OREANDA-NEWS. Fitch Ratings has assigned an 'AA-' rating to approximately $120 million of series 2016 New Jersey Educational Facilities Authority (NJEFA) revenue refunding bonds issued on behalf of Montclair State University (MSU).

The bonds are expected to be sold via negotiation on or about the week of April 18. Proceeds will be used to refund certain existing bonds (current refund series 2006J and advance refund series 2008J), and pay associated costs of issuance.

In addition, Fitch affirms about $440.5 million of outstanding NJEFA revenue bonds issued on behalf of MSU.

The Rating Outlook is Stable.

SECURITY
The bonds are a general unsecured obligation of the university, payable from all legally available funds.

KEY RATING DRIVERS

HIGH LEVERAGE AND DEBT BURDEN: MSU's debt metrics remain moderately high for the rating category due to its need for debt-funded initiatives because of historically limited state capital support. Offsetting factors include adequate debt service coverage, growth in balance sheet resources, and absence of near-term debt plans.

THINNING OPERATING PERFORMANCE: MSU's GAAP-based operating margins are historically positive averaging 4.5% over a five year period and continue to be fueled by enrollment growth, increases in student charges, and prudent expense management. MSU's competitive pricing position partially mitigates flat state operating support. Thinning margins to nearly break-even in fiscal 2015 are primarily due to the required $8.1 million pension expense recorded under GASB 68.

HEALTHY ENROLLMENT: MSU maintains a healthy market position as the second largest postsecondary institution in New Jersey (on a headcount basis), with undergraduate and graduate programs offered across a wide range of disciplines. Total headcount enrollment has grown by a healthy 10.6% over the past five years, to 20,465 in fall 2015.

RATING SENSITIVITIES

OPERATING PERFORMANCE: Montclair State University's inability to manage reductions in state appropriations or tuition revenues in its budget and maintain break-even to positive operating margins could adversely affect the university's rating.

DEBT MANAGEABILITY: Rating stability is predicated on the maintenance of debt service coverage at or above existing levels given Montclair State University's high debt burden. The issuance of additional debt without a commensurate growth in financial resources and revenues would yield negative rating pressure.

CREDIT PROFILE

MSU is a public research university with its main 252 acre campus divided between the town of Montclair in Essex County and the municipalities of Little Falls and Clifton in Passaic County. The university also operates the New Jersey School of Conservation, a 240-acre environment education and research center in Stokes State Forest (Sussex County).

HIGH BUT MANAGEABLE LEVERAGE
Meaningful growth in the university's balance sheet resources over the past few years has increased MSU's capacity to absorb the high debt load.

MSU's debt burden (debt service as a percentage of operating revenues) remains above average for the 'AA' rating category but is expected to moderate somewhat over time, given lack of additional debt plans. This high debt burden is largely due to historically limited capital support provided by the state of New Jersey.

Due to implementation of GASB 68 accounting changes, unrestricted net assets were reduced in the fiscal 2015 audit to record a net pension liability. Further, net assets invested in capital (which are not actually invested in capital until expended) were reduced to $146.7 million with prior amounts reclassified as expendable restricted net assets in fiscal 2015. Fitch further adjusted fiscal 2015 expendable restricted net assets for debt service of $20.5 million, which are included in non-expendable restricted.

Based on the adjustment, available funds, defined by Fitch as cash and investments less certain restricted net assets, totals $165.8 million at fiscal-year end 2015, or 3.7% above the prior year level.

The ratio of available funds to expenses and pro forma long-term debt ($432 million, inclusive of note, bonds and capitalized leases) was 43.3% and 38.4%, respectively, which is on the lower end of Fitch-rated public colleges and universities in the 'AA' category. Public colleges and universities with a stronger available funds-to-debt ratio tend to receive more state support for capital expenditures.

Further, the absence of additional debt plans over the next one to three years, should allow the university's debt burden to moderate over time.

SUFFICIENT DEBT COVERAGE

Management's demonstrated ability to generate steady funds in support of debt service while undertaking sizeable capital projects is a credit strength. MSU has significantly increased its net investment in property, plant and equipment supported by debt. Even with such increase, maximum annual debt service (MADS) coverage levels remains acceptable ranging from 1.5x to 2.0x over the past five fiscal years.

