(March 27): Municipal bonds issued for riskier projects like charter schools and small colleges may break a 12-year record for distress as pandemic aid dries up and inflation raises the cost of labour and supplies.

So far this year, 46 borrowers have become impaired, meaning they have defaulted on their debt, used reserves to make payments or missed financial metrics required by bondholders, according to Municipal Market Analytics (MMA). Last year, the independent research firm tallied 47 impairments in the first quarter, the most since 2012.

Much of the stress has come in the form of borrowers missing targets for debt-service coverage or the amount of cash on hand. Charter schools, which are privately run but taxpayer funded, are showing the most strain, with 15 impairments. Last year, a record 45 charter schools reported distress, according to MMA.

Like traditional public schools, charter schools receive per-pupil funding from states. However, most charter schools don’t receive local tax funding for facilities and can’t levy taxes, making it more difficult for them to cope with inflation that has raised the cost of everything from teachers to lunches.

“Inflation has hit schools just like it has hit everyone else and charters have no way to make it up,” said Starlee Coleman, the president and chief executive officer of the National Alliance for Public Charter Schools. “Schools are hustling to pay their bills right now.”

In addition, falling US birthrates, which reached a record low in 2023, means fewer kids in school. Charter schools located in communities with declining populations face pressure to consolidate, Coleman said.

Charter schools reporting financial strain tend to operate independently and not part of large national networks like KIPP Public Schools or National Heritage Academies, said Lisa Washburn, a managing director at MMA. These school can’t take advantage of economies of scale, where costs can be spread out over a larger number of facilities.

“If you’ve got a school thats under 400 kids, it’s hard to absorb increases in expenses if you started getting used to that increase in revenue from (pandemic aid) and you started paying teachers more,” Washburn said. “If you have scale, you’re able to absorb increases in costs.”

In February, Tyler, Texas-based Cumberland Academy had its already junk credit ratings placed on review for downgrade by Moody’s Ratings after it missed its target ratio of cash-to-debt service. Cumberland, which has four schools with 2,050 students, reported a debt service coverage ratio of 0.81, falling short of its 1.0 target in fiscal 2024.

Financial pressure on charter and traditional public schools in Texas is building amid a battle in the state legislature over school vouchers. Lawmakers haven’t increased public education funding since 2019.

“This school got a little bit behind the eight ball,” said Moody’s analyst Alex Rawlings. “They weren’t making those proactive adjustments.”

Cumberland Academy, with almost US$75 million in municipal debt, hired a consultant to improve operations. Superintendent Charles Pulliam didn’t respond to a phone call and email seeking comment.

Colleges, also struggling with inflationary pressures and the roll-off of Covid-era stimulus dollars, recorded five impairments. Higher-education institutions are also facing a dwindling pool of students due to the declining birth rate.

Earlier this month, the trustee for Ohio Dominican University bondholders needed to tap a debt service reserve fund to make a bond payment due in March. The Roman Catholic institution in Columbus, Ohio, has about 1,200 students.

In contrast, the outlook for senior living, which was battered by the pandemic, is improving. Only four communities reported impairments so far this year, according to MMA. Occupancy has finally surpassed pre-pandemic levels as the senior population grows and new construction slows to the lowest level since 2014, according to the National Investment Center for Seniors Housing & Care (NIC).

Residency at assisted and independent-living facilities rose to 87.2% in the fourth quarter of 2024 from 86.5% in the third quarter, according to NIC.

Uploaded by Siow Chen Ming