New Warnings on Colleges' Finances From 2 Big Credit-Rating Agencies

July 26, 2012

The two major credit-rating agencies issued reports this week on the continuing financial challenges for colleges, particularly those that are not market leaders or not managed with close attention to future trends.

In an update to its January report, Moody's Investors Service said on Thursday that colleges' credit challenges "have intensified as the economic recovery continues to stumble, equity markets have produced stagnant-to-negative investment returns, federal and state budgets remain stressed, and household net worth remains well below prior levels."

Moody's said those factors, "combined with rising political and regulatory scrutiny of the industry and tougher accreditation standards, are making it difficult for colleges and universities to grow revenue and are intensifying the focus on governance, operating efficiency, and revenue diversity."

Standard & Poor's, reporting on public colleges, said the institutions face pressure from operating expenses that are outpacing net tuition revenue growth, education costs that are rising faster than inflation, and downward pressure on the balance sheet from growing liabilities and endowment market values that have not returned to pre-recession levels. "However, relative to private higher education, public institutions still retain a cost advantage," the ratings agency said.

In a report issued earlier this month on private colleges, S&P noted that many of those institutions face continued financial pressure because they have increased spending on student aid to remain competitive with public colleges. S&P also noted that "revenue and program diversity remain a focus of many management teams in trying to balance growing demand in certain areas (nursing and engineering) and cushion areas of softening demand (education)." Many are also trying to decrease their reliance on net tuition revenue.

Moody's and S&P subscribers can obtain the reports through the agencies' Web sites.