Pittsburgh-based Robert Morris University saw its rating downgraded to Ba1 by Moody's Ratings last month, joining a wave of small colleges facing ratings pressure due to falling demand.
The private university, which has about $92 million of outstanding debt, is part of a growing list of smaller higher education institutions, particularly in the Northeast, that are facing increasing financial pressures as the pool of potential students shrinks.
The demand pressures have created two
The industry's first problem is the "demographic cliff." There will simply be fewer 18-year-olds to attend college, according to S&P Global Ratings Analyst Jess Wood. Birthrates in the U.S. declined around 2008, so the enrollment drop off is expected to begin next year. Smaller institutions have already started to see fewer students, she said.
Among the remaining college-aged population, fewer people want to attend universities than in the past, and trade schools and apprenticeships are becoming more popular, according to Lisa Washburn, chief credit officer at Municipal Market Analytics, Inc.
The pandemic amplified universities' existing economic problems, Washburn said. Fewer people could afford a degree, especially when inflation started rising, and some prospective students simply didn't want to attend college remotely.
That blow to tuition revenue takes a while to fade, Moody's analyst Patrick Ronk noted. If a university had a smaller-than-desired freshman class in 2021, that means it had a smaller-than-desired sophomore class in 2022. This happened to Robert Morris University.
"Robert Morris, in particular, in Fall 2023, they did have a good first-year class. They hit their enrollment targets," Ronk said. But "they're still living with a smaller class size from Fall 2020 and Fall 2021 enrollment."
The cost of doing business for universities has also become a pressure, Wood noted. Inflation drove up labor costs and interest rates, and these costs haven't abated even as inflation has slowed.
Universities received a lot of federal funds during the pandemic, but now that the funds have run out, the results of the current economic environment are stark, Washburn said. They're also bifurcated.
"Some schools have pricing power, others don't," Washburn said. "Those that have pricing power are those that are doing just fine."
The institutions that are "doing just fine": community colleges, flagship public universities and private colleges with strong reputations. These schools often have high brand recognition and large applicant pools that are more national than local, according to Washburn, granting them financial flexibility.
On the other end are smaller public and private institutions, especially liberal arts colleges. These schools usually accept a higher percentage of applicants, so they don't have much recourse when the number of applications decline. These schools' applicants are usually regional, Washburn noted, so it's not easy or cheap for them to expand their applicant pool.
The pressures are especially pronounced in the Northeast, Washburn said, a region with an aging population and a lot of small universities.
Joseph Krist, publisher of Muni Credit News, found several recent examples. Moody's downgraded Hartwick College in New York to Caa1 from B2 and revised its outlook to stable from negative, citing deep operating deficits and weakening liquidity.
S&P revised the outlook for Champlain College in Vermont to negative from stable. The college has a BBB- rating. "The school has a debt service coverage covenant of 1.10x, which was not met in fiscal 2023 with debt service coverage of negative 0.43x. Based on the legal documents, the remedy for this covenant violation was to hire an independent consultant, which was fulfilled," Krist wrote.
S&P also downgraded Albany College of Pharmacy and Health Sciences to BBB from BBB+ in a reflection of ongoing demand challenges.
Of S&P's rated universe of schools, about 30% to 40% of higher education institutions have an A rating or higher, a third are rated in the BBB range and 7% are non-investment grade.
The schools on the lower end of the spectrum, with less flexibility to respond to demand, face a perilous set of financial choices. Robert Morris University is making these choices now.
The struggling universities receive fewer applicants, and, as usual, accept most of those applicants. But every year, more and more of their applicants are also accepted into larger schools, Washburn explained,
To persuade these applicants to attend, the smaller schools offer tuition discounts — they've been hitting record numbers of tuition discounts in recent years, Washburn said.
"It becomes this negative cycle. Not really having that cushion on the acceptance rate," Washburn said. "Not as many students are accepting your offer because they're getting offers elsewhere. And then in order to attract students, you're discounting your tuition, and all of that creates revenue pressures."
The best-case scenario would be to attract new applicants outside of an institution's region, Wood said. Some schools are sending recruiters to areas where the population is growing, like California. But that takes a lot of resources and it can take years to yield results.
Schools also haven't pulled back significantly from issuing debt, Wood noted, even when interest rates rose.
"Because of all this demand pressure, you have schools that, if they have older buildings, older dorms, residence halls, older facilities, they may be still looking at demand and putting money to work on their facilities, maybe adding new buildings," Wood said. "When you're on a tour, those are things that are important to students."
Some schools are creating new athletic teams to bring in more students. Some schools are creating new majors and eliminating programs that don't attract enough revenue. Robert Morris is trying to strengthen and expand its business program, Ronk said, which is attractive to students who want high-paying jobs after graduation.
Richard Morris was not downgraded because of poor financial management. Moody's credit report noted the university was pulling in around $13 million of donations annually, and its investment in high demand majors yielded enrollment gains in Fall 2023.
Moody's downgraded Richard Morris because, in its strategic plan to respond to market pressures, the university plans to fix its budget deficits by drawing on reserves. This will lower its liquidity.
"We still expect them to make debt service payments and we don't expect them to close anytime soon, at this rating level," Ronk said.
Even if Robert Morris's strategic plan succeeds, the oversupply of higher education will have to fall in line with the demand.
"We're going to continue to see a steady pace of closures, mergers and affiliations continue within the sector," Washburn said.
Public universities can attempt these adjustments on a structural level. In 2022, Pennsylvania's public university system consolidated six institutions into two universities. The governor's budget request this year proposed merging the university system with the commonwealth's community college system.
Washburn said this could be effective if it reduces overhead costs and creates a feeder system from community colleges to universities.
When schools do close, there are better and worse outcomes, according to Wood.
Cabrini University
Cabrini made a responsible decision considering its falling admissions and budget deficits, Wood said.
"They could have continued to operate for several years," Wood said. "They made the decision to look for a partner while they were sort of in a position of some strength … they've made some agreements around the name and the continuation of some of the history and legacy of Cabrini University."
