Negative Credit Ratings Reflect Financial Strain on Small Colleges

Shannon DeCelle for The Chronicle

The Sage Colleges spruced up their campuses in Troy (above) and Albany, N.Y., to help enrollment.
July 20, 2010

More than a dozen private colleges have had their credit ratings downgraded since the start of 2010, most of them tuition-dependent, less-than-selective institutions facing the challenge of attracting students in a bad economy and a competitive market.

For one, Birmingham-Southern College, the fiscal strains have been compounded by financial mismanagement of the student-aid budget, which last week prompted the college to slash its $49-million annual budget by 20 percent. The Alabama institution announced it was laying off 51 staff members and leaving 14 other positions vacant, cutting salaries by an average of 10 percent, suspending contributions to retirement plans, and ordering two-week furloughs for all employees.

John C. Nelson, who heads the higher-education practice for Moody's Investors Service, said the mismanagement issues aside, institutions like Birmingham-Southern, which has about 1,500 students, just might be too small to thrive in the current climate.

"In this day and age, when private colleges have to compete with public universities" on price, "it has too small of an enrollment for the business model" under which it operates, said Mr. Nelson.

Other less-selective colleges of that size face the same challenges, he added. "They'd better have a large endowment, or they better start growing."

In fact Birmingham-Southern had been growing, based on a revival plan it began about five years ago. But as it was trying to "outrun the devil," as its president, G. David Pollick, put it last week, the college was sacrificing tuition revenue, in the form of scholarships, to attain that growth.

Several institutions that were downgraded or saw their outlooks lowered (which could signal a future downgrade) are in the Northeast or the Midwest, where lots of small colleges are vying for a gradually shrinking supply of traditional students.

Along with those common demographic and competitive challenges, Mr. Nelson suggested that many of the institutions shared another characteristic: stagnant leadership.

"One of the hallmarks of small private colleges that have underperformed are presidents who have stayed too long," he said.

"The strategies become stale," said Mr. Nelson, and "the board often doesn't step up to the plate in the way it might have if it were challenged by a new president."

Along with Birmingham-Southern, the private institutions downgraded by Moody's since January are: Central (Iowa), Hartwick (N.Y.), Mills (Calif.), Mount Union (Ohio), Sage (N.Y.), and Spelman (Ga.) Colleges; Brandeis (Mass.), Franklin Pierce (N.H.), Howard (D.C.), Quinnipiac (Conn.), and Southwestern (Tex.) Universities; and the University of Miami. Of those, Brandeis, Howard, Miami, Mount Union, Quinnipiac, Southwestern, and Spelman continue to hold one of the agency's seven A-category ratings.

In higher education, most of the ratings changes and changes in outlooks occur in the first part of the year, as the ratings agency evaluates colleges' audited financial statements from the previous year. For the first six months of 2010, Moody's downgraded a total of 17 public and private institutions and lowered the outlook on 17 others.

That's fewer than the 22 institutions downgraded during the same period in 2009, when colleges were still feeling reverberations from the credit crunch, but far more than the five downgrades reported for the period in 2008, before the effects of the financial crisis hit. Mr. Nelson said the level of downgrades in the past two years hadn't been seen since 2003.

New Revenue Strategies

The continuing effects of the poor economy are a worry for some small-college advocates. For institutions that were already struggling financially, "things are just a tiny bit harder," said Richard H. Ekman, president of the Council of Independent Colleges. Last month one of the council's members in Nebraska, Dana College, announced it was closing. (A smaller institution, the 140-student Wesley College in Mississippi, also just announced it would close.)

Mr. Ekman, admitting he likes to be optimistic, said he still believes most institutions will weather this recession, but as it drags on, he allowed, "the hanging on might be a little tougher."

Still, he said he was impressed by the resilience of the many institutions scrambling to develop new revenue strategies.

