From 2009 through 2013, the number of downgrades of colleges’ credit ratings by Moody’s Investors Service outpaced upgrades by nearly five to one.
More evidence of colleges’ weakening financial picture? Yes, but that picture is not as clear-cut as it might seem.
The period examined by The Chronicle covered the worst financial crisis since the Great Depression, so those 141 downgrades versus 33 upgrades are not so surprising.
Of perhaps more significance: Of the 500-plus colleges, universities, and higher-education systems that Moody’s rates, more than two-thirds were able to keep their credit ratings intact during the era of economic turmoil.
“We view higher education as a remarkably resilient industry,” said Susan Fitzgerald, senior vice president at Moody’s, who oversees the higher-education practice. “Most institutions took steps to adjust to the challenging financial times in which they found themselves.”
Still, there’s plenty of reason for continued worry. For one, not all of those steps came easily. While some institutions maintained their financial equilibrium by controlling costs and expanding graduate and online offerings, plenty of others, particularly public colleges, were able to do so only by raising tuition.
Also, the colleges rated by Moody’s—which enroll about 70 percent of all college students—are generally the ones with sturdier financial footing to begin with, so their ability to withstand financial pressure doesn’t necessarily carry over to those institutions on shakier financial ground. Over the past few years, dozens of such colleges, public and private, have closed, merged, or cut back programs.
And the financial trends are not promising, particularly for public colleges. As Ms. Fitzgerald notes, even as states seem to be restoring support, many are linking that support with tuition freezes or caps—welcome news for students but problematic for institutions. And many private colleges have been able to attract students only by upping their spending on financial aid.
“They’ve adjusted well so far, but that doesn’t mean the pressure is lessening,” she said. “Where we’re really seeing the pressure is in the public sector.”
Public Colleges at Risk
That pressure seems to be building. Among public universities over the past five years, downgrades outnumbered upgrades by more than four to one. No public colleges were upgraded in 2013, while four in Illinois—Governors State University and Eastern, Northeastern, Northern Illinois Universities—were downgraded twice in a single year, in part because of declining enrollments and in part because of the state’s delays in providing the money it had appropriated and concerns about underfunded pension liabilities.
Among private institutions, downgrades outnumbered upgrades by two to one. Some of the effects of that shift can be seen in the comparison (see chart, below) of the ratings profile of all Moody’s-covered institutions as of the summer of 2009, before the effects of the financial crisis began to fully reverberate, with those as of the summer of 2013.
Alan Phillips, executive deputy director at the Illinois Board of Higher Education, called the 2013 downgrades of institutions in his state “unfortunate” but noted that many of the circumstances driving them were out of the universities’ control. The “cash-flow problem” and the pension issues emanated from the state, he said.
Illinois lawmakers passed a pension-reform measure this winter that could “take somewhat of the pressure off,” said Mr. Phillips, but that may not happen so quickly. The measure is being challenged in the courts.
And like other institutions, the universities face a demographic challenge because of declining numbers of high-school students. Moody’s cited similar concerns about attracting students in its 2013 downgrade of Michigan Technological University.
A ‘Vuca’ Approach
According to Ms. Fitzgerald, one common factor in nearly all of the recent downgrades by Moody’s has less to do with finances and more to do with leadership. “Weak governance and weak management” play a key role, she said, particularly in this “disruptive period” when colleges face mounting demands to control costs, improve quality, and adapt to new academic models.
What’s crucial, she said, is, “How good are institutions at dealing with disruptive change?”
Colleges are getting that message, said John Walda, president of the National Association of College and University Business Officers. “Becoming more focused is part of the new business model,” he said, citing steps like the series of mergers of public colleges in Georgia as one example.
But while Mr. Walda said he was “optimistic because I see lots of innovation wherever I go,” others worry that too many colleges still don’t appreciate the challenges they face or have the tools to assess, analyze, and act on them.
“My impression is we haven’t begun to see the bottom,” said Ellen Chaffee, a former college president and now a senior fellow at the Association of Governing Boards of Universities and Colleges. Governance “has been much more backward looking than forward looking,” she said.
Ms. Chaffee said colleges needed more “Vuca"—an acronym that has long been used in the military to mean volatility, uncertainty, complexity, and ambiguity but that today has been updated to mean vision, understanding, clarity, and agility. With more Vuca, she said, colleges could do a better job of shifting their organizational cultures, developing leadership from within the campus, and better understanding the needs of students and employees.
“We don’t need a bunch of solutions” from outsiders, said Ms. Chaffee. “We need a bunch of tools for people to find their own solutions.”
Clarification (3/4/2014, 10:30 a.m.): Beginning in April 2010, Moody’s undertook a recalibration of its ratings on all public finance entities, a move that resulted in the raising of actual ratings for most public colleges by one notch (e.g., to Aa2 from Aa3) and is reflected in the chart above.
Correction (3/5/2014, 4:31 p.m.): This article originally misspelled the surname of a senior fellow at the Association of Governing Boards of Universities and Colleges. She is Ellen Chaffee, not Chafee. The article has been updated to reflect this correction.