CHICAGO – A $600 million infusion for Illinois' cash-starved public higher education system wasn't enough to avoid major job cuts at Chicago State University.
Friday's announcement of layoffs for one-third of the staff at the beleaguered school, which primarily serves an inner-city base, illustrates the prolonged weakening of a higher ed system strained without regular state aid distributions as Illinois enters its 11th month without a budget.
The recent passage of partial funding for higher education and student aid funding marked a rare moment of agreement in a state capital locked in partisan gridlock. But it does little to calm concerns about the long-term impact of the funding drought on schools' balance sheets and images.
The package provides only about 30% of the schools' annual support, though for Chicago State it amounts to more than 50%. Senate Democrats on Tuesday unveiled legislation that would provide an additional $450 million to bring overall funding levels up to 60%, but its fate is unclear.
"While the stopgap relief is certainly welcome, we would anticipate that the market will continue to punish public universities and community colleges until the state is able to accomplish a more sustainable solution," said Tom Schuette, co-head of credit research and portfolio management at Gurtin Fixed Income Management LLC.
"I think everyone is still trying to assess both the short-term fiscal damage and the long-term reputational damage that is being done to the higher education system in the state," he said. "It is hard to believe that the state's woes are not resulting in students that have choices deciding to look elsewhere. However, how broad the impact will be and how lasting is yet to be determined."
Alan Schankel, a managing director on Janney Capital Markets' fixed income strategy team, shares the same concerns.
"I do not believe the $600 million will stem market perception of credit deterioration," he said. "Much damage has been done already with downgrades, and continuation of the budget impasse puts into question the ability of divided government to address not only the current year but future years."
As schools wait for state lawmakers to resolve their budgetary divide, they must also worry about long-term aid cuts as the state grapples with a $5 billion to $6 billion deficit.
"The funding issues are not just those of timing due to budget delay, but also magnitude since the administration's proposed budget for 2016 and 2017 includes large reductions in public university aid," Schankel added.
While 90% of state government funding continues through ongoing appropriations, court decrees and consent agreements, higher education and social services have gone unpaid. Amid growing outcry from schools that are exhausting reserves and cutting staff, Rauner last week signed the stopgap funding aimed at getting schools through the summer.
Senate Bill 2059 provides $350 million for four-year universities and $75 million for two-year junior colleges. While the funding is less than half of what Democrats had proposed in their version of the fiscal 2016 budget, Chicago State will see less of a cut. The remaining appropriation would fund Monetary Award Program grants for lower-income students.
The bill draws from a surplus in the Education Assistance Fund, a special education-related account.
The funding will only go so far, rating agencies have said in commentaries issued in recent days.
The funding "will have little positive impact on community college funding in fiscal 2016" because it only provides two months' worth of funding, Standard & Poor's said.
The state has 39 community colleges and nine public universities.
S&P has sounded alarms over the impasse's impact on community colleges, although it believes many are weathering the funding drought due to sufficient reserves and the ability of some to issue working cash bonds, which four-year schools lack. S&P rates 26 of the 39. All but two, which are rated at the A-plus level, are in the double-A category.
"Despite these tools, we expect community colleges to remain under pressure and management responses will be critical to maintain credit quality. Failure to find solutions to address the continued delay of the majority of state revenue and the high likelihood of cuts in state funding for fiscal 2017 and beyond could lead to downgrades," S&P warned.
The rating agency had previously put five of the seven state's public four-year universities it rates on CreditWatch. It covers the auxiliary facility system revenue bonds and certificates of participation of A-minus rated Eastern Illinois University, Governors State University, Northeastern Illinois University, and Western Illinois University; and Southern Illinois University, which is rated A. All had carried negative outlooks.
Moody's Investors Service previously put the ratings of 19 Illinois community colleges and their $855 million of debt under review for a possible downgrade. Moody's has confirmed some while downgrading others. Moody's also downgraded three four-year universities in February.
The state's public universities carry $2.4 billion in debt.
Moody's called the funding bill a positive development but said it falls far short of resolving a funding crisis.
"This is credit positive in the short term, relieving some of the immediate liquidity pressures confronting the state's higher education sector. However, the measure provides only part of the funding that these institutions originally expected in fiscal year 2016," Moody's added. "The sector will continue to confront longer-term funding pressures as the state remains unable to resolve its own severe budget issues and significant pension underfunding."
Rauner has proposed 20% to 30% cuts in his budget proposals.
On average, the state's public universities rely on state appropriations for about 37% of their operating funds while community colleges rely on the state for an average of 13% of their operating revenue. MAP grants bring community college funding aid up to an average of 28%, Moody's said.
Moody's rates the state flagship University of Illinois Aa3, Illinois State University A3, Northern Illinois University Baa2, Southern Illinois University Baa1, Northeastern Illinois University Baa3, Eastern Illinois University Ba1, and Governors State University Baa3. It does not rate Western Illinois University and Chicago State University. All carry a negative outlook.
Chicago State University, whose struggles are the most acute of the state's nine public universities, is not rated by S&P either. It cancelled spring break in an effort to end the semester early because it was running out of cash needed to stay open and over the weekend announced it was cutting one-third of its staff.
In recent weeks, Moody's Investors Service has downgraded to A1 from Aa3 Lake Land Community College District 517's rating, affecting $100,000 of debt, citing to exposure to the state's challenges. It carries a negative outlook.
Richland Community College's rating on $160,000 on debt was downgraded to A1 from Aa3 and a negative outlook assigned because its profile no longer was commensurate for the category despite healthy reserves.
Joliet Community College District 525's $44 million of debt was dropped to Aa2 from Aa1, and a negative outlook assigned, due to limited liquidity and moderate exposure to the state.
Moody's also has downgraded Community College District 521 Rend Lake's rating to A1 from Aa3, affecting $2.2 million of GOs, and a negative outlook was assigned. The district has strong liquidity but its cash reserves are diminished due to the delay.
Moody's also downgraded Community College District 505 Parkland's rating to Aa3 from Aa2, affecting $61 million of GOs, and assigned a negative outlook. Its liquidity is sufficient but its reserves also have deteriorated.
Community College District 522 Southwestern Illinois College was dropped to Aa3 from Aa2, and a negative outlook assigned on $27 million of debt, due to reserve erosion.
The rating agency recently has affirmed Illinois Central's Aa2 rating and negative outlook on $38 million of debt. It also confirmed Harper Community College 512's Aaa rating. A negative outlook was assigned to its $170 million of general obligation debt.
Community College District 528 in McHenry County's Aa1 issuer rating on $1.4 million of debt was affirmed because it has resources to manage delays, but its outlook was revised to negative. Community College District 532 Lake County's Aaa was affirmed and a negative outlook assigned, impacting about $75 million of debt.
Oakton and Elgin community colleges were previously affirmed.
Concerns over the funding crisis prompted a warning earlier this year from the Higher Learning Commission, which accredits the universities. The commission has notified all Illinois colleges and universities that if they expect to suspend operations or close they must provide a detailed plan on how students will be assured of continuing their education.