New Warning for Illinois Universities

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CHICAGO – As the alarms sounded by Illinois' cash-starved public universities grow more intense amid the state's budget stalemate, there is a new warning from a voice that packs a fiscal and reputational punch.

"The lack of state funding is putting Illinois colleges and universities at serious risk and jeopardizing the future of students," Barbara Gellman-Danley, president of the Higher Learning Commission, wrote in a letter sent late last week to state leaders.

The commission is the regional accrediting agency for nineteen states, including Illinois, and in effect holds the purse strings to federal financial aid. To maintain accreditation, a school must demonstrate the "availability of financial, physical, and human resources necessary to provide quality higher education," Gellman-Danley wrote.

"I recognize the pain of budget shortfalls," she wrote. "The economic challenges the state faces are significant, and difficult decisions undoubtedly must be made."

The commission sees red flags in the plight of some of the state's public universities, which have warned of layoffs and one possible closure because the flow of state support has been halted without a fiscal 2016 budget in place.

The commission said it 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.

"I am writing because I believe it is important for you to have all the relevant information before making the tough decisions that fall to your positions," the letter says.

The accreditation threat has so far done little to move state leaders; it comes with President Obama planning to deliver an address before the Illinois General Assembly about bridging political differences to find common ground.

The president comes to the state capital to mark the ninth anniversary of announcing his candidacy there; the focus of the speech is on the broader national political landscape, but it should resonate at the state capital where lawmakers have held the state budget hostage in a battle of political will.

"The governor cares deeply about the fiscal health of all of state universities," Rauner spokeswoman Catherine Kelly said. "The fact remains that they could all be funded tomorrow if the Democrats in the legislature supported HB 4539/SB 2349. That bill would fund MAP [Monetary Award Program] grants, community colleges and all of Illinois' public universities while giving the governor the authority to respond to an unbalanced budget by reallocating funds and reducing spending in a number or ways."

Divisions run deep on the bill between the GOP governor and the Legislature's Democratic majorities, as they have on many appropriation bills.

Democrats have rejected the Rauner-backed bills that would free up $1.6 billion because they would give him additional powers to move funds around and cut spending. Democrats instead passed a bill late last month that provided MAP grants and funding for community colleges, but not universities, and did not give Rauner any new powers he requested. The governor pledged a veto although the bill has not yet been sent to his desk.

The commission's warning is worrisome, several market participants said, and underscores the stress universities are under.

Moody's Investors Service warned of the potential impact of an accreditation loss in a special commentary published Monday that looks at the short-and long-term challenges the budget stalemate creates for Illinois universities.

The Higher Learning Commission warned Rauner and lawmakers of several potential outcomes of its reviews, the most severe of which would be withdrawal of accreditation.

"Loss of accreditation would have significant negative financial ramifications for any university, because enrolled students would not have access to federal financial aid," Moody's said. "Review of compliance with criteria for accreditation and sanctions would be less severe but still have negative outcomes for a university."

The pleas from higher education institutions have been amplified in recent weeks as their operations have become more strained. Chicago State University last week declared a fiscal exigency and has warned it could be forced to close. The declaration gives the school special powers to cut tenured staff and halt academic programming.

The budget battle creates long-term challenges for the universities, with the potential to hurt future enrollment levels and recruitment, state comptroller Leslie Geissler Munger warned last week as she announced the state's bill backlog was on pace to hit $10 billion this fiscal year.

Moody's echoed those concerns in its special commentary.

"Chicago State was the first, but may not be the last, of Illinois' public universities to take such action because in the absence of a state budget, the state's public universities face escalating financial and liquidity pressures," its analysts wrote.

The rating agency does not rate Chicago State but it does rate the state's other eight public universities. Six were downgraded last fall due to exposure to the stalemate and the impact on their operating revenues. All carry a negative outlook.

The schools have managed through a combination of reserve use, expense controls, and careful management of liquidity, but some have indicated that more material cost reduction measures are underway, including larger-scale layoffs. The state's universities generally lack the ability to borrow for working capital. Lengthy state payment delays back in 2010 prompted lawmakers to temporarily gave them special authority to issue notes for liquidity but there's been little talk about a similar move.

"The longer the budget crisis continues, the greater the likelihood that additional Illinois public universities will declare financial exigency to address costs," Moody's said. Such declarations can be a credit positive tool but Moody's said further credit stress is possible in the near term in the face of ongoing liquidity declines and operating pressures.

Long-term, the universities that already have been struggling with enrollment amid declining high school graduation levels could suffer the most.

"These declines will be exacerbated as some students increasingly consider more financially stable universities, either private colleges in state or alternative out of state options," Moody's suggested.

The eight universities rated by Moody's carry about $2.4 billion of debt, with the state flagship University of Illinois accounting for $1.6 billion.

Chicago State has about $14 million of outstanding insured debt from a 1998 issue with term bonds due in 2018 and 2023 term and debt service paid in June and December.

Governor's State University, Eastern Illinois University and Western Illinois University carry Moody's lowest investment-grade rating of Baa3.

Northern Illinois University, Southern Illinois University, Illinois State University, and Northeastern Illinois University are the other state universities. They rely on the state for between 30% to nearly 50% of operating revenues, a figure higher than the average in other states, according to past rating reports.

The University of Illinois retains ratings in the double-A category, weathering the state delays better than its sister institutions because of its strong liquidity. The school collects more than $5.4 billion of revenues annually from diverse sources. It holds a national market position as Illinois' flagship, land-grant university. The Big 10 conference member has 76,000 students at its Urbana-Champaign, Chicago, and Springfield campuses.

Still, it hasn't gone unscathed. In an investor presentation ahead of a planned refunding, the university reports that it has frozen hiring, salaries and made administrative cuts. It's holding on to more than $500 million in unpaid state vouchers and capital appropriations are frozen.

Chicago State has been hit the hardest and student and faculty held a protest Monday to draw attention to the severity of the school's plight. While the school has warned of closure, it's also said it is committed to completing the current semester and graduating its seniors.

"Over the past year, this university has made significant cuts to personnel and spending but has reached a tipping point where the ability to function is threatened," board of trustees chairman Anthony Young said after the special vote late last week.

"I want to be very clear, this action may help the administration manage this crisis in the short term, but exigency is by no means a solution to our budget woes," he said in his statement. "The only real solution is for the governor and the leaders to come together and provide the necessary funding to avoid further damage to our universities."

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