Illinois’ enduring budget crisis has led Moody’s Investors Service to downgrade the credit rating of seven of the state’s public universities, signaling that a stopgap spending bill to keep the schools afloat through the summer has done nothing to reverse the damage of the standoff.
Republican Gov. Bruce Rauner and the Democratic-controlled general assembly have been locked in an epic budget battle for the past year, starving state universities of funding that has resulted in rounds of layoffs and threatened to shutter at least one school. The governor made passage of the $36 billion budget conditional on changes in collective bargaining rights for public employees and worker compensation to revive the state’s slumping economy, business-friendly moves that lawmakers refused to back. Lawmakers agreed in April to funnel $600 million into the state’s public colleges and universities, about 70 percent less than the funding Democrats tried to secure in the past budget year. And it was too little to assuage concerns raised by credit analysts.
“While the stopgap budget provides temporary operating relief, it does not permanently restore liquidity, which has been severely depleted at many of the state’s public universities,” Moody’s analysts wrote in a recent note. “Universities will continue to operate with lack of budget clarity into fiscal year 2017, limiting long-term planning and investment in programs and facilities. They still face high likelihood of continued state funding reductions and delays given the state’s fundamental fiscal challenges.”
Moody’s has held a negative outlook since the fall on all of the seven Illinois universities it rates because of their strained cash flow, but had only downgraded the credit ratings of three schools — Northeastern Illinois University, Northern Illinois University and Eastern Illinois University — until now.
Analysts have now downgraded Governors State University, Northeastern and Eastern Illinois to varying degrees of junk status, doing the same to a majority of Northern’s bonds. They have also dropped the credit rating of Southern Illinois University and Illinois State University to the lowest reaches of investment grade. The University of Illinois also had some of its revenue bonds downgraded, but the school overall maintains a stellar credit rating.
All of this means that analysts consider revenue bonds and certificates issued on behalf of many of the state’s universities to be a credit risk for investors. Eastern Illinois, which laid off nearly 200 civil service employees and imposed up to 24 furlough days on faculty and staff, is in one of the worst positions. Analysts say the school’s certificates of participation — a form of financing — are at “heightened risk of a debt service payment default or cancellation of the purchase contract due to extremely thin liquidity, lack of a viable state funding solution, weak revenue generating prospects from other sources, and very weak cash flow.”
Smaller regional universities in Illinois are bearing the brunt of the budget standoff, while schools with significant reserves and endowments, such as the University of Illinois and Illinois State, have been able to weather the stalemate. But the longer the impasse drags on, the greater the risk to all state colleges and universities.
Chicago State University has teetered on the edge of closing. The historically black university sent layoff notices to all faculty, staff and administrators in February, a month after declaring a state of financial emergency to make it easier to fire tenured faculty and eliminate academic programs. Nearly a third of CSU’s funding, roughly $36 million a year, comes from the state. The stopgap spending bill provides $20 million in funding for the university, which school officials have said falls short of what is needed.
Gov. Rauner has called on state universities to cut administrative costs and curtail their spending on goods and services. Even though universities have taken those steps to keep the doors open, the actions taken by Moody’s show they are not enough.
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