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
3 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
Ratings as Window into Public University Financial Risk
4 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
5 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
6 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
0
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
0
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
7 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
8 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
Public University Business Model Fundamentally Changed
9 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
10 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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 %
11 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
12 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
… 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
13 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
14 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
15 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
16 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
17 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
Where are we headed?
18 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
19 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
20 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
21 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
22 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
Additional Areas of State/Public University Intersection
Tuition
Procurement
Zoning and construction regulations
Personnel Benefits
Health Care
Pensions
Compensated Absences
Investment of public funds
23 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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
24 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 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?
25 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
Questions and Discussion
26 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
Edith F. Behr Vice President/Senior Credit Officer Higher Education & Not-for-Profit Team [email protected] 212.553.0566
27 Financing Public Colleges and Universities in an Era of State Fiscal Constraints November 30, 2011
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