While it’s a tricky proposition to make a blanket statement about the credit quality of any sector within the municipal bond market, a recent study has determined that charter schools appear to demonstrate strong loan performance.
In a MuniNetGuide interview entitled, “A Closer Look at Charter School Financing (September 2010),” Maria Sazon, Senior Director of Facilities Initiatives with the National Alliance for Public Charter Schools, emphasized the overall credit quality of charter schools. “Charter schools are good borrowers despite the limited public support they receive for facilities,” she says, citing the 2010 Charter School Facility Finance Landscape report released last fall.
Now, a new report issued by Ernst & Young entitled “A Decade of Results: Charter School Loan and Operating Performance” strengthens that assertion, finding that most of the loans to charter schools are high performing. The study performed an analysis of 430 outstanding and current charter school loans made between 2000 and 2009. Of these loans, totaling $1.2 billion in original amount, only five, valued at $12 million ended in foreclosure.
Among outstanding loans, the report says, eight had been delinquent at some point in their history for 60 days or more. To put these numbers in perspective, 1.0 percent of the total loan amount made during the nine-year period ended in default, and 3.6 percent experienced some form of delinquency.
The study was jointly sponsored by Low Income Investment Fund (LIIF), Raza Development Fund (RDF), The Reinvestment Fund (TRF), and Bank of America Charitable Foundation.
“The main objective of the study was to produce high-quality, research-driven data in order to attract more capital to the sector,” says Kimberly Latimer-Nelligan of the Low Income Investment Fund, one of the study’s co-authors. “The study’s partners aim to spur an industry-wide movement for shared information and standardization of performance indicators for lending to charter schools. We hope this is the first year of an ongoing study that will continue to be refined and improved.”
The study found a correlation between loan performance and factors such as the size of the school, academic performance, prevalence of charter schools within a district, and occupancy costs.
Stronger academic performance was associated with better loan performance. As Kimberly Latimer-Nelligan explains, LIIF views charter school loans as business loans secured by real estate. “Charter schools are in the business of educating students,” she says, “so it is not surprising to us that borrowers with strong business models achieve good academic results and perform well on loans.”
“When underwriting these loans, we look for a solid board, management capacity and a strong record of academic achievement as factors that would lead to good loan performance.”
Loan-related metrics such as the loan-to-value ratio, debt service coverage, and interest rate at underwriting did not appear to affect loan performance.
On the other hand, one surprising finding of the study was that occupancy costs mattered much more than revenue in indicating future loan performance. “On average, occupancy costs accounted for 11 percent of operating expenses at schools with poor performing loans versus 8 percent at other schools.”
Kimberly Latimer-Nelligan says that charter schools provide high-quality educational alternatives in low-income communities. Many of these schools have near or at 100 percent college placement rates. “As long as they continue to provide those kinds of opportunities, we would not be surprised if demand continued to rise.”
“The National Alliance for Public Charter Schools estimates that charter school enrollment will grow at an average rate of approximately 10 percent per year in the next five years,” according to Maria Sazon. “This estimate is based on historical growth patterns and closure rates, as well as changes in state policies that lift charter school caps and that allow multiple authorizers to which charter schools may directly apply.”
Blog Provides Charter School News, Updates
“The finding that charter schools are good borrowers did not surprise those of us who are closely involved with charter schools,” says Maria Sazon, Senior Director of Facilities Initiatives with the National Alliance for Public Charter Schools, in a blog entry highlighting this recent report.
“This study, the first and only industry-wide research of charter school loans, is important because it proves that a vast majority of charter school operators manage their finances well and are responsible borrowers despite their relatively small enrollments, limited operating history and limited financial resources. “
Looking for more information, research, and policy updates related to charter schools? Visit the National Alliance for Public Charter Schools (NAPCS) blog, with contributions by key research and advocacy professionals within the organization, as well as guest bloggers noted for their expertise in the industry.
The blog is organized by category, including research, “great schools,” policy, and more. While informative in nature, readers have the opportunity to provide feedback by submitting their comments on any blog entry.