Academic journal article Planning for Higher Education

Fiscal Structure and Public College and University Credit Ratings: An Exploratory Analysis

Academic journal article Planning for Higher Education

Fiscal Structure and Public College and University Credit Ratings: An Exploratory Analysis

Article excerpt

By understanding how fiscal structure affects institutional credit ratings, leaders can better respond to today's variable economic conditions.


IN THE U.S. MARKET FOR HIGHER EDUCATION, many institutions are seeking ways to make themselves more attractive to prospective students (Serna 2013b, c). In fact, institutions are spending greater portions of their capital budgets to build what Jacob, McCall, and Stange (2013) describe as "country club campuses." Moreover, many public colleges and universities have years' worth of deferred maintenance with which to deal that at some point will likely require debt financing to complete (Manns 2003-2004; Manns and Katsinas 2006). The demand for consumption activities coupled with deferred maintenance means that institutions are undertaking larger and larger capital projects that often require debt, in the form of bonds, to fund. This trend has not gone unnoticed. In fact, recent articles in trade publications show that there is a great deal of interest in the topic both domestically and internationally. The Chronicle of Higher Education (Carlson 2013), The Economist (2006), and Inside Higher Ed (Blumenstyk 2014; Jaschick 2013; Kiley 2012, 2013) have all reported that this type of spending appears to be on the rise. For example, in the 2010-2011 fiscal year, public institutions in the United States saw their outstanding debt rise to nearly $60 billion (Kiley 2012). Three examples of rising debt and deferred maintenance come from the states of Ohio and California.

First, in October 2011 The Ohio State University issued $500 million of 100-year bonds, becoming the first public institution in the country to do so. A few months later, the University of California system followed suit with its own "century bonds" totaling $860 million. That bond buyers purchased the debt for relatively low rates of return suggests that more prestigious institutions are recognized in debt markets as both going concerns and less risky investments (Kiley 2012).

A third example comes from the University of Akron, a large public research university in Ohio, which, while well known in its region, is not necessarily considered a national university. Between 1999 and 2012 the university issued $626 million in debt to fund 21 new buildings to accommodate rising enrollments. Additionally, the university noted that it still had $450 million in deferred maintenance. It argued that this deferred maintenance would require state support to complete because further borrowing could have an adverse effect on its credit rating, which would increase borrowing costs based on its debt capacity.

This realization came on the heels of large decreases in state support for capital projects. While state capital project funding to the University of Akron was $11 million in 2009 and $17 million in 2010, it dropped to just $4 million in 2011 (Kiley 2012). This is not surprising given the economic reverberations resulting from the fiscal crisis that began in 2008. Weisbrod and Asch (2010) note that after the fiscal crisis institutions saw their access to not only bank credit but also the tax-exempt bond market diminish. Over the same time period, institutions faced higher interest rates on maturing debt based on the liquidity concerns of the credit rating agencies. Though unease around liquidity is less of a concern now (Moody's 2011b; Serna 2013b, c), given the examples provided above, institutions should be keenly aware of how their fiscal structure is related to the interest rates they will face in bond markets based on their credit rating.

The situation at the University of Akron further highlights this concern. Recently, following a routine debt refinancing by the university, Moody's credit ratings service revised its outlook to negative, based on "enrollment declines over multiple years... an expected smaller class entering the university... decline[s] in state funding. …

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