Social vulnerability and incompetent governance are becoming increasingly significant factors in the municipal investment calculus. In a previous blog post on Maricopa County’s Glendale Elementary School District 40, we touched on the concept of municipal vulnerability. The Glendale Elementary School District appeared more vulnerable than its encompassing county given declining student enrollment in recent years, despite strong population growth in Maricopa.
There are many different flavors of municipal vulnerability. Although 7 out of 8 of the charter schools obligated in this upcoming debt offering have displayed strong student enrollment growth in recent years, the Florida charter school industry appears to exhibit increasing vulnerability due to discontent amongst public school teachers and years of charter school mismanagement. Mixing in a healthy dose of climate risk – which is rarely, if ever, disclosed – and municipal vulnerability can quickly snowball into credit impairment. For a good summary of this, you only need look at our joint analysis with our good friends at MMA to see where climate risk, financial impairment and charter schools come together. The 42 charter school issuers designated as having suffered a financial impairment have a tangibly higher climate risk than the 300 or so who have stayed financially stable.
This year’s climate risk non-disclosure April Fools award goes to:
Capital Trust Agency, Senior Revenue Bonds, Series 2021 — Educational Growth Fund, LLC Charter School Portfolio Projects
Educational Growth Fund (EGF) is the borrower in this transaction. The proceeds of the offering will finance the cost of acquiring eight properties and the buildings located in Florida that are currently leased for the operation of public charter schools. The obligations will be secured by a pledge of EGF’s gross revenues and mortgage liens on and security interests in the real property, improvements and equipment owned by EGF.
The eight obligated charter schools are:
- Avant Garde in Hollywood FL (Broward County) – risQ Score 4.5
- Bell Creek Academy in Riverview FL (Hillsborough County) – risQ Score 3.9
- BridgePrep Academy of Duval in Jacksonville FL (Duval County) – risQ Score 3.1
- BridgePrep Academy of Riverview in Riverview FL (Hillsborough County) – risQ Score 4.0
- Everglades Preparatory Academy in Homestead FL (Miami-Dade County) – risQ Score 4.9
- Hillsborough Academy of Math and Science in Tampa FL (Hillsborough County) – risQ Score 4.0
- Navigator Academy of Leadership in Valrico FL (Hillsborough County) – risQ Score 3.9
- Orange County Preparatory Academy in Orlando FL (Orange County) – risQ Score 3.0
The managers of EGF have decades experience in the charter school and educational real estate finance sectors, and one of the founding members of EGF is a champion for social and environmental impact investing within the municipal educational sector (read: The Bond Buyer: Why social bonds are key to driving more investment in education).
Curious, then, that the disclosure of climate risk in the preliminary OS leaves much to the imagination. The Climate Change section is pure boilerplate copy + paste, and the preceding Risks Related to Natural Disasters provides useless and generalized statements regarding the availability of property & casualty insurance in the State of Florida. There is not a shred of valuable information in either of these two sections of risk disclosure — this is merely disclosure fluff. As we know well already, most Florida municipalities and obligors are long on climate exposure but egregiously short on climate disclosure.
EGF’s two most southern schools, Avant Garde Academy (risQ Score 4.5) in Broward and Everglades Preparatory Academy (risQ Score 4.5) in Miami-Dade, will experience the most severe economic impacts from flooding events over the coming decade. Avant Garde is the second risQiest of the 8 EGF charter schools, and the most lucrative. The Hollywood-based school is #1 out of EGF schools both in terms of enrollment (26% of total 2020-2021 EGF student population) and annual revenue (24% of total FY 2020 EGF revenue). Everglades is #4 and #3 in terms of enrollment and annual revenue during the same time period, respectively.
The other 6 EGF schools have 30-50% of the GDP impairment and property VaR as Avant Garde and Everglades by 2030; however, all charter school entities rank above 90th percentile across the national charter school cohort in terms of those two risk metrics.
