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Arizona Charter School Closures With Bond Debt as a Contributing FactorSummary prepared for Senator Pace & Senator BowieNovember 18, 2019The following summary is derived from the Grand Canyon Institute’s (GCI) metadata on Arizona charter schools regarding bond debt and school closures. The data directly demonstrates that academically performing charters can and do fail because of financial issues. GCI has found that these charters have become overleveraged on their debt. To date, no clear indicator to identify schools likely to close during the school year has been developed. This is in part because of the complicated nature of IDA bond payments which may be deferred or interest only payments during the first few years the bond is in repayment. GCI will investigate any future midyear closures in an effort to understand contributing circumstances. GCI recommends continued monitoring of the Charter Board’s Performance Dashboard to identify those charters that show signs of financial distress so that proactive measures can be taken to prevent midyear closures if at all possible. Key facts about Arizona’s charter sector:In FY2019, 579 charter sites were operated by 240 charter corporations in Arizona.From FY2012 – FY2019:21 charters were placed on probation by the Charter Board. 43 charter school sites closed. Since 1994, 436 charters have closed. Of this total, 83 (19%) have closed during the school year. The Arizona Association for Charter Schools’ assertion that the largest amount of closures occurred during the first 10 years of charter schools is correct. Importantly, the rate of closures and probationary actions has been accelerating since 2012 Bond debt counts against Net Assets at Arizona charters as they represent a liability190500216217500Grand Canyon Institute evaluated Arizona’s 23940 charter corporations (this does not include university-based corporations). These corporations controlled 436 charters and 590 sites at the end of FY 2018. The average bond debt held by Arizona charters was $11,145 per ADM in FY 2018. As a comparison average bond debt per ADM at Arizona’s school districts was $5,341 per ADM during FY 2018. Source: Collated Data on Bond Debt (2018 audits) divided by charter ADM for FY 2018 analyzed and sorted by Grand Canyon InstituteNet assets held by Arizona charter schools have continued to decline over the past 5 years. In other words, debt payments are consuming the financial resources of Arizona’s charter sector This trend has led to a higher amount (112 in FY 2018 compared to 49 in FY 2014) of charter sites receiving red marks against their financial performance (i.e. does not meet) on the Charter Board’s Financial Dashboard. Charters are businesses. In business, financial distress shows up first in liquidity and cash flow issues when a business is having financial difficulties. The charter market is showing this type of financial distress. Declining net assets reflect the liabilities (debts and commitments) of this market.Source: Collated data on Net Assets from FY 2014-FY 2018 audits. Collation done by Grand Canyon InstituteSummative Bond Debt is growingSummative BOND DEBT is growing at Arizona charter schools. Growth in charter revenues and expenditures is being outpaced by the debt and required one-year lease payments on long-term leases. While charter revenues have grown by 36.69% over five years, expenditures have grown by 38.92%. Bond Debt has grown by 56.9%. Expenditures and debt are outpacing revenue growth. At the end of FY 2018 the charter market has had four less charter corporations than it did in 2016. In spite of this drop in corporate ownership the overall number of charters (including openings and closures) was 436 at the end of 2018. At the end of FY 2014 the number of charters was 407. This represents a 5-year net gain of 29 charters. There were 590 individual charter sites at the end of FY 2018 compared to 541 sites in FY 2014. This is a net gain of 49 sites. The majority of the charter and site increases went to the top 10 charter corporations. Where did this growth in charters, sites and ADM go? FY 2017, 31 new charters were added by the top 10 charter corporations at 84 new sites. Debt at those companies, as one would suspect, is growing at a faster rate than the market as a whole. In FY 2014 these top ten 10 charter corporations held $380,566,449 (28.47%) of total charter bond debt of $1,336,920,497 