BRADENTON, Fla. - Moody's Investors Service dropped Alabama State University's bond ratings to Baa1 from A3 amid an ongoing forensic audit and public relations issues over allegations of potential fraud, waste, and nepotism by the university's board.
The second downgrade in three months affects $233.1 million of rated debt, and the outlook remains negative, Moody's said in concluding a credit review Jan. 21. The agency also downgraded ASU's 2005 lease revenue bonds to Baa2 from Baa1.
Moody's dropped the university's bond rating to A3 from A2 in October awaiting results of the forensic audit.
Many of the concerns leading to both downgrades are the same: weakening financial performance "combined with ongoing public and stakeholder relations issues including a forensic investigation requested by the governor, sexual harassment litigation, and an informational request from its regional accrediting body," according to analyst Caitlin Bertha.
ASU's operating performance has "markedly deteriorated" as expense growth over the past three years of 15.5% has "markedly exceeded" revenue growth of 5%, Bertha said. A fiscal 2012 operating deficit of 4.6% resulted in debt service coverage under 1 times.
Gov. Robert Bentley, president of the ASU board, hired Forensic Strategic Solutions Inc. in December 2012 to perform a forensic financial audit that preliminarily found "obfuscation by the university throughout the investigation and multiple acts of potential fraud, waste, and nepotism by the board of the university." The final forensic audit is not complete, and the Southern Association of Colleges and Schools has requested documents from the university explaining FSS's early findings.
ASU has not filed a financial audit for 2012, and a review of some bond issues found that neither the delayed audit nor ongoing difficulties have been disclosed with the Municipal Securities Rulemaking Board's EMMA filing system. Alabama State did not respond to a request for comment on the late audit, though it did issue a lengthy statement saying the university has concentrated on investing in the campus, which has increased its debt load.
"The uncertainty of the [forensic] audit not being completed in a reasonable period of time has caused a domino effect upon ASU and is one of the reasons for our downgrade, as has the request for information from the university's accrediting body and the general negativity, which has kept ASU's management team off task from its regular daily duties of administering the university," said Freddie Gallot, vice president of Business & Finance.
Moody's said the challenges facing the Montgomery-based historically black university include "management's inability or unwillingness" to significantly cut operating expenses and staunch expense growth as operating revenues stagnated.
Gallot said that his division has scrutinized expenditures "in a proactive approach to improve financial standing," limited hiring and continues to search for cost-saving measures and new sources of revenue. The university board intends to appoint a special Credit Rating Restoration Committee to work with the president and the senior management on the fiscal plan with the goal of restoring its "pre-downgrade, A-category level" ratings, he said.
ASU's new president, Gwendolyn Boyd, becomes its first female leader on Feb. 1. Boyd, who most recently worked at Johns Hopkins University in Baltimore as the executive assistant to the chief of staff in the applied physics lab, has a bachelor's degree from ASU, a master's from Yale, and a doctorate in divinity from Howard University.
Standard & Poor's affirmed a bbb-plus standalone credit profile rating to ASU in November citing the financials and ongoing forensic investigation. S&P affirmed its A-minus underlying ratings on ASU's debt, and said the outlook is negative.
