EXECUTIVE SUMMARY
SINCE LISC’S LAST COMPREHENSIVE ANALYSIS of charter school bond issuance, published in 2015, the charter school sector of the municipal bond market has continued to gain size and momentum. As of December 31, 2022, public charter schools in 34 states and the District of Columbia have issued more than $40 billion in tax-exempt bonds to finance their facilities.
The Bond Study includes:
- The first comprehensive listing of the approximately 2,200 tax-exempt bond transactions undertaken by charter schools, totaling more than $40 billion from inception of the sector in 1998 through year-end 2022.
- Updated data and analysis of the universe of transactions, including par amount, issuer, jurisdiction, rating, credit enhancement, term, and pricing—including coupon, yield, and costs of issuance.
- Analysis of state bond credit enhancement programs, including issuance statistics, impact on rating distribution, and estimated cost savings.
- New state charter school bond data dashboards with up-to-date statistics on the number of transactions and total par amount issued, average costs of issuance, the rating distribution within the state, and other state-level data.
Volume & Growth
- The charter school sector of the municipal bond market achieved record growth in the eight-year period since the last LISC Bond Study. Between January 1, 2015, and December 31, 2022, charter schools issued more than $29 billion in tax-exempt bonds—nearly three times the total par issued in the sector’s first 17 years.
- For the first time in the sector’s history, 2022’s annual charter school bond issuance ($4.9 billion) surpassed 1% of total municipal bond issuance that year ($391 billion).
Pricing
- Yields on charter school bonds declined to historic lows between 2015 and 2021 before an uptick in 2022, reflecting the general interest-rate environment as well as sector-specific trends. The median yield for bonds issued since 2015 is 4.75%, compared to 5.50% for total issuance since inception.
- The median spread to the benchmark triple-A Municipal Market Data (MMD) rate for all charter school bonds issued since 1998 is 232 basis points. In 2021, the median spread to MMD dipped to 208 basis points, the lowest level since the credit crisis of 2008, driven in part by an increase in triple-A rated par. Median yield in 2022 returned to within one basis point of the historic median.
- Costs of issuance and underwriter’s discount, measured as a percentage of par, continue to decline from previous years. The median cost of issuance for bonds issued between 2015 and 2022 is 3.72%, down from 4.62% for bonds issued prior to 2015.
- The median underwriter’s discount, measured as a percentage of par, was 1.25% between 2015 and 2022. This is 50 basis points lower than the median underwriter’s discount in the preceding 17 years (1.75%).
Ratings
- Approximately half of all charter school bonds issued since 1998 were rated at issuance by one of the three major rating agencies. Of the 920 rated transactions since 1998, 68% were rated investment-grade, including a significant number of “enhanced” transactions that utilized third-party credit enhancement to increase the rating on the bond.
- Access to state bond credit enhancement programs that increase the rating on charter school bonds such as those in Colorado, Utah, Texas, and Idaho has resulted in a sustained shift toward higher investment-grade rated offerings within the sector. This shift was first reported in LISC’s 2015 Bond Study and has evolved into a multi-year trend.
Charter School Bond Issuance by State
- As of December 31, 2022, charter schools in 34 states and the District of Columbia have accessed the tax-exempt bond market to finance their facilities. Five states—Texas, Arizona, Florida, Colorado, and California—account for more than 57% of aggregate charter school bond issuance since 1998. Hawaii issued its first charter school bond in 2022.
- Three states—Arizona, Colorado and Texas—have executed more than 200 tax-exempt bond transactions benefitting schools in those states. Five states have executed more than 100 transactions on behalf of schools in those states. As of year-end 2022, charter schools in eleven states with a charter law had yet to access the tax-exempt bond market.
State Bond Credit Enhancement Programs
- As of 2022, six states offer bond credit enhancement programs that result in a higher rating on charter school bonds due to the presence of some additional security provided by the state; however, one of these programs has not enhanced a charter school bond since 2015. The 5 active programs, including those with 'moral obligation' provisions in Colorado, Utah, and Idaho, along with the Texas Permanent School Fund (Texas PSF) and the Arizona Public School Credit Enhancement Program, offer distinct mechanisms for charter school bond credit enhancement.
- State bond credit enhancement programs represent one of the most effective and least costly options available to lower the cost of financing for charter school facilities. These programs significantly reduce taxpayer dollars spent on facility debt service by effectively substituting the state’s generally far superior credit rating for that of the charter school, resulting in a lower interest rate and reduced debt service payments.
- Seventy-seven Colorado charter school transactions representing over $1 billion of par issuance have been credit enhanced with the state’s moral obligation pledge. Based on our cost savings methodology (see State Bond Credit Enhancement section), we estimate that Colorado’s moral obligation program has saved participating schools more than $130 million in debt service expense—a savings of 12%.
- Thirty-one charter school bond offerings have utilized Utah’s moral obligation pledge as additional security for more than $525 million in par issuance. We estimate that Utah’s moral obligation program has saved participating schools more than $103 million in debt service expense—an estimated savings of more than 19%.
- More than $4 billion in par issuance (71 issues) has been enhanced through the Texas PSF since the first PSF-guaranteed issuance in 2014. Based on our cost savings methodology, the Texas PSF has saved participating charter schools more than $770 million in debt service expense—an estimated savings of 19%.
- In Arizona, 12 transactions totaling more than $275 million in original par issuance have received credit enhancement through the Arizona Public School Credit Enhancement Program. Arizona’s program is saving schools an estimated $39 million in bond debt service over the life of the bonds—an estimated savings of 14%.
- Idaho’s credit enhancement program is the newest state bond credit enhancement program and has already had a pronounced impact on the rating distribution and associated cost of capital for Idaho charter schools. As of December 31, 2022, ten schools issued bonds totaling approximately $93 million with enhanced ratings in the single-A or double-A category. These were the first enhanced offerings in the state since before the 2008 credit crisis. Based on our cost savings methodology, Idaho’s credit enhancement program will save participating charter schools more than 25% in debt service expense over the life of the bonds.
- These five state programs have reduced borrowing costs on more than $6 billion of charter school bond issuance (201 transactions). Based on issuance through year-end 2022, we estimate that these programs will save over $1 billion in debt service costs for public charter schools.
- With no known defaults or draws on the debt service reserve funds among enhanced transactions in any state, these programs are a cost-effective mechanism to reduce the cost of capital for charter schools without straining state balance sheets.