that year or 28.47% of all charter debt. In FY 2018, those ten 10 firms held $1,148,811,786 (54.77%) of total charter debt of compared to the $2,097,610,620 in debt held by the entire charter sector. that year or 54.77% of all charter debt.In FY 2014, tThose ten 10 corporations controlled had ADM of 34,358.831 ADM in FY 2014 or (22.89%) of the charter market compared to the sector’s total ADM of of 150,120.2 ADM. In FY 2018 those same 10 corporations controlled had ADM of 62,033.932 ADM or (32.96%) compared to the charter sector’s total ADM of of the charter market of 188,229.11 ADM.Data from the Charter Board’s Financial Performance Dashboard indicates that increasing numbers of charter schools are scoring “Does not Meet” in one or more area and increased numbers are falling FAR BELOW on the standards. One reason for this is that new ADM is being captured by the top 10 charter corporations leaving 230 corporations sharing the remaining growth.A graph illustrating this trend in ADM growth and bond debt growth over the past five years is provided on the next page.-63500Source: Annual AZDOE Superintendent’s Annual Report data on ADM and Audit data on lLong-t Term bBond dDebt collated by top ten 10 charter ADM gaining schools for FY 2014 – FY 2018 by Grand Canyon Institute. Note: This graph does not include one- year, long-term lease of commitments to Long Term Leases which are illustrated in another graph in this report.Annual Net Losses and overall Net (Deficits) raise Red FlagsGCI notes that NET LOSSES are allowed at Arizona’s charter schools, like in any business there are years when the corporations loses money. GCI’s research has found that: Net losses greater than $500 per student are unsustainable. Net deficits greater than $400 per student are a sign that the charter is underwater on its debt and struggling with that debt. Net gains in excess of $1000 per student are indicative of profiteering in the market. Online schools account for most of the charters in this category.EOY NET LOSS > $500 / ADMEOY NET (DEFICITS) >$400 / ADMNet Gain >$1000 per ADMFY201464.0097.0029.00FY201574.00113.0057.00FY201649.00113.0044.00FY2017115.00133.0044.00FY2018139.00147.0027.00EOY NET LOSS > $500 / ADMEOY NET (DEFICITS) >$400 / ADMNet Gain >$1000 per ADMFY201464.0097.0029.00FY201574.00113.0057.00FY201649.00113.0044.00FY2017115.00133.0044.00FY2018139.00147.0027.00EOY NET LOSS > $500 / ADMEOY NET (DEFICITS) >$400 / ADMNet Gain >$1000 per ADMProfiteeringFiscal Year 201467.0094.0031.00Fiscal Year 201561.00117.0059.00Fiscal Year 201647.00116.0054.00Fiscal Year 2017100.00121.0047.00Fiscal Year 201898.00122.0046.00 Source: Collated data on NETS and nNet aAssets or nNet (dDeficits) at AZ cCharters for FY 2014 – FY 2018 evaluated by the standard noted at the top of each section (GCI generated red flags based on analysis of multiple years of data on these factors and compared to ASBCS Financial Performance rankings)Consolidation of Charter ADMGCI’s research has found that a consolidation of enrollment in the charter market ADM among at 30 corporations is causing smaller charters with overleveraged debt to fail when expected their anticipated new ADM does not materialize. Between FY 2014 and FY 2018 these 30 top charter corporations captured 36,791.76 of a total of 38,108.9 new ADM at Arizona’s charter schools or 96.43% of all new charter students. This group controlled 92,599.66 ADM at the end of FY 2018 or 49.2% of the entire charter student ADM. There were 128 charter corporations that LOST ADM between FY 2014 and FY 2018. Those corporations had debt premised on increased ADM. The results show up in increased “Does Not Meet” scores on the ASBCS financial performance standards.Data from the Charter Board’s Performance Dashboard indicates that increasing numbers of charter schools are scoring “Does not Meet” in one or more area and an increased numbers are falling FAR BELOW on the standards.By the Numbers:Graph based on total ADM growth at charters from FY 2014 – FY 2018 of 38,108.9 New ADM at AZ ChartersNote: The top 10 charters in ADM growth referenced earlier gained 27,675.1 ADM or 72.62% of all charter ADM growth in this market.Overleveraged Charters There were 90 charter corporations that GCI considered to be over-extended in FY 2018. Those corporations control 213 charters and 308 sites. The entire charter market consisted of 239 240 corporations that controlled 436 charters and 590 separate sites in FY 2018. The