ASU rating, room for improvement

ALAMOSA — Adams State University’s Moody’s rating can improve, Moody’s Investors Service Associate Managing Director Susan Fitzgerald told ASU trustees during their meeting on Friday.

Fitzgerald described factors that Moody’s takes into account in assigning ratings to institutions of higher education like Adams State. She said although the rating is financial, reflecting an institution’s ability to repay debt, other factors play into that rating.

For example, the fact ASU was on accreditation probation factored into its A3 negative rating, Fitzgerald explained.

Other factors in the negative rating included management turnover and declining enrollment, she explained.

Fitzgerald said that ASU’s lower enrollment was not surprising, especially given the strong economy “because you are not only competing with other schools, you are competing with jobs … A robust job market means fewer students are going to college.”

Fitzgerald said she did not see the economy experiencing much of a downturn until 2020.

The highest Moody’s rating is AAA, which might go to an institution like the University of Texas, which receives strong state financial support, Fitzgerald said. State support for public universities like Adams State factors into the Moody’s rating. Moody’s rates more than 250 private universities and more than 225 four-year public universities in the U.S.

Fitzgerald said the fact the state supports ASU and believes it is an important higher education institution in Colorado definitely factors into the Moody’s rating, “not that the state would step in to pay your debt but the expectation there are many things they could do to make sure you survive to continue to serve your very important mission, that’s built into that rating.”

She added that right now she is not seeing pressure on state funding but in the event of an economic downturn, “higher education as always will bear the brunt of that” because higher education funding is discretionary.

Moody’s also looks at an institution’s debt and ability to repay that debt, and what is securing that debt as well as cash, liquidity, capital, revenue streams, investments and other factors including philanthropic support and endowments. Fitzgerald said having a strong foundation can add credit strength to a university even though the foundation is separate and not legally bound to pay the university’s debts.

The pension liability that has been a challenge in Colorado also factors into the rating.

Relative to other public institutions of higher education, Adams State is on the lower end, but not the lowest, Fitzgerald said. Institutions in Illinois and West Virginia, for example, are going through “really challenging” times.

Within the state, in a peer comparison Adams State and the University of Northern Colorado both have A3 ratings, but UNC is rated stable while ASU has an A3 negative outlook rating. Fort Lewis and Colorado Mesa University are rated A2, Colorado School of Mines and Metro State are A1 and Colorado State University and the University of Colorado are Aa3 and Aa1, respectively. Western State is rated lower than ASU at Baa1, stable.

Adams State is stronger than many A rated institutions in its liquid reserves, cash on hand situation, Fitzgerald said.

She said ASU is not unique and lies within a sector of regional public universities that also have a negative outlook rating because of the pressures they are facing, such as the lack of tuition revenue. Survey projections for 2019 predict the lowest rate of growth in tuition revenue for public universities in more than a decade at 1.5 percent, Fitzgerald said, and she expected Adams State’s to be less than that, partially because of tuition guarantees offered by the university.

Fitzgerald described broader factors ranging from interest rates and the stock market to political factors like immigration and Brexit that have an effect on higher education institutions. Some of those factors are more specific to colleges and universities, such as online learning, a trend that will likely continue. Fitzgerald said that while some see online learning as the demise of brick-and-mortar universities, “we are not in that camp.” She said Moody’s does not see a wholesale shake up of higher education institutions, “but we do think it’s going to change.”

Universities must keep up with the technological advances, she said. That might result in program and facility changes, she explained. Some campuses in other states are actually tearing down buildings and not replacing them, because they know they will not see the sizes of on-campus enrollments they had 10 years ago, and they cannot afford to maintain all of the buildings on campus. Some campuses are also looking at ways to generate revenue by leasing or selling some of their land to private developers for commercial uses.

Fitzgerald also talked about factors that could change Adams State’s rating from negative to stable and positive. Tuition increases from higher enrollment would definitely play a factor.

Fitzgerald said 20-30 percent of universities and colleges had to cut expenses because their revenues were less than before, and Adams State is in that cadre that has struggled with declining revenues, “not that you are falling off the cliff, because you have done a good job managing expenses, but you are in the cadre that does not have excesses.”

Colorado and Adams State are not unique in dealing with enrollment issues, Fitzgerald said. Some states like Georgia and Wisconsin have even taken steps to consolidate institutions, which is a very politically charged issue, she said. She expected more states to look at that option in the next 10-15 years. She said that would not mean that colleges would necessarily shut down, but one might become a branch of another. She said she did not know how that might play out in Colorado where universities are geographically farther apart than Pennsylvania, for example, where there are two public universities within 20 minutes of each other.

Fitzgerald encouraged ASU trustees that the university’s rating could improve if enrollment stabilizes; the university continues to align revenues and expenses; and ASU gets a handle on the management turnover, because it is hard to plan ahead without stable management in place.

She said ASU’s accreditation issues being resolved would also reflect positively on the institution, as would the fact ASU has an interim president in place.

“Those are major accomplishments,” she said.

Moody’s reviews all ratings on an annual basis, Fitzgerald said.