Budget stress drives Hartwick College deeper into junk

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A steep revenue dip amid deficit struggles was cited in a two-notch downgrade for the already-junk-rated Hartwick College in Oneonta, New York.

Moody’s Investors Service lowered Hartwick’s debt rating to Ba3 from Ba1 Wednesday citing a 20% decline in operating revenue the past five years despite efforts to incrementally trim expenses. The private liberal arts school lost its investment-grade rating in July 2017.

The new lower rating affecting $38 million of bonds issued by the Otsego County Capital Resource Corporation which have a final maturity date in the 2046 fiscal year. Moody’s assigned a negative outlook putting Hartwick at risk of a further downgrade as the small college seeks to navigate a challenging higher education landscape that is particularly difficult for private colleges in the Northeast.

‘The downgrade is driven by Hartwick's materially increasing and now very deep operating deficits that will persist through at least fiscal 2020 and most likely beyond,” Moody’s analyst Christopher Collins wrote. “The college is relying on supplemental endowment draws to fund operations which will result in further reductions in liquidity.”

Collins noted that Hartwick is further challenged by having a small scale of operations. It has, according to Moody's, a high-cost education model with net tuition revenues accounting for about 81% of the college’s total operating revenue. Hartwick has seen declines in tuition revenues the past few years in a competitive student market environment, which Collins said will likely persist for the foreseeable future.

“The negative outlook acknowledges the college's structurally unbalanced operating performance driving continued liquidity declines,” Collins said. “Absent a significant increase in philanthropy, it will be difficult for the college to restore fiscal balance.”

The $39 million of 2015 general obligation bonds Hartwick issued through the Otsego County Capital Resource Corporation are backed by any legally available moneys of the college and further secured by an interest in unrestricted gross revenues. There is no debt service reserve fund.

Despite an anticipated spend down in liquid reserves in fiscal 2020, Hartwick retains some financial flexibility to work through its fiscal challenges with wealth that provides “solid” coverage of debt and operating expenses, according to Collins. The college stabilized enrollment in the fall 2019 with 1,180 students and has no additional near-term borrowing plans.

"We are well aware of the competitive higher education marketplace and continually adjust our base of operations to account for shifts within this market,” Paula Lee Hobson, Hartwick’s vice president for college advancement, said in a statement. “Our strategic investments add to our expense base in the short term, but are necessary to create a new and successful revenue platform that addresses shifting market priorities, upon which to operate in the mid- to long-term.”

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