DALLAS — Barring an unforeseen crisis, Pima Community College will be completely out of debt a year from now.
But Arizona's second largest community college district will be fighting to maintain its accreditation.
"Keeping our accreditation is absolutely the most critical issue the college is facing," said chief financial officer David Bea. "We're working extremely hard to make sure we fulfill the accreditation criteria."
While PCC's straits are not as dire as those of City College of San Francisco — threatened by a shutdown next year due to loss of accreditation — it must remedy some serious management issues raised by its own accreditation provider, the Chicago-based Higher Learning Commission.
In placing PCC on probation on April 6, the accreditation committee cited failure to respond to reports of sexual harassment by a former chancellor, improper financial practices, and creating "a culture of fear and retribution that pervaded the administration of the college."
The HLC board gave the district two years to correct the deficiencies and required the district to undergo another evaluation in September 2014. If the HLC decides the district failed, it could lose its accreditation in 2015.
The probation prompted a negative outlook from Moody's Investors Service on the district's Aa1 rating.
"Moody's believes the accreditation challenges present significant risk to the district's overall credit profile given that the loss of accreditation would result in severe enrollment and financial loss, as the college would lose eligibility for federal financial aid, including Pell Grants," analysts wrote in the May 13 report. "Should the issue be resolved within the next two years and the college's financial position remains stable or improved, it is likely the negative outlook could be removed."
Standard & Poor's, meanwhile, affirmed its double-A rating on the district on June 25 and maintained a stable outlook in a report that did not mention the probationary status.
"Despite the district's very steady finances, which are somewhat offset by the strained state funding environment and recent declines in the tax base, we do not anticipate changing the rating during the two-year outlook horizon," wrote S&P analyst Kate Parmer.
Since the probation report was issued, the district has responded by hiring a new chancellor, sought volunteers for a public committee to address the deficiencies and posted the report on its Web site with a request for comments.
Lee D. Lambert, former president of Shoreline Community College in Shoreline, Wash., came aboard as chancellor at the Pima County district on July 1 after a public search by an independent citizens committee.
While the district is working to escape probation, it can be fairly sure that it will do so debt-free. The last payment on PCC's $100 million of bonds issued in 2001 is next June.
For Arizona community colleges, which typically operate multiple campuses and often have to adapt to changing economic demands, the debt-free status is far from typical. Four of Arizona's 12 community college districts carry no debt, but they serve much smaller populations than Pima County's nearly 1 million people, which includes the county seat of Tucson.
Bea calls the debt-free prospect "fairly unusual, especially for an institution our size.
"I would think a system our size would have a pretty sizable debt," he said.
The Pima district, in terms of enrollment, is about a third of the size of the Maricopa County Community College District that serves the Phoenix metro area. MCCCD ranks as the largest in the nation with 260,000 students.
The Maricopa district had about $616 million of outstanding debt or $6,637 per student in 2012, according to the Arizona Department of Revenue. With triple-A ratings, MCCCD held a competitive sale of $150 million of bonds for facilities on May 29.
The double-A-rated Pima district, which hasn't issued any general obligation bonds since 2005, has a debt load of only $123 per student — for now.
Statewide, total debt for community college districts decreased $21.8 million or 2.5% in fiscal year 2012, falling from $872.4 million to $851.6 million, according to the Arizona Department of Revenue.
The sparsely populated Northland Pioneer, Eastern Arizona, and the Gila and Santa Cruz provisional districts reported no debt.
Maricopa CCD accounted for 72% of total community college debt, so its $67.6 million, or 9.9%, drop drove the overall decrease.
Beyond the state, the threat to shut down City College of San Francisco is the most serious example of a large, troubled community college district.
Barring a successful appeal, the San Francisco district will lose its accreditation at the end of July 2014, though its $359 million of general obligation debt will remain the taxpayers' liability.
"A loss of accreditation threatens the district's ability to continue operations," Moody's analysts wrote in a recent report. "It also reflects a credit negative trend of growing accreditation pressure on California community college districts."
Loss of accreditation would lead to the loss of state grant funding and Title IV federal financial aid, which make up 54% of unrestricted general fund revenue.
Even the threat of lost accreditation can accelerate declining enrollment, a phenomenon that is already happening in many districts amid improving economies.
Pima Community College's enrollment fell 3.8% in fiscal year 2012 and the college anticipates another 10% decrease in fiscal year 2013.
"Our enrollment tends to follow economic cycles inversely," Bea said.
As demand for retraining classes and certification programs grew following the financial collapse of 2008, community colleges also suffered deep cuts in state funding.
State appropriations to the district have plummeted 68% since fiscal year 2009 amid drastic legislative budget cutting. In fiscal year 2012, state funding fell by 55% and is not expected to recover.
Despite the funding hardships, the Pima district maintained its credit ratings and what analysts at Moody's called a strong financial position through a combination of increases to tuition and fees and cutbacks in spending.
In June, the district's board approved a 2% increase in the primary property tax rate while reducing the secondary property tax that will pay off the remaining $1.4 million of debt.
With the debt erased from the balance sheet, the district has no plans to call another bond election for its six-campus system, Bea said.
"We're in pretty good shape with infrastructure," he said. "Our oldest campus was built in 1971, so it has some challenges. With a new chancellor, we'll be doing strategic planning. Part of the key to doing a good master plan is to find out where we're at and where we need to be."
