Fitch Affirms Enterprise Charter School (NY) Revs at 'B'; Outlook Revised to Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'B' rating on approximately $6.9 million of series 2011A revenue bonds issued by the Erie County Industrial Development Agency on behalf of Enterprise Charter School, NY (ECS, or the school).
The Rating Outlook is revised to Stable from Positive.
The bonds are secured by a pledge of the gross revenues of ECS, a first mortgage lien on the school's facilities, assignment of rents and leases receivable, and a cash-funded debt service reserve fund sized to maximum annual debt service (MADS).
KEY RATING DRIVERS
ABBREVIATED CHARTER TERM: The 'B' rating reflects ECS' abbreviated three-year charter renewal term that was recently approved by the state board of regents in April 2016. The charter term is being extended from July 1, 2016 to June 30, 2019 (following a two-year term in July 2014). These very limited renewal periods are driven by poor academic performance, and compare unfavorably to the maximum renewal period of five years in New York State, and currently constrains the rating.
ACADEMIC CHALLENGES: The Outlook revision to Stable from Positive reflects the school's failure to sustain academic improvement over the past year as anticipated by Fitch. Conversely, academic performance at ECS weakened in 2014-2015, with students failing to demonstrate measurable progress in math and English language arts (ELA) testing. New York State charter renewal standards are weighted heavily toward academic performance which could be a concern on or before the next charter renewal in June 2019, without implementation of a sustainable academic correction plan and annually demonstrated progress.
BALANCED OPERATIONS: ECS' consistently full and stable enrollment has driven its track record of operating surpluses (albeit based on a small revenue base), relatively sound liquidity levels, and solid debt service coverage from current operations. Further benefiting the school's financial performance is improved state per pupil funding which increased slightly in fiscal 2016, with another modest increase anticipated for fiscal 2017.
HIGH, BUT MANAGEABLE DEBT BURDEN: MADS comprised a high 10.6% of fiscal 2015 operating revenues but was covered by a solid 2.0x by net income available for debt service. ECS' ratio of debt outstanding to net income available for debt service was 5.8x in fiscal 2015, which compares favorably to many other charter schools rated by Fitch. Moreover, the school has no identified capital needs or additional debt plans.
ADACEMIC IMPROVEMENT: Enterprise Charter School's completion of a corrective action plan and demonstrated improvement in student academic performance could yield upward rating movement. Conversely, the continued weakening of academic performance could result in downward rating pressure.
STANDARD SECTOR CONCERNS: A limited financial cushion; substantial reliance on enrollment-driven, per-pupil funding; high debt burden and charter renewal risk are credit concerns typically common among all charter schools that, if pressured, could negatively impact the rating.
Enterprise Charter School opened in 2003 in the city of Buffalo, NY. It currently serves 405 students in grades K-8, with about 140 students presently wait-listed for the 2016-2017 academic year. ECS is authorized by Buffalo Public Schools (BPS) and has had its charter renewed five times to date, albeit with varying durations. Its current charter expires on June 30, 2019.
ECS' management is in transition as the former head of school left in November 2015, after being in the position one and half years, following the replacement of the former CEO who had left after six months. An interim Head of School joined ECS in December 2015 and has taken the lead in the development of an organizational restructuring aimed at providing more student and faculty support. A search is underway for a permanent replacement, which is expected by July 2016.
ECS is in the process of hiring a state approved consultant to help with a corrective action plan aimed at improving academic proficiency levels which is required for a school with priority status such as ECS. BPS will help to monitor the action plan once it is put in place. At this time, neither ECS nor BPS are certain what the plan will look like and if the plan will include any conditions/benchmarks for the next charter renewal in 2019.
LIMITED CHARTER AND ACADEMICS CONSTRAINS RATING
ECS recently received its fifth charter renewal in April 2016 for an abbreviated term of three-years. This follows a shorter-term two-year charter renewal in July 2014, after a very short one-year renewal in July 2013. Fitch considers these as very limited periods for a charter renewal and believes it presents significant credit risk, constraining the rating. The Stable Outlook reflects the fact that, while still for only a three-year term, ECS did receive its fifth charter renewal in 2016 and the school's proficiency levels and test scores are expected to improve in 2015-2016 under new leadership after weakening in 2014-2015, according to management.
