Standard & Poor's cut its rating on the College of DuPage, Ill., two notches to AA amid continuing management turmoil.

CHICAGO – Continuing turmoil at the College of DuPage, Ill. has cost the two-year school one of its triple-A ratings.

Standard & Poor's last week hit the college that serves an affluent area west of Chicago with a two-notch downgrade and warned of further action by assigning a negative outlook. The rating moved to AA from AAA on the Glen Ellyn-based school, formally known as College District No. 52.

The school has $284 million of outstanding general obligation debt and most recently issued $84 million in 2013 to finance a wide range of capital improvements. Its bonds are secured by its full faith and credit unlimited ad valorem tax pledge.

While other public colleges in Illinois are struggling due to exposure to the state's budget impasse, the DuPage community college's woes are of its own making.

"The downgrade reflects our view of the college's accreditation status being placed on probation recently by the Higher Learning Commission," a weakening of its financial management, and "unstable board governance and management turnover," Standard & Poor's analyst Blake Yocom said in the report.

The college has been stung by county and federal probes of its spending and financial oversight practices as well as a very public feud between some board of trustee members and the former administration that led to the ouster of the school's president and finance team.

The officials who were forced out have filed wrongful termination lawsuits.

The board member who led reform efforts and helped get allies elected to the board last spring has since resigned, leading to further upheaval and conflict.

Until last week, the college's gilt-edge ratings had weathered the governance troubles due to its healthy balance sheet supported by strong reserve levels.

That changed with the Friday downgrade.

The credit continues to benefit from a very strong financial position, a moderate debt level, and strong income and market value supporting the debt, but the ongoing storm that drove the accreditation agency's December action has taken a toll.

The Higher Learning Commission said in its probation notice that the action was taken because of concerns related to integrity and governance of the college. The probation period lasts for two years and the college is required to file a report in February 2017 followed by another comprehensive evaluation in April 2017.

Specifically, the commission found the college to be out of compliance with the requirement that it "operates with integrity in its financial, academic, personnel, and auxiliary functions; it establishes and follows policies and processes for fair and ethical behavior on the part of its governing board, administration, faculty, and staff" and "the institution's governance and administrative structures promote effective leadership and support collaborative processes that enable the institution to fulfill its mission."

The accreditation report cited the college's acknowledgment of investment policy violations, alleged illegal and unethical conduct by employees that was not acted on by administrators, and no-bid contracts given to vendors with college board ties.

The college reports taking actions to address the probation status that have brought it into compliance with its own investment and oversight policies but the threat remains.

"Although new management has taken concrete steps to eliminate its probation status and improve its governing structure, we believe it will be difficult to achieve without affecting its other credit characteristics," said Yocom, the S&P analyst.

A full loss of accreditation would trigger a series of negative consequences for students, including an immediate loss of federal financial aid and an inability to transfer school credits to other colleges.

"The negative outlook reflects the at least one-in three chance that we could lower the rating within the two-year outlook period give the uncertainty surrounding the college's probation status and unsettled board turmoil," Yocom said.

A stable outlook could be restored if the college succeeds in improving and adhering to fiscal management policies while also resolving the accreditation threat and demonstrating stable governance.

"College of DuPage is in excellent financial condition," college spokesman Joseph Moore said. "We are going to examine the ramifications of the new bond rating."

Moore said the school has no imminent borrowing plans that would be impacted by the downgrade.

Though state aid is on hold amid the impasse over Illinois' fiscal 2016 budget, S&P sees the impact as minor for the school because state funds account for just 7.3% of its revenues with reserves and has the ability to raise taxes and tuition.

The college retains its Aaa rating from Moody's Investors Service.

The college is the subject of county and federal probes over administrative spending, contracts related to a fundraising arm, credits tied to its law enforcement academy, and other financial and oversight matters. They followed a Chicago Tribune series that questioned the dining habits of administrators at the school's high-end restaurant and other management decisions and practices.

Governance remains a challenge.

Board chairwoman Kathy Hamilton, who spearheaded reform efforts that led to the ouster of college president Robert Breuder and the school's finance team, abruptly resigned in December. Hamilton said in a letter released by the community college Dec. 14 that she resigned from the board for personal reasons.

Hamilton first joined the board three years ago and, after the April elections when three candidates she supported won election, she was elevated to chairwoman. With a majority, Hamilton pushed through a series of fiscal and management reforms.

The previous board agreed to a lucrative separation package with Breuder.

After Hamilton won a majority, the board cancelled the deal and put Breuder on leave.

The college also last fall fired its top fiscal officers, Thomas Glaser, the vice president of administration and treasurer, and Lynn Sapyta, vice president of financial affairs and controller. It accused them of mismanagement and violations of board investment rules and other internal rules.

The lawsuit filed by the pair accuses Hamilton of pushing to fire them retaliation for their opposition to her agenda in the previous election by opposing candidates she endorsed and supporting those who were against her agenda. They also argue that the former board had full knowledge and support for decisions they made.

The lawsuit names the college, Hamilton, and interim President Joseph Collins as defendants.

Hamilton's departure threw the board into upheaval, leaving a 3-3 split on many issues, leading to disagreements that have stalled action on even simple business measures.

The college board failed to agree on a new trustee by a deadline last week, forcing the Illinois Community College Board over the weekend to select the new board members. It named David Olsen, a 27-year-old commissioner of the suburban village of Downers Grove, to fill the vacancy.

He'll serve until an April 2017 election to fill the final two years of Hamilton's term.

"While I am deeply disappointed that the six elected trustees at the College of DuPage were unable to meet their responsibility to fill the vacancy on the board, I am confident that Mr. Olsen has the experience in directing reforms, commitment to ensuring that all stakeholders have a voice in the process, and passion for service that will move the College of DuPage forward," ICC board chairman Lazaro Lopez said in a statement.

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