Standard & Poor’s Global Ratings has lowered its debt rating for the University of Alaska system. They cited big cuts in state funding as an indicator of credit risk.
S&P Global Ratings report is the second time this year a rating agency has downgraded this measure, after Moody’s downgraded the UA system’s credit rating in July.
However, this week’s downgrade is only one notch in S&P’s rating system, from AA- to A+.
On their scale is AAA, AA, A, BBB, BB, B, CCC, CC, C and below that are junk bonds.
“In our rated universe, for higher education public institutions in the United States, A is the average rating, so it is above average,” said Mary Ellen Wriedt, S&P Global’s primary credit analyst in San Francisco. She wrote a report on UA’s ability to pay back bonds. She said it is based on both strengths and weaknesses.
“The S&P Global Ratings criteria we have that dictate how we come to a rating looks at enrollment, matriculation, selectivity, graduation rates, tuition discounting, how much financial aid the university pays out,” she said.
In addition to the enterprise profile, S&P Global looked at the university system’s financial profile, including cuts every year from the state since the 2014 drop in oil prices. Especially this year’s $25 million cut. It’s what S&P Global calls “Negative net operating income.”
But Wreidt said there were a lot of indicators to keep UA’s rating in the A category.
“There are still tremendous strengths to the system despite enrollment declines and cuts to the state appropriation. Management also has been working very proactively to operate the system in a prudent fashion,” she said.
UA Chief Finance Officer Myron Dosch said the rating is a measure of creditworthiness, or of risk that UA will pay back what it borrows.
“The university would sell bonds to finance or pay for a new building, like the engineering building here in Fairbanks or the new power plant,” Dosch said.
Dosch said the downgrading from S&P global doesn’t affect any debt service payments the university is already making. About two-thirds of the new power plant and about a third of the new engineering building was financed by bonds.
And he said the university isn’t about to bond for any new construction in the near future.
“The university presently doesn’t have any new construction on the horizon. We have reduced state funding, that’s why it may not be the best time to borrow,” he said.
That means this downgrading will probably have no effect on university finances.