Puerto Rico's ongoing fiscal struggles could continue to have negative implications for rated colleges and universities in the commonwealth in the coming year as it has in the past, Standard & Poor's Ratings Services believes.
In June 2015, it downgraded the University of Puerto Rico to CCC-minus/negative, in tandem with the rating on the commonwealth, given the university's significant dependence on governmental revenues (about 68% of 2014 revenues). Although appropriations are not pledged to the university's bonds, they make up the largest portion of revenues available for operations.
Any delay or reduction in appropriations could have a serious effect on the university's operations. Standard & Poor's also lowered the rating on University of the Sacred Heart to BBB-minus from BBB, in August 2015, based on its view that the university's continued enrollment decreases and the commonwealth's continued modest economic decline and fiscal uncertainty would further constrain consumer budgets and future enrollment.
For the remaining three universities it rates in Puerto Rico (Inter-American University of Puerto Rico, Ana G. Mendez University System, and Polytechnic University of Puerto Rico), it does not yet know the full effect of the deepening recession on future credit quality.
As private universities, the aforementioned institutions do not depend on local government revenues as does University of Puerto Rico. However, in its opinion, private institutions will remain vulnerable to the local economy, which will in turn lessen affordability, which will likely create enrollment pressure during the next year or two. Moreover, highly educated graduates have been seeking employment off the island, which will accelerate as a result of the economic uncertainty. Lastly, the number of high school students graduating on the island has been diminishing in recent years, and the changing demographics have been pressuring university enrollment.
Declining enrollment could jeopardize tuition revenue if the number of students decreases sharply; in turn, if management teams are not able to cut expenses to match enrollment levels, operating performance could suffer.
As a result of wealth and income levels on the island, Pell grants constitute a high percentage of tuition revenue. In this regard, tuition revenue of the private universities it rates is not directly dependent on the uncertain local economy. They remain vulnerable, however, to constrained consumer budgets and potential Pell grant federal funding or eligibility changes, all of which limit tuition flexibility at each institution.
Specifically, if cohort default rates escalate sharply to levels near federal limits for Pell grant eligibility, the result could be sanctions and loss of federal funding, thus challenging future operating performance.
The management team at each institution remains committed to enhancing revenue and controlling expenses in light of the local operating challenges.