following graph depicts the bond debt loads per ADM that is at issue at these corporations. There are currently four LESS charter corporations than there were in FY 2014. The charter marketplace is consolidating around the largest charter corporations.Academic and Financial Performance Do Not Always CorrelateGCI has analyzed the Financial Performance data to assess the correlation between academic scores and financial scores.Those findings are presented in the table below.Charter Performance Based on Charter Board Dashboard FY2017 FY2018 Positive MatchASBCS Academics Meets Standards and Financials Meet Standards set by ASBCS204134Negative MatchAcademics Do Not Meet and ASBCS Standards and Financials Do Not Meet ASBCS Financial Recommendations 4158Match with IssuesASBCS Academics and Financials Meet Financial Issues Identified122179ASBCS Academic and Financial Results are Polar Opposites202197Comments: GCI uses the Academic Grades assigned by ADE and posted by the Charter Board. These results are were then posted next to the Charter Board Financial Performance Scores for the same year in GCI’s data base. GCI counted a C or an NR Meets as Passing Grades. The correlations made are identified in the table to the left. Academic grades: Grades of A, B, C or NR Meets are counted as PASSING. Grades of D or F or NR DOES NOT MEET are considered NOT PASSING.Financials and Academics that Match Positively I.e. A, B, C and NR and Passes with ALL MEETS on the ASBCS Financials. Financials and Academics that Match Negatively, I.e. D, F and NR and Does not Pass with DOES NOT MEET as a Financial. Academic and Financials Match but there are financials that indicate an area of concern, i.e. Going Concern, Cash Flow, Liquidity, FCCR, Net Income. Academic Results are the Polar Opposite of the Financial Results.Why aren’t reports on charter school IDA debt produced and publicly available? For this data sheet Grand Canyon Institute evaluated ‘debt per ADM’. This phrase is used when discussing school district debt by the General Accounting Office. Grand Canyon Institute considers this to be an effective way of identifying whether an entity has a debt issue. The debt limitations cited below keep school districts from accumulating more debt than they, or taxpayers, can afford and keep more money flowing to classrooms rather than to servicing debt. “Class B general obligation bonds are subject to a lower debt limitation. Elementary schools and high schools are subject to a debt limitation of 10% of ad valorem valuation or $1,500 per student based on average daily membership (ADM), whichever is greater. Unified school districts have a limit of 20% or $1,500 per student based on average daily membership, whichever is greater. Class B debt limits were increased pursuant to HB 2003 (Laws 2013, Chapter 3).Of the 239 school districts that reported, 58 had no bonded debt in FY2018. The remaining 181 school districts had outstanding debt of a total of $4.9 billion, the same as reported in FY2017”:Source: 2018 report of Bonded Indebtedness from the State Comptroller December 2018Answer to question posited aboveregarding why this data is no longer publicly availableSignificanceSignificant Date: In FY 2006, the Annual Government Account Office State Bond Indebtedness Report stopped including charter ADM debt. The requirement for reporting IDA debt at charters was cancelled by legislative action (Senate Bill #1162 2006 session). The final year of reporting (FY 2004) showed $41,610,000 of charter bonded indebtedness. This debt has now reached $2,097,610,620 and represents what GCI considers a “red flag” in the data on Arizona’s charter schools and their sustainability as viable businesses. GCI also shares the same concerns regarding IDA debt that were pointed out in a paper produced by the Goldwater Institute regarding IDA debt and AZ Municipalities by Mark Flatten. See: HYPERLINK "" ’s data set is the only known repository of all of Arizona Charter’s bond debt statistics as IDA reports its loans by IDA Agency. The bulk of IDA funding is sourced out of Pima County. The bonds are typically “non-investment grade”. GCI believes that some of these bond issues are now in the derivative markets with many of the players involved in the mortgage crisis and market failures of FY 2006 and FY 2007. See Also HYPERLINK "" \l "6f9990932be8" you for your attention to this important issue. ................
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