Fitch Ratings downgrades PASSHE bonds

Citing an “uncertain funding environment,” combined with growing expenses, Fitch Ratings downgraded bonds this week held by the Pennsylvania State System of Higher Education.

Fitch downgraded the rating on PASSHE’s approximately $860 million of currently outstanding revenue bonds to AA- from AA.

The rating outlook was revised to stable from negative. 

The downgrade reflects “Fitch’s belief that a declining number of high school graduates; an uncertain commonwealth funding environment; and employee compensation and other expense growth will continue to pressure the system,” the ratings service said in a news release.

Fitch also assigned an AA- rating to approximately $99.7 million worth of series AQ bonds to be issued on behalf of PASSHE.

The bonds are expected to sell competitively on or about April 27. Bond proceeds will be used to refund currently due series AC bonds and refund future series AE bonds.

PASSHE officials were not available for comment this morning.

Negative GAAP-based operating margins in each of the past two fiscal years and various revenue- and expense-related hurdles drive the rating downgrade, Fitch said. Operating margins on a full accrual basis registered negative 1.7 percent and negative 3 percent in fiscal years 2013 and 2014, respectively, following an average of 1.6 percent the preceding three years.

“A return to positive operating margins resulting from enrollment growth could yield positive rating action,” Fitch said in the report.

Fitch delivered good news as well, noting that “ratios of available funds to fiscal 2014 operating expenses (63.9 percent) and pro forma debt (124.2 percent) compare favorably to rating category medians.”

Regarding enrollment numbers, Fitch said full-time equivalent enrollment has declined by an average of negative 2.4 percent annually since fiscal 2010 to 97,394 in fiscal 2015. Preliminary fall 2015 application and admissions data through March 2015 suggest continued trends, Fitch said.

About 87 percent of PASHHE employees are represented by bargaining units, Fitch noted, with most contracts expiring at the end of FY 2015. That creates budgetary uncertainty, Fitch said.

John Hilton

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