Moody’s Investors Service, the New York City-based credit rating agency, recently announced an A1 rating for SVSU’s existing debt.
While the evaluation is conducted to determine SVSU’s ability to pay back its debts to creditors, it looks at a wide range of factors impacting SVSU’s financial position. Ratings are analyzed by investors looking to buy bonds from corporations, municipalities and higher education institutions.
A higher rating reflects a lower risk of default on university-issued bonds, meaning SVSU can offer lower interest rates to its creditors, lowering the cost of borrowing money to fund projects.
In addition to the Moody’s rating, competing rating agency Standard and Poor’s (S&P) also recently gave SVSU a similarly high A credit rating.
“The rating process is a very thorough review of university operations, and not just financially,” said Executive Vice President for Administration and Business Affairs Jim Muladore. “We provide a fair amount of information in terms of enrollment, applications, acceptance rates and matriculation rates, and look closely at enrollment trends. From there, it makes the transition over to looking at the impact of all of that on the financial sustainability of a particular institution.”
The Moody report stated, “The A1 rating reflects SVSU’s consistently well-managed operations that continue to generate very good cash flow and debt service coverage despite significant enrollment challenges that have led to modest declines in net tuition revenue.”
It also cited “management’s prudent fiscal discipline” in continuing to guide the university through a challenging operating environment.
At the end of the most recent fiscal year, SVSU had $102,920,000 in notes and bonds payable. This is a moderate level of debt in comparison with other similar sized universities, Muladore said. SVSU’s overall cost of debt is below the industry standard, he added.
Moving forward, SVSU plans to reduce its debt load, as a sizable portion of its debt will mature in the coming years without any new debt being issued to replace it. Projections show the debt load reducing to just over $70 million by 2023.
“That was a critical factor in their evaluation of the university, that we have a specific debt reduction plan,” Muladore said. “By lowering our debt load, we are going to be providing some flexibility to the university because at some future date, we’ll undoubtedly need to borrow again.”
The university most recently used bond issuances in 2013 to help fund the SVSU Fieldhouse and Ryder Center renovation project and in 2016 to help fund the Zahnow Library renovations.
However, the majority of its debt is comprised of much older projects related to the university’s rapid expansion away from being a commuter institution to a more residential one, along with other capital outlay projects such as the construction of the Health and Human Services building.
The university does not plan to issue new bonds to assist in paying for the new Scott L. Carmona College of Business and Management building.
In addition to its debt-reduction plan, Moody’s and S&P also recognized SVSU for its long-term capital project plan. The plan most recently allowed SVSU to use primarily excess cash to fund the library renovations, along with only a small amount of debt.
Along with the A1 rating, Moody’s also noted that SVSU’s outlook moving forward was stable. This comes at a time when universities across the country struggle with the challenges of enrollment declines that cut into net tuition revenue.
Muladore said that both Moody’s and S&P have given the higher education industry as a whole a negative outlook.
“That is primarily based on what they see as significant downward demographic trends, particularly in the Midwest and the Northeast parts of the country,” he said. “They’re, in effect, advising investors that this industry has some pretty significant challenges.”
For example, in December 2018, Moody’s revised its outlook on Central Michigan University, whose Aa3 rating is slightly above SVSU’s A1, to negative, citing declines in enrollment leading to a challenging operating environment.
While SVSU’s strong financial position has been recognized by two major rating agencies, challenges do lie ahead for the institution, along with the higher education industry as a whole.
The largest challenge universities face moving forward is the declining number of high school graduates nationwide. This is particularly problematic in Michigan, where the number of high school graduates in the state will decline to about 88,000 in 2027-2028, down from over 123,000 in the mid-2000s, according to the Western Interstate Commission for Higher Education.
Fewer students graduating from high school means fewer students applying to universities, leading to less tuition revenue. This problem is exacerbated by a lower percentage of high school graduates attending college and a general decline in state support that has put more financial pressure on the universities themselves.
“Historically, if you go back 25 years or so, the state provided 70 to 75 percent of our general fund budget,” Muladore said. “That has flipped, and we’re at a point now where the state is providing about 22 percent of our budget. … Tuition revenue has become the dominant revenue source and, of course, tuition revenue is impacted by how many people come to the institution.”
While SVSU did see a substantial increase in freshman enrollment for this academic year, it is still taking proactive measures to remain financially stable despite industry-wide challenges moving forward.
SVSU President Don Bachand said one of the keys for SVSU has been staying proactive and taking measures to curb potential problems before they grow in magnitude. Closely monitoring faculty and staff size is one such measure. The university has undergone a sizable staff reduction over the past five years, but this has been done largely through an attrition strategy.
“There have been many instances where the university or the community college did not make these kinds of adjustments when their revenues started to shift,” Bachand said. “We saw it coming, and Muladore made all of us aware of it very early on. … We’ve been dealing with all of these financial concerns rather than being overwhelmed by them. We’ve been looking at it holistically and developing very good responses to it.”
The university has also been able to stay ahead of the curve from a budgetary standpoint by prudently managing its deferred maintenance costs.
Bachand said this often amounts to between $3 million and $5 million dollars per year. These costs include repairs and maintenance on an institution’s property.
“Deferred maintenance is a major issue nationally,” Muladore said. “Universities on average have huge backlogs of deferred maintenance type issues, and many times, schools have to borrow money in response. Our particular strategy here is to not be in that position so by having adequate re
serves, we pretty much stay out in front of deferred maintenance.”
Other steps have been taken to help reduce costs. Muladore said these include energy management, utilities and adjusting departmental operating budgets. Through these initiatives, SVSU’s overall cost per student continues to be the lowest among the state’s public universities.
The financial hardship presented by a declining number of high school graduates is furthered as SVSU continues to increase the amount of money it allocates toward financial aid. Muladore said that in years past, financial aid has made up about 14 percent of the university’s budget. That number will increase to about 19 percent in the coming years.
“It’s an enrollment management initiative,” Muladore said. “University aid historically has been oriented mostly to academic merit, but I think we felt that students with financial need were perhaps not being funded at a level that would assist them with the cost of attending SVSU, so we have enhanced our financial aid budget primarily in the area of need-based aid.”
While students may not have a frequent and up-close look at the university’s financial standing, Bachand and Muladore both feel there is a reason to care and be proud of its high praise.
“It should raise your level of confidence in the overall prudent management of the institution,” Bachand said. “It’s just the sense that we have a very strong strategic plan that deals with financial issues and development of academic programs and we adhere to it.”
Reporting from Connor Doyle, Vanguard Reporter