Market Commentary: Chalk it up to Inflation

by Gayl Mileszko

“Chalk it up to Inflation”

For well over a year, the talk around American kitchen tables has been mainly focused on sky high food and energy prices. Families have had to re-juggle budgets and dip into savings in order to allocate more funds to meals, gasoline, and utility bills. Many have tapped savings accounts or taken on more debt to cover these expenses, but less essential purchases including clothing, entertainment, and vacations travel have been scaled back, postponed, or canceled. Many prospective homebuyers have had to end talks with builders as rising material and labor costs have rendered new construction unaffordable. Higher rents have necessitated quite a few family moves. This all comes at the same time that employers battling lease, labor, refinancing, and insurance woes, have announced layoffs, reduced hours, relocations, and mergers. U.S. consumer sentiment is nevertheless high and the U.S. economy continues to be bolstered by unusually strong consumer spending, representing 68% of GDP, even as that has increasingly involved withdrawals from retirement accounts and maximizing credit lines.

Economic ABCs 

No sector of the economy has been spared from the ravages of inflation, including, most notably that of the government, which also accounts for a significant percentage of GDP.  Tax revenue in 2022 rose to an all-time high: the U.S. Bureau of Economic Analysis reported that Americans paid out an estimated 14.7% of personal income in 2022 in personal current taxes (mainly federal, state and local income taxes). But high tax payments obviously reduced discretionary spending and exacerbated the impact of the inflationary costs that taxpayers had to absorb. That inflation reached 9.1% in June of 2022, the highest point in more than 40 years. Although the government’s gauge of inflation has since declined overall and in certain categories, it still ranged between 5.4% and 19.8% in June in key areas that matter to everyone: electricity, rent, bread, frozen vegetables, pet food, and car insurance and repairs.  

Moody’s Summer School

Moody’s Investors Service in a key July 11 report to our industry focused on the impact of inflation on the education sector and examined how schools in the K-12 as well as the higher education space have been coping with higher operating costs including wages, utility and construction expenses, as well as new financing and refinancing challenges. Their chief analysts are seeing strains on university budgets through at least 2024 and many challenges in balancing the need to raise room and board fees in the context of affordability concerns.  They point out that public schools heavily reliant on state aid may not be able to keep pace with rising costs. 

Charter School Daze

Charter schools across the nation have faced and overcome numerous challenges since the first ones were authorized in the 1990s.  But results matter to parents and to the nation as a whole. And, as the June 2023 Stanford’s Center for Research on Education Outcomes study just reported, charter schools “produce superior student gains despite enrolling a more challenging student population.”  The HJ Sims Education Team has believed this for many years, so we work with charter schools in every exciting phase of their growth, from standalone start-ups to seasoned multi-campus organizations with multi-year charter renewals. We understand that all face the same inflationary challenges and, in some cases, limited access to financing for operations and growth.  This year, we note that inflation has made the process of accessing capital for start-up and early-stage financings even more problematic. But our team takes a deep dive into the unique needs and strengths of each school, and we work with boards and managers as well as our own analysts, traders and major retail and institutional buyers to tell each story and come up with workable solutions from our perspectives as parents, financing professionals, and investors.  

A New School Year Ahead 

We know that schools can no longer count on more pandemic-level state and federal stimulus, and it does not take a fortune teller to see that, in a slowing economy, reduced tax revenue and strains on state budgets may reduce per-pupil funding.  We are heading into a presidential election year and so we know that political issues on school choice and funding will heat up.  Fundraising is always a challenge and demographics are constantly changing. We agree with Moody’s that higher costs may cause some downsizing or halts in capital projects and hamper budget flexibility for those moving ahead with large construction projects in this environment. But we believe that our professional team has the insights, commitment, and resources to help guide organizations unsure about how to move forward in these evolving market conditions.

Go To the Head of The Class

HJ Sims is a strong supporter of U.S. charter schools, and our education team has financed more than $7 billion of start-ups, building acquisitions, and campus expansions.  If you would like more information about charter school medians and industry trends, or assistance with rating presentations, board education, risk management, capital planning, debt issuance or portfolio reviews, please give us a call.