University’s financial outlook remains ‘stable’

Despite factors like uncertain research funding, the University was evaluated favorably by credit agencies.
July 30, 2014

Despite a slow national recovery from the recent recession and uncertain federal research funding, credit rating agencies say the University of Minnesota’s finances look promising.

Two high-profile rating companies scored the University in the second-highest rating category earlier this month for some of its new bonds, while also giving the institution a stable outlook. Analysts said an improving state economy, high numbers of prospective students and increased revenues contributed to the ratings.

Standard and Poor’s Ratings Services awarded the University’s bonds one of the highest grades among public higher education institutions, said Henry Henderson, the primary credit analyst for the rating. Moody’s Investors Service  assigned a similar score.

Only four out of 161 public colleges rated by Standard and Poor’s scored in a category above the University’s in fiscal year 2013, according to data from the firm.

“We’re comfortable at our rating,” said University Chief Financial Officer Richard Pfutzenreuter. “It’s a good rating, and it’s what we expected.”

If the University wanted to reach the highest rating category and remain there, Pfutzenreuter said, it potentially couldn’t take on as much long-term debt, which would in turn limit its ability to renovate or erect buildings.

“That’s kind of a double-edged sword,” he said.

The University will use proceeds from the recently rated bonds to cover the construction of a new Ambulatory Care Center near the Oak Street Ramp, and the school plans to take on more debt this fiscal year to fund two other buildings — a heat and power plant and the new Bell Museum of Natural History.

Although both rating agencies mentioned the University’s plans to take on more debt in the coming year for the two projects — which total $134 million combined — as potential challenges, Henderson said his rating agency considered the additional debt to be manageable.

One of the factors that determined the University’s strong rating was high student demand for a spot at the institution, Henderson said.

Applications to the University for fall 2014 totaled more than two and a half times the number for fall 2003, and applications have increased almost every year for the past decade. Stable enrollment and high demand tell rating agencies that tuition revenue is unlikely to drop in the future, Pfutzenreuter said.

Standard and Poor’s also pointed to favorable state funding as evidence that the University’s rating is unlikely to shift in the next few years.

Before the state increased its appropriation to the University for fiscal years 2014 and 2015, legislators had consistently decreased state funding for the institution since the recession. The state had considered the University financially strong enough to withstand some of the shock of the recession on its own, said Sen. Terri Bonoff, DFL-Minnetonka.

“I think that was a mistake,” she said, adding that she will continue to push for increased state support for the University.

But while the future might be bright for the University’s appropriation from the state, federal allocations are more uncertain.

Moody’s listed the “federal funding environment” as a challenge for the institution. University students and officials have previously expressed concern over declining research funding, which came after last year’s across-the-board federal budget cuts known as the sequester.

Successful fundraising efforts and a state economy that’s growing stronger also helped the University snag a stable financial outlook. The University has raised more than $200 million in gifts in each of the past four fiscal years.

Minnesota’s economy is also steady, according to Moody’s rating report, and “is expected to out-perform the nation” over time.

“When the state is strong financially, then we have more resources to be able to contribute,” Bonoff said.

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