Fiscal resiliency: examining credit rating impact on colleges and universities

This blog summarizes the key takeaways from our fiscal resiliency podcast, episode eight.

In a higher education environment permeated with challenges further exacerbated by the COVID-19 pandemic, many colleges and universities are concerned with improving their credit ratings. Our recent fiscal resiliency podcast features a candid discussion with Barry Fick, executive director of the Minnesota Higher Education Facilities Authority and Elizabeth Bergman, one of our firm’s credit ratings specialists and a director with Baker Tilly Municipal Advisors, on the impact of credit ratings in the higher education industry.

The two guests along with Higher Ed Advisor podcast hosts Dave Capitano and Christine Smith acknowledge that enrollment decline continues to be a major issue for many institutions due to a variety of factors, including geographic and demographic population shifts, a decrease in international enrollment and the continued discussion around the value of a college degree. Many current students wonder what return on investment they are receiving for their tuition dollars, while prospective students question if they even need a college degree after watching others succeed economically and professionally without one. However, economic analysis and research studies maintain that access to higher education is still the most critical facet of driving upward mobility and regional economic success.

Tuition trending in the wrong direction

The days when institutions would receive approval for annual tuition increases of 4% or 5% are gone. Since the pandemic and for the foreseeable future, these annual increases are much more likely to be small – or even non-existent. Stable tuition, featuring no increase at all, is becoming more common across the country.

Even a college’s tuition discount rate – the average percentage of full tuition that students don’t have to pay – has increased to 50% or 60% in some cases, resulting in less tuition revenue. This too is problematic for higher education institutions trying to balance increased costs with shrinking revenues and having the necessary cash available to pay the bills.

How do colleges and universities maintain their net tuition per student and their tuition discount rate at manageable levels? One method is to take advantage of revenue diversification. Some private institutions can create additional revenue through new programs or adjustments to the athletics program, for instance, while research institutions often can obtain government or corporate grants. The key is knowing what your current performance is and what trajectory you need to take to improve or maintain it. 

Even by implementing this strategy, how do colleges and universities take advantage from a credit perspective? How do they integrate those revenue streams while absorbing any startup or operating costs? It’s a challenge for institutions of every shape and size, and below are some specific ideas relative to leveraging and protecting credit ratings.

How can institutions protect their credit ratings?

Many institutions were discussing strategies to address myriad fiscal challenges before the pandemic even began. Related to credit ratings, state schools and strong flagship universities, such as Ivy Leagues, have generally seen smaller changes in their rating. On the other hand, smaller institutions and community colleges have taken a bigger hit in this regard. Higher Education Emergency Relief Fund (HEERF) programs have helped stabilize credit ratings by creating a bridge to address short-term challenges and liquidity issues. But what else can colleges and universities do to protect their credit ratings now and tomorrow?

• Prioritize open communication and transparency – credit agencies appreciate candid communication. Credit analysts don’t want any surprises. They want institutions to be frank in their discussions. If the institution is exhibiting financial obstacles, leaders should tell the agencies what they’re planning to do about it. Analysts naturally think about the worst-case scenarios. Institutions can be proactive by being honest and demonstrating planned solutions for their problems. Ultimately, they will communicate that candidness to the rating committee, which helps determine an institution’s final credit rating.
• Manage debt aggressively and proactively – when it comes to an institution’s debt, being aggressive in attacking that debt – even more aggressive than in past years – can have a significant impact. College and university leaders should develop a plan for how they’ll repay the debt, and ensure this plan is an integrated component of their management team and financial strategy. Colleges and universities must not view debt management as an isolated issue. On the contrary, it is a good way to engage their institution’s entire leadership team in fiscal conversations. In fact, it is important to note that most university boards are comprised of many people not directly affiliated with higher education on a day-to-day basis. So, it’s helpful to speak about credit and debt on their level. In other words, describe the institution’s credit rating as an asset of the institution – an asset whose value can be increased by having greater liquidity, a higher number of students or more net tuition per student. As a cohesive leadership team, build a holistic picture of the university and have an intentional and strategic discussion about where you are and where you want to be.
• Provide information in an easily understandable form – any information that an institution provides to the credit agencies should be presented clearly and accurately. Ideally, the information needs to tell the story that they need it to tell. There are good and bad elements within any institution’s credit rating. What has leadership done to ameliorate the bad factors and what have they done to enhance the good factors? Taking that perspective will help the college or university (and its relationship with the credit agency) move forward.  

Finally, remember that there are new rating factors that credit agencies are examining – environmental, social and governance (ESG), for example. Agencies want to create some transparency, which means they want colleges and universities to consider these factors before their meetings.

For more information, or to learn how Baker Tilly’s higher education specialists can help your institution achieve fiscal resiliency, contact our team.