CHICAGO – S&P Global Ratings dropped the ratings hammer on six Illinois public universities and Chicago’s City Colleges system because of strains from the state’s historic budget stalemate.
The rating agency socked four universities with three-notch downgrades, pushing two into junk territory and sending two others deeper into speculative grade, while the state's flagship school and another were dropped by one notch. Chicago City Colleges, which operates seven community college campuses in Chicago, suffered a four-notch hit.
The downgrades may not be over; S&P placed the schools on credit watch with negative implications in actions published late Thursday. It’s news that will greet lawmakers who are set to return to work early next week after a two-week spring break.
"The downgrade and CreditWatch negative status reflect our belief that the state may fail to pass a fiscal 2017 budget by the end of May, which would likely result in no additional operating appropriations distributed to the university for the remainder of fiscal 2017," analysts wrote.
If Republican Gov. Bruce Rauner and the General Assembly’s Democrats can’t resolve their differences by the end of May, any resolution will require a super-majority vote “making the likelihood of such passage more remote,” S&P added.
--Southern Illinois University saw its rating on housing and auxiliary facilities revenue bonds and certificates of participation fall three notches to the junk level of BB from BBB.
--Western Illinois University’s auxiliary bonds and COPS fell three notches to BB-minus from BBB-minus.
--Northeastern Illinois University’s already junk rating of BB for its university facilities system bonds and COPs fell three notches to B.
--Eastern Illinois University’s already junk rating of BB on auxiliary facilities bonds and COPs sunk three notches to B.
-- Governors State University’s already junk rating of BB-plus on its university facilities system bonds and COPs fell one notch to BB.
-- University of Illinois auxiliary facilities bonds and COPs were dropped one notch to A from A-plus as the agency applied its criteria limiting its rating to three notches above its supporting government. Illinois general obligation bonds are rated BBB. The flagship campus has weathered the aid drought better than its regional counterparts due to its diverse revenue streams and strong enrollment trends.
--The lone school to escape a downgrade was Illinois State University, although it too is now on watch with negative implications. S&P affirmed its A rating on auxiliary revenue bonds and COPs.
--City Colleges’ general obligation bonds were dropped due to weakened unrestricted net assets and a trend of operating deficits that has led to a negative fund balance "along with liquidity pressure caused in part by reduced and unreliable state funding,” said analyst Blake Yocom.
S&P does not rate the state’s two other public universities, Chicago State University and Northern Illinois University. The state's public universities carry more than $2 billion in outstanding debt. The state has shorted universities by more than $2 billion in expected aid over the last two fiscal years.
The downgrades leave only the University of Illinois and Illinois State with investment grade ratings and the regionals at junk.
“In our opinion, the speculative-grade ratings on the regional universities' bonds reflect their respective levels of vulnerability to nonpayment due to business and event risk associated with the state's failure to provide funding support, given the universities' reliance on state funds to support operations,” S&P said in a statement Friday. “Each institution has been evaluated independently."
S&P’s action followed Moody’s Investors Service's April 6 downgrade of one university and placement of all seven of the universities it rates on review for a downgrade. Moody’s review to be completed in next 90 days is measuring each university's near-term debt service commitments against pledged revenues and related reserves.
The Illinois House returns to session Monday and the Senate on Tuesday. The university rating actions add to the growing pressures on lawmakers to resolve the fiscal crisis before the new fiscal year begins July 1 although no end is in sight. The state has been warned it could lose its investment-grade rating which would mark a first for any state.
Tensions have only been rising between the Republican governor and Democrats as Rauner launched an advertising campaign touting the need for his policy and governance reforms as part of budget fix.
A sweeping bipartisan Senate package has stalled. House Democrats passed a stopgap appropriation that would give the public university and community college system $559 million – on top of $1 billion approved last June -- but Rauner is opposed to the short-term fix.
Illinois Secretary of Education Beth Purvis issued a statement after the downgrades saying: “The governor understands and is gravely concerned about the severe financial challenges facing our students, colleges and universities due to the General Assembly’s failure to pass a balanced budget. This crisis is why he is working every day to find consensus on a budget that is truly balanced, and ensure the state's higher education system thrives in the long-term.”
“These are disturbing developments, but the warning signs have been obvious,” John Patterson, spokesman to Senate President John Cullerton, D-Chicago, said of the downgrades. “State schools need support from the state and they're just not getting it. The Senate president's goal in trying to put a budget deal together has been to restore stability for our state and its vital institutions. We will keep trying.”
One Democratic candidate in the 2019 governor’s race pounced on the downgrades.
“State universities are the backbone of our state and help us attract talent for the next generation,” said businessman JB Pritzker. “It’s downright wrong that students are paying the price for a political fight and failed leadership.”
While funding for 90% of state government activities goes on under continuing appropriations and legal orders, higher education aid requires an appropriation and the sector has received just pieces of aid in stopgap or special appropriation bills.
The seven schools on average relied on the state for about 40% of their operating funds in fiscal 2015 with the flagship the least reliant at 29.8% and Northeastern most reliant 45%, according to a March report from S&P.
The universities have all warned of the dire, long-term impact of the funding drought on their balance sheets, reputations, and ability to attract students as the impasse progresses and they are forced to cut programs and staff, drop school days, and raise tuition.
COPS are payable from state-appropriated funds and budgeted legally available funds but they are especially at risk as they represent an unsecured obligation that a university board can terminate if revenues are not available.
The auxiliary revenue bonds are typically secured by a pledge of net revenues of the auxiliary system as well as pledged fees and tuition and sometimes parking, dining, residential, athletic, and research facilities.