For the 2013-2014 school year, ECS' student academic performance improved as demonstrated by good growth in math and English language arts (ELA) per New York State Assessment testing. ECS showed the most growth in ELA proficiency levels from 7% to 17% which exceeded BPS proficiency levels of 12% but continued to lag the state level (31%). The school demonstrated some growth in math proficiency as well, from 9% to 12%, on par with BPS but below state levels (36%). However, for the 2014-2015 school year, ECS failed to sustain academic progress. Proficiency levels in both math and ELA dropped significantly to 5% and 10%, respectively, which is below BPS levels (15% and 12%) and state levels (38% and 31%).
Under the Interim Head of School, improvement in 2015-2016 academic proficiency levels is expected due to various corrective measures already taken by ECS over the past year to reduce faculty/staff turnover. Corrective measures are aimed at providing professional development and support, such as adding a math interventionist and full-time curriculum specialist. However, results for the 2015-2016 academic assessments taken in April 2016 are not expected to be available until August 2016. Nonetheless, ECS' authorizer reported to Fitch that the current leadership has sufficiently demonstrated several corrective actions that should improve ECS' academic performance. This was the primary driver of BPS' recommendation for a three-year charter renewal.
ENROLLMENT STABILITY SUPPORTS OPERATIONS
ECS is a small school but enrollment has remained very stable. Enrollment for the current 2015-2016 school year is near full capacity, with 405 students enrolled in kindergarten through eighth grade as of March 31, 2016. This was up slightly from 398 students at the same time last year. The school generally operates at or close to its full capacity of 405 students. ECS also maintains a robust waiting list, with 250 children (62% of existing enrollment) presently wait-listed for the current 2015-2016 school year. At present, 140 students are wait-listed for the upcoming 2016-2017 school year.
HEALTHY FINANCIAL PROFILE
Typical of charter schools, state per pupil funding makes up the majority of ECS' revenue base. Per pupil funding made up about 84% of fiscal 2015 revenue, in line with prior years, which has improved slightly in recent years. Per pupil funding increased about 0.8% to $12,355 per student in fiscal 2016, following a 2.1% to $12,255 per student in fiscal 2015. Management anticipates funding to increase another 1.2% or $150 per student for fiscal 2017. Fitch rates New York State GOs 'AA+'/Outlook Stable (July 2015).
ECS has generated positive operating margins for the past several years, albeit based on a small revenue base ($5.8 million in fiscal 2015), so surpluses are modest ($318,000). The operating margin was a solid 5.5% in fiscal 2015, though was below the 10.7% average of the prior four fiscal years (2011-2014). According to school management, fiscal 2016 results should be similar to the fiscal 2015 level due partly to enrollment stability and a state per pupil funding increase.
ECS' balance sheet resources are limited, which is typical of the sector. However, the school's liquidity metrics compare favorably to most other Fitch-rated schools and provide an adequate financial cushion, especially at the current rating level. As of June 30, 2015, available funds (unrestricted cash) totaled $4.4 million, up from $3.9 million the prior year. Available funds covered fiscal 2015 expenses ($5.5 million) and outstanding debt ($7.1 million at June 30, 2015) by an adequate 80.6% and 63.2%, respectively. Fitch expects ECS' financial cushion to remain stable due to its track record of operating surpluses; stable enrollment; and lack of additional debt or capital needs, but notes the importance of maintaining liquidity at current levels due to its small revenue base and high reliance on enrollment-driven per pupil funding.
The fixed-rate series 2011A bonds ($6.9 million currently outstanding) amortize over 30 years with level debt service through final maturity in 2040. The bonds are the school's only outstanding debt. MADS of approximately $616,000 represented a high 10.6% of fiscal 2015 revenues ($5.8 million), which was in line with prior years and better than many other charter schools rated by Fitch. The high burden is partially offset by ECS' ability to cover MADS from current operations. MADS coverage has been solid, ranging from 1.9x-2.7x since fiscal 2011; 2.0x in fiscal 2015. Pro forma debt to net available income was a moderate 5.8x, which is also better than many other Fitch-rated charter schools.