Fitch Rates Pennsylvania State System of Higher Ed Series AT Revs 'AA-'
The series AT bonds are expected to sell competitively on or about Aug. 25, 2016. Bond proceeds will be used for a variety of new capital projects ($79.3 million), acquiring off-balance sheet housing facilities ($263.8 million), and to pay costs of issuance.
In addition, Fitch has affirmed the rating on PASSHE's approximately $842.6 million outstanding revenue bonds at
The Rating Outlook is Stable.
PASSHE's payment obligations pursuant to a loan agreement with the Pennsylvania Higher Educational Facilities Authority are an unsecured general obligation of the system.
KEY RATING DRIVERS
SOLID FINANCIAL CUSHION: The 'AA-' rating reflects the statewide system's relatively solid financial cushion. Offsetting factors include PASSHE's weakened GAAP-based operating margins in recent years, including fiscal 2015, and continuing expense pressures related to ongoing collective bargaining negotiations.
WEAKENED SYSTEMWIDE ENROLLMENT: PASSHE's broad reach in Pennsylvania is a credit strength and is consistent with the rating category. However, systemwide full-time equivalent (FTE) enrollment continues to decline, in part due to fewer high school graduates in the state, and was down 2.6% in fall 2015 over fall 2014. Management projects another dip for fall 2016.
STRONG AVAILABLE FUNDS: Solid balance sheet resources support the rating. Fitch-calculated ratios of available funds to fiscal 2015 operating expenses (62.3%) and pro forma debt (93.5%) compare favorably to rating category medians. Including off-balance-sheet student housing debt, the latter ratio is a weaker but still adequate 51.1%.
PRESSURED DEBT SERVICE COVERAGE: Compressed operating margins pressured annual debt service coverage to a lower 0.8x in fiscal 2015, requiring the system to use some capital reserves. The front-loaded debt structure in conjunction with the system's manageable, albeit moderately high, maximum annual debt service (MADS) burden (6.4%) somewhat mitigates this concern.
WEAKENED MARGINS AND COVERAGE: Declining enrollment at the Pennsylvania State System of Higher Education that lead to weaker operations and debt service coverage could result in negative rating action.
ADDITIONAL DEBT: Issuance of additional debt without a commensurate increase in resources, growth in net tuition revenue, and stronger institutional debt service coverage, could put negative pressure on the rating.
PASSHE is the Commonwealth of Pennsylvania's (GO bonds rated 'AA-'/Outlook Stable) largest higher education provider, and its universities offer the lowest-cost four-year baccalaureate degree programs in the commonwealth. The system includes 14 universities, four branch campuses, several regional centers, and the McKeever Environmental Learning Center.
Specifically, bond proceeds from series AT will be used to: renovate an academic facility at Slippery Rock University of Pennsylvania; upgrade IT infrastructure at Slippery Rock University of Pennsylvania; upgrade the steam plant at Bloomsburg University of Pennsylvania; construct student housing facilities at Bloomsburg University of Pennsylvania; acquire student housing at Mansfield University of Pennsylvania from Mansfield Auxiliary Corporation; acquire student housing at Lock Haven University of Pennsylvania from the Lock Haven University Foundation; acquire student housing at Edinboro University of Pennsylvania from the Edinboro University Foundation; construct and renovate dining facilities at Indiana University of Pennsylvania (taxable portion only), and pay costs of issuance.
NEGATIVE MARGINS FOR THIRD YEAR
Operations were negative (-3.8%) for a third consecutive fiscal year in 2015. However, stronger margins are expected in fiscal 2016 due to higher tuition, state aid, and contained expenses. PASSHE benefits from its multi-institution higher education system, sufficient financial reserves, and has demonstrated its willingness to make budgetary cuts to adjust for enrollment and appropriation fluctuations.
The system's focus on student affordability has historically limited tuition increases, although the PASSHE Board of Governors increased tuition by 3.5% for fall 2015 (fiscal 2016). Management indicates that the tuition increase, in conjunction with a 5% increase in state appropriations and ongoing expense containment, should support improved margins in fiscal 2016. For fall 2016 (reflected in fiscal 2017), the Board approved a 2.5% tuition increase. Fitch will monitor the system's operating results for the effect of these changes.
ENROLLMENT PRESSURES CONTINUE
Enrollment declines reflect state demographics and the declining number of high school graduates. This has contributed to recent operating pressures. However, management indicates that the number of high school graduates is stabilizing (rather than declining).
FTE enrollment declined 2.6% to 94,829 in fall 2015 from one year prior, and is down from 105,898 in fall 2010. Preliminary fall 2016 application and admissions data through Aug. 4, 2016 again suggest modestly declining fall 2016 enrollment. Management notes that enrollment trends vary by member institution, with some showing increases, but not enough to reflect systemwide growth. Final enrollment numbers are not yet available.
COMMONWEALTH FUNDING IMPROVED
Positively, Pennsylvania passed a budget with a 5% ($20.6 million) operating increase for the system. PASSHE successfully managed through the appropriation delays and reports no cash-flow issue with operations in fiscal 2016. After January 2016, PASSHE received monthly payments that also incorporated payments owed since July 2015.
Moreover, Pennsylvania passed its fiscal 2017 budget in July 2016, with a 2.5% ($10.8 million) operating increase for the system (i. e. appropriations up to $444.2 million).
SOLID BALANCE SHEET RESOURCES
The system's available funds (AF), defined by Fitch as cash and investments less nonexpendable restricted net assets, support the current rating. Addressing imbalances over the past several years with budgetary adjustments, including workforce reductions, has helped maintain available funds at an average of $1.24 billion annually since fiscal 2011.
Fiscal 2015 AF ($1.26 billion) covered unrestricted operating expenses ($2 billion) and pro forma debt ($1.35 billion, which includes series AT-1 and AT-2 as well as Board-approved projects beyond this issuance) by 62.3% and 93.5%, respectively. Both ratios compare favorably to Fitch's 'AA' rating category medians of 48.6% and 90.9%. Including additional $1.12 billion of off-balance-sheet student housing debt, AF relative to debt remains adequate for the rating category, but weakens to 51.1%.
MANAGEABLE DEBT BURDEN
Annual debt service coverage weakened due to operating pressures in fiscal 2015, and was 0.8x. This compares to 1.1x in fiscal 2014. Management reports that debt service payments were supported in part by reserves.