Moody's Ratings downgraded Northern Illinois University's issuer and revenue bond ratings to speculative-grade Ba1 from investment grade Baa3 and the university's outstanding certificates of participation rating to Ba2 from Ba1.
Moody's in Thursday's action also revised NIU's outlook to stable from negative at the lower rating.
The public university in DeKalb, about 65 miles west of Chicago, had $301 million of outstanding debt as of fiscal 2025.
NIU Chief Financial Officer George Middlemist said while the university was "disappointed" at the downgrade, "we certainly value the partnership that we have with Moody's and we understand their process.
"The reality is that the university has been dealing with a deficit for a number of years," he said, noting that NIU has a balanced budget this fiscal year.
"We'll see if we can deliver on that, but right now all signs point to us being able to deliver a balanced budget," he added. "We have an opportunity to begin to improve that rating in the next year or so."
In its rating report, Moody's said the downgrade to Ba1 stemmed from "a difficult operating environment," with wage pressures and years of spending growth leading to weakening operating results.
The downgrade of the COPs to Ba2 reflects "the issuer rating, the contingent nature of the obligation, the relative subordination to the auxiliary facilities system revenue bonds and limited unrestricted liquidity," Moody's said.
The university now faces deficit operations and a material decline in unrestricted liquidity, which Moody's said drove the rating action.
NIU's significant weakening of operating results in fiscal 2025 was compounded by collective bargaining agreements that limit its fiscal options, Moody's said.
"Improvement will depend on NIU's ability to control expenses and build back liquidity amid what will likely be modest revenue increases," the rating agency added.
While NIU's enrollment surpasses 13,000 full-time equivalents, the university is highly leveraged, with less than 1x debt service coverage on its outstanding debt service obligations in FY2025.
Still, Moody's highlighted NIU's expanded enrollment and financial aid opportunities, which it said opens the door to more budgeted revenue predictability.
The university's enrollment continues to grow "despite a competitive student market," Tatum Drazen, public projects and infrastructure finance analyst at Moody's, said by email.
"The stable outlook reflects expectations for the maintenance of close to breakeven operations with EBIDA sufficient to provide for adequate debt service coverage. It incorporates maintenance of wealth and liquidity levels with no substantial new debt," Moody's said in the rating report.
Drazen said NIU does not plan to issue debt in the near term and has no future debt plans. "They expect to receive money from the state for any capital projects (or) deferred maintenance," he said.
Middlemist said operating costs are continuing to grow throughout much of the higher ed sector, and "we certainly have contractual obligations with our employees… so that does drive costs up a little bit," he said.
"The positive is our enrollment was higher last year, our net tuition revenues are continuing to grow," he said. "The goal going forward is to really begin to rebuild the cash and strengthen our fiscal position."
The university is also trying to rein in spending by looking at opportunities for efficiencies, Middlemist said — shared services, combining positions to support multiple areas, and exploring different uses of technology, including artificial intelligence.
AI is "still evolving for everybody," he said, but NIU has tried leveraging it in the initial student contact process and in routine document preparation.
The university's strategic enrollment plan focuses heavily on retention, Middlemist added, and that was a driver for NIU's recent enrollment numbers. Enrollment was up in the fall semester about 4%, he said, which translated to an increase in revenues of about $5 million.
"When you think about the fiscal situation of the university, three years ago we were facing a $32 million deficit," he said, adding that they intend to "live within our fiscal means."
Moody's could upgrade the university if it sees signs of continued improvement in operating performance and debt service coverage. Other upgrade drivers include stronger liquidity; a healthier fiscal condition for the state combined with more state support for higher education; and enrollment and net tuition growth at NIU.
The university could see further downgrades if it fails to strengthen operating performance in FY2027 to at least 1x debt service coverage; if financial performance fails to respond to guidance; or if the state's fiscal condition weakens, Moody's said.
The distance between the issuer rating and the COPs rating could grow if there is a sustained deterioration of legally available non-appropriated funds, the rating agency said.
