Financing Public Colleges and Universities in an Era of State Fiscal Constraints

Transcription

1 Financing Public Colleges and Universities in an Era of State Fiscal Constraints Edith F. Behr, Vice President/Senior Credit Officer Moody s Higher Education & Not-for-Profit Team edith.behr@moodys.com Higher Education Government Relations Conference November 30,

2 Agenda Ratings as Window into Public University Financial Risk Mixed sector credit outlook vs. stable ratings? Quantitative data vs. analyst judgment Public University Business Model Fundamentally Changed Market-driven with a public mission, not government-driven Greater financial stability under student pay-market driven model Means-tested tuition pricing is consistent with public mission Bond market/donors replace state as main capital source Where are we headed? Governance, management, market strategy key drivers Greater professionalism and efficiency Better disclosure to investors, students, donors, regulators Questions and Discussion 2

3 Ratings as Window into Public University Financial Risk 3

4 Moody s Sector Outlook No Longer Negative for All 2009 & 2010: Negative Outlook for All Sub-Sectors of Higher Education (all private/public universities) Increased pressure on tuition and financial aid Broad impact of investment losses on operations and philanthropy Illiquidity of balance sheets, amplified by alternative investments Volatility in debt markets as well as debt structures More credit pressure for private universities than public universities 2011: Mixed Outlook for U.S. Higher Education; Stable for Some Outlook revised to stable for diversified market leading universities, many of which are public flagships, land grants and systems Maintenance of negative outlook for majority of tuition-dependent private colleges & regional public universities 4

5 But Negative Outlook Remains for Most Reflects New Realities and Need for Adaptation More stress testing of long- range assumptions and management planning Heightened price sensitivity Pressure on top-line revenue growth Long-term pressure on government funding Increasing diversity of the student market Uncertainty about long-term endowment returns More financial accountability placed on boards of trustees and management teams Reduced tuition increases; growth of financial aid budgets; need to demonstrate product value Expense containment, operating efficiency, cut backs in capital Business diversification; growth of alternative private revenue sources (research, gifts, tuition) On-line, weekends, counseling vocational, 3 year B.A.) Increased transparency to all constituencies 5

6 Public Universities Are Rated Higher Than Privates Moody s currently rates 220 U.S. public colleges and universities, with over $100.9 billion of debt outstanding. More than 3/4, or 77%, of public universities are rated A1 or higher U.S. Public University Rating Distribution Moody s rates approx 300 private colleges/universities in the US, with over $75.4 billion of debt outstanding Only about 1/3, or 36%, of private colleges and universities are rated A1 or higher U.S. Private University Rating Distribution Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 0 Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 6

7 Public University Rating Stability, Despite Funding Stress Public University Activity YTD Private University Activity YTD 100% 90% 80% 5% 3% 3% 6% 10% 8% 1% 3% 2% 1% 1% 2% 2% 2% 100% 90% 80% 4% 7% 8% 12% 11% 15% 6% 7% 0% 5% 3% 3% 5% 8% 70% 70% 60% 50% 40% 86% 83% 81% 84% 84% 79% 90% 60% 50% 40% 76% 73% 67% 76% 67% 70% 72% 30% 30% 20% 20% 15% 10% 10% 0% 11% 8% 4% 6% 3% 4% 2% 2% 3% 4% 4% 7% 4% 2% Downgrade YTD Outlook Revised Down Affirm with Stable Outlook Outlook Revised Up Upgrade 10% 0% 7% 7% 8% 4% 4% 6% 3% 3% 4% 12% 14% 10% Downgrade Outlook Revised Down YTD Affirm with Stable Outlook Outlook Revised Up Upgrade 7

8 Public University Business Model Fundamentally Changed 8

9 State Government Funding On Long-Term Decline Federal ARRA funds ended in FY 2011 State budget gaps persist necessitating cuts to sacred cows Operating funds Capital support Research funding is tighter Cash flow squeeze at a few public universities for first time 9

