S&P affirms Texas charter schools’ rating in wake of conservatorship

S&P Global Ratings affirmed its A-minus underlying rating and negative outlook for Texas-based IDEA Public Schools, while warning of potential governance risk associated with the state’s appointment of conservators that could lead to a downgrade.

Under a settlement agreement announced earlier this month with the Texas Education Agency (TEA), two conservators will oversee and direct IDEA’s actions, facilitate a needs assessment, conduct onsite inspections, and help create a corrective action plan.  TEA had been investigating IDEA (Individuals Dedicated to Excellence and Achievement) since 2021 for alleged financial and operational improprieties.

“The negative outlook reflects the continued turnover in certain key management positions, as well as our opinion that the assignment of two conservators to monitor IDEA following the recent conclusion of the Texas Education Agency investigation introduces additional oversight and potential governance risk,” S&P analyst Brian Marshall said in a statement Friday.

The rating agency said it could downgrade the rating “following any actions taken by conservators that result in material adverse effects relative to IDEA’s governance, charter standing, or finances.” 

“We could also consider a negative rating if liquidity weakens, operations are pressured, enrollment trends soften, or IDEA issues significant additional debt resulting in metrics no longer consistent with the rating level,” it added. 

An outlook revision to stable could occur if IDEA exits the conservatorship and maintains steady demand and financial performance “with a strengthened liquidity position and management of additional debt plans to support metrics consistent with the current profile,” according to S&P.

The rating agency noted IDEA’s healthy enrollment growth over the past 10 years, along with historically positive operating margins and consistently favorable student test scores were partially offset by its moderately high debt burden, “only satisfactory liquidity,” and the risk of charter revocation. 

The Weslaco, Texas-based nonprofit, which was formed in 2000, serves about 80,000 students at 143 schools under a charter granted by the Texas State Board of Education effective until July 2025, according to its latest financial report.

IDEA has $1.112 billion of revenue bonds issued between 2010 and 2022 outstanding, with $908.4 million of the debt guaranteed by the triple-A-rated Texas Permanent School Fund, according to TEA data. 

The charter school system also entered into an agreement with the U.S. Department of Education under which it will return $28.7 million in grant and formula funding. 

S&P said the payment is spread out over three years and is expected to have limited impact on IDEA’s financial metrics “given its sizable operating base.”