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Financial Outlook Remains Negative for Higher Education, Moody’s Says

By  Libby Nelson
January 19, 2010

Although some of the most urgent pressures facing private and public colleges have receded, significant challenges remain, according to a new report being released on Tuesday by Moody’s Investors Service. The credit-rating agency retained its negative outlook for all sectors of higher education for a second consecutive year.

Fundamental stresses on colleges and universities — especially private ones — will quickly become evident, says the report, citing uncertainty over enrollments and tuition revenue, as well as dwindling private donations.

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Although some of the most urgent pressures facing private and public colleges have receded, significant challenges remain, according to a new report being released on Tuesday by Moody’s Investors Service. The credit-rating agency retained its negative outlook for all sectors of higher education for a second consecutive year.

Fundamental stresses on colleges and universities — especially private ones — will quickly become evident, says the report, citing uncertainty over enrollments and tuition revenue, as well as dwindling private donations.

Tuition pricing remains uncertain, the report says. At the beginning of the economic downturn, many institutions increased tuition minimally or not at all, hoping to maintain their enrollments. The enrollments did remain stable, a result of both pricing and increases in acceptance rates to ensure that more students would enroll.

The resulting loss of tuition revenue is “manageable for one to two years,” the report says, but over time, it will take its toll. The prospect of raising tuition to alleviate shortfalls is complicated by heightened public scrutiny of such increases and the lingering effects of the recession among families of collegebound students.

Revenue from gifts also declined by “a meaningful amount” in the 2009 fiscal year, with a rapid recovery unlikely in the near future, the report says. In this area, at least, the Moody’s report was contradicted by the findings of a survey of college fund raisers, also released on Tuesday, by the Council for Advancement and Support of Education. According to that survey, fund raisers predict that private giving to higher education will grow by 3.7 percent in 2010.

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Public colleges and universities are less dependent on tuition and fees for their operating revenue, and so are less affected by those pressures. But the threat of further cuts in state support looms for them.

Uncertainties surrounding enrollment and tuition pricing for private colleges, and state spending on public institutions, are the biggest issues facing the sector, said Roger Goodman, a Moody’s vice president.

“Seeing stability and growth return on the enrollment and tuition sides, and stability and/or predictability on the state-funding side, would be the major drivers of us getting back to stable,” he said.

Since January 2009, when Moody’s changed the higher-education sector’s outlook to negative, immediate risks for universities, including liquidity issues and stress on balance sheets, have lessened, the new report says.

“What we think has gotten better is that a lot of the short-term crisis-type issues ... have all improved,” Mr. Goodman said. “There are still risks, but they are far better.”

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Estimates project an average decline of 19 percent in investment value for higher-education institutions for the 2009 fiscal year, the report says. But Moody’s does not anticipate widespread credit-rating deterioration in the sector. Instead, institutions are suffering from less financial flexibility to “absorb negative surprises.”

Given their reduced resources, colleges and universities will need to consider a fundamental restructuring of their business models to regain financial stability, the report says, noting that responses like freezing hiring, furloughing faculty members, and suspending capital projects are all short-term solutions.

The report is available on the Moody’s Web site, but is restricted to subscribers only.

We welcome your thoughts and questions about this article. Please email the editors or submit a letter for publication.
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