Six Illinois Universities Downgraded Amid Budget Gridlock

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CHICAGO – Six of Illinois’ eight public universities took a fresh credit blow from Moody’s Investors Service with downgrades stemming from exposure to the state’s fiscal strains and its budget crisis.

The downgrades late Monday affect $670 million of outstanding debt.

Several campuses were hit with multi-notch downgrades and three are now rated at the lowest investment grade level.

Moody’s downgraded Northern Illinois University, Southern Illinois University, Eastern Illinois University, Western Illinois University, Governor’s State University, and Northeastern Illinois University.

All carry a negative outlook.

Moody’s spared Illinois State University and the state’s flagship University of Illinois from downgrades.

The downgrades mark the latest spillover from the state’s budget stalemate, which provoked two downgrades last week to the state’s general obligation rating, including Moody’s one-notch cut to Baa1.

The gridlock has harmed the ratings of other credits, including Chicago convention center debt and the city’s motor fuel credit. It’s also been cited by analysts as a negative factor for some other local government credits facing state payment delays on their share of state income tax aid and gaming and motor fuel revenues.

“The spillover effect has begun to have a real impact on credits dependent on the state for cash, endangering other governments that are just bystanders” to the state’s gridlock, said Richard Ciccarone, president of Merritt Research Services. As the strains grow, Ciccarone said a danger is posed to the market’s “perception” of the state’s willingness to meet its obligations.

Monday’s downgrades come as university presidents have called on state leaders to resolve the budget stalemate.

“There is going to come a point where one of us in the statewide system is not going to make it, and shame on the state, shame on the players, shame on all of us if we get to the point where that happens,” Southern Illinois University’s President Randy Dunn said in a September statement.

Now at the lowest investment grade rating of Baa3, following two-notch downgrades, are Governor’s State University, Eastern Illinois University and Western Illinois University.

Governors State and its $22 million of debt were dropped citing the school’s significant exposure to the state.

Additionally, the downgrade incorporates the risks and opportunities associated with GSU’s shift to becoming a four-year university. The school is located in the far south suburbs of Chicago.

Eastern Illinois University and its $110 million of debt were cut due to its “very high vulnerability to state budget challenges given its 45% reliance on support,” Moody’s wrote.

“While management has demonstrated the ability to navigate through a challenging state funding environment to date, the cumulative effect of weak revenue growth and limited means to materially reduce expenses to adjust to lower enrollments has weakened operations and places additional stress on the university’s already thin liquidity profile,” analysts added. Eastern is located in Charleston with about 8,500 students.

Western Illinois University is a regional comprehensive public university near the Iowa border.

“Relative to other regional public universities in the state, WIU has a particularly thin liquid resource base, meaning that the incremental pressure from continued budget delays has a sharper negative impact on WIU than some of its peers,” analysts said.

Northern Illinois University’s $207 million of debt was dropped to Baa1 from A3, because of its high reliance on state funding for operations “with the state’s budget impasse and longer term budgetary pressures signaling increased likelihood of ongoing material reductions in state support.”

NIU has a modest liquidity cushion that’s allowed it to manage state’s near-term payment delays due to the budget impasse but “liquidity pressures will build if the state budget impasse continues into 2016,” Moody’s wrote.

NIU has struggled with enrollment declines in the face of a competitive student market, as well as its high leverage and thin financial resource coverage. The school’s strengths include its role as one of the state’s largest public universities with diverse academic offerings.

NIU is in DeKalb with three satellite campuses.

Southern Illinois University’s $289 million of debt was dropped one notch to Baa1. The downgrade was blamed on “SIU’s modest liquidity position and elevated 43% reliance on state appropriations, making it vulnerable to the state of Illinois’ weakening financial position and ongoing fiscal pressures,” Moody’s wrote.

While SIU’s liquidity position is modest, it has sufficient cash flow to manage through the state’s payment delays near-term and a large expense base from which it could cut over a prolonged period, Moody’s added. SIU is the second largest public university in Illinois, located in Carbondale with an additional campus in Edwardsville, with total enrollment of 31,557.

Northeastern Illinois University in Chicago and its $34 million of debt was dropped to one notch to Baa2 due to its exposure to the state for operating funds and the possibility of cuts that “place a strain on operations and liquidity.” Additional challenges include declining enrollment leading to moderation of historically strong operating performance.

Illinois State University’s A3 rating on $121 million of debt was affirmed due to its “ample liquidity, which has strengthened to 171 monthly days cash on hand for FY 2014 and is estimated to have improved further in FY 2015 that mitigates its exposure” to the state.

ISU is the oldest public university in Illinois and is located in the twin-city community of Bloomington-Normal near the geographic center of the state.

Total enrollment was approximately 21,000 students this fall.

Moody’s affirmed ratings on the University of Illinois’ $1.6 billion of debt including the Aa3 on its Auxiliary Facility System Revenue Bonds and Certificates of Participation, the A1 on the South Campus Development Bonds, and the A2 on the Health Services Facilities System bonds.

“University of Illinois’ ratings reflect very good liquidity enabling the university to manage through delayed receipt of state funding as the state budget impasse continues. The ratings also incorporate UI’s strong student demand, significant scale with over $5.4 billion of revenues from diverse sources, favorable overall financial resources, good cash flow, and a modest debt burden,” Moody’s said.

The university holds a national market position as Illinois’ flagship and land grant university and a Big 10 conference member with 76,000 students at its Urbana-Champaign, Chicago, and Springfield campuses.

Local governments, universities, and social service agencies are holding out hope that a Nov. 18 meeting between Gov. Bruce Rauner and legislative leaders from both parties will break the budget gridlock.

Rauner’s comments late Monday might have dashed some of those hopes. While some view the meeting as a positive development since all have not met since the spring, Rauner said at a public appearance he doesn’t expect a budget agreement to come from the meeting and he continued to press for his reform agenda items as part of a budget package.

“I’ve said all along that I will support tax reform and some new revenues if we do it the conjunction of major structural reform,” he was quoted as saying.

Rauner won’t agree to the Democratic leadership’s push for higher taxes to offset cuts in a roughly $36 billion budget and Rauner won’t consider new tax revenues unless Democrats pass his governance and policy initiatives like curbing labor negotiating rights at the local government level as part of a property tax freeze and worker’s compensation and tort reforms.

Local governments’ share of distributive aid continues but the state is behind and gaming and motor fuel revenues have been halted as the state grapples with dwindling cash on hand to abide by court orders and continuing appropriations at fiscal 2015. Revenues have shrunk this year as a temporary income tax hike partially expired Jan. 1. The state is carrying a $6.9 billion bill backlog and the comptroller earlier this month said the November pension payment would be delayed.

Standard & Poor’s said in a recent commentary that local governments have weathered the impasse so far as some credits benefit from bond structures with reserves. Sound liquidity has helped.

“With the budget impasse blocking only a limited number of revenue sources, most local governments should be able to get by without an immediate ratings impact because of adequate liquidity and reserves. If this were to last much longer, however, we might see more widespread effects,” Standard & Poor’s wrote.

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