CHICAGO – Illinois community colleges are under pressure that is likely to hurt their ratings, Standard & Poor’s said.
"Downward rating pressure is likely for CCDs [community college districts] with less than very strong reserves and revenue streams that are overly reliant on state revenue," analyst Blake Yocom said in a report published this week.
In addition to funding delays the two-year-schools are weathering because the state lacks a budget, they also face a possible reduction in state aid that could impact ratings over the intermediate term, the rating agency added.
“Although most community colleges have sufficient reserves to withstand the delayed state funding, as well as additional liquidity in their working cash funds, continued funding delays and potential state aid cuts in fiscal 2017 will likely lead to downgrades,” the report said.
“We would likely lower ratings on issuers that do not show plans to align their budgets and maintain their historically very strong reserves through necessary expenditure cuts and/or tuition and property tax increases,” it said.
S&P rates 26 of the state’s 39 two-year, community colleges. All but two – which are rated at the A-plus level -- are in the double-A category. Two carry a negative outlook while the rest are currently stable. Community college districts benefit from strong reserves, diverse revenue streams, autonomy over tuition and fees, and sizable and diverse tax bases, with some expenditure and revenue flexibility.
There’s wide disparity in the level of support they receive from the state – ranging from a low of 5% of operating revenues to a high of 43% -- and also in their surplus levels – ranging from a low of 1.4% of expenses to a high of 90.7%.
The state entered fiscal 2016 in July without a budget, bringing state aid payments to the community college system and public universities to a halt. Several legislative packages have been pitched that would free up their appropriations as well as funds owed to students under the state’s Monetary Award Program, which some schools have been covering. None have been able to clear both the General Assembly and win Gov. Bruce Rauner’s signature.
“From our conversations with issuers, the districts are expecting anywhere from 50% to 100% of state revenue in fiscal 2016 and have relied on reserves up to this point,” S&P reported. “On the expenditure side, issuer responses have varied but have mostly been through reduced staffing and program and course offerings.”
The schools are crafting are crafting their fiscal 2017 budgets with various state revenue stress scenarios and proposing corresponding revenue and expenditure adjustments to make up the shortfall. “The magnitude of the potential state funding cuts and management's response will likely drive any rating changes,” S&P said.
Recent negative rating actions due in part to the state budget impasse include Richland Community College District No. 537 and Parkland Community College District No. 505. Both are rated AA.
S&P put five of the state’s public four-year universities on CreditWatch last month and Moody’s Investors Service last month put the ratings of 19 Illinois community colleges and their $855 million of debt under review for a possible downgrade. Moody’s recently confirmed several of the ratings after a review.
