CHICAGO – Three of Illinois' public universities were downgraded, one to junk, as impacts from the state's almost eight-month overdue budget continue to ripple.
Without a budget, the schools' state aid is blocked.
Moody's Investors Service's downgraded Eastern Illinois University's auxiliary facilities system revenue bonds to Ba1, one notch into speculative grade territory, from Baa3, and dropped its certificates of participation three notches to Ba3 from Baa3 late Wednesday, when it acted on the ratings of eight state universities.
Northern Illinois University was lowered one level to Baa2 from Baa1 and Northeastern Illinois University was lowered one notch to Baa3 from Baa2.
Five schools, including the flagship University of Illinois, were affirmed. The others are Southern Illinois University, Illinois State University, Governor's State University, and Western Illinois University.
The outlook on all eight remains negative.
Three sit at the cusp of investment grade.
Moody's does not rate the $14 million of debt from Chicago State University, whose struggles are the most acute of the nine state universities. It recently announced the cancellation of spring break to end the semester early because it is running out of cash needed to stay open.
Republican Gov. Bruce Rauner and the Legislature's Democratic majority remain at loggerheads over a fiscal 2016 budget, leaving universities to fend for themselves because their state support requires an appropriation. Several bills have been floated to get money to the universities but none have been to both the Democrats and Rauner's liking.
"The only thing standing in the way of funding for Illinois universities is the Democratic majority who refuse to call bills that would truly fund higher education. If the Democrats in the legislature passed either House Bill 4539 or Senate 2349, all of Illinois' public universities, community colleges and MAP [monetary award program] grants would be funded because the bills give the Governor the authority to redirect funding to those programs," Rauner's spokeswoman Catherine Kelly said.
Democrats are opposed because the bills give Rauner new powers to adjust spending. A new bill would free up funds by canceling the state's repayment of $450 million in interfund borrowing owed, but its fate is unclear. Concerns over the funding crisis prompted a recent warning from the Higher Learning Commission, which accredits the universities.
"The lack of state funding is putting Illinois colleges and universities at serious risk and jeopardizing the future of students," commission President Barbara Gellman-Danley wrote in a recent letter to state leaders.
The commission 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.
Eastern Illinois was rated A3 as recently as 2013, when Moody's began a series of downgrades and reviews of Illinois state universities.
This week's downgrade to junk affects $121 million of debt. The school recently announced various cuts and layoffs to help manage through the funding crisis.
Eastern is especially hard pressed to cope without its state funding given enrollment declines that have strained its balance sheet. It relies on the state for about 40% of its operating revenues.
"Thin liquidity, declining enrollment, and high reliance on state funding" drove Moody's downgrade. Liquid reserves are expected to be exhausted by the end of the fiscal year.
The auxiliary facilities system revenue bonds are rated higher because of strong reserves that roughly equal AFS debt outstanding, are legally restricted to support only AFS expenses and debt obligations, and hold a priority claim on net tuition revenue should net AFS revenues be insufficient to cover debt service.
The COPs have lower ratings because they lack those stronger features. The rating, among other things, reflects the "near exhaustion" of unrestricted reserves and a lack of anticipated revenue until the net wave of tuition payments in the summer, Moody's said.
The university, which is located in Charleston and serves 8,500 students, owes a $3.7 million payment on a portion of its COPs in April and $146,000 on another piece in August.
"The negative outlook reflects the expectation that the university's liquidity position will remain severely pressured," Moody's wrote.
Moody's downgrade to Northeastern Illinois University's roughly $34 million of debt cited "challenges posed by the state's ongoing budget impasse, along with declining enrollment, thinning operating performance and execution risk on strategic initiatives."
NEIU's stronger liquidity position is offset by a material decline in operating performance over the last three years.
The Chicago-based school hopes to benefit from the opening of the university's first residence hall in fall 2016, but execution risk around the project and weak early demand indicators add risk.
"The outlook captures the fact that an extended period of time without any state appropriations beyond the end of the fiscal year could stress the university's ability to sustainably cover all obligations," Moody's warned.
The Northern Illinois downgrade affected $199 million of AFS debt and $12 million of COPs.
The school has moved to reduce expenses and manage liquidity but narrow cash flow is expected to continue for the next few years due to enrollment declines in the face of a competitive student market, combined with high leverage and relatively modest balance sheet reserves.
The school is in DeKalb but operates several satellite campuses. It benefits from its market role as one of Illinois' largest regional public universities with diverse academic offerings.
Moody's affirmed the University of Illinois' Aa3 rating on AFS bonds, the A1 rating on south campus development bonds, and A2 rating on healthcare related bonds. The university has $1.6 billion of debt. The flagship benefits from diverse revenue streams and strong liquidity that has allowed it to weather the lack of state aid.
Moody's also affirmed Illinois State University's A3 rating as the university prepares to sell $37 million of refunding AFS revenue bonds early next month. The school is in Bloomington-Normal.
Moody's affirmed the Baa3 ratings of both Western Illinois University and Governor's State University.
The eight universities rated by Moody's carry about $2.4 billion of debt.
