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CO Muni Sector: Charter Schools

The municipal bond market offers investors a diverse array of credits, sectors, and structures. For many retail investors, a risk averse mentality leads them to focus on the highest quality bonds in the market. In Colorado, general obligation school district bonds offer investors the desired safety and comfort through a dedicated property tax revenue stream as well as state support. However, for those risk-tolerant investors willing to work a little harder in search of yield, Colorado charter school bonds can be an attractive sector to explore.



Colorado Charter Schools

Charter schools are publicly funded, non-profit schools operating independently of traditional school districts to provide tuition-free education. In 1993, the Colorado state legislature became the 3rd in the US to enact charter school law, paving the way for the state’s first two charter schools – The Connect School in Pueblo and Academy Charter School located in Castle Rock, both opened their doors in 1994 and are still in operation today. Currently, Colorado charter schools educate approximately 15% of the total student population or over 137,000 students across 269 charter schools. Additionally, 7 out of the top 10 CO high schools in 2023 were charter schools.


Not all state specific charter school laws are the same. According to a study released by the National Alliance for Public Charter Schools (NAPCS), Colorado continues to have the nation’s second-best public charter school laws in the nation. 2022 was the fifth consecutive year that Colorado ranked second.


Many CO charter schools will tap the municipal bond market to raise funds when constructing or renovating their facilities. Charter school municipal bonds come in all shapes, sizes, credit qualities, and maturity structures.


Analyzing Charter Schools

Successfully investing in charter schools, typically smaller schools financed through revenue bonds, requires an additional level of credit analysis. One of the key metrics to understand for a charter is its enrollment history and trend, because charters receive state funding on a per pupil basis. During COVID, over 1.4 million students across the country left traditional public schools in search of more flexibility and alternative options for education. A record number of students migrated towards charters. Additionally, investors should focus on financial stability – traditional ratios of days cash on hand, debt service coverage, profit margins, and leverage ratios. Qualitative analysis of a bond’s collateral, insurance, or other state-operated backstops can help an investor assess the credit risk. Lastly, academic performance relative to local district and state metrics can also be a helpful tool. Depending on the charter school, idiosyncratic demographics and household income measures can also affect a school’s performance and state-funded income sources.


Charter school revenue bonds trade at higher yields than the traditional general obligation debt from school districts. This makes intuitive sense given the bonds’ reliance on student enrollment and overall demand for the organization versus a property-tax supported general obligation. However, the yield advantage can be quite advantageous, at times, yielding 100 basis points or more than the higher quality school district GO’s. If an investor can find comfort in the enrollment trends, financial stability and competitive landscape, these additional yields can help boost the tax-exempt income on an otherwise generic bond portfolio.


Not all charter school bonds are the same and investors should take careful consideration in understanding the risks associated with each specific credit. Risks include declining enrollment, academic underperformance, or poor financial management. Charters that exhibit these types of characteristics should be avoided. If the negative performance continues, the schools may lose their charter altogether and be forced to close their doors. Investors should assess their risk tolerance in respect to individual charter school investments and to their cumulative exposure to charter schools as a sector.


Your CO Muni Specialists

For more information on how M. Austin views the charter school landscape in Colorado and how local expertise can provide a competitive advantage in the Muni market, please visit our website or reach out for a consultation.



 

Sources:

Best High Schools in Colorado; U.S. News, 2024; {https://www.usnews.com/education/best-high-schools/colorado}


Colorado Dashboard; National Alliance for Public Charter Schools, 2024; {https://data.publiccharters.org/state/colorado/}


Colorado League of Charter Schools, 2024; {https://coloradoleague.org/}


Colorado Department of Education, 2024; {https://www.cde.state.co.us/}


 

Disclosures:

This content has been prepared for informational purposes only and should not be considered as investment, tax, or legal advice. Opinions and forward-looking statements expressed are subject to change without notice. We recommend all investors to consult with a financial and/or tax advisor regarding their individual circumstances before taking investment decisions.

 

Investing in bonds exposes the investor to the risk of loss of principal. Lower and non-rated securities are more volatile and less liquid than investment grade bonds. Liquidity risk relates to the timing of converting a security into cash without affecting the market price. Municipal bonds and preferred stocks tend to be less liquid than government or corporate bonds. Higher-yielding, longer-maturity, lower-rated, non-rated, or certain bond restrictions (minimum denomination requirements) limit or reduce the liquidity of bond holdings.

 

Please visit our website for a complete list of disclosures and risks: www.maustininvestments.com.

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