Moody’s Downgrades PA Higher Ed System, Including Penn State

The debt holdings on 14 colleges and universities in the Pennsylvania State System of Higher Education have had their ratings reduced from Aa2 to Aa3 by Moody’s Investor Services, one of the top three credit rating services. Moody’s cited decreasing government support and dropping enrollment numbers as justification for the downgrade.

Under the Governorship of Tom Corbett, state funding for its university system has declined, and the number of students attending its member campuses dropped from 112,000 last year to 107,000 this year. Continuing fallout from the 2008 nationwide economic recession also means that economically distressed parts of the state are sending fewer and fewer of their high school graduates to colleges, bringing down the potential number of students who in previous years would have chosen a state system school.

Moody’s also noted that the current political climate makes it harder for schools to raise their tuition and fees to compensate for the loss of funding elsewhere. Restrictive labor contracts currently in force also make it more difficult for schools to approach their funding deficits by reducing expenses.

The state system schools face a “very large and growing liability” for unfunded pensions and healthcare benefits promised to retired professors and other staff, along with fallout from the Commonwealth of Pennsylvania’s credit-rating downgrade last July, which left the state rating at Aa2, Moody’s added.

Moody’s ratings apply to approximately $1.5 billion in outstanding loans.

In addition to the system-wide downgrade, Moody’s also announced that it was downgrading the credit rating of the system’s flagship Pennsylvania State University. After issuing a warning earlier this year that the school’s credit rating was being reevaluated, Moody’s pulled the trigger on a one notch reduction to classify the university’s debt as Aa1.

Penn State’s financial obligations could rise substantially in the next several years due to its involvement in the coverup of child sexual abuse by former assistant football coach Jerry Sandusky. The NCAA has already a $60 million fine on the school in addition to other sanctions, but the main expense may come from the outlay to settle or resolve the civil suits sure to be brought against the school by Sandusky’s victims.

The state-owned colleges’ debt load has risen significantly since 2004, partly because of new dormitories built at local campuses to lure more students. The debt contributes to the colleges’ “high leverage” compared with tuition income and other revenues. Still, Moody’s concluded, current cash flow is enough to make bond payments.

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