New Jersey Gov. Chris Christie’s budget philosophy is for the state and local governments to operate more efficiently with less revenue rather than increasing taxes or fees.
The Republican governor is also applying that ideology to New Jersey’s public colleges and universities. His fiscal 2011 budget proposal includes a $173 million reduction in state aid to the higher education sector. At the same time, the administration is seeking to cap at 4% undergraduate tuition and general fee increases at state colleges and universities for the 2010-2011 school year.
Reductions in state aid are not new to New Jersey’s nine colleges and universities and its three public research universities. In addition, the state’s higher educational institutions have taken on more debt than state college and university systems in other states, since New Jersey typically does not issue bonds for higher education capital projects.
“The New Jersey publics are among the most nimble as far as having lived in this environment for many years,” said Fitch Ratings analyst Doug Kilcommons. “They have never been overly reliant on the state for funding.”
While a potential 4% cap on undergraduate tuition increases coupled with a reduction in state aid may restrict the schools’ budgets, Moody’s Investors Service analyst Roger Goodman said the issue now is how the colleges and universities will adapt to the potential changes.
“If you have an environment that moves more towards greater limitations on the tuition revenue piece, if that’s matched by greater controls of expenses and budgets to match that, or pursuit of other revenues that help offset that cap, you could still have a very financially viable and healthy institution,” Goodman said.
“Universities are very complex organizations with a lot of different activities and a lot of different revenue sources and a lot of control over their expense base,” he said. “So we’re really paying a lot of attention to how management responds to these kinds of issues like a budget reduction or like a tuition cap in determining how much of a credit impact there really is.”
Lower-rated institutions that are already facing budget woes would have less flexibility to take on revenue limitations, Goodman said. Moody’s rates the majority of New Jersey colleges and universities A2 and A3, while Fitch and Standard & Poor’s rate them mostly in the single-A category, with a few schools in the AA category.
Rutgers University is New Jersey’s top-rated public university. It carries AA and Aa3 ratings from Standard & Poor’s and Moody’s, respectively. Fitch does not rate Rutgers.
The institution with the lowest ratings is the University of Medicine and Dentistry of New Jersey. Moody’s and Standard & Poor’s rate the school Baa2 and A. Fitch assigns a recalibrated rating of A-minus. The prior rating was BBB-plus.
“I think the issues that UMDNJ faces and what’s reflected in our rating there are really not around this kind of issue,” Goodman said. “It’s more of the health-care related activities that are of a concern and a risk for the rating.”
Still, investors in New Jersey higher education bonds would probably view restrictions on tuition increases as a credit risk because it would limit an institution’s main revenue generator, according to John Mousseau, portfolio manager at Cumberland Advisors.
“You certainly don’t like it as a bondholder — it makes you less secure from the ability to raise debt-service coverage,” he said. “You don’t like it from that aspect.”
Mousseau said that while Christie’s overall initiative to reduce state spending for higher education and local governments would help New Jersey’s operating budget, the cost of borrowing for colleges and universities may increase as bondholders seek more yield to offset the tuition-increase limitation.
“Investors would demand a higher yield,” Mousseau said. “Whether they get it or not is the call of Mr. Market, of course.”
On Thursday, there were three trades on Rutgers’ Series 2009F bonds, amounting to a total par of $150,000. The average price to the customer was 105.302 for a yield of 4.286. The bonds mature on May 1, 2039, and have a 5% coupon.
While he does not support Christie’s proposed tuition increase cap, Darryl Greer, chief executive officer of the New Jersey Association of State Colleges and Universities, said outstanding debt for public higher education will continue to be paid.
“In terms of the immediate effect on current bondholders, there shouldn’t be an effect for projects that are going up now and are planned in the very near future — say, in the next year,” Greer said. “I think that the Legislature and the governor recognize that they shouldn’t interfere with that revenue or upset the bondholders or the bond market.”
Rating analysts agreed that coverage of current outstanding bonds would be sufficient, especially since much of the outstanding debt is backed by specific revenues tied to the capital projects.
“Some of a significant amount of what’s been borrowed for would be for things like a residence hall which may not be covered at all under the caps that the governor’s proposing,” Goodman said. “Or even if it was, that doesn’t mean that there’s not new revenue and revenue growth from having a new facility and housing students that you wouldn’t be housing otherwise. So it’s very important to look at it on a case-by-case basis at each university and how they’ve planned to absorb the debt that they’ve taken on.”
In looking at future infrastructure development, Greer believes that limiting a school’s revenue stream would hinder an institution’s ability to finance capital projects and make the school more competitive in the higher educational sector.
“On the long term, reductions through the state of New Jersey have not provided any significant funds for capital in 20 years,” Greer said. “And since institutions are pretty much financing things on their own, any limitation in the future on tuition and general non-capital fees will have a long-term effect on planning for future growth or future facilities. But I don’t see any immediate threat or alarm to current bondholders or current projects.”
In addition, the schools have spoken out against the proposal, saying that imposing a ceiling on tuition increases while the state reduces its support will cause harm.
“We are concerned about the burdens faced by our students and their families, and Rutgers is working hard to contain costs, identify savings, and to generate new sources of revenue,” the school said in a prepared statement. “No one wants to see large tuition increases, but in the wake of significant reductions in state appropriations for higher education, an artificial tuition cap isn’t appropriate either.”
Christie spokesman Michael Drewniak said the cuts in state aid, along with the proposed 4% tuition-increase cap, are necessary while New Jersey regains its fiscal footing. The governor’s $29.3 billion fiscal 2011 budget proposal addresses a $10.7 billion deficit. In addition, the state’s annual debt-service costs are significant, since it has $34 billion of outstanding debt.
“It’s really what you’re seeing across the board here,” Drewniak said. “We’re asking everyone to be more careful with their public funding and to be more resourceful. We recognize that this may, at first blush, appear difficult, and it’s not optimal. We understand that, but it really is just a reflection of the times that we’re dealing with. Everyone needs a break and that includes parents sending their kids to college.”
