Moody's lowers outlook on University of Arizona ratings to negative

Financial woes at the University of Arizona led Moody's Investors Service on Monday to revise the outlook on the school's Aa2 system revenue bond rating to negative from stable.

The rating agency pointed to a structural imbalance and uncertainty over the pace of operating performance improvements, along with continued integration risk related to the university's acquisition of for-profit, online Ashford University.

"Inability to right size operations in a relatively short period of time would further narrow the university's already thin liquidity profile," Moody's said in a report. "With turnover in management, recent evidence of weaker financial monitoring, and ongoing governance scrutiny, management credibility and track record, a key governance risk under our ESG methodology, is a key driver of this rating action."

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The outlook revision to negative comes after a Moody's commentary in December said heightened fiscal oversight of the university by the Arizona Board of Regents demonstrates "credit positive governance during fiscal crises."

Under pressure from Gov. Katie Hobbs, the board has taken action to address the Tucson-based university's troubled finances, which include a projected $177 million fiscal 2024 operating deficit.

In December, regents unanimously approved recommendations, including enhanced financial reporting and expenditure controls, after the University of Arizona's cash on hand fell below the board's minimum 140 days requirement. Officials said decentralized and unaccountable budgeting was the main driver of the fiscal problem.

Moody's listed factors that could lead to a downgrade of the university's rating, including multi-year monthly liquidity that falls below 100 days cash on hand, debt service below one times coverage, an inability to improve financial reporting and monitoring, and a "prolonged period of governance instability."

A presentation to the regents board in January indicated that without intervention, the university's fiscal 2024 beginning balance of $705 million, which was down from $845 million at the start of fiscal 2023, would drop to $510 million or about 70 days cash on hand.

Last week, Fred DuVal stepped down from chairing the regent board with Cecilia Mata assuming that role. At the same time, John Arnold took a leave of absence from his position as the board's executive director to concentrate on serving as the university's interim chief financial officer.

On Monday, Mata announced the board will reduce University President Robert Robbins' salary by 10% and eliminate his individual at-risk and multiple year performance compensation.

As for Moody's action, the university said the ongoing implementation of its "financial action plan will assure the University of Arizona can stand on solid financial footing for decades to come." The school's future "is exceedingly bright," it said.

"We are working with division and college leaders to review budget plans and to develop specific strategies for each individual unit to right size spending," the statement said. "We expect to know more about any reductions or adjustments, including potential layoffs, in late April as fiscal year 2025 budgets become finalized."

Ashford University had a troubled history before it became a university asset on June 30 and was rebranded University of Arizona Global Campus. The state of California successfully sued the school over misrepresentations it made to student loan borrowers, which led the U.S. Department of Education to approve $72 million in loan relief and repayments in August.

The University of Arizona said it was not responsible for Ashford's actions.

"While the (U.S. Department of Education) has not indicated a timeline on recoupment, we remain encouraged that we will achieve an outcome that is best for the students of UAGC and the taxpayers of Arizona," it said in a statement.

Moody's outlook revision also affects Aa3 ratings on the university's SPEED (Stimulus Plan for Economic and Educational Development) revenue bonds and certificates of participation. The university, which had nearly $1.3 billion of bonds outstanding at the end of fiscal 2023, is rated AA-minus with a stable outlook by S&P Global Ratings, which rates SPEED bonds and COPs at A-plus.