Wayne State University outlook dims on coronavirus, governance strains

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Wayne State University heads into the market this week with two new negative rating outlooks as the COVID-19 pandemic and potential state aid cuts add to governance and medical school challenges confronting the Detroit-based school.

The taxable issue for $115 million of general revenue bonds from the Board of Governors of WSU is currently slated for a Thursday sale with BofA Securities running the books. Blue Rose Capital Advisors LLC is advising the university.

The Detroit campus of Wayne State University, which sells taxable new-money bonds this week.

Proceeds will “fund the construction and renovation of State Hall which has been the identified as the number one priority project from the university’s recently approved master plan and is the linchpin of the campus consolidation strategy,” the university reports in an investor slideshow. Proceeds will also pay for other projects and deferred maintenance. No additional debt is planned in the next 12 months.

Ahead of the sale, Moody’s Investors Service affirmed the university’s Aa3 rating and S&P Global Ratings affirmed its A-plus rating. Both moved their outlooks to negative from stable.

The negative outlook reflects a series of pressures including an ongoing accreditation issue at the School of Medicine and the potential for continued pressure at the board level over intra-board litigation last year, S&P said.

The negative outlook also is due to S&P’s “view of the university's thinning available resources and operating margins over the past year, coupled with our view that COVID-19 pressures may continue to exacerbate ongoing difficulties at the university,” said S&P analyst Phillip Pena.

Despite challenges “strategic goals continue to be advanced," Pena added.

Moody’s said its negative outlook stems from “continued institutional structure and governance credibility risks with rising fiscal challenges as the university confronts likely state funding cuts for fiscal 2021.”

Michigan Gov. Gretchen Whitmer and legislative leaders agreed to a plan last month to solve the state’s $2.2 billion hole in the current budget that runs through September that relies in part on a $200 million cut to higher education funding. The freeing up of federal relief dollars is designed to offset the impact but another $3 billion state revenue hit looms in fiscal 2021 and state leaders have not announced how it would be addressed.

“As COVID-19 introduces greater operational and financial disruptions, effectively functioning governance and management will be even more important to strategic decision-making,” Moody’s said.

The governance and management issues stem in part from a board dispute with some members challenging the president, a lawsuit last year that pitted board members against one another, and the loss of a potential new primary long-term care partner Moody’s said is critical for the long-term success of the medical school.

Four board members in June 2019 challenged the validity of various board actions on the claim that a quorum was lacking. The complaint was rejected and an appeal denied on one claim denied. The lower court threw out the entire case earlier this year but a notice of an intent to file an appeal was filed in April. Undergraduates in April filed a lawsuit seeking greater refunds for the winter term after the shift to remote learning.

The university's clinical practice groups also have struggled and the relationship with clinical partners Detroit Medical Center “has been fraught with issues, posing reputational difficulties for the university,” Moody’s said. A state court judge earlier this year dismissed a lawsuit brought by a group of university pediatricians in 2019 against the university accusing it of pocketing $61 million in Medicaid funds.

The university filed its own lawsuit against the pediatrics group in August for failing to reimburse the school for salaries it paid upfront.

The university warns that it can’t accurately impact the full impact of COVID-19 on its balance for the fiscal year ending Sept. 30 but it could be “material and adverse” and continue into 2021 in the areas of enrollment and tuition, state aid, research, fundraising, and investment returns. The fiscal 2021 budget will be presented in September.

The university canceled all in-person classes March 11 and on-line learning remains in place through the summer term. About one-third of fall term classes are slated to resume in person although that could change. The university halted merit pay raises for higher earners and is limiting spending to essential purposes.

The school received $19.3 million from the federal CARES Act relief package signed March 27 with half going to students and the other half covering university expenses. The university refunded winter semester housing, parking, and dining fees, totaling about $2 million.

“While there is high uncertainty regarding the duration and extent of the COVID-19 outbreak, we believe that Wayne State University has taken prudent steps to address its COVID-19 concerns,” S&P said.

The university operates on an $878 million budget with tuition accounting for $309 million. The other sources are $287 million from grants and contracts, $202 million from the state, and $80 million from gifts. The university had total cash and investments of $822 million in fiscal 2019.

About $575 million of available revenues to repay debt service provide 14.4 times coverage of the university’s debt that will total $549 million after the sale.

The university’s main campus is in Detroit with six extension centers in the metropolitan area with a total enrollment of 27,000 students.

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Higher education bonds Coronavirus Board of Governors of Wayne State University of MI Michigan Primary bond market