10 As State Funding Has Declined, Student Based Revenue Has Filled the Gap Student Funding Now Drives Public Universities Source: Moody s Median MFRA Data (Share of Revenues by Source for US Public Universities (%)) est est Student Revenues % Government Appropriations % Students are paying more: like progressive income taxing Publics acting just like privates: Higher tuition and higher aid National/international student recruitment 10

11 Public Universities Exercise Their Market Pricing Power Publics Net Tuition/Student Rises Faster than Privates Source: Moodys Median MFRA Data % Change est Publics (Left) Privates (Left) Pub/Pri Ratio (Right) Public sector net pricing rising 3x faster than private sector tuition Reaction from state government varies from attempts at WWII-era price controls to laissez faire, hands off realism Reaction from students is generally accepting despite events in California California sudden sharp tuition spikes reveal unstable model used by government in that state vs Big Ten pricing model Unsustainable political compacts vs Market Gradualism 11

12 And Lowest Cost Competitors $25,000 $20,000 Public Net Tuition Per Student Remains Competitive Source: Moodys Median MFRA Data ($) $14,000 $13,500 Public sector remains far more affordable than private competitors $15,000 $10,000 $5,000 $ est $13,000 $12,500 $12,000 $11,500 $11,000 Publics are actually more affordable than privates five years ago Advantage in 2011 $13,000 compared to $12,000 in 2006 Publics Privates Pri-Pub Difference (Right) 12

13 Will Public Universities Use Up Their Pricing Power? Demand is function of net worth, income & demographics Slowed Net Tuition Growth Lags Steep Decline in U.S. Net Worth Change in Net Worth of Households & Not for Profit Organizations ($, trillion) Political and public pressure to improve affordability $10 $5 5.7% 5.6% 6.0% 5.3% 4.2% 2.6% 2.7% 10% 5% Moderation of tuition increases $ % Expanded financial aid budgets -$5 -$10-5% -10% Need to become more efficient -$15-15% Source: Change in Net Worth , Federal Reserve; 2011 Forecast from Moody s Analytics ; Median Net Tuition per Student: Moody s 13

14 Will Pell Continue to Pick up the Slack? Dependence on Pell and other aid for low income students is increasing, but it is covering a smaller portion of net tuition per student. % Net Tuition per Student Covered 120% 100% 80% 60% 40% 20% Maximum Pell Award is Covering a Smaller Portion of Net Tuition Per Student, Especially for Public Universities $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 Maximum Pell Award per Student 0% $0 Maximum Pell Award % of Net Tuition Per Student Covered by Pell Award - Public Source: Moody s, NCES & The College Board 14

15 Publics Are Biggest 20% All Campuses > 5,000 FTE 60% All Publics > 5,000 FTE 8% All Private NFPs > 5,000 6% 4Yr Publics <1,000 FTE 46% 4Yr Private NFP <1,000 FTE Average US FTE Enrollment By Degree Granting Type Priv/NFP Prop Public Associate's Degree ,200 Bachelor's Degree ,288 Master's Degree or Doctor's Degree 2,613 3,127 11,011 First Professional Degree Grand Total 2, ,428 Bachelor's thru Professional Only 2,105 1,649 9,860 15

16 Publics Have Size/Price Advantages; Privates Have Leadership Edge PUBLIC UNIVERSITIES Economies of Scale Low Price Competitor Public Subsidy/Ultimate Support More Diversified Revenues Management Slow but Improving Governance Lagging Some Exposed to Pensions/OPEB Political Limits of Tuition PRIVATE COLLEGES Much Smaller on Average Moderate to High Price Competitor Philanthropic Subsidy Most Highly Tuition Dependent Management More Nimble Governance Mostly Better Investments/ Liquidity Challenges Economic Limits on Tuition 16

