Understanding the shifting
environment for elementary and
secondary education can help municipal
bond investors identify opportunities
and mitigate risk in the sector. Here we
explore the investment implications of
increasing charter school enrollment
and the outlook for continued growth of
this education sector, which currently
represents $33 billion of outstanding
bonds within the roughly $580 billion
K-12 muni bond market.
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credit analyst team – one of the industry’s largest
and longest tenured – constantly assesses the
impact of the trends that influence muni credit
quality across all market sectors.
Municipal bonds are a foundational element
in Nuveen’s proud heritage of investing to
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that touches the everyday lives of all Americans.
Munis fund essential infrastructure for state and
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and sewer utilities; housing and more.
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daily – things like the price of an airline ticket or a
hospital visit, the health of regional transportation
options, the quality of local school systems or the
dependability of critical utilities.
Enrollment for traditional public schools has declined, while charter schools have gained students.
Total public k-12 enrollment declines while charter schools gain students
As students head back to school across the country,
the types of schools they attend will in some
cases look different from the ones they attended
as recently as pre-pandemic. The school choice
movement, which seeks to promote alternatives to
traditional district schools, has been in existence
for decades. But the trend has been accelerated by
the pandemic and legislation in many states that
supports expanded school choice.
Public school enrollment fell across the country
in the wake of the pandemic, and student count
has still not recovered fully or evenly. Enrollment
for traditional public schools declined, while
charter schools gained students – a shift driven by
demographics and a growing preference for new
school choice options.
Between 2019 and 2023, overall public school
enrollment – including public district and charter
schools – fell -2.6%. Traditional K-12 public
schools lost more than 1.5 million students, a
-3.5% drop. Declining birth rates and a smaller
school age population contributed to this drop. But
many families’ opting for charter schools, private
education or homeschooling also contributed to the
loss. In contrast to traditional public K-12 schools,
charter schools gained close to 300,000 students, a
9.0% increase, during that time period.
In the 2022-23 school year, charter schools served
3.6 million students in about 7,800 schools or
campuses. In that same school year, charter schools
enrolled 8% of all public school students in the U.S.
For perspective, total public school enrollment was
more than 45 million students.
Several states’ passing legislation favorable to
charter school expansion and funding encouraged
this trend. Additionally, school models offering
the potential for a targeted curriculum focus
(foreign language immersion, STEM or project based learning, for example) have aligned with
a growing national preference for additional
education options.
Longer-term projections estimate a cumulative
-6% decrease in K-12 enrollment nationwide
through 2030, with the trend varying greatly by
region. Lower birth rates have impacted all areas
of the country, and uneven population trends have
meant many districts – especially in the Midwest
and Northeast – have seen steeper declines,
while others have seen stronger growth trends
necessitating new school construction. Texas
projects strong growth in many communities, but
other states, like California and New York, will
likely see a decline.
K-12 enrollment nationwide is expected to decrease a cumulative -6% through 2030.
Enrollment trends influence bond issuance
Given increasing student demand for charter
schools, we anticipate continued strong supply
issued into the municipal market. 2021 and 2022
were banner years for charter school issuance, at
more than $4 billion and $5 billion, respectively.
2023 and 2024 saw declining issuance as interest
rates increased, though we expect issuance to pick
up again if interest rates decline.
Most charter school bonds are issued into the
market on a non-rated basis (approximately 50%),
or carry ratings that are low investment grade
(15%) or below investment grade (17%). Many
charter school bonds that carry high investment
grade ratings have support from a state bond
enhancement program. In general, charter school
investors can expect to receive a higher interest
rate on bonds issued by these entities compared
to public school districts. For example, average
charter school bonds currently yield around 5%,
while public school district bonds yield 3.5% to
4.0%, a difference of 100-150 basis points.
Typically, public school districts are highly rated
and carry relatively low credit risk. The bonds
issued by school districts are secured by dedicated
property taxes levied specifically to pay debt
service and cannot be used for operating expenses.
Most school districts are subject to state-imposed
debt limits and required to petition voters for
approval to issue debt, providing investors
assurance that the bonds and funded projects have
community support.
In contrast, charter schools do not have the ability
to levy taxes and are typically funded by state or
local revenues determined by state-specific formulas
tied to enrollment levels. Charter school bonds
are typically secured by general revenues of the
charter school, and there is no dedicated revenue
stream to repay debt service like there is for public
school districts. However, charter school bonds are
often secured by a mortgage on the school facility,
providing investors with marketable collateral.
