Negative credit outlook given to higher ed

Moody's

Though Moody’s Investor Services affirmed Yale’s top credit rating last month, the agency recently expressed concerns about the financial future of the higher education sector at large.

In a January report, Moody’s — a prominent credit rating agency — revised its “outlook” for the entire higher education sector to “negative,” indicating its expectation that the political and economic conditions in which educational institutions operate will continue to deteriorate. The announcement marks a shift from recent years, when although Moody’s gave most of the higher education sector a negative outlook, it considered top research universities, including Yale, “stable.” David Jacobson, a spokesman for Moody’s, told the News that the agency extended the negative outlook to even the top universities this year in response to several trends that have been putting pressure on universities’ traditional sources of revenue, but Jacobson and Yale administrators interviewed agreed that Yale is in no danger of losing its “Aaa” credit rating.

“In previous years, the higher-rated universities received a good stream of income from their endowments and from research grants from the government and other places,” Jacobson said. “Now, endowment returns have not been good for this past year, and there are talks of both budget and sequestration issues [in the government] that may cut back on some of the funds for research as well.”

The report said anemic endowment returns in the fiscal year that ended June 30 would reduce universities’ abilities to support their budgets with endowment funds over the next several years. Universities with larger endowments are more dependent on their endowments to cover their operating costs, Jacobson said.

Universities’ endowment returns for the current fiscal year will depend largely on the investment environment, which has the “potential to be volatile,” Jacobson said. The expected volatility is primarily due to continued financial difficulties in Europe and ongoing questions about key budget and tax issues in the United States, the report said, adding that Moody’s expects the U.S. economy to “pick up” by the second half of 2013 if Congress and President Obama “swiftly settle on a federal budget and deficit plan.”

Though Yale’s endowment performance last year outranked the national average, the University continues to face financial challenges in the aftermath of the recession. Yale faculty and administrators are working to cut costs to close a projected $40 million budget gap for the 2013-’14 academic year, newly appointed Provost Benjamin Polak told the News in January.

Nevertheless, Moody’s gave Yale a stable outlook in January. This outlook means the agency anticipates that Yale’s credit rating — an evaluation of Yale’s ability to pay back its debts — will not change for at least the next 12 to 18 months, Jacobson said.

Though Polak said a lower credit rating would negatively impact the University by making it more expensive for Yale to borrow money, he added that he is not worried about Yale’s rating.

“The Investments Office keeps a close eye on things like the debt-to-endowment ratio, which is the kind of thing Moody’s monitors, and makes sure that we are always in a good place,” Polak said.

In addition to investment earnings and government funding, other traditional sources of university revenue facing uncertainty include tuition, gifts, research grants and patient care reimbursements, the report said.

Private universities with smaller endowments in particular are more reliant on tuition for revenue and have become accustomed to raising their tuition prices each year to sustain revenue growth, Jacobson said. He added that these tuition increases have come under fire in recent years as incomes have stagnated and government scrutiny has increased.

“Now, there’s starting to be a public backlash, and universities are starting to put on the brakes,” Jacobson said.

The report found that all but the most elite universities are facing reduced enrollment because many people are questioning whether a college education is worth the high costs.

Diminished revenue prohibits schools from increasing the salaries of their faculty members or funding new initiatives unless they can cut costs elsewhere, the report said, adding that increased pressure on key revenue sources will require “bolder actions by university leaders to reduce costs and increase operating efficiency.”

Yale saw a 4.7 percent return on its endowments in fiscal year 2012.

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