same old scam with a new label. Whether they are junk or not, they are not a good investment and should be avoided at all costs. By the way, Krazy, I really appreciate your guide to the dead philosophers greatest hits, Keep em coming.
LikeLike
“EPR Properties has a 6 percent yield and owns everything from megaplex movie theaters and to metropolitan ski parks. Cramer sat down with EPR Properties CEO David Brain to find out if this stock can continue to grow at the rapid pace and shell out the dividends as it has thus far.
With the change in winds and Republicans taking majority in the Senate, could this mean more charter schools will be built?”
“Discussing theaters, water parks, and charter schools, David Brain, EPR Properties president and CEO, tells Mad Money’s Jim Cramer this week’s midterm election was a ringing endorsement for charter schools and will be healthy for the industry.”
But no one other than the CEO may call charter schools an industry! That’s conspiracy theory talk!
http://www.cnbc.com/id/102165989#
LikeLike
Meanwhile in North Carolina public money is being used to support religious schools, via vouchers and “scholarships.” The distribution comes from a state authority while the legal issues are working their way through the courts. More at http://www.wcnc.com/story/news/politics/2014/11/09/where-is-nc-school-voucher-money-going/18759651/
LikeLike
I think it’s funny that states are using EngageNY for Common Core materials. It makes sense that they would, “free” is a pretty good price, and I almost applaud them for taking advantage of NY’s investment, but it pretty much puts paid to the idea that states would be carefully crafting specific approaches.
We are all NY now 🙂
http://www.ed.gov/edblogs/progress/2014/11/high-quality-and-easy-to-use-resources-draw-educators-from-around-the-nation-to-engageny/
LikeLike
I would not be surprised to see a similar dynamic if the CCSI completely fell apart: i.e., states revising their standards by either nibbling around the edges of the CC standards or by cutting and pasting from other states.
LikeLike
Being all NY is perhaps better than being all Texas.
LikeLike
“Texas Bleedership”
Texas leads
In boom and bust
Public bleeds
From trampled trust
LikeLike
Reblogged this on Crazy Normal – the Classroom Exposé and commented:
Corporate Charter schools, privately run with public funding, have sold $1.6 billion of—state guaranteed—securities in 2014, data compiled by Bloomberg show. That’s more than all of last year and the most in Bloomberg data beginning in 2007. What this means is that in some states the state government is making promises to financially insure corporate Charter schools with public taxes.
LikeLike
“Charter schools, privately run with public funding, have sold $1.6 billion of—state guaranteed—securities in 2014, data compiled by Bloomberg show. ”
As I noted above, the Bloomberg article does not say that charter schools have sold $1.6 billion worth of “state-guaranteed” bonds in 2014. It says that charter schools have sold a total of $1.6 billion of bonds in 2014, and that those bond offerings include at least one offering that was state-guaranteed.
In that one state-guaranteed offering, approximately $92 million worth of bonds were sold, according to data compiled by FLERP!
LikeLike
Good to know. Thanks. Sounds like they have a lot yet to sell. I wonder if the few billionaire oligarchs already invested in corporate driven Pub-Ed reform will step up and start buying them.
LikeLike
Does this mean that those states are using public taxes to fund and insurance scheme that will support venture capitalists and other private sector investors who invest in the private-sector, for profit corporate Charter schools—then if those schools fail, the investors get their money back from the tax payers?
How is that different than forcing someone to pay for their own execution without a trial to determine if the victim is guilty of a crime?
In other words, a posse of vigilantes forces an alleged criminal to buy the rope they hang him with and all without a trial.
LikeLike
Shanker is turning in his grave – his orginal concept of a charter school is now so corrupted. All this money changing hands – your tax dollars, your education dollars going into private pockets instead of into classrooms.
LikeLike