In a higher education environment permeated with challenges further exacerbated by the COVID-19 pandemic, many colleges and universities are concerned with improving their credit ratings. Our recent fiscal resiliency podcast features a candid discussion with Barry Fick, executive director of the Minnesota Higher Education Facilities Authority and Elizabeth Bergman, one of our firm’s credit ratings specialists and a director with Baker Tilly Municipal Advisors, on the impact of credit ratings in the higher education industry.
The two guests along with Higher Ed Advisor podcast hosts Dave Capitano and Christine Smith acknowledge that enrollment decline continues to be a major issue for many institutions due to a variety of factors, including geographic and demographic population shifts, a decrease in international enrollment and the continued discussion around the value of a college degree. Many current students wonder what return on investment they are receiving for their tuition dollars, while prospective students question if they even need a college degree after watching others succeed economically and professionally without one. However, economic analysis and research studies maintain that access to higher education is still the most critical facet of driving upward mobility and regional economic success.
The days when institutions would receive approval for annual tuition increases of 4% or 5% are gone. Since the pandemic and for the foreseeable future, these annual increases are much more likely to be small – or even non-existent. Stable tuition, featuring no increase at all, is becoming more common across the country.
Even a college’s tuition discount rate – the average percentage of full tuition that students don’t have to pay – has increased to 50% or 60% in some cases, resulting in less tuition revenue. This too is problematic for higher education institutions trying to balance increased costs with shrinking revenues and having the necessary cash available to pay the bills.
How do colleges and universities maintain their net tuition per student and their tuition discount rate at manageable levels? One method is to take advantage of revenue diversification. Some private institutions can create additional revenue through new programs or adjustments to the athletics program, for instance, while research institutions often can obtain government or corporate grants. The key is knowing what your current performance is and what trajectory you need to take to improve or maintain it.
Even by implementing this strategy, how do colleges and universities take advantage from a credit perspective? How do they integrate those revenue streams while absorbing any startup or operating costs? It’s a challenge for institutions of every shape and size, and below are some specific ideas relative to leveraging and protecting credit ratings.
Many institutions were discussing strategies to address myriad fiscal challenges before the pandemic even began. Related to credit ratings, state schools and strong flagship universities, such as Ivy Leagues, have generally seen smaller changes in their rating. On the other hand, smaller institutions and community colleges have taken a bigger hit in this regard. Higher Education Emergency Relief Fund (HEERF) programs have helped stabilize credit ratings by creating a bridge to address short-term challenges and liquidity issues. But what else can colleges and universities do to protect their credit ratings now and tomorrow?
Finally, remember that there are new rating factors that credit agencies are examining – environmental, social and governance (ESG), for example. Agencies want to create some transparency, which means they want colleges and universities to consider these factors before their meetings.
For more information, or to learn how Baker Tilly’s higher education specialists can help your institution achieve fiscal resiliency, contact our team.