The outlook on United States colleges and universities is stable for 2013, with limited negative rating action anticipated, Fitch Ratings said in a recent report.
“Primary drivers of the sector are student demand and enrollment, balance sheet resources and liquidity, and risk management — these are the primary areas and they all remain relatively stable,” said Fitch analyst Joanne Ferrigan.
Negative rating or outlook actions are expected to be fairly isolated and likely to be limited to some private university credits that are already in the speculative-grade rating category, Ferrigan said.
For the majority of public institutions, Fitch has seen a greater focus on enrollment management, with an emphasis on retention and graduation rates. Overall enrollment is expected to remain stable for 2013.
In addition, most institutions have been able to manage their liquidity amidst mixed investment performance in fiscal 2012 and uncertainty in the financial markets.
“The majority of investment-grade higher education institutions have been managing their resources with the recognition of the importance of financial cushions, relative to both financial leverage and operating expenses,” the outlook report said.
Fitch noted the public institutions have also given attention to affordability by monitoring tuition costs and rates of increase in recognition of students’ ability to pay, while maintaining a competitive position.
For the fall of 2012, tuition levels had increased an average of 4.2% for private institutions and 4.8% for in-state students at public institutions, according to the College Board Advocacy and Policy Center.
Despite the stable outlook, the sector will still face challenges in 2013. Most notably, it will face the impending “fiscal cliff,” which refers to a series of federal taxing and spending measures set to kick in Jan. 1.
“While we recognize that current environment is challenging, we believe that it’s manageable,” Ferrigan said.
For most public institutions, state appropriation is among the largest funding sources, although the level of state support has declined in recent years and many institutions have adjusted accordingly.
While Fitch believes that the sequestration set to take effect in 2013 unless Congress and the administration act is unlikely, the agency does expect some level of federal deficit reduction to occur.
“To the extent the reductions include reduced funding for state programs, states will need to look for ways to accommodate the cuts,” the report said.
The sector’s stable outlook could be changed if Fitch sees a trend in declining enrollments, paired with an inability or unwillingness to increase tuition fees.
The outlook could also be pressured if the financial markets deteriorate to the point where investment performance declines sharply. Institutions that are heavily dependent upon earnings to support operations will likely see a negative rating action, the report said.