CHICAGO – Four of Illinois’ junk-rated public universities won an upgrade Monday from S&P Global Ratings, which cited the near term fiscal relief that should come from passage of a fiscal 2018 state budget.
The ratings of all seven of the state’s nine universities rated by S&P were taken off watch status. They were placed there in April as analysts awaited the outcome of fiscal 2018 budget deliberations. If the state entered a third fiscal year on July 1 without a spending plan in place S&P had warned it could drop the state’s BBB-minus rating to junk.
"The rating actions reflect our view that these universities' immediate liquidity risks as a result of the state's failure to provide timely payment of operating appropriations are mitigated with the recent passage of the fiscal 2018 budget and retroactive payment anticipated for fiscal 2017," analyst Ashley Ramchandani said.
With the one notch upgrade to the BB-plus level, Southern Illinois University and Governor’s State University moved closer to restoring the investment grades they had lost due to the impasse, which cut into their funding levels. Northeastern Illinois University and Eastern Illinois University were upgraded to B-plus from B. All four schools now carry a stable outlook.
S&P affirmed the A-minus ratings of the flagship University of Illinois and Illinois State University and assigned a stable outlook. Western Illinois University’s BB-minus rating was affirmed and assigned a positive outlook.
The $36.1 billion fiscal 2018 budget pushed through by the Democratic-led General Assembly with the help of some GOP members who broke with Gov. Bruce Rauner cuts higher education spending by 10% from fiscal 2015 levels. While the schools must now make due with lower aid levels, the budget “provides some monetary relief after two consecutive years of uncertainty and limited funding.”
The new budget comes as the funding drought had threatened some universities’ accreditation which could have hurt student access to federal financial aid. Many have cut programming and staff, raised tuition, and some closed early as they struggled without their full state funding.
The schools’ pressures are far from over as state coffers will remain low on cash even after passage of $5 billion in tax increases.
“Given the universities' reliance on state funds to support operations, the timing of funding distributions to these institutions will be pertinent,” S&P said. Monetary award grants for lower income students have gone out to schools and some operating appropriations are expected to be released this month.
Longer term, S&P said it would be watching to see how the schools recover from the cuts they imposed to manage through the impasse and the damage to their reputations. “These cuts have, in our view, weakened many of these institutions' competitive market position with regard to faculty, staff, and student recruitment,” S&P said.
In a separate report that concluded the universities can expect relief, S&P highlighted the long road to recovery ahead. "In our opinion, the full impact of the new budget – and the end of the protracted state budget impasse on the universities' operations, finances, enrollment, and overall performance – cannot be immediately determined," wrote analyst Jessica Wood.
With the new spending authority, the state’s average annual funding for higher education from fiscal 2016 through fiscal 2018 is at about 80% of the fiscal 2015 level. Average annual state funding for those three years is $1.5 billion, compared with $1.9 billion in fiscal 2015, according to a report from the Chicago Civic Federation.
S&P last stung some of universities with downgrades in April that left a total of five in junk territory. Moody’s Investors Service then struck, downgrading all seven universities it rates, leaving only U of I and ISU with investment grade ratings.
The schools rely on the state for about 40% of their operating funds, although the percentage is lower for the flagship. The nine schools carry more than $2 billion in outstanding debt, with most issuing under two structures – certificates of participation and auxiliary revenue bonds.