Edie Behr, vice president, senior credit officer and manager for the higher-education and not-for-profits team at Moody's Investors Service, discusses the decision to revise Moody's outlook on the sector to stable from negative with Bond Buyer's markets reporter Aaron Weitzman.
WEITZMAN: Moody's recently revised her outlook on higher education from negative to stable. My first question for you is what kind of factors went into that decision as far as revising the outlook?
BEHR: There're really three reasons we revised the outlook to stable for US higher education. The first is that we expect operating revenue growth to exceed expenditure growth in a low inflation environment. The second is that US colleges and universities have demonstrated that they can contain their costs. Third, passion investments have grown to pre-recession highs again and we expect them to remain at about that level.
WEITZMAN: Out of those factors you just discussed, was there any one of those that played the biggest role into the decision of changing the outlook?
BEHR: The one that played the biggest role is the one that is the revenue growth over expenditure growth because that demonstrates operating stability. There are several different revenue sources for US higher education, the most important of which is tuition. Tuition revenue, in fact, net tuition revenue, which is net of financial aid, which is being used more and more by colleges to attract students, really to buy students in a competitive environment. The net tuition is expected to go up about a little over 3% in the next 12 to 18 months.
Public universities also benefit from state appropriations. State appropriations are going to be up in fiscal 2016 for a third consecutive year. The third part of that revenue stream that's important here is that we expect endowment spending and gifts to continue at their recently high levels.
WEITZMAN: I know this, the higher education sector, there's been a lot of negative headlines associated with the sector, hence, I know in the report that you guys put out, you guys mentioned there's still pockets of stress in this sector. Would you mind elaborating on that a little bit?
BEHR: There are about 20% of US colleges and universities that are still experiencing financial stress after the recession. That's both public and private universities. This segment of our US sector are highly competitive for students. There's stiff competition for students, and so they are using financial aid to attract students to their colleges. What's happening is the use of that financial aid is depressing their operating revenue so they're in a difficult situation.
WEITZMAN: [laughs] What could change the outlook for good or for worse?
BEHR: The outlook could be revised to positive if the economy heats up and revenues are anticipated to far exceed expenditures. Alternatively, the outlook could be revised back to or returned to negative if expenditures exceed revenue. That's obvious, but also if there's a major market correction, which might increase price sensitivity and have a negative impact on cash in investments.