Some quick insights can also be drawn from the residential demographic data available in the UI for each school and the system overall. The aforementioned Avant Garde campus serves a population with 18% below the poverty line, which in the highest 20% of charter schools nationally, and with the lowest median household income of all eight schools in the system. It also has the highest inequality at 0.44 Gini index, also in the highest 20% nationally. As the system’s biggest revenue generator, this provides some ESG boost. On the flipside, the Everglades Preparatory campus, also higher in revenue and enrollment, serves a much more affluent area, with only 10% of the population below the poverty line and a median household income a full 42% higher than Avant Garde. Tellingly for both, they’re each in the worst 7% nationally in terms of stressed renters in their respective catchment areas, with Avant Garde having an eyepopping 47% of local renters classified as stressed (i.e. > 40% rent-to-income). This is a problem not just for the potential students, but even more so for trying to attract teachers to work there and live within a reasonable distance.
The number of charter schools operating in Florida has grown modestly in recent years, from 652 in 2015 to 673 in 2020 (~3%), but student enrollment has skyrocketed. During the same 2015-2020 time period, FL charter school student enrollment has increased from around 270k in 2015 to almost 330k in 2020, a 22% increase in student population. Enrollment is far outpacing capacity, and the FL charter school system is feeling the stress. According to the Florida Education Association (FEA), more than 2,440 teaching positions in Florida remained unfilled at the beginning of 2020, a 10% increase from one year prior (source: FEA: Teacher and Staff Shortage). Increased demand for Florida real estate has driven up property values and cost of living, pricing many teachers out of the housing market within areas that are in close proximity to charter schools. Florida ranks 46th nationally for teacher salaries, according to FEA. In the summer of 2020, Governor Desantis signed into law an increase of Florida’s minimum salary for public school teachers to $47,500 from $37,600, however veteran teachers were not included in the salary plan (source: Florida Promised Teacher Pay Raises – It’s Not Working out for Everyone, December 2020). If you want to find stressed renters, you might start with the teaching population.
Proper oversight of Florida charter schools has also been heavily criticized. Florida charter school laws received a rating of “very poor” (one level above “abysmal) and a grade of F in a report card issued by the National Education Association (NEA) in mid-2019. NEA found that FL charter school laws fell short of protecting students and risked leaving taxpayers on the hook for fraud and waste (source: Florida Charter Schools Lack Proper Oversight).
Poor teacher salaries and poor oversight. FL charter schools appear to rank low from a Social and Governance standpoint. And, for the Educational Growth Fund, its Environmental component isn’t any less dire, and its a bit of mixed bag in terms of its own specific Social characteristics.
We’ve all heard this popular aphorism: a rising tide lifts all boats. In this case, poor treatment of teachers and poor oversight will surely sink many charter school ‘boats’ in Florida, and the rising tides may only accelerate sinkings. Undisclosed climate risks — in particular, coastal flood and storm surge — will only exacerbate the vulnerability factor for EGF schools. As properties in risQy locations cease to remain inhabitable, properties further inland and at higher elevation could appreciate in value and further price school teachers out of the housing market.
Folsom Ranch Financing Authority – Folsom CFD No. 21, CA (risQ Score 3.9; Wildfire risQ Score 4.8)
Worth paying attention to in general, as this CFD has 98th percentile wildfire risQ within just the California CFD cohort. That’s really high risQ in the highest wildfire risQ cohort there is. That said, on page 75-76, the OS does about the best job we’ve seen of discussing specific measures to mitigate wildfire risQ. They add to that in pages 36-37 of the appraisal document in Appendix G where a section on Fire Hazard is laid out. This issuer could teach a lot of the California municipal bond issuing universe a thing or two about specificity of action, and we include the largest, most resourced issuers all the way up to the state of California itself in making that statement. We would quibble with a “portion” of the district being in “a moderate fire severity zone”. The outside resource referenced and relying upon it is akin to relying on FEMA flood plain data in a Texas MUD’s OS…its worse than that generic data would lead you to believe. Make no mistake, this CFD has really high wildfire risQ, but credit where credit’s due on the mitigation language.
