CHICAGO – Two Illinois community colleges were downgraded by Moody’s Investors Service this week over the state’s budget impasse.

Moody’s lowered Community College District 530, J.A. Logan, and its $1.7 million of rated debt to A3 from A2. The outlook remains negative.

The downgrade “reflects the district's material exposure to the state of Illinois for operating aid, which leaves the district at risk of a rapid erosion of currently satisfactory reserve levels absent passage of a state budget or steep spending cuts,” Moody’s wrote.

The rating also considers the district's limited financial flexibility given it has exhausted working cash bonding authority and a declining enrollment trend that somewhat limits the practical ability to increase tuition. Other factors in the rating include the district’s large and stable tax base in southern Illinois, below average demographic profile, and low debt burden.

The negative outlook reflects analysts’ expectation of continued pressure on operations given the ongoing state budget impasse and college's limited financial flexibility. Should the college not receive an appropriation in fiscal 2018 there could be substantial decline in liquidity absent very large expenditure adjustments, Moody’s said.

Moody's also lowered its rating on Community College District 507, Danville Area, and its $4.1 million of rated debt by two notches to A1 from Aa2. The outlook remains negative.

The downgrade reflects “the college's exposure to the state of Illinois for operating aid, which is beginning to erode reserves given the absence of a state budget,” Moody’s said. The rating also incorporates the college's limited financial flexibility given it is levying at statutory rate caps.

While the college has the legal ability to increase tuition, its practical ability is limited by a declining enrollment trend and below average demographic profile. The rating also considers the district's large, stable tax base, and low debt burden. It is located in central-eastern Illinois.

Illinois' public higher education system remains under threat of downgrades over state budget woes. Fotolia

Moody’s on June 1 lowered the state’s general obligation rating by one level to Baa3 and assigned a negative outlook as the state ended its spring session without resolving its budget crisis. Aid to the state’s public higher education system and social service providers dried up on Jan. 1 when a stopgap budget expired.

Community colleges have been increasingly pressured by the prolonged budget impasse, which has resulted in either reduced or absent state-appropriated aid. Until recently they had largely escaped the same downgrades suffered by the state’s four-year universities because community colleges rely less on state aid and more on local sources.

In April, Moody’s placed the seven state public universities it rates and their $2.2 billion of debt on review for a downgrade due to the ongoing budget gridlock. Three are already rated in junk territory and one carries a junk rating on its certificates of participation and low investment grade on auxiliary facilities system revenue bonds. The rating agency expects to complete its review in July.

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