The Sage Colleges, a group of three institutions in New York, is a case in point. Over the past two years, under a new president and leadership team, it has been pressing to raise undergraduate and graduate enrollment and reduce spending. It's cut some majors (dropping computer science, communications, and environmental studies), but added a new, regionally relevant major in Hudson River studies. It's also spruced up the appearance of its two campuses, in Albany and Troy, with new plantings and signs showcasing a new college logo.

"The grounds were scruffy," said Susan C. Scrimshaw, the president. "We had to restore curb appeal."

To help reverse back-to-back years of operating deficits, Ms. Scrimshaw has also tuned up fund raising, starting with her own Board of Trustees. "They hadn't been an aggressive fund-raising board before," she said. "They are now." Their gifts include $750,000 donated by trustees for a "turnaround" fund and a $1.5-million challenge grant offered by a single trustee.

Nelson (Tip) Simons, a trustee for 11 years, said Sage did epitomize some of the management and leadership failings that Mr. Nelson, of Moody's, described. A banker by profession, Mr. Simons said he was "not terribly concerned" by the downgrade because, he asserted, it's based on financial information that is "backward looking."

Officials at nearby Hartwick College voiced similar optimism, despite the Moody's assessment of weak enrollment trends. "The rating really reflects the past," said George J. Elsbeck, vice president for finance. This year, he noted, the college had its largest applicant pool ever, and as of mid-July, the college was expecting 50 more freshmen than the 450 it had projected. Hartwick's new three-year bachelor's-degree program helped drive some of that interest (about 12 percent), but Mr. Elsbeck said even without it, the college would have made its class this year.

But Hartwick's class comes at a cost. To attract students, it will spend more on student aid. Its tuition discount rate will climb from 45 percent to 47 percent this year. Given the economy, said Mr. Elsbeck, "we felt it was the appropriate thing to do."

Rating Too Harshly?

Some colleges say the ratings agencies may be reacting too harshly. "Our underlying business model is working," said Hamline University's vice president for finance, Douglas P. Anderson.

The St. Paul, Minn., institution of about 4,900 students received a negative outlook from Moody's in June, despite signs that its admissions yield was improving and its annual operating finances were solid. Moody's noted that the college is located in a competitive market for undergraduates, that the successes it's seen from a two-year-old M.B.A. program might not hold once the economy picks up and students can find jobs, and that its fund-raising expectations for a new $40-million student center might be too optimistic.

Mr. Anderson said the questions about fund raising are fair but not necessarily grounds for the negative outlook. He said a general public skepticism about ratings agencies' role in the financial crisis may be causing Moody's and the other major ratings agency, Standard & Poor's, to overreact now.

"Their perspective has been influenced by the general marketplace, and the general marketplace has caused them to be more careful," said Mr. Anderson. (Mr. Nelson of Moody's said that's not the case. S&P officials said no analysts were available to comment about higher-education ratings until the agency releases its next broad report on the sector, expected in a few weeks.)

Richard Staisloff, vice president for finance and administration at the College of Notre Dame of Maryland, said that he didn't think his institution merited its recent negative rating from S&P either, but that he understands the agency's caution. The college has shifted its business model and plans to rely more on its growing market of part-time and graduate students. S&P understands that, Mr. Staisloff said, and it's saying, "Now you have to deliver."

Audio: Richard Staisloff discusses the College of Notre Dame of Maryland's negative credit rating.

The ratings agency raised concerns about signs of declining undergraduate enrollment and the college's plan to take on additional debt to complete renovations on its new School of Pharmacy. But Mr. Staisloff said the spending for the new school is part of a rebuilding strategy developed after careful analysis. "We don't work off a field-of-dreams mentality," he said.

Even with some colleges in distress, Mr. Nelson said it's also important to note that the colleges downgraded or facing negative outlooks still represent only about 10 percent of the 300-plus private colleges for which Moody's issues credit ratings.

"The underlying demand for these colleges is still there," said Mr. Nelson. But in this climate, a less-expensive public college with more extensive offerings can sometimes seem like a better option than a smaller private institution.

For some institutions, that could be enough to make a difference. "When you take 5 to 10 percent of that demand away," said Mr. Nelson, "those that are at the edge struggle."