With deal coming, University of Illinois ratings highlight resilience amid state budget uncertainty

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CHICAGO – Illinois’ flagship public university returns to the market this spring with its ratings holding steady thanks to its healthy fiscal position that has better weathered the state’s fiscal mess than its regional counterparts and to a break in the budget impasse.

The University of Illinois Board of Trustees will take bids next month on $145 million of auxiliary facilities system revenue bonds. PFM Financial Advisors LLC is advisor. Chapman and Cutler LLP is bond counsel and Katten Muchin Rosenman LLP is special issuer’s counsel.

A portion of the deal will refund variable rate demand paper and the remaining will provide funding for the university’s new football performance center that will house football team rooms, locker rooms, sports medicine, strength and sports training areas, and coaches’ offices. Renovations to a residence hall dining facilities and a new soccer and track complex also funded.

Ahead of the sale, Moody’s Investors Service affirmed the university’s A1 rating and negative outlook that applies to $1.1 billion of similarly backed bonds and $183 million of certificates of participation. It also affirmed the A2 rating on south campus development bonds and Baa1 on health facilities bonds.

S&P Global Ratings affirmed the university’s AFS rating of A-minus and stable outlook. The rating is capped at three levels above the sponsoring state – Illinois – which is rated BBB-minus with a stable outlook. If it weren't linked off the state rating, S&P said the university’s profile reflects a AA-minus credit.

The AFS are payable from pledged system revenues that total $1.28 billion and student tuition and fees. The school, which operates campuses in Urbana-Champaign, Chicago, and Springfield with a combined enrollment of more than 80,000, has $1.65 billion of debt that carried ratings in the double-A category before the budget impasse dragged the state's rating down.

"The stable outlook reflects our expectation that during our two-year outlook period, the university's enrollment will continue to grow at a moderate rate, and operations will remain, at a minimum, positive on a cash basis," said analyst Ashley Ramchandani.

The university benefits from its flagship position with more than $5.2 billion in revenues, federal research grants totaling $800 million, excellent demand profile, substantial endowment of $2.3 billion, strong fundraising record, and balanced operations. The challenging state funding environment, long-term capital pressures, and low unrestricted available resources offset the strengths, S&P said.

“The key offsetting consideration is the university's material reliance on the state of Illinois for operations, including on-behalf payments for employee benefits, with uncertainty regarding funding of direct appropriations and potential shifting of responsibility for pension costs to the university,” Moody’s wrote, adding that state funding pressure “are likely to result in ongoing weakening of U of I’s financial position over a multi-year period.”

The university’s balance sheet relies on $889 million in fiscal 2018 state appropriations, including $300 million that was delayed from fiscal 2017. State aid accounts for about 30% of operations, a far lower level than some of Illinois' other eight public universities many of which saw their ratings sink to junk during the state’s budget impasse. The university is also one of the few state public universities that didn’t lose enrollment during two years of budget gridlock and averted deep programming cuts to manage through state aid payment delays.

The fiscal 2018 budget pushed through by the legislature’s Democratic majorities cut aid to universities and Republican Gov. Bruce Rauner has proposed shifting a portion of the state’s annual pension contributions for university employees to the schools that employ them.

The fate of the budget for the fiscal year beginning July 1 remains up in the air with lawmakers focused on the Tuesday primary which comes ahead of the November general election. Rauner faces an opponent and three contenders are vying for the Democratic nod.

“We will continue to monitor the state's situation, an impending fiscal 2019 budget, and its potential effects on the university, as we move closer to fiscal year-end 2018,” S&P wrote.

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Higher education bonds Primary bond market Illinois