Vassar College's increased reliance on endowment spending has put the school at risk of a credit downgrade as it contends with operating deficits.
Moody’s Investors Service on Friday revised the outlook on Vassar’s Aa3 rating to negative from stable, citing an operating deficit that rose to 11% in the 2018 fiscal year from 2.5% in 2017. The Poughkeepsie, N.Y.-based liberal arts college has also faced liquidity pressures, according to Moody’s, with operating cash flow dropping to a “low” 8.4% during the 2018 fiscal year. Moody’s analyst Susan Shaffer said that while Vassar is implementing a plan to lower endowment spending, the college’s projections remain “elevated,” which inhibits its ability to achieve operating levels in line with other Aa3-rated schools.
“The revision of the outlook to negative from stable reflects ongoing weak operating performance, with declining operating and cash flow margins in fiscal 2018 and limited improvement anticipated in the near term,” Shaffer wrote in an Aug. 16 report. “The negative outlook reflects the possibility of a rating downgrade should Vassar's operating results remain weak, indicating more fundamental weakness in the college's operating model.”
The negative outlook applies to roughly $239 million of Moody’s-rated debt. Vassar’s outstanding bonds were issued through the Dormitory Authority of the State of New York and the Dutchess County Local Development Corp.
Shaffer said Vassar’s cash flow pressures have resulted in “weak affordability” of debt that is “moderately high" at 16 times cash flow. Vassar’s total cash and investments grew a "low" 5.6% over the past five years compared to a 12.4% peer median growth rate for other Aa3-rated colleges, according to Shaffer. Overall revenue growth will also remain constrained by tuition staying relatively flat since 2015 because of the school’s commitment to “affordability.”
While Vassar is facing some near-term fiscal pressures, the school’s Aa3 rating is bolstered by high reserve levels with $1.1 billion in total cash and investments for 2018 that provided coverage of 5.6 times operating expenses, according to Moody’s.
“Credit quality is further supported by the college's sound market position as a highly selective liberal arts college, with relatively strong student demand and philanthropic support,” Shaffer said.
Vassar may face a downgrade if there is a reduction in financial reserves or liquidity since the school’s wealth is the “primary” factor supporting a double-A rating, according to Shaffer. A downgrade may also occur if Vassar has continued deficit operations and thin operating cash flow margins beyond the 2020 fiscal year.
The Vassar press office did not immediately respond for comment. The college enrolled 2,400 students in the fall 2018 semester.
