financing public colleges and universities in an era … public colleges and universities in an era...

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

1

Edith F. Behr, Vice President/Senior Credit Officer Moody’s Higher Education & Not-for-Profit Team [email protected]

Higher Education Government Relations Conference November 30, 2011

2 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011

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


Ratings as Window into Public University Financial Risk


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


But Negative Outlook Remains for Most… Reflects “New Realities” and Need for Adaptation

Heightened price sensitivity Reduced tuition increases; growth of financial aid budgets; need to demonstrate product value

Pressure on top-line revenue growth Expense containment, operating efficiency, cut backs in capital

Long-term pressure on government Business diversification; growth of funding alternative private revenue sources

(research, gifts, tuition)

Increasing diversity of the student On-line, weekends, counseling market vocational, 3 year B.A.)

Uncertainty about long-term More stress testing of long-endowment returns range assumptions and management planning

More financial accountability placed Increased transparency to all on boards of trustees and constituencies management teams


Public Universities Are Rated Higher Than Privates 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

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10

20

30

40

50

60

70

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3

U.S. Public University Rating Distribution

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

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10

20

30

40

50

60

70

Aaa

Aa1

Aa2

Aa3 A1

A2

A3

Baa1

Baa2

Baa3

Ba1

Ba2

Ba3 B1

B2

B3

U.S. Private University Rating Distribution


Public University Rating Stability, Despite Funding Stress

2% 2% 3% 4% 4% 7% 2% 4% 6% 3% 4%

8% 11%

4%

86% 83% 81%

84% 84%

79% 90%

3% 6% 3%

1% 2% 2% 2% 5% 3%

10% 8% 2% 1% 1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 YTD

Public University Activity 2005 - 2011 YTD

Downgrade Outlook Revised Down Affirm with Stable Outlook Outlook Revised Up Upgrade

6% 3% 3% 4% 12% 14% 10%

7% 4% 4%

8%

15% 10% 7%

76%

73% 67%

76%

67% 70%

72%

7% 12%

15%

7% 5% 5% 8%

4% 8% 11% 6% 0% 3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011 YTD

Private University Activity 2005 - 2011 YTD

Downgrade Outlook Revised Down Affirm with Stable Outlook Outlook Revised Up Upgrade


Public University Business Model Fundamentally Changed


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


As State Funding Has Declined, Student Based Revenue Has Filled the Gap

Students are paying more: like progressive income taxing

Publics acting just like privates:

Higher tuition and higher aid

National/international student recruitment

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 est

2012 est

Student Funding Now Drives Public Universities Source: Moody’s Median MFRA Data (Share of Revenues by Source

for US Public Universities (%))

Student Revenues % Government Appropriations %


Public Universities Exercise Their Market Pricing Power…

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

0

2

4

6

8

10

12

2004 2005 2006 2007 2008 2009 2010 2011 est

Publics Net Tuition/Student Rises Faster than Privates

Source: Moodys Median MFRA Data % Change

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


… And Lowest Cost Competitors

$11,000

$11,500

$12,000

$12,500

$13,000

$13,500

$14,000

$0

$5,000

$10,000

$15,000

$20,000

$25,000

2004 2005 2006 2007 2008 2009 2010 2011 est

Public Net Tuition Per Student Remains Competitive

Source: Moodys Median MFRA Data ($)

Publics Privates Pri-Pub Difference (Right)

Public sector remains far more affordable than private competitors

Publics are actually more affordable than privates five years ago

Advantage in 2011 $13,000 compared to $12,000 in 2006


Will Public Universities Use Up Their Pricing Power?

5.7% 5.6% 6.0% 5.3% 4.2%

2.6% 2.7%

-15%

-10%

-5%

0%

5%

10%

-$15

-$10

-$5

$0

$5

$10

2005 2006 2007 2008 2009 2010 2011

Slowed Net Tuition Growth Lags Steep Decline in U.S. Net Worth

Change in Net Worth of Households & Not for Profit Organizations ($, trillion)

Demand is function of net worth, income & demographics

Political and public pressure to

improve affordability Moderation of tuition increases Expanded financial aid budgets Need to become more efficient

Source: Change in Net Worth 1980-2010, Federal Reserve; 2011 Forecast from Moody’s Analytics ; Median Net Tuition per Student: Moody’s


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.

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

0%

20%

40%

60%

80%

100%

120%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Maxim

um Pell Aw

ard per Student

% N

et T

uitio

n pe

r Stu

dent

Cov

ered

Maximum Pell Award is Covering a Smaller Portion of Net Tuition Per Student, Especially for Public Universities

Maximum Pell Award % of Net Tuition Per Student Covered by Pell Award - Public

Source: Moody’s, NCES & The College Board


Publics Are Biggest …

• 20% All Campuses > 5,000 FTE

Average US FTE Enrollment By Degree Granting Type Priv/NFP Prop Public

Associate's Degree 568 579 4,200

Bachelor's Degree 951 938 3,288

Master's Degree or Doctor's Degree 2,613 3,127 11,011

First Professional Degree 488 451 660

Grand Total 2,013 986 6,428

Bachelor's thru Professional Only 2,105 1,649 9,860

• 6% 4Yr Publics <1,000 FTE

• 46% 4Yr Private NFP <1,000 FTE • 60% All Publics > 5,000 FTE

• 8% All Private NFPs > 5,000


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


Where are we headed?


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


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


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


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


Additional Areas of State/Public University Intersection

Tuition

Procurement

Zoning and construction regulations

Personnel Benefits

Health Care

Pensions

Compensated Absences

Investment of public funds


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, 2011


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 for-

profits 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?


Questions and Discussion


Edith F. Behr Vice President/Senior Credit Officer Higher Education & Not-for-Profit Team [email protected] 212.553.0566

mailto:[email protected]�


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