The Cliff Notes on Golden State Charter School Bonds

by Gayl Mileszko

Investment Opportunities Worth Studying

Both investment grade and higher yield bond buyers can find a wide array of investment opportunities in California’s public charter schools. The Golden State was one of the first two in the country, second only to Minnesota, to enact a charter school law. And, since 1992, it has become home to 1,285 charter schools with 685,549 students, currently educating approximately 12% of the state’s K-12 population according to the California Charter School Association. Not all the schools have bond debt outstanding, but Bloomberg data show that that there are approximately 90 charter school credits issued through the California School Finance Authority, the California Municipal Finance Authority, the California Infrastructure & Economic Development Bank, the California Enterprise Development Authority, and the California Statewide Communities Development Authority.  These are federally and state tax-exempt or federally taxable and state tax-exempt bonds with coupons ranging from 0% to 10% issued in denominations that range from $5,000 to $250,000. Many are non-rated, quite a few are below investment grade, but some are right above the cusp into investment grade and some even are part of a pool of loans rated “A” by S&P. Buyers can find pre-refunded and noncallable bonds as well as those with a par call or premium call.

Diverse School Missions in a Charter-Friendly State

To buyers, California is known as a charter friendly state because, under Proposition 39, school districts are required to provide charter schools with facilities that are reasonably equivalent to traditional public schools. They also offer a state intercept, which captures state payments first for bondholders prior to the disbursement reaching the school’s bank account. Most of the state’s charter schools are standalone but an increasing number are part of an obligated group or a multi-state network; bonds in the primary and secondary markets sometimes come under the umbrella of organizations such as Aspire Public Schools, Rocketship, KIPP, and Green Dot. The missions of these schools differ, enabling investors to focus in on those in Pre-kindergarten to elementary, middle, and/or high schools, with programs devoted to college prep, adult, disadvantaged, homeless, or autistic populations; STEM; arts; foreign language; career and technical pathways; athletics; international baccalaureate, or classical education, to name a few They may be site-base or non-classroom based and can offer dual enrollment in local community colleges. Extracurricular and transportation offerings vary as do dress codes.


California charter school managers can be non-profit charter management organizations, for-profit education management organizations, or independent and freestanding. Most have boards with three to seven members from the local community with banking, legal, academic, management, and other backgrounds to oversee academic progress, operational compliance, and financial integrity. Approximately 81% of California charters schools are authorized by their local school districts for terms that usually run for five years. The Los Angeles Unified School District, which is the second biggest public school district in the nation, also happens to be the largest district charter school authorizer in the U.S. Other schools may receive charters from one of the state’s 40 county school boards or the state’s own board of education. These authorizers conduct annual site visits and ensure that minimum academic performance standards are met before granting renewals. For this oversight, they are entitled to receive a fee of up to 1% of the school’s revenue.

S&P Sees the Charter School Sector as Stable, Rates and Monitors 40 California Schools

S&P Global Ratings has a “Stable” view on the charter school sector as a whole based on the fact that demand continues to grow, per-pupil funding levels are healthy, significant federal funds remain available, and they expect credit stability for states despite increased expense pressures. They note concerns over labor shortages, teacher burnout, politics influencing school choice policies, state testing issues, demographics, pension funding, and event risks including management turnover. Altogether, S&P rates 336 charter schools, including 40 in California, 15 of which are investment grade, 35 of which are part of a network. In its latest California Charter School Brief published March 13, 2023, S&P reported that its ratings range from B+ to BBB with a median rating of BB+ and median days cash on hand of 162. The median enrollment for each of its rated schools is 1,627 students and median debt per student is $14,490.  Across the spectrum, 93% currently have stable outlooks. California charter schools typically have higher capital costs and therefore higher total debt but the state offers supplemental grants for students that are English learners, in foster care, or eligible for free or reduced priced meals. 

Yield Offerings and Credit Surveillance

In the past week our trading desk has seen a non-rated California charter school with 5% coupon trading at $91.946 (yield 5.57%) and a BBB-minus rated new issue sustainability bond with a 5.25% coupon sell at $98.95 to yield 5.32%. In reviewing these credits, our traders and analysts consider debt service coverage ratios, days cash on hand covenants, governance, enrollment trends, wait lists, academic performance, competition, student and teacher retention, parental involvement, graduation rates, and brand integrity.  For more information on California charter school bonds, including those with ratings by S&P, please contact your HJ Sims representative or the HJ Sims Education Finance Team.