One of Illinois’ public universities climbed out of junk while three others inched closer to investment grade territory as Moody’s Investors Service handed out upgrades on the back of the state’s recent positive rating momentum.
With Gov. J.B. Pritzker’s signature fresh on a fiscal 2023 budget and 2022 revisions that tap surpluses to deposit $1 billion into a depleted rainy day fund, pay down bills, and supplement pension contributions by $500 million, Moody’s
In the first ripple effect, Moody’s over the last week upgraded five of the six state public universities it rates, delivering a
The earlier upgrades came as COVID-19 and state-induced funding worries ebbed amid swelling tax revenues and it after a state upgrade in June, the
“The upgrades were largely driven by the strengthening of the state’s fiscal condition and the downstream effects to the universities while at the same time incorporating the credit characteristics of each university,” Michael Osborn, Moody’s lead analyst on Illinois’ public universities, said of the latest actions.
Southern Illinois University was lifted to investment grade, Illinois State University moved higher up the investment grade scale, and Eastern Illinois, Northeastern Illinois, and Northern Illinois University inched closer to shedding the junk label. Moody’s has not acted on the flagship University of Illinois which it raised to Aa3 from A1 last December.
Moody’s last year withdrew its rating on Governors’ State University after it paid off its rated debt and it does not rate the state’s other two universities, Western Illinois University and Chicago State University.
The
As the state’s ratings tumbled over the last decade landing at one cut from junk, the public universities
It's rare that a state’s public universities get tagged with junk ratings, even regional schools, Osborn said.
The state’s new $46.5 billion general fund budget raised higher education appropriations by 5% or $248.5 million for universities and community colleges. The higher education budget totaled $2.24 billion with the 5% increase that the Pritzker administration said was the largest annual hike in two decades. The budget included a $122 million increase in the state’s need based financial aid monetary award program grants.
“Both are favorable for the university's operating environment, aiding greater budget predictability and supporting student affordability,” Moody’s said in all of the upgrade reports.
Operating performance will continue to face headwinds driven by near-term inflation and wage pressures and the ratings are constrained by many of the schools’ heavy reliance on state aid and challenging student markets for some based on projected demographics, Moody’s warned.
The upgrades offer multiple benefits as higher ratings broaden a buyer base and will help keep spread penalties in check which is all the more impactful given that interest rates are heading up. On the reputational front, improved ratings that come with financial stability broaden appeal.
“Students don’t want to go to a school that has severe financial trouble or might not be around in the future so financial stability can induce more students to apply,” said John Hallacy, president of John Hallacy Consulting LLC. “The wild card is if there’s a recession” and the state falls back into fiscal distress that trickles down the universities.
Moody’s also viewed the state’s decision to bolster pension payments positively. “Increased pension contributions by the state lessens the risk of the state shifting future pension liabilities and associated contributions to the university,” analysts wrote.
During past periods of fiscal distress, the state considered requiring universities to pay towards employee pensions.
The rating report noted capital spending at some campuses have lagged below what’s needed to offset depreciation which could weaken the universities “brand and strategic positioning over the long run.”
Pritzker recently announced $33.5 million for work at four universities that brings to $435 million spending on 149 deferred projects at community colleges and public universities.
"Smoothing sidewalks, fixing leaky pipes, repairing sewage lines and exteriors, replacing broken windows — these are the kind of upgrades that ensure students have a modern learning experience and can feel proud of the schools they attend,” Pritzker said at the announcement.
SIU
Moody's lifted Southern Illinois University to Baa3 from Ba1 bringing its issuer and housing and auxiliary facilities revenue ratings up to investment grade level. The school’s certificates of participation rose to Ba1 from Ba2. A stable outlook was assigned to the credits. The school has $186 million of debt.
The university receives about 25% of its core operating revenue from the state. “While enrollment stabilized in fall 2021 with a solid increase in freshmen students, challenges will remain as demographic projections in Illinois weigh on all of its public universities,” Moody’s said. “SIU's balance sheet is a source of credit strength” due to a rapid amortization schedule.”
Southern Illinois University has 24,000 students across its flagship Carbondale campus, Edwardsville campus, and medical campuses. SIU reported over $1.2 billion of total operating revenue in preliminary fiscal 2021 results.
Eastern Illinois
Moody's raised Eastern’s issuer and auxiliary facilities system revenue bonds by two notches to Ba1 from Ba3 and its certificates of participation to Ba2 from B1. The school has $72 million of debt. The outlook is stable.
The university receives over 50% of its revenue from the state. “Favorably, enrollment has shown signs of stability over the past few years,” Moody’s said.
While capital spending has been below depreciation for many years resulting in an increasing age of plant, a significant $119 million investment from the state for a new science building will address some need, Moody’s said.
Eastern is in Charleston with an enrollment of 8,600 for fall 2021.
Northeastern Illinois
Moody’s raised Northeastern’s issuer rating to Ba1 from Ba2 and its COPs to Ba2 from Ba3. The school has $47 million of debt. The outlook is stable.
The university receives over 50% of its overall operating revenue from the state and “while operating performance has strengthened, recent improvement is bolstered by non-recurring federal pandemic support with future performance reliant primarily on the ability to generate net tuition revenue, increased state support, and cost containment efforts,” Moody’s said.
Brand and strategic positioning challenges are evidenced by sustained and persistent enrollment hits that have driven it down by more than 40% over the past decade.
NEIU is a regional public university with multiple campuses in the Chicago area and is designated by the U.S. Department of Education as a Hispanic-Serving Institution. Fall 2020 student enrollment was 4,672 students and fiscal 2020 operating revenue was approximately $170 million.
Northern Illinois
Moody’s raised Northern’s issuer and AFS ratings to Ba1 from Ba2 and its COPs to Ba2 from Ba3. The outlook is positive. The university has $261 million of debt.
The school relies on the state for 40% of its operating revenue and “faces significant long-term fiscal challenges despite recent improvements,” Moody’s said.
“The positive outlook reflects prospects for credit improvement if the university is able to maintain continued operating performance stability and increase liquidity, driven by increased state funding and enrollment growth,” Moody’s said.
Northern Illinois University is a multi-campus public university with its main campus in DeKalb and a fall enrollment of 13,153.
Illinois State
Moody’s raised Illinois State’s already investment-grade rating, lifting auxiliary facilities system bonds up one notch to Baa1 from Baa2 and the COPs to Baa2 from Baa3. The school has $171 million of debt. The school relies on the state for 40% of its operating revenue. The outlook is positive.
“Despite a difficult market environment, enrollment levels have been generally stable, reflecting high demand for ISU's residential experience and diverse program offerings,” Moody’s said.
Founded in 1857, Illinois State, based in Bloomington-Normal, is the oldest public university in the state. It reported a fall enrollment of more than 20,200 and fiscal 2021 operating revenue was $611 million.