A reduction in adjusted net income available for debt service (as calculated by Fitch) to $46.7 million in fiscal 2015 (from $60.4 million in the prior year) was primarily due to the expense impact of the pension effect of GASB 68 accounting changes. MSU was required to record an $8.1 million expense which is spread across all functional categories in fiscal 2015.

Further, while the estimated pro forma MADS figure represents a high 8.3% of unrestricted operating revenues, Fitch notes MSU's heavy investment in growth programs, namely business, health/life science, and communication/media, which are expected to drive total revenue growth over time.

A privatized on-campus student housing project that opened in fall 2011 continues to register favorable occupancy results (near 100%). Since the project was financed with debt that is nonrecourse to the university and the university has not been required to provide any financial support, Fitch does not include the debt associated with the project (approximately $205 million) in its calculation of long-term debt.

THINNING OPERATING PERFORMANCE
The operating margin for fiscals 2011-2015 has averaged 4.5%, including 0.3% in the most recent fiscal year. Fitch expects the operating margin for public colleges and universities to be at least break-even on a GAAP basis. Before non-cash GASB 68 accruals, MSU's fiscal 2015 margin would be closer to 2.7%.
MSU's generally healthy operating performance reflects strong revenue growth despite a flat state funding environment and the management team's financial expertise and consistent monitoring of the budget.

While MSU receives operating appropriations from the state of New Jersey ('A'/Outlook Stable), these annual payments have been relatively flat and continue to contribute to a smaller share of the overall budget. However, enrollment growth coupled with further adjustments in the rate structure, including a 2% increase in undergraduate tuition/fees in fall 2015, is contributing to growth in total revenues.

MSU's competitive pricing position and the absence of a cap on tuition rates are viewed as key credit strengths, although pricing flexibility is somewhat limited by its mission to serve as an affordable educational option to state residents.

In fiscal 2015, MSU's total state annual appropriations increased by 3.5%. Though MSU's general operating appropriation has remained flat for the last five fiscal years (2011-2015) at $38.6 million, the state-paid fringe benefit has grown. In fiscal 2016, legislative appropriation declined $2.75 million, accounting for 1% of MSU's operating budget, and management expects the fringe appropriation to be 2-3% higher over the prior year.

Overall, MSU appears to be managing the appropriation fluctuations; however, given the university's declining, but still significant, reliance on state funding for operations (20.6% of unrestricted operating revenues in fiscal 2015), a significant reduction in state funding for MSU could have a negative effect on the financial strength of the university.

This concern is mitigated somewhat by the university's satisfactory increased tuition revenues, from both enrollment growth and modest tuition increases, effective expense management, and adequate level of unencumbered resources to help it manage through short-term financial difficulties (the ratio of available funds to operating expenses in fiscal 2015 was 43.3%).

HEALTHY STUDENT ENROLLMENT TRENDS
Fitch considers student demand the primary determinant of the university's long-term viability. Between fall 2011 and fall 2015, total headcount increased 10.6% to 20,465, exceeding the university goal to enroll 20,000 students by 2016. Fall 2016 is expected to show another large incoming freshmen class.

While freshmen application volume dipped 4% in each of the last two prior years, demand remains strong. MSU is accepting more students as reflected in higher acceptance rates. Acceptance rates reached 70% in fall 2015 from 57% in fall 2011. No apparent change in student quality has been reported despite MSU's new admission policy which makes SAT/ACT test scores an optional part of the application process. Graduate applications have had strong growth (26.1%) between fall 2011 and fall 2015. However, undergraduate students make up the majority (about 80%) of MSU's student population.

The university continues to compete with nearby public universities; however, MSU's competitive tuition and fee rates remain a key strength for student recruitment. For academic year 2015-16, the university's tuition/fees for in-state undergraduate students were among the lowest relative to other four-year colleges and universities in New Jersey. Fitch believes that the university's significant investment in its infrastructure helped bolster enrollment.