Illinois state universities face coronavirus fiscal fallout
Illinois' public universities are grappling with the threat COVID-19 poses to state aid levels, enrollment, and already battered ratings while still recovering from the fiscal upheaval caused by the state’s two-and-a-half year budget impasse.
Many of the state schools lost their investment grade ratings during the budget stalemate that griped the state from 2015 to mid-2017, and now face uncertain prospects heading into the next school year.
Gov. J.B. Pritzker has warned the proposed 2021 budget that would cover the fiscal year beginning July 1 requires a major rewrite due to the economic toll of the pandemic. The General Assembly has cancelled in-person sessions.
S&P Global Ratings' shift to a negative outlook on the state's BBB-minus rating, combined with concerns that state aid will take a hit, and the still weakened position of some of the universities led the agency to revise its outlook on the seven state universities it rates to negative from stable.
“In our opinion, for the rated public universities, the impact from weaker economic conditions could mean a material reduction in state funding and appropriations for higher education,” S&P wrote last week.
The state outlook change reflected the strains posed to the state’s tax base by the “stay at home order” in place that closed all non-essential businesses. Schools are also shuttered.
Illinois expects to receive about $2.7 billion from the $2 trillion stimulus/relief package approved in late March. It will help cover the costs of dealing with the disease caused by the novel coronavirus, but not the tax losses.
Illinois has not yet offered any estimates on tax losses, but a state legislative commission and university research group have warned that billions could be lost in state income and sale taxes depending on the severity of the recession.
“In previous times of fiscal stress, the state has delayed or reduced appropriations to universities, which we believe could occur again given our view of the onset of a global recession and the potential for budgetary stress at the state level,” S&P said.
The state's position, with lower reserve levels and elevated fixed costs from pensions, debt service, and retiree healthcare “makes it particularly vulnerable," S&P wrote. "We believe that this will likely lead to reduced appropriations and financial performance implications for universities.”
The state revenue pressures compound sectorwide struggles for higher education institutions, including the near-term loss of auxiliary revenues such as housing after campuses were vacated because of coronavirus concerns, and weakened operating results.
The picture remains murky going forward, because of the unknown duration of COVID-19 and potential declines in fall 2020 enrollments.
Illinois' regional universities face more risk as they’ve spent the last two years rebuilding their enrollment base, faculty, and reserves and rely most heavily on state support for operations.
“In addition, the declining investment performance and endowment market values, and weaker fundraising could also negatively affect ratings,” S&P warned. “These factors exacerbate pressures many of these schools already face, including a weakening demographic profile with a declining population of potential college applicants; significant outmigration of students to out-of-state institutions; and fairly thin balance sheet cushions to offset operating.”
S&P rates the flagship University of Illinois and Illinois State University A-minus. That’s three notches above the state’s rating of BBB-minus.
“These universities have, in our opinion, demonstrated more robust demand profiles, larger endowments, and more manageable debt burdens, which all provide support to the ratings,” S&P said.
The other five are junk rated.
Southern Illinois University and Governors State University are rated BB-plus; Western Illinois University and Northeastern Illinois University are rated BB; Eastern Illinois University is rated BB-minus. S&P does not rate Northern Illinois University or Chicago State University.
Moody’s Investors Service rates the University of Illinois A1 and Illinois State Baa2. The remainder of those it rates are at a speculative grade: Southern and Northern Illinois at Ba2, Governors State at Ba3, Northeastern Illinois at B3, and Eastern Illinois at B1. All have a stable outlook. It does not rate Western Illinois or Chicago State.
The nine schools rely on the state for about 40% of their operating funds, although the percentage is lower for the flagship. The nine schools carry more than $2 billion in outstanding debt, with most issuing under two structures: certificates of participation and auxiliary revenue bonds.
The nine universities wrote last week to the state’s congressional delegation pleading their case for additional relief because they incurred costs of about $224 million with only $140 million covered by the last stimulus/relief package. They support the request made by the Association of Public and Land-grant Universities that Congress provide an additional $47 billion in emergency funding for students and institutions of higher education.
“Over the past several weeks, we have taken unprecedented steps to safeguard the health, well-being and education of our students while maintaining our commitments to our employees and to the communities we serve. These measures have taken a significant financial toll,” the schools wrote.
The expenses include refunds for room and board; costs of transitioning to online education and telework; expenses associated with mitigating and remediating the impact of COVID-19, including assisting relief and response efforts, cleaning our campuses, and safely ramping down research activities; and lost revenues from cancelled programs and events, closed facilities and delayed grants.
Half of the $140 million the schools expect from the Coronavirus Aid, Relief, and Economic Security (CARES) Act is to be passed on to students for emergency financial aid grants.
The schools said they have a combined enrollment of more than 180,000 students and more than 48,000 employees.
The universities had been pressing for more than the 5% aid boost Pritzker offered in his proposed $42 billion 2021 general fund budget.
That hike, however, was contingent on voter adoption of a constitutional amendment allowing the state to move to a progressive income tax rate structure from a flat rate. If voters don’t approve the change, the higher education increase is among $1.4 billion of spending that would be withheld.
Now coronavirus-driven revenue losses put the entire budget proposal in question.
During the impasse between former Gov. Bruce Rauner, a Republican, and the General Assembly’s Democratic majorities, the state did not have adopted budgets for fiscal 2016 and 2017, and higher education appropriations were limited, damaging all of the schools.
Many dipped deeply into reserves, cut programs and staff, raised tuition, and cut some school days. The Higher Education Learning Commission warned in 2017 that the accreditation status of some schools was at risk if the impasse continued. Such a loss would block the flow of federal student aid.
The state’s public colleges and universities lost more than 72,000 students, eliminated nearly 7,500 jobs, and the strains cost the Illinois economy nearly $1 billion per year, according to a 2017 report from the Illinois Economic Policy Institute and the Project for Middle Class Renewal at the University of Illinois at Urbana-Champaign.