The University of Minnesota’s financial outlook was revised from negative to stable after school leaders expressed concern that the school was unfairly assessed.
The revised outlook by credit rating firm Standard and Poor’s helped the University to sell about $122 million in bonds, the profits from which are expected to go toward capital projects. The projects include the renovation of Tate Laboratory, construction of a new Bell Museum and construction of a Wellness Center on the Crookston campus.
“S&P’s outlook affirms that our commitment to mission and financial responsibility are the right things to do and I’m grateful,” said University President Eric Kaler in a statement.
The outlooks estimate future financial outcomes and, in the case of universities, often weigh how much debt they carry versus sellable assets.
“We have assessed the university’s enterprise profile as very strong, reflecting stable enrollment and robust demand, with very good selectivity and student quality,” said S&P Analyst Jessica Wood in the report.
The report issued an AA rating for the University, which is the second-highest rating behind AAA. This designation means the school has met financial obligations.
Financial outlooks help assure investors that the school’s long-term finances are stable and nets them returns when they buy bonds, said University Chief Financial Officer and Vice President Richard Pfutzenreuter.
The University relies on information from S&P and credit rating agency Moody’s when they’re in the market to sell bonds.
Pfutzenreuter said the University scored one notch below an AAA rating with Moody’s, slightly better than S&P’s rating.
When credit outlooks degrade, Pfutzenreuter said, people might lose interest in buying bonds. With less competition to purchase bonds, interest rates on bonds could potentially increase, he said.
“We were surprised last August when S&P took us from a positive to a negative,” Pfutzenreuter said, adding that little had changed after an earlier meeting with S&P. “We didn’t feel it was justified.”
Regent Richard Beeson, who chairs the board’s finance committee, said University officials met with S&P analysts to explain certain financial details.
“We feel positive, but not surprised, they gave us this change,” Beeson said. “I’m glad our staff was able to work with them.”
Beeson said some schools follow conservative money management practices, while others carry more debt at the expense of their bond’s interest rates.
The University’s debt sat around $1.3 billion dollars last fall and is expected to peak in 2018.
According to a 2014 analysis of peer universities, Minnesota ranked in the middle of its Big Ten peers when comparing debt to financial resources.
Schools like the University of Michigan maintain AAA ratings, whereas schools like the University of Illinois have negative outlooks, according to Moody’s.
“It really ranges,” Pfutzenreuter said, adding that he speculates the state’s financial troubles factor into the University of Illinois’ low rating.
Numbers aside, rating agencies often meet with universities’ financial leaders to assess their economic health, Beeson said.
“[Credit rating agencies’] views are heavily tilted to their view of management because ultimately people are who create the conditions that result in financial conditions,” Beeson said.
*Moody’s credit ratings used in the report are, from best to worst, Aaa, Aa1 and Aa2. There are lower ratings, but none were used in the report.
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