October 15, 2013 / 5:13 PM / in 4 years

Charter schools could hurt U.S. city school districts-Moody's

WASHINGTON, Oct 15 (Reuters) - The widening reach of charter schools across the United States is raising red flags for credit rating agencies about the financial support of urban public school districts.

“Charter schools are now significant competitors for public...school districts, particularly in older core cities, where they have achieved substantial, double-digit growth in enrollment,” said Moody’s Investors Service in a special report on Tuesday.

“While the vast majority of traditional public districts are managing through the rise of charter schools without a negative credit impact, a small but growing number face financial stress due to the movement of students to charters,” it added.

In August, another major credit agency, Standard & Poor’s Ratings Service warned the rise of charter schools could pose credit risks to districts, too.

Most states - 42 out of 50 - have charter schools, publicly financed institutions operating independently of districts and frequently run by corporations. According to Moody‘s, one in 20 U.S. students attends a charter school, so called because it is granted a charter to provide alternative education to standard public schools.

But in 11 major cities, the percentage is much larger, “making charter schools a predominantly urban phenomenon,” Moody’s said.

In the New Orleans Public School System, nearly 80 percent of students attend a charter institution, according to Moody‘s. For Washington, D.C. and Detroit the portion is 40 percent.

In Albany City School District, Cleveland Metropolitan School District, San Antonio Independent School District and St. Louis Public Schools more than 20 percent of students attend charter schools.

Property tax revenues provide the bulk of school funding. But with the bursting of the housing bubble and financial crises hitting cities, state aid to school districts became increasing vital. States often determine funding using student populations.

Lower funding for public schools could damage their quality, and in turn push more students into charters, Moody’s said.

In Detroit, enrollment in public schools fell 58 percent between 2002 and 2012. While the city’s overall population decline contributed to the fall, many students also left for charters. In 2012, Detroit public schools received $495 million in state aid, compared to $1.2 billion in 2002, Moody’s said.

For Philadelphia, where education funding problems have grabbed national headlines, the transfer into charter schools has been swift, with charter enrollment nearly doubling in four years. The school district could not cut costs quickly enough to counterbalance the plunge in funds, Moody’s said.

President Barack Obama believes charters can improve U.S. public education. Last month, his administration awarded $2.8 million in grants for expanding charter schools.

Still, another major rating agency, Fitch Ratings, is concerned the schools are financially shaky. It cut 23 charter schools’ ratings this spring, finding their “operating history and financial and debt profile are generally speculative grade.”

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