Charter Schools and the Impact on Local K-12 General Obligation Debt

Charter schools are publicly funded, independent K-12 schoolsestablished by teachers, parents or community groups as an alternative to public schools.  As the public has become comfortable with the idea of charter schools, we are seeing more jurisdictions refining the laws governing them.  For example, the Texas Public School Fund guarantee program recently expanded its mandate to include insuring charter school debt.  Another example recently in the news comes from Georgia, where a judge ruled the City of Atlanta could not deduct pro-rata pension contribution costs from annual charter school funding.  Finally, just this week, a charter school in Detroit defaulted on its debt, despite the fact that it had a state aid intercept pledge.  Charter schools have made the greatest inroads in underperforming and distressed education markets such as the City of Baltimore, although charter Montessori schools are popping up with greater frequency in more affluent and high-performing school systems as well.  While charter schools pose little risk of displacing public schools, their rise is being felt at the margin as declining enrollment in public schools leads to cuts in funding. Without changes to expense structures, margins will fall and create operating budget pressure.  We are watching this issue closely for the K-12 districts we hold in client portfolios.