CHICAGO - The declining number of Midwestern high school graduates is adding to the strains of the region's small colleges, according to a Moody's Investors Service comment.

"Availability of affordable and high-quality public options will weaken these colleges' ability to maintain enrollment and grow net tuition revenue," analysts wrote May 7. "With constrained revenue forecasts, expense controls will be vital to long-term fiscal sustainability for colleges with operating revenue less than $100 million."

Colleges are competing for a shrinking number of students and enrollment is expected to decline. About two-thirds of the 35 small private colleges rated by Moody's in the Midwest have experienced two consecutive years of smaller entering class sizes.

The number of high school graduates in the Midwest is expected to decline through 2016 followed by only nominal growth before a sharp decline in 2025.

At the same time, net tuition revenue is stagnant with rising tuition discount rates restricting revenue growth and limiting financial flexibility. About 40% of colleges discounted tuition by 50% or more in fiscal year 2013.

Some colleges have deferred capital investments but such a move offers only a short-term solution that can lead to long-term problems. "Failure to invest in facilities and programs, over time, reduces a college's ability to recruit and retain faculty and students," Moody's wrote. Capital investment dropped 45% over the past five years, leading to increased aging of plant.

Downward rating pressure is expected to continue. Recent Moody's downgrades have included Earlham College in Indiana, which is rated Baa1 with a negative outlook, and Ashland University in Ohio, which is rated Caa2 with a negative outlook.

The median rating for small private Midwest colleges is Baa1 versus a median rating of A2 for the private college sector as a whole, Moody's said.

Analysts noted that despite the challenges, some colleges are faring well. Colleges that are supported by strong governance and management will likely do better. Flexibility is also helped by a strong endowment that supports operations during times of transition or challenging operating environments.

"Private colleges with a strong market position, both regionally and nationally, with expense levers yet to pull, will be among the most well-positioned institutions for this sustained period of contraction in high school graduates and an ultra-competitive landscape," Moody's wrote.

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