It has become a familiar scenario: Faced with mounting budget deficits, state legislators cut funding for higher education, forcing colleges and universities to raise tuition.
While educators, parents, students and policymakers have been watching it happen for several years now, agencies that determine the credit rating of institutions like the University of Missouri system are beginning to take notice, as well.
“There is somewhat of a trend developing,” said Susan Carlson, an analyst with credit rating agency Standard & Poor’s. “Financially burdened states cut back on higher education funding, which universities counterbalance through tuition increases. That cycle puts negative pressure on their balance sheets and raises questions concerning their credit.”
Standard & Poor’s downgraded the UM system Board of Curators and the UM system’s debt from AA to AA-plus in October in conjunction with a coming sale of bonds for capital projects at the system’s four campuses. The downgrade affects a total of $419 million in debt backed by university revenues. Lower credit ratings often mean higher borrowing costs for debt issuers, although Carlson said that the UM system’s debt rating is still strong and that the downgrade should not have a negative impact on the upcoming bond sale.
Standard & Poor’s report explains that despite increasing enrollment and the UM system’s position as the state’s only public university system, “steep” reductions in state funding, improved but “slim” financial performance by University of Missouri Health Care and plans to issue more debt triggered the downgrade.
To offset funding cuts to the system in the past couple years, the curators approved a 20 percent tuition increase in May.
In addition to “a prolonged cycle” of operating and capital appropriation cuts, Carlson cited the tuition increases as “a continuing concern.”
But efforts to cap tuition can also hurt the credit quality of universities and colleges. While private institutions derive a substantial percentage of revenue from private sources, their public counterparts are more dependent on tuitions.
In October, U.S. Rep. Howard P. “Buck” McKeon, R-Calif., introduced the Affordability in Higher Education Act, legislation that would impose price controls on colleges and enforce sanctions for institutions whose annual tuition rates increase by more than two times the rate of inflation over a five-year period.
In the wake of McKeon’s proposed legislation, the credit rating agency Moody’s Investors Service released a report that said such legislation could put downward pressure on the debt ratings of the nation’s premier public universities.
“Putting a strict ceiling on tuition increases could have some negative implications for universities,” said AG Edwards & Sons analyst David Friedman. “It’s not difficult to see why the rating agencies are beginning to voice concerns.”
Still, Friedman said, the Affordability in Education Act has “quite a few more hurdles” to clear and, for now, the UM system is handling its funding reductions “very well.”
“The AA rating is still excellent,” Friedman said, “and I think debt is, and will continue to be, of a very high quality.”