U’s credit outlook degraded

The reduced outlook by a credit rating agency was prompted by an increase in University debt.

by Brian Edwards

Although a credit rating agency has lowered the University of Minnesota’s credit outlook, regents and administrators say the numbers aren’t too concerning.
The reduced outlook by credit rating agency Standard & Poor’s was prompted by an increase in University debt due to the school taking on projects like the University’s Athletes Village, which is scheduled to break ground this week. 
The agency downgraded its 2014 credit outlook for the University to negative and gave a negative outlook for 2015. 
Administrators say they disagree with the agency’s assessment and plan to discuss it with the agencies later in the year.
“The negative outlook reflects our opinion that increased debt issuance over time, coupled with weakness in financial operations, could pressure the debt ratings on UM,” said Jessica Wood, S&P’s credit analyst, in an August report. The school’s Board of Regents was briefed on the agency’s findings earlier this month. 
S&P’s credit rating for the University remained at “AA” for long-term debts and “A-1+” for short-term debts.
But University Chief Financial Officer Richard Pfutzenreuter said both ratings are considered respectable. 
“Our debt rating from Moody’s — another credit rating agency — is one notch below AAA, and with Standard & Poor’s, it is two notches below,” he said, adding that there are only 4 Moody’s AAA public institutions in the country.
Pfutzenreuter said the University disagrees with S&P’s rating, and he said he was surprised when he heard about it.
The school will call on the agency to change the outlook in December and January when the credit agencies meet with school administrators, he said.
University debt is expected to peak in 2018 at about $1.3 billion dollars. The University is currently about $1 billion in debt. 
This number may seem high, Pfutzenreuter said, but only about 3 percent of the annual budget goes toward paying debts. 
To measure the scope of an institution’s debt, he said the amount of a budget used to pay off debt is commonly used to gauge the ratio of debt to financial stability. Moody’s average ratio is 3.3 percent. 
Regent Michael Hsu said the University’s debt capacity isn’t a concern at the moment.
By 2021, the University is projected be able to take on an additional $1 billion in debt before it becomes a burden to University operations, Pfutzenreuter said.
Regent Richard Beeson said many of the regents also felt that the assessment was unfair because University debts owned by the state were included in S&P’s assessment. 
While Beeson said legislators may be concerned about the credit outlook, the University has a strong credit history that the state is aware of.
“It’s always the case with the Legislature to talk about the things behind the headlines,” he said, adding the University debt is well below its peer schools’ numbers.
Additionally, the numbers are the highest possible projections, Hsu said, and it’s expected that donors will come forward for projects like the Athletes Village to lower the debt.
Regents are monitoring future projects, like the health merger between Fairview Health Services and the University of Minnesota Physicians announced earlier this month and their effect on the debt capacity, he said.
“It’s not to the point where I am worried, but we are keeping an eye on it,” Hsu said.