Arizona’s charter schools are overleveraged, holding $2.56 billion in debt while property and assets are valued at $1.4 billion, according to a new policy paper.
Meanwhile, 33 charter sites are losing at least $1,000 per student per school year, three-quarters of which also have significant negative net assets—owing more than they are worth, according to the non-partisan think tank the Grand Canyon Institute (GCI). Financial failure is inevitable for charters in this financial position, according to GCI’s research.
In comparison, district schools very rarely report net losses and virtually never close during the school year. Another 67 charter sites are losing between $400 and $1,000 per student per school year, which is roughly the threshold for the state to take over a district school.
Red Fags: Overleveraged Debt, the third in a series of policy papers published by GCI about charter school financial practices, details the current debt load and its implications for Arizona’s charter market. The table below shows the depreciated property value of all charters and long-term, lease-adjusted debt on those properties.
Two key issues underpin Arizona’s overleveraged charter schools:
- 80 percent of charter debt is held in bonds that are guaranteed in part by projected enrollment, according to annual charter audits.
- Enrollment is stagnating or declining at one-third of Arizona’s charter schools, while the sector is in a consolidation phase with 10 charter companies capturing 73 percent of new charter students according to Arizona Dept. of Education data.
“Charters with stagnant or declining enrollment with debt guaranteed by projected enrollment growth struggle to cover their debt and other financial commitments. Typically, this results in more taxpayer funds being spent on debt payments and less on classrooms,” says Curt Cardine, GCI research fellow and principal author of Red Flags: Overleveraged Debt. “This is similar to a homeowner claiming projected income on their mortgage documents and then not having enough income to make their debt payments.”
“Financial markets recognize this issue, as nearly all Arizona charter debt offerings are classified as speculative or junk bonds as opposed to investment grade, meaning charter holders are spending more of their public funds on higher interest rates. By contrast, in Texas most charter debt is investment grade due to stronger oversight.”
In 2018, 3 charters closed during the school year, leaving hundreds of students and their families scrambling to find new school placements. More school-year closures will occur without stronger oversight and acknowledgement that there is a debt issue in the charter sector.
GCI recommends the following to strengthen financial oversight of the charter sector as well as balance taxpayer funding with private property responsibility:
- Charters should guarantee debt based on property values only, not projected enrollment.
- Charters companies that currently hold debt based on projected enrollment growth should be required to report whether or not they are achieving that growth in their audits.
- Charter companies should be required to seek out a commercial loan quote and report their chosen debt instrument and interest rate to the Arizona State Board for Charter Schools.
- Charter Additional Assistance should be based on satisfactory academic performance and limited to fair market value to provide early support for schools.
“If Arizona is going to allocate about $1.5 billion per year to charter schools, then our legislature should approve legislation and invest the resources to ensure they operate with sufficient financial oversight and transparency,” according to George Cunningham, chair of the Grand Canyon Institute. Cunningham is a former sate legislator and voted in support of Arizona’s original charter legislation.
Click here to read the Executive Summary and full report.