S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Charter Schoolsan impartial legal framework for charter renewal orrevocation, including a right to appeal a charternon-renewal; such oversight contributes to moreuniform results. A clear renewal and appeal processshould diminish the political elements involved inestablishing or maintaining such schools, whileensuring adequate community input.Some states also provide start-up or other additionalcapital funding for charter schools, enhancingthe ability of a charter school to fund its debt.Charter termThe charter term is an important credit factor. Thestate statute will either limit the term or establishthe entity that is charged with granting the charterterm. Charter schools are often granted charters oflimited terms—typically up to five years—andtherefore are subject to periodic renewal evaluations.Some states do grant charter renewals forlonger periods, some as long as 20 years. Charterscan usually be revoked even prior to the end of thecharter term, usually for cause. While charters mayonly extend for five years, longer-term capitalfinancings are generally amortized over a 20-30year term. A good match between the charter termand bond amortization may contribute to a betterrating, although Standard & Poor’s does notrequire long charter authorization periods for aninvestment-grade rating. A school with good financialoperations and stable enrollment is likely toremain a going concern, and thus a shorter charterterm relative to debt maturity can be acceptable.Schools that have been through a charter renewalor similar review process at least once support theassumption of future successful renewals, and aremost likely to be rated investment grade.In general, Standard & Poor’s believes that theperiodic need to renew a charter does not necessarilypose a major risk to receiving an investmentgraderating. A successful charter school with highdemand for its product will have its charterrenewed, much as successful hospitals will havetheir operating licenses renewed if they meet a communityneed. Closures of charter schools generallyfollow from management or financial disorder, notfrom the arbitrary charter revocation or closuredecision of the authorizing body.The role of the charter school authorizerThe charter school authorizer plays an importantrole in determining credit quality. Nearly all of theinvestment-grade charter schools rated byStandard & Poor’s have been through a successfulcharter renewal process, although schools that havenot been through the renewal process may stillmerit an investment-grade rating. A long-term chartercould be a positive rating consideration. In addition,a school that has received interim charterapprovals as new grades are added or programschanged will be considered to have gone through aprocess similar to a charter renewal. In some cases,where the initial charter term is long, Standard &Poor’s has accepted a letter from the charter authorizeraffirming current school compliance with theterms of its charter.Standard & Poor’s focuses on the following questionswhen evaluating the authorizer as part of acredit review:■ What are the guidelines for charter renewal? Ifthis is a detailed and specific process, there is lessroom for arbitrary revocation.■ What is the history of charter revocation in thestate and for the specific authorizer? Have asponsor’s charter decisions been appealed? Whohandles the appeals?■ What is the level of oversight from a financialreporting and facilities planning standpoint? Isthere a formalized financial reporting and oversightprocess during the fiscal year that allows forcorrective action to be taken in advance of thecharter review time frame?■ Is there a role for the authorizer in providing liquidityor credit enhancement relating to short-orlong-term debt issuance? This could be a positivecredit factor.■ Is there an interim charter renewal period whengrades are added or triggered to some other event?■ What is the relationship between the sponsor andits charter(s) over time? What level of academic,planning, or administrative support is available?■ How many charters have been granted and/or areoverseen by the charter authorizer? How manyschools has the charter authorizer closed?The strongest sponsor/charter relationships willhave formalized coordination and reporting inplace, and good communication that allows quickresolution of any academic, policy, facilities orfinancial issues that arise. As part of the ratingprocess, Standard & Poor’s will typically meet withofficials from both the sponsoring entity and thecharter school.Charter School FinancingA key part of the analysis deals with the fundingmechanism for charter school operation, that is,whether a combination of state or local funds willbe predictable and adequate. Many states simplyfinance students in their charter schools at or nearthe same per-pupil funding level of traditional publicschools, while others leave the funding formulato negotiation with the sponsor. In some states,charter schools get less funding per pupil than publicschools and receive no public funds for capitalwww.standardandpoors.com195