Moody’s shortchanges investors

We know this much: Moody’s investment analysts don’t care much for parental choice, but they care a lot about the credit-worthiness of school districts. A Moody’s report released this week shows that as charter schools gain public school market share in cities such as Detroit, Philadelphia, St. Louis, and Washington, D.C., they’re putting financial stress on their local school systems, which have ended up with negative credit prospects due to the students they’ve lost. “Charter schools can pull students and revenues away from districts faster than the districts can reduce their costs,” the investor service reports.

Moody’s has its sights set on cities where more than a fifth of public school students are enrolled in charters. Its analysis, however, has several weaknesses and flimsy assumptions. The first has already been handily countered by Nina Rees of the National Alliance for Public Charter Schools, who correctly notes that cities such as Detroit and Philadelphia were distressed long before charters enrolled a significant share of public school students. Charters may not have made their job easier, but these school systems have been creeping toward insolvency and negative credit ratings on their own just fine.

More troubling is the underlying message from this reputable and ubiquitous credit-rating agency: It tells policymakers that their interest in charters and other alternative measures of public schooling has severe consequences. Moreover, it assumes the only way for districts to deal with growing charter enrollments is to get or maintain higher revenues (the better to repay their bonds).

But, as Rees notes, there are eighteen other urban school systems that Moody’s didn’t include but are doing just fine financially, even though they also have at least 20 percent of their student populations in charters. What are they doing right? How are they maintaining their high credit ratings? Moody’s doesn’t say.

But what we can say is that many major school systems have dealt with the charter threat by implementing their own innovations—adopting more policies for open enrollment, opening schools within schools, providing more options such as International Baccalaureate, and administering more online-learning options—all within the new normal. Moody’s says that fixed costs and the “intricacies of collective bargaining contracts” have exacerbated the threat charters pose, but some districts have made certain tradeoffs—such as launching more choice programs but limiting transportation to them—and have even reached out to charters to identify academic- and capital-improvement opportunities that benefit each sector.

Furthermore, Moody’s paid no attention to the credit-worthiness of the burgeoning charter sector. The overall financial condition of the charter sector is sound, say analysts with the Local Initiatives Support Corporation. This is especially true of high-performing charter schools, which are turning more and more to municipal bond markets to finance their building projects. If charters are capturing a greater share of the public school market in the cities highlighted by Moody’s and are showing a stronger ability to repay their bonds, isn’t that a good thing?

Maybe Moody’s analysts would have considered these questions if they had to send their own children to Detroit Public Schools. They might have given investors something more to study.

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