Charter schools are putting increasing stress on the credits of traditional districts in Arizona, according to Moody’s Investors Service.
Arizona’s share of students enrolled in charter schools is second in the nation after the District of Columbia, according to Moody's. The Grand Canyon State's charter school enrollment as a share of publicly funded education grew to 16.5% in 2017 from 12.4% in 2012.
“Because operating revenues for school districts and charter schools are driven by enrollment, competition for students is a critical aspect of the financial health and credit quality for both types of schools,” said Moody’s analyst William Oh. “Charter schools are winning the competition, although Arizona’s school districts have features that will help mitigate some of the credit strain associated with weaker enrollment.”
From 2012 to 2017, enrollment in K-12 school districts shrank by 0.7% to 942,288, according to the state Department of Education. Over that same period, charter school enrollment grew by 38% to 185,900.
“Charter school enrollment grew by an average of 7% per year, while school district enrollment shrank by an average of 0.1% per year,” Oh noted. “As a point of comparison, Arizona’s population grew by an average of 1.37% per year between 2012 and 2017.”
Traditional districts lose revenue when a student leaves a district for a charter school, Oh said. But the district is left with instructional, administrative and facilities costs for the student that cannot be reduced quickly.
“Additionally, the negative financial impact of losing students to charter schools will likely increase as districts compete by adding programs, or are unable to find cost efficiencies and/or reduce expenditures,” Oh said. “Further, as districts lose market share, they face the prospect of local voters failing to support capital improvement bonds or supplemental operations and maintenance tax levies.”
A 2017 report by the Grand Canyon Institute found questionable finance practices at some charter schools, including exceptionally high salaries for administrators and low pay for teachers.
“The losers in this mix appear to be taxpayers, teachers and students in a majority of cases,” the think tank reported. “Charter school teachers on average earn 20% less than their public district school colleagues while 43% of charters do not offer a retirement or savings plan to their employees.”
The 2013-2014 Annual Report of the Superintendent for Public Instruction said that charter schools spend 45% of revenues on classroom instruction compared to public district school spending at 52% of revenue.
One of the advantages traditional schools enjoy is the ability to ask voters for higher property taxes, though charter schools could undermine voter support for those measures, Moody’s said.
“Credit quality for school districts is further enhanced by a statutory lien and a lockbox structure whereby the county collects and remits property taxes to the paying agent for general obligation bond debt service,” Oh wrote.
