Cory Hall at UC Berkeley

LOS ANGELES — Fitch Ratings downgraded more than $7.5 billion of the University of California's revenue bonds to AA from AA-plus, citing slower than anticipated progress toward stabilizing operating performance.

Fitch also downgraded the university's limited project revenue bonds and medical center pooled revenue bonds to AA-minus from AA. Its short-term F1-plus rating was affirmed.

Analysts said in a credit report that the university's operating margin slipped slightly in fiscal 2013 to negative 8.9% from negative 8.4% in 2012—its sixth consecutive year with an operating deficit.

"Fitch had expected operating improvement in fiscal 2013 as was noted in prior rating reports," Fitch analyst Colin Walsh wrote. "The systematic mismatch between revenue and expenses and lack of expected progress towards margin improvement are the primary drivers of the rating downgrade."

The university, chartered in 1868, is a comprehensive graduate research university with 10 campuses, including in Berkeley, Los Angeles, and San Diego. It also operates five academic medical centers, four law schools, and an agricultural and natural resources division.

The UC system continues to have a strong reputation for academic, research and medical care that continues to promote consistently strong student demand, analysts said.

It's rating is also strengthened by the university's strong financial cushion, stabilizing state funding, and resource efficiency.

Fitch assigns the rating a stable outlook, which reflects an expectation of marginal operating improvement for fiscal 2014 and beyond, based on the improved state funding environment and modest enrollment growth, coupled with tuition increases and cost-saving initiatives.

"Fitch also views positively the strong emphasis on system-wide cost containment and budgetary initiatives that UC's new president, Janet Napolitano, has implemented," Walsh wrote. "While she has only been in office since fall 2013, these timely actions should serve UC well following several very challenging years for the university."

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