Nassau County, NY (risQ Score 1.9; Flood risQ Score 3.6)
This is at the 88th percentile for Property Value at Risk for counties natiuonally and the fourth worst in the state of New York. We have long highlighted the abysmal climate risQ disclosure of Long Island issuers, with many school districts and towns having even greater risk than Nassau and not mentioning it anywhere in any OS. For Nassau County’s OS “flood” is mentioned precisely once. The document does spend some time discussing Superstorm Sandy and the 62 repair projects that were required from that event. There is no mention of what, of any efforts, have been made to mitigate future the future risQ from another Sandy, or any other flooding event of any scale for that matter. No wonder all the other issuers in the county don’t talk about risk or risk mitigation. They’re following the “leader”. We are herein requesting that those of you buying Nassau County debt start asking some real questions.
The State of Louisiana (risQ Score 3.5; Flood risQ Score 4.2)
As you’ll already know, Louisiana is the second risQiest state overall and has the highest inland flood risQ of any state, to go along with all its hurricane and coastal flood risQ that are conventional wisdom. Buried in Appendix D you’ll find the solitary mention of “flood”. “Hurricane” gets a lot more attention – 27 times, no less – so worth looking at that. The section on “Hurricane and Storm Damage Risk Reduction” details a financial hole that is being negotiated. What it also highlights is the massive focus on coastal flood, when so much of the risQ to the state is from inland flooding. Those in Houston know a thing or two about that. The State of Louisiana seems to think that water only comes from the sea and not from the sky when it comes to risk mitigation wherever you look in the document (including the Environmental Risk section). This is despite a lengthy section called “Recent Hurricanes and Other Weather Related Events” reviewing the four hurricanes that struck the state in 2020 and the rainfall associated with those events. Note therein, the FEMA is not making the state whole in all this. There is a burden to the state. There is unquestionably a substantial additional financial burden that falls to the population and their property and livelihoods. Finally, Louisiana also picked up some impact from the February “cold-out” that made the front pages with respect to Texas. They’re even less made whole by FEMA in that recovery. Oh, and by the way, no mention of “climate change” anywhere in the document for $227 million of debt extending out to a 2041 maturity. Yikes.
For the carbon transition risk junkies amongst you, already evidence of impacts on the state there with a drop in oil & gas jobs from 2010 to 2020 documented, although still some attrition to come. What hasn’t yet followed through is the decline in derivative industries and jobs from the downstream utilization of fossil fuels that fall in the manufacturing sector.
Miami Dade County Water & Sewer (risQ Score 4.8; Hurricane risQ Score 4.4; Flood risQ Score 4.2)
The statutory mention any time a Miami Dade County defined obligor issues debt to see if their climate risQ disclosure is still solid. As usual “Climate Change” comes early in the Investment Considerations with an array of resources and links to draw from. In Miami Dade’s case, the focus on coastal risk, whether hurricane or more vanilla coastal flood, and both exacerbated by sea level rise is slightly more justified than Louisiana (see above). However, the county is also 100th percentile for hurricane flood (i.e. from precipitation), and these events go directly to a water and sewer system’s investment in storm water management. We don’t see any mention of significant recognition or action around this, and hurricanes are only going to get wetter over time. To us, as much as we lover Miami Dade’s leadership on climate risk disclosure, there is a key piece missing, and especially for the water and sewer system.
One hidden aspect of sea level rise that is not specifically discussed, and is material to a water system in Florida, are the challenges of salt water incursion into water systems. Because of Florida’s relatively porous geology, even small rises in sea level increase saline penetration including water wells and aquifers. There isn’t a seawall that will protect Miami Dade’s water resources from this phenomenon, which means increased water treatment costs and infrastructure investment are coming.
Central Florida Expressway Authority (risQ Score 3.4; Flood risQ Score 3.4)
First of all, Assured Guaranty has your back on this one, so breathe is a bit easier. The OS itself, and especially the reports from CDM Smith in Appendix D, lays out the impacts that hurricanes have had historically on Expressway revenues via both toll suspensions as well as reductions in overall usage after each event. These V-shaped impacts on revenue vary by event. What you won’t see anywhere in the document is a mention of climate change and the resulting increase in frequency and severity of the aforementioned revenue V’s. We hope the rainy day funds are kept in good order, because more revenue-impacting rainy days are a’comin’ in the 20 years that this debt is projecting to.