Jersey City Community Charter School, NJ

Transcription

1 CREDIT OPINION New Issue Jersey City Community Charter School, NJ New Issue - Moody s Assigns Baa3 to Jersey City Comm.Charter (NJ) s $10.3M Charter School Revenue Bonds; Outlook Stable Summary Rating Rationale Contacts Tiphany Lee-Allen AVP-Analyst tiphany.lee-allen@moodys.com Jennifer Diercksen AVP-Analyst jennifer.diercksen@moodys.com Moody s Investors Service has assigned a Baa3 rating to Jersey City Community Charter School s (NJ) (JCCCS) $9.7 million Charter School Revenue Bonds (Jersey City Community Charter School, Inc. Project) Tax Exempt Series 2016 A and $610,000 Taxable 2016 B. The bonds will be issued through the New Jersey Economic Development Authority. The Baa3 incorporates JCCS s good competitive profile, history of charter renewals, and steady student demand. These strengths are offset by narrow and declining liquidity, weak debt service coverage and small scale. Additional credit considerations include a mortgage lien on all facilities, a debt service reserve funded at MADS and a 1.1 times debt service coverage covenant. Credit Strengths Stable enrollment trends aided by challenges for Jersey City public schools Projected improvement in debt service and liquidity ratios Long standing history of charter renewal since establishment in 1997 Legal security includes mortgage in financed facilities Credit Challenges Extremely weak monthly days cash on hand and debt service coverage history combine to create highly limited financial flexibility 5-Year charter renewal process poses ongoing risk relative to maturity (30 years) Enrollment cap limits future growth in pledged revenues 30 year financing current facilities creates little room for capital renewal absent material improvement in operating cash flow Rating Outlook The stable outlook reflects expectations of continued market strength and maintenance of solid relationship with charter authorizer. The stable outlook is also contingent on the ability to achieve measured improvement in debt service coverage and liquidity.

2 Factors that Could Lead to an Upgrade Substantial improvement in unrestricted liquidity and debt service coverage Increase in the school's scale of operations Factors that Could Lead to a Downgrade Deterioration in the school's available cash and coverage of debt service by net revenues Inability to achieve gains in monthly days cash on hand or debt service coverage in FY 2017 Increased borrowing resulting in further leveraging of per-pupil revenues Key Indicators Exhibit 1 Source: Moody's Investors Service / Jersey City Community Charter School Audited Financial Statements FY 11 - FY 15 Detailed Rating Considerations Jersey City Charter School Maintains Full Capacity and Active Waiting List Located in Jersey City (A1, stable), New Jersey (A2, negative), JCCCS provides K-8 education for 602 students in 2 school facilities. JCCCS provides an alternative education option to the Jersey City Public School System and serves a primarily Black and Hispanic population (93% of total student population), of which, 76% of students receive free or reduced lunch and 9% receive Special Education services. Academic improvement is fair, test scores are marginally improving but historically have trailed state averages but compare more favorably to some local charter schools and the Jersey City Public School system. JCCCS most recent test scores outperform Jersey City Public Schools in 3rd grade English and Math, 5th grade math, and 7th and 8th grade English. However, test scores significantly trail state-wide scores only outperforming the median in 3rd grade English. JCCCS outperformed neighboring Dr. Lena Edwards (K-8) Charter School in 3rd-7th grade math and 3rd and 6th grade English. Faculty retention rates which have historically averaged 90% since 2012 dropped in 2015 to 76% following a number of teacher retirements and personnel changes brought on by the new management team. Student retention rate remains strong at 99% in 2015 and has averaged 99.3% since Enrollment is projected at 589 over the projection period which is maximum capacity for both facilities. Since facilities are at maximum capacity and there are currently no plans for expansion; expectations for additional per-pupil revenue growth is limited. However, demand for JCCCS remains strong with a waitlist of 143 students in This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Coverage Expected to Increase as JCCCS Realizes Debt Service Cost Savings; No Medium-Term Additional Borrowing Plans Fiscal 2015 coverage dipped significantly to 0.8 times following a spike in annual debt service costs. Under its previous mortgage loans, JCCCS had been making interest only payments, fiscal 2015 represents the first year of full principal and interest payments totaling $1.034 million up from $659,000 in fiscal Sustained improvement in coverage is key the maintenance of the Baa3 rating. Management guidance based on unaudited results for FY 2016 show marginal improvement to with projected coverage of 1.05 times. The school s financial position is expected to further improve in fiscal 2017 as JCCCS realizes lower debt service costs associated with this bond issuance. Debt service, which is projected at an interest rate of 5.5% is expected to decline to $584,000 in fiscal Debt service coverage is projected to increase to 1.54 times. Coverage is not expected to be diluted by additional leveraging. JCCCS has no plans to issue additional revenue bonds or enter into any loan agreements over the next 3-5 years. Additional leveraging could significantly impact coverage. Narrow Liquidity Projected to Improve Slightly JCCCS will remain challenged to improve operating performance and liquidity. Declines in cash on hand have largely been driven by escalating debt service and renewal costs associated with the schools current mortgage loans. Projections for improvement in the liquidity position and operating performance are heavily factored into the Baa3 rating. Fiscal 2015 days cash on hand dropped to 36 days from 47 days in fiscal 2014 and a high of 92.5 days in fiscal Out-year projections indicate a return to stronger liquidity levels beginning in 2017 as JCCCS realizes debt service cost savings. Liquidity is expected to increase annually over the forecast period to a high of 113 days in Projections for fiscal 2017 days cash on hand total 56 days. Charter Renewal Risk & Government Relations: JCCCS has never been denied charter renewal in its 19 year history. Charters are renewed on a 5-year basis. JCCCS received its 4th 5-Year Renewal from New Jersey Department of Education in While there is relative risk of charter renewal to bond maturity (2047) JCCCS s long standing history of charter renewal and operations in the community somewhat mitigate this risk. Additionally, sound transparency and clarity around the charter renewal process in New Jersey helps to further insulate JCCCS from renewal risk. The NJ DOE practices oversight of the state s charters through its Office of Charter Schools Department, an office of 10 employees charged with approving and renewing all charters and setting forth common terms and conditions for approval and renewal. Following a careful and stringent three-stage review and approval process for new charter school applicants, the department evaluates the quality of the proposed educational program, the capacity of the founding team to implement that program, and the need for the proposed school in the community. Since 1995, when the first charter began operating in New Jersey, 16 charter schools have been closed by the Department of Education, and 8 others have surrendered their charters and have closed. Most recently 2 charters were denied renewal in These charter schools were performing in the bottom 5% of schools in the state for three consecutive years and are largely underperforming their home districts. In addition, the schools each had operational or fiscal issues and had demonstrated leadership capacity concerns State support for charters continues to gradually improve. Management reports that per pupil funding to JCCCS has increased in each of the last 3 years ranging from 1% to 3% annually. However, JCCCS remains nearly 50% underfunded when compared to the Jersey City Public School System. Funding is on a per-pupil basis and remitted monthly. Legal Structure Previously the school was burdened by relatively complex debt structure for its $8.1 million of outstanding debt, with debt management essential to mitigate the risks associated with bullet maturities, mandatory puts, and a variable rate mortgage loans. Favorably, the school will refinance all of its outstanding loans with the current bond issuance. The 2016 Charter School Revenue Bonds will be structured as 30-year, fixed rate bonds with level debt service. PENSIONS AND OPEB The school participates in the statewide New Jersey Teachers Pension and Annuity Fund, administered by the state. School districts do not currently contribute directly to this plan as the state makes on behalf payments equal to the annual statutorily required contribution. The district participates in the statewide New Jersey Teachers Pension and Annuity Fund, administered by the state. 3

