CHICAGO – Moody’s Investors Service downgraded four of Illinois’ public universities and left intact the ratings of four others after a review of $2.6 billion of rated debt sparked late last year by the state government’s deteriorating credit.

The action late Monday ends Moody’s placement of the credits on review for a possible downgrade. The review was announced in mid-December after the agency revised its outlook on the state’ A2 general obligation rating to negative from stable.

Analysts undertook the review due to the universities’ dependence on the state for operating funds and ongoing state payment delays that have pressured the schools’ cash flow and liquidity. The analysis looked at fiscal 2012 results, the latest enrollment figures, projected 2013 results and how the schools were managing with state delays and cuts to aid.

Moody’s undertook a similar review last spring which was concluded with the ratings of all eight being confirmed.

Four schools did not fare as well in the latest analysis. Moody’s lowered the ratings of Governors State University, Northeastern Illinois University, Northern Illinois University, and Eastern Illinois University all by one notch to the A3 level. 

Moody’s confirmed Southern Illinois University’s A2 rating, Western Illinois University’s A2 rating, and Illinois State University’s A2 rating. It also confirmed the state flagship University of Illinois’ ratings attached to $1.56 billion of debt. All four schools were assigned a negative outlook.

The flagship university’s auxiliary facility system revenue bonds and certificates of participation are rated Aa2, its south campus development bonds are rated Aa3, and its health services facilities system bonds are rated A1.

Governors carries $24 million of debt. It relies on the state for 46% of its operating revenues.  The high reliance on the state “as well as the university’s modest operating base, balance sheet and enrollment” drove the downgrade, according to Moody’s. The outlook is stable.

Northeastern Illinois has $64 million of debt and relies on the state for 46% of its revenues. Its challenges also include a highly competitive market and declining enrollment along with a moderate balance sheet. “State appropriations are the university’s largest revenue stream and it is therefore particularly vulnerable to funding cuts and payment delays,” Moody’s wrote. The outlook is stable.

Northern Illinois has $217 million of rated debt and relies on the state 37.5% of its revenues. A negative outlook was assigned. In addition to the state’s struggles, the downgrade is due to “turnover in senior financial leadership over the past year and ongoing legal investigations; multiple years of enrollment declines…and stagnant net tuition revenue in fiscal year 2012,” Moody’s wrote. “NIU demonstrates the weakest expendable financial resource coverage of direct debt for all Illinois public universities.”

The university announced last week that chief of operations and executive vice president of finance and facilities Eddie Williams was taking a leave of absence. The university said the step was being taken until a federal investigation is resolved. It came days after the Federal Bureau of Investigation raided the campus police department to search records. Last month, the former police chief was fired and a former NIU police officer was indicted on sexual assault charges. Last fall, several NIU employees were indicted in connection with an investigation involving the sale of university scrap metal.

Eastern Illinois has $121 million of rated debt and relies on the state for 41 % of its operating revenues. The downgrade stems from its reliance on the state, deeper enrollment declines than other regional public universities, and projections of stagnant to declining net tuition revenues. The outlook is stable.

Among the schools with ratings affirmed, Western Illinois has $30 million of debt and relies on the state for 41% of revenues. The affirmed rating reflects “the university’s market position as a regional public university with two campuses, providing enrollment diversity, as well as favorable operating performance, healthy debt service coverage, moderate leverage and sufficient expendable financial resources to cushion debt and operations.”

Southern Illinois has $319 million of rated debt. It benefits from its position as the second largest public university here by enrollment and operating revenue and satisfactory operating cash flow margins. Its negative outlook is due to the state’s fiscal position and enrollment declines that are straining future net tuition revenue growth. It relies on state aid for 41% of operating revenues.

Illinois State has $208 million of rated debt and relies on the state for 38% of its funding. Moody’s said the rating is supported by “an established student market position, strong liquidity and balance sheet resources …. as well as its ability to absorb reductions or significant delays in state funding.”

The University of Illinois relies on the state for 31 % of its operating revenues but its favorable financial profile helps offset the state’s struggles. The credit benefits from the school’s flagship status “with strong student demand, national position as a leading research university, strong liquidity and growing balance sheet resources supporting debt and operations.”

The negative outlook on the school’s general credit is due to the state’s struggles and the school’s high debt levels and modest financial resources compared to peer institutions. The negative outlook on the healthcare bonds is also due to a reliance on state and federal Medicaid and Medicare funds.

Another credit challenge for all eight is the potential shift in a portion of pension expenses off the state’s back and on to university rolls if Illinois adopts pension reforms.

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