CHICAGO – Passage of a stopgap Illinois budget that keeps the spigot of aid at least partially flowing to the state's cash-hungry public universities was overshadowed by fresh credit erosion.
Downgrades for six of the state's public universities came from Moody's Investors Service Thursday before the ink was dry on Gov. Bruce Rauner's signature of stopgap funding for state services and universities and fiscal 2017 funding for kindergarten through 12th grade education.
Several schools sunk to junk level following the action.
S&P Global Ratings followed with its own action on Friday. Analysts lowered the state flagship's credit, underscoring the deepening pressures on the prolonged budget impasse on university balances sheets, enrollment prospects, and planning.
The University of Illinois lost its double-A level credit in the downgrade tied to the state's own recent credit hit in which S&P downgraded the state to BBB-plus. S&P dropped the university's auxiliary facilities system revenue bonds and certificates of participation to A-plus from AA-minus.
"The negative outlook reflects our view of the weakening financial situation in Illinois, its impact on operating appropriations, and the potential for negative rating actions on the university due to the prolonged state impasse and budgetary challenges for fiscal 2016 and 2017," said analyst Jessica Wood.
While the stopgap funding helps, it doesn't solve the state or universities' long term funding woes and without a substantial agreement among elected leaders, S&P said state appropriation prospects remain uncertain.
The flagship retains a rating higher than the state because of its operational independence, strong demand and selectivity, and healthy reserves. The credit however is capped at three notches above the state due to its reliance on aid.
S&P also placed Illinois State's A-plus rating on credit watch with negative implications last week. It reflects "our view of Illinois' weakening financial situation, its impact on operating appropriations, and the potential for negative rating actions on the university due to the prolonged state impasse and budgetary challenges for fiscals 2016 and 2017," said analyst Jessica Matsumori.
Like the rating agencies, investors also are looking for a long-term solution. "We don't see Thursday's short term budget measure making a material difference in the market's perception of Illinois' higher education network," said Tom Schuette, co-head of credit research and portfolio management at Gurtin Fixed Income Management LLC. "The bill provides short term relief, but we believe many high-quality investors are staying on the sidelines as they wait to assess the damage done by the state's unprecedented dysfunction."
The impact on schools of the a larger budget solution also weighs on investor minds placing "tremendous uncertainty in the market about what demand and matriculation levels will look like and how individual university's finances will trend in coming years," Schuette added.
Moody's socked six Illinois public universities -- Eastern Illinois University, Governors State University, Illinois State University, Northern Illinois University, Northeastern Illinois University and Southern Illinois University. It affirmed the University of Illinois' $1.4 billion of debt but downgraded its healthcare debt.
Moody's reports complete a review launched in early June that was spurred by the rating agency's downgrade of the state's general obligation rating to Baa2 from Baa1. The outlook on all the schools is negative.
The Moody's blows came late Thursday on the same day that state lawmakers approved a series of stopgap budget bills aimed at funding some services through the 2016 calendar year. Lawmakers entered the second fiscal year July 1 without full year's budget in place. The bills approved last week provide $1 billion for higher education, doling out about $650 million for the state's nine public universities.
Rauner signed the package Thursday evening that when coupled with aid approved in the spring gets most of the schools to about 80% of their previously approved funding levels while Eastern, Western Illinois University, and Chicago State University will get to about 90%.
Uncertainty over the remainder of fiscal 2017 remains as Rauner and lawmakers will attempt to hash out a long term spending plan to stabilize state finances after the November elections. Community colleges, some of which also have been hit with recent downgrades and face further credit erosion, will receive $115 million and about $150 million will fund low income student grants.
Moody's affirmed the University of Illinois' Aa3 rating on $1.1 billion of auxiliary revenue bonds and $258 million of COPs, and the A1 on $47 million south campus development bonds. The rating agency dropped $85 million of health services facilities system bonds to A3 from A2.