17 Where are we headed? 17

18 Arguably, Public Universities Are More Stable with Less State Funding Reduced public operating funding of public universities is irreversible Higher tuition dependence makes revenue less volatile better for planning Challenges Access at affordable tuition rates for low income, first generation students With less state capital funding, borrowing will keep rising 18

19 Strategies to Cope with Pressing Issues Community colleges as cost-effective capacity relief; also partnerships with for-profits and traditional private colleges Enable graduation in shorter periods of time Public universities have large economies of scale and can reap many more operating efficiencies much more capacity can be freed Private fundraising will follow same pattern as private universities, most especially for financial aid 19

20 Improved Governance in the Public Sector will be Necessary Outcome Commitment to market disclosure Strong accountability and oversight of management without government dominance Diversification of board members to include those with sector expertise as well as strong philanthropic capacity Competitive strategies and culture driven to succeed financially as well as meet public mandate for more affordable education Use of detailed, multi-year financial plans linking budget and capital plans with key assumptions to guide annual budgets Use of self-assessment, benchmarking Openness to new organizational partnerships, campus closure, and even mergers in some cases 20

21 Government Relations to Combat Cut-Backs is Especially Important Pressure to restrict access to capital, reduce tax subsidies, and increase regulatory oversight University leaders can promote: New political partnership with state fostering operating independence and ultimately allowing universities the flexibility to promote an entrepreneurial climate and promote economic development Continuance of state financial support for operations and capital projects Special programs which provide additional support for public higher education such as debt service reimbursement, intercept programs, and funds established to support one or more universities 21

22 Additional Areas of State/Public University Intersection Tuition Procurement Zoning and construction regulations Personnel Benefits Health Care Pensions Compensated Absences Investment of public funds 22

23 So A New Business Model for Publics and Privates? Moody s rates large majority of higher education measured by enrollment and not one rated college or university has ever defaulted on its debt Moody s Higher Ed team, November 2011 The American system of higher education is going to change dramatically in the 21st century, said Aoun. Our existing college campuses are based on a model that we imported from England in the 17th century. This model cannot meet the full demands of contemporary society Joseph Aoun, President of Northeastern University, November 2011 The institutions to which the country would turn to help tackle this (competitive) challenge its colleges and universities are facing a crisis of their own (this) presents an opportunity to rethink many of the age-old assumptions about higher education its processes, where it happens, and what its goals are and to use the disruptive start-up organizations to create institutions that operate very differently and more appropriately to address the country s challenges. Clay Christianson, Harvard Business School, from Center for American Progress Disrupting College, February,

24 Why the Business Model Still Works for now States need public universities even more now despite funding cuts Labor force training, job growth, research/tech transfer, health care No real substitute for face-to-face But, cost structure is too high Public universities offer an expensive bundled product Content delivery not valuable part, easily replicated more cheaply by forprofits Customers pay for transformation of the late adolescent into a young-adult with judgment, thinking skills, communication ability and career connections But can the wealth and income levels of the country support the model? 24

25 Questions and Discussion 25

26 Edith F. Behr Vice President/Senior Credit Officer Higher Education & Not-for-Profit Team

27 2011 Moody s Investors Service, Inc. and/or its licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ARE MOODY'S INVESTORS SERVICE, INC.'S ( MIS ) CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MIS DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS DO NOT CONSTITUTE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS ARE NOT RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. CREDIT RATINGS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MIS ISSUES ITS CREDIT RATINGS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. Except as expressly stated otherwise, MOODY S has not verified, audited or validated independently any information received in the rating process, nor will it do so. Under no circumstances shall MOODY S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained herein must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. MIS, a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MIS have, prior to assignment of any rating, agreed to pay to MIS for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Shareholder Relations Corporate Governance Director and Shareholder Affiliation Policy. Any publication into Australia of this document is by MOODY S affiliate, Moody s Investors Service Pty Limited ABN , which holds Australian Financial Services License no This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act