Enrollment declines at the 14 universities in Pennsylvania's State System of Higher Education underscore their eroding operating margins, according to a municipal analyst.

Those schools are more dependent on in-state applications and have a less diversified revenue stream, said Alan Schankel, a managing director at Janney Capital Markets in Philadelphia.

By contrast, Pennsylvania's three primary universities — Pennsylvania State University, Temple University and the University of Pittsburgh — benefit from strong brands helped partially from television exposure to sports teams, strong national demand and stable enrollment.

"It's quite a contrast between the big three — Penn State, Temple and Pitt — and the 14 schools in the system," said Schankel.

All state schools receive state aid, but dependence varies from 23.4% for the state system to roughly 5% at Penn State and Temple. Gov. Tom Wolf's $30 billion fiscal 2016 budget proposal increases the aid by 11%, partially restoring cuts predecessor Tom Corbett made, although the still-unsigned budget is subject to further politicking between Democrat Wolf and the Republican legislature.

"The governor's proposal gives a pretty significant increase," Schankel said. "It remains to be seen how much they'll get. But they won't go backwards. I don't see state aid sliding."

The state system includes Bloomsburg, California, Cheyney, Clarion, East Stroudsburg, Edinboro, Indiana, Kutztown, Lock Haven, Mansfield, Millersville, Shippensburg, Slippery Rock and West Chester universities. Smaller, state-sponsored Lincoln University and Thaddeus Stevens College of Technology have little or no debt, so Schankel omitted them from his report.

According to U.S. Department of Education National Center for Education statistics, the number of Pennsylvania high school graduates is expected to decline by 18% from 2008 to 2021. Applications to the state system schools dropped 24% over the past five years.

"They'll probably have to consider some kind of consolidation across platforms or downsizing — West Chester and Cheyney, for example," said Schankel.

Schankel said those schools still display strong liquidity. He cited $1.3 billion, or 272 days, cash on hand. The direct debt of the system is $860 million, he said, but this spikes to $2.3 billion when factoring in off-balance-sheet debt for privatized student housing projects.

"This student housing debt, which typically carries ratings in the triple-B category, is revenue debt [student rental payments], with bondholders having no recourse to the state system for debt service payment," said Schankel, "but since the financings and the projects being financed are integral to the state system, the debt is a consideration in analyzing the state system's credit worthiness."

Fallout from the child molestation scandal that engulfed its football program had minimal effect on applications and enrollment at Penn State, according to Schankel. Former assistant football coach Jerry Sandusky received a 30-to-60 year sentence for molesting 10 boys. As the scandal emerged in 2011, the university fired college football's winningest coach, Joe Paterno. Paterno died in 2012 at age 85.

Penn State is a solid credit, said Schankel, with a history of "strongly positive operations," $6.7 billion of cash and investment and manageable debt, about $1 billion in bonds.

Pitt, central to its city's "eds and meds" rebounds, generates the strongest metrics of the schools studied. Though the school neither owns nor operates hospitals, its medical school benefits from a strong relationship with the University of Pittsburgh Medical Center, an independent nonprofit that operates one of the country's largest hospital systems.

Temple's biggest challenge, according to Schankel, is its health system subsidiary, a legally separate entity that issues debt under an indenture separate from the university. As Philadelphia's safety-net provider, Temple University Health System serves indigent and uninsured patients, among others. Continued losses could force the university to provide further support and compromise its ratings, said Schankel.

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