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

Education And Non-Traditional Not-For-ProfitsRelevant demand informationnot yet developed an active public debt market forcharter schools. Although charter school facilitiesfinancing varies substantially from state to state,many schools are left to their own resourcefulnessand the diligence of interested community membersto secure and finance adequate facilities. Many newschools initially finance space using short-term leases,then later purchase their leased facilities or relocateto new facilities purchased with long-term debtonce they have established a financial track record.If a substantial portion of classroom space will stillremain under short-term lease after a debt-financedexpansion, a contingency plan needs to be in placein case the leased space cannot be renewed.Charter School Information Requirements■ Description of school’s history and founding■ Total student enrollment (for last 5 years)■ Current year and future enrollment targets■ Number of students on waiting lists (for last 5 years), preferably broken outby grade-level■ Measures of educational outcomes (test scores, performance onstandardized tests)■ Number of faculty and staff■ Description of current facilities (if more than one location, indicate numberof students■ Number and description of close competitorsRelevant financial information■ Sponsor (names and addresses of key contacts)■ Charter School management biographies■ Current charter provisions (term and funding levels)■ Charter renewal history and description of charter renewal process■ Audited financial statements (or independent financial reports for last 3 years)■ Current year operating budget■ Description of funding mechanism and cash flow■ Description of any fundraising activities, public or private gifts or grants■ Revenue projections (including estimated enrollment, revenues, expenses, anddebt service coverage)Other documentation requirements■ Sources and uses and debt service schedule■ Description of bondholder security■ Offering statement/disclosure information■ Independent property appraisal (market value assessment of completed projectand land may be required)■ Independent site assessment (may be required)■ Lease agreement■ Trust indentureA key charter school debt ratio is the debt serviceburden relative to the operating budget. An annualdebt service burden of more than 20% of expenseswould be considered onerous in most cases. This isprobably one of the more critical measures, becausea high fixed cost for debt service can significantlylimit fiscal flexibility. Any charter school expectingto raise its debt levels needs to demonstrate an abilityto pay for the increased debt service, especiallyif the revenues are expected to come from enrollmentgrowth. The need to grow enrollment rapidlyto meet approaching debt service obligations is considereda weakness. The strongest charter schoolscan demonstrate ability to meet future debt servicewith existing enrollment levels or very limitedreliance on enrollment growth. An example of limitedreliance on future growth might be the additionof an extra grade level, which currently enrolledcharter school students may graduate into.Using a lease structure to repay debt rated at thelower end of the credit spectrum may not be considereda material credit weakness, although it is preferableto have a general obligation pledge of the charterschool in addition to a mortgage on a school building.Charter school lease structures must meetStandard & Poor’s lease criteria. Basic security featuressuch as appropriate debt service reserve funds,additional bonds tests, use of a trustee to hold bondfunds, and similar security features should be incorporatedinto the financing structure. Legalcovenants such as a rate covenant are not relevantto a charter school; charter schools do not chargetuition, but receive state revenues. A charter schoolusually can only increase net revenues by increasingenrollment or reducing expenses.Standard & Poor’s also considers what futurecapital requirements and other projects will be necessaryto keep schools viable and competitive:■ How will annual maintenance requirements behandled as part of the operating budget?■ If capital facilities are to be expanded, how willthe increased operating costs be handled?■ How thoroughly have expansion plans been considered?Charter schools are at a disadvantage comparedwith public schools, because their state operatingrevenues might also be needed for paying debtservice, in contrast, public schools enjoy a separateproperty tax levy for debt service. A formalcomprehensive business or capital plan can be acredit strength.Also of concern are the debt issuing provisionsof the entity providing the charter authorization.Is it actively involved and does it have an approvalrole on projects under consideration? Does the198 Standard & Poor’s Public Finance Criteria 2007