Moody's Says Financial and Governance Issues Could Spell Trouble for Some Colleges
Chronicle of Higher Education 1/9/07
After many recent years of large growth in tuition revenue and in enrollment, the tide may be about to turn, says the report, "2007 Higher Education Outlook," which is to be released today. Total enrollment in American higher education grew by 12.8 percent from 1999 to 2004, but is expected to rise by only about 1 percent this year, a rate of increase that is likely to remain about the same for the next several years, said Susan I. Fitzgerald, a senior vice president at Moody's and the chief author of the report.
Tuition increases, particularly at public universities, are expected to slow for a variety of reasons, including stagnant household incomes, increasing scrutiny by state and federal politicians and policy makers, and increasing competition for the dwindling number of students.
To respond, colleges must further professionalize their management and more sharply define their strengths, or students will find other alternatives, said Ms. Fitzgerald.
"Private colleges need to have a realistic financial plan," she said. "There are some colleges that are spending far more than their peers in an attempt to join a higher tier of competition, and they are challenged right now financially."
Moody's released another report last week, noting the strengths of three private institutions -- Northwestern University, Swarthmore College, and Washington University in St. Louis -- which have all had their bond ratings upgraded within the last four months to Aaa, the highest possible rating.
Those institutions "are places that have just built up financial strength year after year," Ms. Fitzgerald said.
"Then there are the mid-tier and upper-mid-tier colleges," she said, "that have tried to buy their way up very quickly, and you have to question how sustainable that is."
She declined to name any colleges in that category. Moody's lowered the rating of Rensselaer Polytechnic Institute in December 2005, however, because of its increasing debt. More recently, Moody's expressed concerns about the financial position of Case Western Reserve University, citing an average budget deficit of 5.5 percent over the last three years, and the likelihood that deficits will be difficult to reverse in the next several years.
The report says that while some colleges are trying to bring more diversity and expertise to their governing boards, others have boards that are unwieldy in size, and some are dominated by one or two members who do all the work. The sophistication of governance of colleges and universities lags behind that of other nonprofit industries, like hospitals, the report notes.
Many colleges and universities "continue to use arcane budgeting models," and they "cannot determine the revenues and costs associated with departments and schools (a politically controversial area on many campuses), and have focused little on revenue cycle or operating-cash-flow management," the report says.
In addition, it says, colleges need to be more nimble and innovative as they adjust to changing student markets. "This is likely to pose significant challenges for institutions that have a strong consensus-driven management culture."
The report says there are four types of institutions that will be particularly challenged in the years ahead: mid-tier private colleges that have large ambitions and are spending heavily to improve their reputations, small rural colleges with limited geographic draw, regional public universities in areas of declining population, and community colleges in "economically stagnant areas."
Community colleges often see higher enrollment during tough economic times, says Ms. Fitzgerald, but in truly depressed areas, the population often declines, limiting the pool of potential students, and the colleges have less revenue because they are frequently dependent on a shrinking property-tax base.
In 2007, Moody's anticipates that upgrades of bond ratings will slightly outnumber downgrades. In 2006, 19 institutions had their bond ratings upgraded, while 7 were downgraded.
Moody's rates 533 colleges, universities, and community-college districts. It and Standard & Poor's are the leading agencies in rating college bond issues.
Copies of the report are available by e-mail at john.nelson@moodys.com