In-depth credit research is key
For charter schools, we focus on:
- Location in demographically supportive area with limited competition
- Solid academic performance and an experienced management team, focused on academics, marketing and financial health
- Differentiating curriculum or programs that set the school apart from other local public schools
- Strong legal and security provisions, including revenue pledge of the school, mortgage on the school facility, financial covenants and continuing disclosure provisions that promote transparency
For public school districts, we look for:
- Strong legal security pledge with bonds benefitting from an unlimited property tax levy and good continuing disclosure practices
- Healthy local economy with favorable demographics and enrollment growth
- Solid financial operations and management; budgetary flexibility provided by reserves and the ability to independently adjust revenues and expenditures
Uneven enrollment trends and increased competition drive expenditure growth
Public education is facing new competition and
funding challenges due to the overall enrollment
decline, as well as shifting parent preferences
leaning toward charter schools, private schools and
homeschooling, in some cases funded by expanded
state voucher programs. These enrollment and
funding dynamics have credit quality implications
for all K-12 schools - with winners and losers in
each market segment.
Funding models for K-12 education vary by location,
with funding shared between states and local
districts pursuant to each state’s specific funding
formulas. In some states, local property taxes
provide most of the funding with per-pupil state aid
providing the rest. In others, districts are primarily
funded by formula-based state aid with funding
formulas dependent on size and need
Charter schools are authorized and funded by
states and in some cases compete with local school
districts for available state and local resources. In
recent years, state sponsored voucher programs,
like expansive universal voucher programs in
Arizona and Florida, have gained momentum.
These programs provide public funding to families
to pay for private or religious school tuition bills or
home schooling, potentially reducing state funding
available for public schools as enrollment shifts
toward these other school options.
Regardless of school type or funding model,
enrollment is a key revenue determinant for
public schools. Increased competition for students
puts pressure on districts to attract students,
exacerbating a challenging financial situation
if enrollment and revenues are simultaneously
pressured as well.
Total per pupil expenditures increased 12.6%
between the 2010-11 and 2020-21 school years after
adjusting for inflation. Pressure to keep student/
teacher ratios low, keep facilities and technology
up to date and as provide support services as
well as enrichment activities has driven spending
increases. This level of increase will not be
sustainable, especially if enrollment does not return
to healthy levels in public school districts.
Nuveen continues to see value in charter school bonds.
School district bonds are insulated from operating risk
Traditional public K-12 school districts issue long-term bonds typically secured by a general obligation
pledge and a dedicated property tax levy to repay the
debt. Most school districts are subject to state-imposed
debt limits and required to petition voters for approval
to issue debt, assuring investors that the bonds and
funded projects have community support. Revenues
collected from ad valorem property tax levies in place
for debt service are legally unavailable for operating
costs. This insulates investors from operating risk and
budgetary pressures and ensures debt service is paid,
even if the district has a structural budget gap.
The bottom line
While traditional public school districts are facing
pressures such as enrollment declines and budget
pressures, bonds issued by these districts have
exceptionally strong security, backed by dedicated
property tax pledges that are only available for debt
service. This insulates investors from operating risk
and budgetary pressures and ensures debt service
is paid, even if the district has a structural budget
gap. The strong security structure gives Nuveen
confidence that investments in traditional school
districts continue to be prudent and can add value
to a diversified investment portfolio.
In general, charter schools located in
demographically vibrant markets or sub-markets
with solid fiscal plans and limited competition
provide a good investment opportunity for muni
bond investors. Charter school bonds have returned
11.8% over the past 12 months and provide
an essential service. These bonds have strong
security features, such as mortgages and financial
covenants, that keep borrowers accountable while
also providing bondholders with solid collateral in
the unlikely case that the school does not perform.
Nuveen continues to see value in charter school
bonds and employs careful credit selection to drive
investment returns.
Endnotes
Sources
Yield data and sector size: Bloomberg, L.P.; Local Initiatives Support Corporation, “Charter School Bond Issuance, A Complete History,” December 2022; Moody’s Ratings, “Tightening operating environment will challenge a growing minority of districts” 23 Jul 2024; National Alliance for Public Charter Schools, “Believing in Public Education”; Center for Budget and Policy Priorities, “Expiration of Federal K-12 Emergency Funds Could Pose Challenges for States”; https://www.cbpp.org/research/state-budget-and-tax/expiration-of-federalk-12-emergency-funds-could-pose-challenges-for; National Center for Education Statistics, “Revenues and Expenditures for Public Elementary and Secondary School Districts: School Year 2021-22 (Fiscal Year 2022)” 17 Jul 2024, https://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2024309; Barclays, “School Districts – Getting Ready for a Test,” 31 Jul 2024; The 74, “Big Districts like Philadelphia ‘Gamble’ on Higher Spending as Enrollment Falls, Study Finds” 13 Jun 2024; https://www.the74million.org/article/big-districtslike-philadelphia-gamble-on-higher-spending-as-enrollment-falls-study-finds/; New York Post, “With so few students in class, why aren’t public schools doing better?” 20 Jul 2024 https://nypost.com/2024/07/20/opinion/why-arent-public-schools-performing-better/; B.C. Ziergler and Company, “Charter School & Bond Market Overview,” 10 Jul 2024.
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