The flagship has weathered the state's budget gridlock better than most others in the state system. The rating affirmation reflects "the university's excellent liquidity providing significant flexibility to manage the lack of regular, full direct state funding over a multi-year period," Moody's said.
The university projects a sizeable $2.16 billion of remaining unrestricted liquidity compared to $2.6 billion at the close of fiscal 2015. The school generates $5.5 billion of revenues and benefits from $4.8 billion of total cash and investments.
"While UI has some ability to grow student related revenues based on its still strong reputation, prolonged budget challenges will more materially impair its strategic positioning and longer term financial health," Moody's warned.
The flagship operates campuses in Urbana-Champaign, Chicago, and Springfield and has an extensive healthcare operation. The downgrade of the health bonds was due to strains on cash flow, with expected pressures on pledged revenues from Medicaid reimbursement and weaker system utilization.
Southern's $231 million of housing and auxiliary facilities system debt was lowered to Baa2 from Baa1. The school's $39 million of COPs fell two notch to Baa3 from Baa1. "The downgrades reflect SIU's heavy reliance on the state of Illinois and prolonged absence of a state budget that will have a material negative impact on cash flow, already modest liquidity profile, and enrollment," Moody's said.
The school's rating benefits from its sizeable operating scope and scale benefiting from a good market draw as a large, multi-campus comprehensive public university. SIU operates campuses in Carbondale and Edwardsville with an enrollment of more than 31,000 and operating revenue of $1.15 billion.
Illinois State's $78 million of auxiliary facilities system bonds were lowered to Baa1 from A3 and its $51 million of COPs dropped to Baa2 from A3 as it struggles to manage without full state aid levels that has left it with very thin cash flow. The state's oldest public university is located in Bloomington-Normal serving 21,000 students with revenue of $533 million.
Moody's downgraded Northern's $192 million of facilities bonds to Baa3 from Baa2 and its $12 million of COPs landed in junk at Ba1 after being downgraded from Baa2. "The downgrade of the AFS bonds to Baa3 reflects expected weakening of operating cash flow and unrestricted liquidity due to delayed and only partial funding of fiscal 2016 state appropriations," Moody's wrote.
The school benefits from its leadership team's aggressive cuts and careful liquidity management to cope with the budget impasse. Northern is based in DeKalb and operates three satellite campuses.
Northeastern's $33 million of COPs lost their investment grade rating after falling two notches to Ba2 from Baa3 due to "increasing credit risk due to the university's unsecured obligation to pay and the its ability to terminate the installment contract absent legally available funds," Moody's said.
"Further stress is expected from uncertainty as to the amount and timing of state funding for fiscal year 2017. This uncertainty exacerbates possible enrollment and operating pressures from uncertain demand for its new student housing facility," Moody's wrote. Northeastern is located in Chicago with an enrollment of more than 10,000 and is a U.S. Department of Education designed Hispanic-Serving institution.
Governors State's facilities systems bonds fell to the junk rating of Ba1 and its COPS landed even deeper at Ba2 in downgrades driven by its heavy dependence on state aid, its weakened liquidity, deficit operations, and ongoing risks in transitioning to a comprehensive university while state funding levels remain challenged. The school is located about 30 miles south of Chicago.
Moody's dropped Eastern's auxiliary facilities bonds three notches to B1 from Ba1 and its COPs landed even deeper at the Caa1 level from Ba3. "The downgrades reflect EIU's highly stressed financial position, nearly exhausting all of its liquidity at the close of fiscal year 2016, the likely continuation of steep enrollment declines and no assurance on the timing or level of future state funding," Moody's warned. Eastern is located in Charleston.
On average, the state's public universities rely on state appropriations for about 37% of their operating funds while community colleges rely on the state for an average of 13% of their operating revenue. MAP grants bring community college funding aid up to an average of 28%.
All nine of the state's public universities have warned of potential layoffs and one, Chicago State, closed early this spring. The state has 39 community colleges and nine public universities.
