Colleges hit with credit downgrades over N.J. financial problems

By Ted Sherman | NJ Advance Media for NJ.com
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on June 16, 2015

TRENTON — New Jersey's public universities are getting an education this week about the consequences of the state's budget woes, with many being hit with credit downgrades or outlook warnings by Wall Street because of New Jersey's troubled financial situation.

Moody's Investors Service downgraded the credit rating of William Paterson University on Monday to A2 on $165 million of debt —a negative rating, although still considered an upper-medium grade and low credit risk. The agency also gave the school a negative outlook.

Rutgers University received a negative financial outlook as well, although Moody's made no changes in the ratings on $2 billion of bonds issued by the state's largest public university.

The actions come just days after Moody's revised Montclair State University's outlook to negative, and assigned an A1 rating to a planned $72.7million bond issue. It also downgraded New Jersey City University to A3, affecting outstanding $163 million in debt issued through the New Jersey Educational Facilities Authority. And while the agency reconfirmed its current ratings for Rowan University and New Jersey Institute of Technology debt, it similarly gave negative outlooks to both schools.

Last month, Moody's downgraded Stockton University in Galloway to A3, affecting $234 million in debt, and revised the school's outlook to negative, noting its high degree of financial leverage while facing a weakening state funding environment.

The ratings moves could raise borrowing costs of the various institutions.

In all cases, the ratings were attributed to the ongoing uncertainty over state funding—with the potential for continued declines in state operational support—as well as the growing risk that a portion of fringe benefits now funded by the state might be shifted to the universities.

In April, Moody's separately downgraded New Jersey's own debt rating—the ninth ratings cut since Gov. Chris Christie took office—amid the state's underfunded pension system and concerns over the state's worsening financial condition it said was likely to drive further downgrades.

Outlook negative

Rutgers's Aa3 rating, two notches above the state's A2 rating, was left unchanged. Moody's analysts said the assessment reflected the growing strength and stature of Rutgers as a major research university, citing $3.3 billion of operating revenue, $670 million in research activity, and over $2 billion in total cash and investments. The university also has a toolbox of different options that could be used to offset possible declines in direct state support, including a growing donor base. Earlier this year, Rutgers announced it had surpassed a $1 billion goal in the most ambitious fundraising plan in the school's history.

Still, Moody's said the outlook for the public university was negative, pointing to the "very low margins generated by the newly restructured Rutgers" and the dependence on the state for a little more than 20 percent of its total operating revenue. The agency added that any sudden decline in state appropriations "could stress the university financially while it is still working to integrate people, programs, and systems from the now closed University of Medicine and Dentistry of New Jersey."

Rutgers said the university continues to enjoy one of the strongest bond ratings of any public institution in New Jersey.

"We are pleased that Moody's acknowledges that the integration of the medical schools and other health-related entities of the former UMDNJ has proceeded smoothly and enhanced Rutgers' strength and stature as a major research university," said spokesman EJ Miranda. "We are also encouraged that Moody's recognizes the continued high demand for a Rutgers education and our strong donor support."

At William Paterson, a regional public university located in Wayne with an enrollment of more than 8,600 full-time students, analysts said the school's revenue growth potential was limited, with weakening student demand and "a highly price-sensitive student population."

School officials said the university continues to have strong financial reserves.

"Moody's expressed concern about continuing reductions in state appropriations as well as concern about enrollment projections, especially given the decline in high school graduates," said Warren Sandmann, provost and senior vice president for academic affairs. "As noted by Moody's, we have been adjusting our strategic plan for enrollment due to the changing demographics and continue to implement strategies to operate as efficiently as possible."

Montclair State spokeswoman Suzanne Bronski said the university was disappointed that the school's "consistently strong track record of fiscal responsibility is now being overshadowed by the rating agencies' recently downgraded assessment" of New Jersey's financial situation.

"The university is seeing continuing strength in the areas of 2015 fiscal year operating results, liquidity, cash flow and reserve levels," she said. "In addition, Montclair State has exceeded its fall 2015 enrollment goals and anticipates another record-setting number of enrolled students this coming academic year."

Budgetary challenges

The downgrade at New Jersey City University to an A3 rating and a change in the school's outlook to negative was blamed by Moody's on its "high financial leverage, thinning operating performance, and limited revenue growth potential."

The four-year university in Jersey City has more than 6,000 full-time students.

Moody's said the school is expected to face additional budgetary challenges due to an anticipated 9 percent reduction in base state appropriations next fiscal year, and relies on state funding for approximately a third of its operating budget.

Daniel Elwell, vice president of university advancement and executive director of the NJCU Foundation, said the university was disappointed in its downgrade and concerned that appropriations from the state have continued to decline.

"That said, we are looking to increase operating reserves through alternate sources and maintain solid cash flow," he said.

The university is looking to boost enrollment to ensure increased revenue from tuition, and has stepped up fundraising efforts. Additionally, Elwell said they are looking to diversify revenue streams through privatized housing projects.

"The revenues from these projects will provide funding for living and learning spaces without the need to incur additional debt, while enriching the community where NJCU is located," he said.

Rowan University officials noted that Moody's action hit across the board, affecting many of the state's colleges and universities, and said they were comfortable with the school's current debt levels for a major expansion effort expected to more than double the size of the public research university in Glassboro by 2025.

University spokesman Joe Cardona said the negative outlook issued by Moody's will mean just fractions of a percentage on the school's borrowing costs.

"Yes, it's going to cost a little more, but money is still relatively cheap in the grand scheme of things," he said. "We're confident and assured in our investments. Moody's is just telling people there's a lot going on."

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