4 School districts do not currently contribute directly to this plan as the state makes on behalf payments equal to the annual statutorily required contribution. The district also contributes to the statewide Public Employees' Retirement System. The district's combined ANPL for the plan, as of June 30, 2015, under our methodology for adjusted reported pension data, is $4.7 million or a low 0.64 times operating revenue. The adjustments are not intended to replace the district's reported liability information, but to improve comparability with other rated entities. The district's 2015 annual contributions to pensions, net of on-behalf contributions by the state to TPAF, were a modest $169,000. Management and Governance The Board of Trustees is responsible for making policy and business decisions related to the School s operations. The Board of Trustees currently consists of 7 members that are appointed to 3-year terms along with the Head of School and the School Business Administrator. The board of trustees also includes one parent from the school. The Head of School started with JCCCS in March of 2015 and was previously a principle in the Newark Public School System for 10 years. The school's business administrator has been with JCCCS since 2013 and has a background in accounting and charters. Legal Security The 2016 bonds will be secured by a revenue pledge of per-pupil revenues. Additional security is provide by a first lien mortgage on both school facilities appraised at $9.27 million and a Debt Service Reserve Fund funded at MADS. Additionally under the bond documents the school covenants a minimum debt service coverage of 1.10 times (event of default below 1.00 times) and a liquidity minimum of 30 days cash on hand. Use of Proceeds The 2016 Revenue Bonds will refinance the school s outstanding mortgage loans and provide $250,000 in operating cash and $350,000 for computer upgrades. Obligor Profile Jersey City Community Charter School (JCCCS) is one of the state s first charters founded and authorized in JCCCS serves a K-8 population in 2 school facilities with a total student enrollment of 602 in Methodology The principal methodology used in this rating was US Charter Schools published in September Please see the Ratings Methodologies page on for a copy of this methodology. Ratings Exhibit 2 Jersey City Community Charter School, NJ Issue Rating Charter School Revenue Bonds (Jersey City Community Charter School, Inc. Project), Series 2016A (Tax-Exempt) Rating Type Sale Amount Expected Sale Date Rating Description Charter School Revenue Bonds (Jersey City Community Charter School, Inc. Project), Series 2016B (Taxable) Rating Type Sale Amount Expected Sale Date Rating Description Baa3 Underlying LT $9,765,000 09/27/2016 Revenue: Other Baa3 Underlying LT $610,000 09/27/2016 Revenue: Other Source: Moody's Investors Service 4

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6 6 Contacts CLIENT SERVICES Tiphany Lee-Allen AVP-Analyst Americas Asia Pacific Japan EMEA