DALLAS - Moody's Investors Service has restored the stable outlook on $228 million of University of Arizona debt as the university braces for deep cuts in state funding.
Moody's rates the university's senior-most bonds Aa2 and certificates of participation Aa3. The previous negative outlook returned to stable without a ratings change.
The outlook revision comes as the university system prepares to issue $228 million of debt.
It plans to issue two series of refunding COPs, a tax-exempt $89.5 million and a taxable $20.9 million. The tentative date for the issue is March 30.
Two series of revenue bonds will include a tax-exempt $96.7 million and a taxable $10.97 million. Proceeds will include $88.4 million of new money for a Biosciences Research Laboratories project.
The Moody's outlook improvement comes despite a $9.1 billion state budget passed March 7 that reduces funding for Arizona higher education by 14%. The nearly $100 million funding reduction was even larger than the $77.5 million, or 10%, proposed by Gov. Doug Ducey.
"The trend of defunding our universities goes against the state's goals for economic growth and creating opportunity for all Arizonans," Eileen Klein, president of the board of regents, wrote in a policy statement after the budget was announced.
"Arizona's public university system is foundational to the state's economic prosperity, yet our state leads the nation in funding cuts, significantly impeding our ability to be competitive and, more importantly, to serve our students," added ABOR Chair Mark Killian.
Arizona's universities were hit particularly hard during the 2008 recession. From 2007-12, per-student state funding decreased by 50% and tuition doubled. At the same time enrollment increased 17%, or 23,000 students.
Moody's analysts Mary Kay Cooney and Eva Bogaty attributed the revised outlook to the Feb. 27 merger of the University of Arizona Health Network with Banner Health.
"The new relationship with the larger and financially stronger healthcare partner is expected to bring stability to UA's medical education and research components, as well as some growth of financial resources," the analysts said.
"Further supporting the Aa2 rating is healthy student demand leading to strong net tuition growth, significant levels of sponsored research funding from diverse sources, solid and rising gift support, and consistent state support for roughly one-third of debt service," the analysts noted.
"Challenges facing UA include pressure on state operating appropriations for operations, thin reserves and liquidity relative to debt and operations, in addition to increased competition for federal research funding," they added.
The board of regents is seeking legislation that would allow the universities to retain savings from refunding bonds rather than returning the savings to the general fund. ABOR is also working on legislation authorizing the universities to develop independent benefits programs by 2017.
With $1.6 billion of direct debt, the UA System has revenues of $1.7 billion, creating a debt ratio that Moody's considers "very high."
"Debt to operating revenue is a pro-forma 0.9 times, compared to the flagship median of 0.5 times," the analysts wrote. "The weak leverage is somewhat mitigated by state reimbursement for nearly one-third of UA's debt burden."
The UA Health Network's merger with Banner eases the burden considerably on the system, analysts said.
As the merger was developing, Standard & Poor's downgraded the network's bond debt to BBB from BBB-plus and retained a negative outlook. The S&P downgrade and negative outlook followed Moody's downgrade to Baa2 from Baa1.
"The merger adds credit strength by bringing a more financially stable partner to the healthcare enterprise," Moody's said. "The university and Banner have committed to greater collaboration in research."
