Taryn Phaneuf May 28, 2016, 10:19am


BATON ROUGE — Moody’s Investors Service downgraded the Southern University System debt and issuer ratings earlier this month, citing the school’s financial inflexibility in the face of declining state funding.

“The university has made and will continue to make timely bond payments,” university spokesman Henry Tillman told the Louisiana Record. “The downgrade is primarily attributed to many years of state budget reductions. Since 2009, state funding for the Southern University System has decreased by $53.2 million.”

Southern’s issuer rating, which is an opinion of Southern University’s ability to honor its debt obligations, dropped from Baa2 to Ba1. In Moody’s rankings, as an issuer moves down the scale, the risk of default rises. Southern University’s former rating was considered a medium investment grade. The new rating puts the university into a speculative grade.

Moody’s also downgraded the university’s debt rating on its Series 2006 Revenue bond from Baa3 to Ba2, also moving it into the speculative grade.

The new evaluations come after Moody’s announced it would review eight public universities in Louisiana for downgrade because expected state budget cuts midway through the fiscal year would hamper schools’ ability to adjust revenue and expenses.

While each of the other schools are faring better than Southern, public universities in Louisiana as a whole are “in a very challenging environment,” Moody’s reported in February. The state cut operating budget support by 47 percent between 2010 and 2014 — a huge loss compared to the median 9 percent cuts experienced by other public universities rated by the service.

“To mitigate those cuts, universities without a solid brand in the region may have exhausted pricing power by increasing tuition by an average of 52 percent since fiscal year 2010 compared to the U.S. average of 13 percent,” Moody’s reported.

Southern’s rating takes into account its liquidity — or its access to cash — budget deficit, deteriorating reserves and its capital investment needs. Moody’s expects Southern’s liquidity could be further stressed as expenses continue to outpace revenue. Southern brings in $200 million in revenue from its three campuses, a law center and an agricultural research center. It receives some special federal support because it’s a historically black college and university system.

“Unlike peers, Southern's financial condition weakened during a six-year period when Louisiana public universities were given greater autonomy to raise tuition and retain operating surpluses,” according to a Moody’s press release announcing the downgrade. “Southern has limited financial flexibility to withstand stagnant to declining state funding particularly as student demand has softened. In addition, the system faces large and growing retirement health and pension obligations that will drive expense growth.”

Moody’s noted that “extraordinary” state support or major improvements to cash flow could lead to an upgraded rating. But it could face additional downgrades if state support or cash dwindles further, or if it faces accreditation sanctions or changes to federal aid.

As funding has declined, Southern’s administration has made changes and cuts to become more efficient and save money. This has included reorganizing and consolidating operations. Southern also declared that an impending financial crisis — called financial exigency — threatens its viability.

“SU’s management is seeking appropriate financial support from the state to address critical budgetary needs and to upgrade the rating outlook,” the university said.

Organizations in this Story

Southern University and A&M College
801 Harding Boulevard
Baton Rouge, LA 70807

Get notified the next time we write about Southern University and A&M College!

More News