CHICAGO — A New York ratings agency may have issued a negative outlook for the country's higher education sector, but the University of Illinois' chief financial officer said he remained optimistic about the UI's fundamentals, including its strong enrollments and tuition income that in recent years has surpassed the amount of the state's direct appropriation to the university.
In its annual outlook for higher education in the U.S. over the next 12 to 18 months, Moody's Investors Services on Wednesday cited growing fiscal pressure on all university revenue sources, including tuition revenue, federal research funding (due to budget negotiations in Congress) and state appropriations stagnating or in decline as reasons for its downgrade.
"All universities need to lower their cost structures to achieve long-term financial sustainability and examine the cost structure of their traditional business model," the report said. "Additionally, price sensitivity is now having a greater impact on student demand. This is due to the prolonged period of depressed family income and household net worth, compounded by a demographic dip in high school graduates — especially in the Northeast and Midwest," it said.
However, at the University of Illinois, student applications and enrollments are up — that's a good sign, according to Chief Financial Officer Walter Knorr.
"We continue to have strong demand. ... That's the number one thing I think the rating agencies look at," Knorr said Wednesday afternoon.
He also listed several examples of cost-cutting and strategic planning initiatives at the university, such as the "stewarding excellence" process on the Urbana campus a few years ago and recent efforts established by President Bob Easter to review administration costs and academic programs.
However, because of the university's reliance on the state for appropriations — $667 million for this fiscal year — and about $1 billion in payments on behalf, what the state gives the university for benefits like health insurance, the university could face a downgrade.
In December, Moody's downgraded the state of Illinois' outlook from stable to negative (and affirming its A2 bond rating) after the Legislature failed to deal with the state's growing unfunded pension liabilities. A few days later, Moody's announced it had placed the long-term ratings of the state's public universities, including the UI, on review for possible downgrade because of the institutions' reliance on the state for operating funds and benefits.
"The rating agencies pretty much call it as they see it," Knorr said. "I do expect them to take some action on the state (rating)," Knorr said.
Shortly after, he said, he expects an announcement on the universities.
The state made its final appropriation payment of approximately $65 million to the UI in late November for the previous fiscal year ending June 30, 2012. For the current fiscal year the state owes the UI about $493 million, according to Knorr.
Last week Fitch Ratings, which does not rate UI debt, put the state on its negative outlook list after the Legislature's lame-duck session failed to pass any pension reforms.
"We have, between the appropriation and payments on behalf from the state for health care and pensions for employees, a significant reliance on the state. We will just have to wait and see what happens," Knorr said.
The UI has about $1.5 billion in debt, with the majority of it rated by Moody's at Aa2, on a scale of Aaa being the highest and A3 being the lowest. Ratings are used to indicate the credit worthiness of the borrower.
The UI's rated debt includes $1 billion of Aa2-rated auxiliary revenue bonds, which paid primarily for housing projects such as Ikenberry Commons in Champaign. It is being paid back primarily by a portion of the housing fees that students pay. The UI also has $500 million of Aa2-rated certificates of participation which have paid mostly for deferred maintenance and other renovation projects on the campuses over the last two decades.
The UI also has $40 million to $50 million of Aa3-rated South Campus Development bonds, a $20 million energy savings loan and health service facilities system bonds.
The $60 million health service facilities bonds are the UI's lowest rated at A1 and they are paid for solely by revenue from the hospital and medical service plan in Chicago.
"We think that is a pretty good rating for an academic medical center. It's a fairly good peer comparison," because of so many uncertainties faced by the health care industry, such as possible Medicare and Medicaid formula revisions, Knorr said. About 70 percent to 80 percent of patients at the UI's hospital have Medicare or Medicaid, he noted.
The UI plans to pay for an $85 million renovation at its hospital with a bond sale, but because of the ratings uncertainty, it will be delayed a bit. A presentation to the board planned for January has been pushed off by several weeks. How much the UI will finance will have to do with the rating it receives, Knorr said.
"We'll strive to keep the A1 rating," Knorr said. "I'm looking forward to a robust discussion" with representatives from the ratings agency, he said.