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Fitch downgrades PASSHE bond rating outlook

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Fitch Ratings has downgraded the AA bond rating outlook for the Pennsylvania State System of Higher Education from stable to negative.

"While management continues to demonstrate a clear willingness to keep the system in good financial health, Fitch believes that the system faces a variety of significant revenue- and expense-related hurdles that will challenge its ability to restore at least break-even operating performance over the near-term," a news release said.

Fitch cited PASSHE's -1.8 percent operating margin in fiscal year 2013, which was inconsistent with Fitch's previously stated expectations, and total unrestricted revenues that fell 0.5 percent below fiscal 2012. The revenue decline was due in part, Fitch said, to adverse demographic trends resulting in a decline in full-time equivalent enrollment in fall 2012 that slowed revenue growth from net tuition and fees (59 percent of fiscal 2013 unrestricted operating revenues).

Total FTE enrollment totaled 100,258 in fall 2013, or 2.1 percent below the prior year and 8.8 percent below fall 2009.

"Additionally, state funding support for operations (21.4% of fiscal 2013 unrestricted operating revenues) remained flat for a second consecutive year," Fitch said. "Contemporaneously, despite demonstrating evidence of constraining expense growth in fiscal 2012, unrestricted operating expenses increased by 3.1% in fiscal 2013. Increases in salaries, wages, and benefits, as they related to mandatory cost adjustments associated with various labor contracts, growth in healthcare expenditures, and increasing pension costs, were the primary driver of expense-related growth."

Fitch said it views favorably PASSHE's multi-campus presence across the state, continued pricing advantage in relation to other four-year institutions, enrollment and "healthy level of financial flexibility."

"Available funds (cash and investments less certain net assets) totaled approximately $1.3 billion at fiscal year-end 2013, or 4.3% above the prior year and 36.6% over fiscal 2009. Available funds covered fiscal 2013 operating expenses by an adequate 65.9% and pro-forma long-term debt by a stronger 123%," Fitch said. "The system maintained approximately $1.3 billion in off-balance sheet student housing debt at fiscal year-end 2013 across PASSHE's campuses (structured to be non-recourse to the system). Inclusive of these projects, available funds covered a somewhat weaker, though still adequate, 54.8% of debt."

Fitch mentioned the recently introduced legislation that would allow some members of PASSHE to buy their way out of the system and become state-related universities.

"There is no additional information available at this time with regard to the likelihood of the bill's passage," it said. "Fitch will monitor the situation as it develops."

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