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MOODY'S ASSIGNS Aa2 RATING TO CALIFORNIA STATE UNIVERSITY'S $438 MILLION OF SYSTEMWIDE REVENUE BONDS, SERIES 2011A; AFFIRMS RATINGS ON OUTSTANDING LONG-TERM BONDS; OUTLOOK IS STABLE

09 Sep 2011

SYSTEM HAS $4.5 BILLION OF RATED DEBT OUTSTANDING INCLUDING COMMERCIAL PAPER ISSUANCE AT FULLY AUTHORIZED $200 MILLION

Trustees of The California State University
Higher Education
CA

Moody's Rating

ISSUE

RATING

Systemwide Revenue Bonds, Series 2011A

Aa2

  Sale Amount

$438,000,000

  Expected Sale Date

09/14/11

  Rating Description

Public Higher Education Revenue

 

 
Moody's Outlook   Stable
 

Opinion

NEW YORK, Sep 9, 2011 -- Moody's has assigned a Aa2 rating to California State University's (the "System" or "The CSU") Systemwide Revenue Bonds, Series 2011A. The tentative issue amount for the Series 2011A bonds is $438 million including $200 million in refundings and may be reduced subject to market conditions. The CSU's rating outlook is stable. At the same time, we have affirmed the existing ratings of California State University's outstanding rated long-term debt (see RATED DEBT).

SUMMARY RATINGS RATIONALE: The Aa2 rating for California State University reflects The CSU's exceptional market position and student demand as the nation's single largest four-year higher education system and its ability to weather through substantial state funding reductions by implementing significant tuition increases and launching initiatives to reduce expenses. Offsetting the strengths are material reliance on state appropriations to fund operations and moderately high balance sheet leverage relative to comparably rated large systems and universities.

STRENGTHS:

*Exceptional student demand driven by The CSU's 23 campuses located throughout the State, as well as its established access mission, with enrollment of over 344,000 full-time equivalent (FTE) students for Fall 2010.

*Declining reliance on state funding reflected by rising student-related revenues to offset reduced state funding.

*Good financial resources, with $3.1 billion of total financial resources for fiscal year (FY) 2010, up from $2.28 billion the previous year, with unrestricted resources of $1.75 billion, up 100% from FY 2009 and higher than previous years.

*Strong financial and budget oversight to manage through substantial state funding cuts, including implementing fee increases, enrollment caps and expense management initiatives.

*Active, centralized System governance and oversight, coupled with increased operating independence, including a centralized debt management function and capital needs assessment, authority to retain and invest its student fee revenues and autonomy in setting tuition and fees.

CHALLENGES:

*Continued significant reliance on State of California (rated A1 with a stable outlook) to fund System operations and capital funding for academic facilities.

*Increasing leverage, with expendable resources cushioning proforma debt 0.5 times and debt-to-revenues of 0.7 times.

*Expected ongoing debt issuance to fund continuing capital needs for both academic and auxiliary facilities that requires continued strong growth in pledged revenues to support rising debt service.

DETAILED CREDIT DISCUSSION

USE OF PROCEEDS: Proceeds from the Series 2011A bonds will finance capital projects on campuses in the System, redeem commercial paper issued to provide initial funding for capital projects, refund outstanding Systemwide Revenue Bond debt and auxiliary debt previously issued by the campus foundations, and pay issuance costs.

LEGAL SECURITY: The Series 2011A bonds are issued under a Systemwide debt financing program (the SRBs), with pledged revenues including the gross revenues from various auxiliary revenues and mandatory student fees, including those for student union, student housing, parking, health center facility and from the continuing education program. Total gross and net revenues for the SRBs were $1.18 billion and $321 million, respectively, for FY 2010. The 2011A bonds are on parity with approximately $3.38 billion of outstanding Systemwide Revenue Bonds. The CSU has covenanted to not issue senior lien debt. There is a sum sufficient rate covenant and no debt service reserve fund for the Systemwide Revenue Bonds.

The CSU's lease revenue bonds issued by the State Public Works Board incorporates both the strength of CSU's pledge to make rental payments and the historical practice of the State of California to include funds for payment in its annual budget. The lease revenues bonds are an important financing structure and should lead to appropriate support of any individual lease. Although there is a history of the State including the debt service payment, the rating is one level below the SRBs reflecting The CSU's pledge to make the required lease payments from all legally available funds.

DEBT-RELATED DERIVATIVES: None

MARKET/COMPETITIVE PROFILE: KEY CREDIT STRENGTH OF STRONG STUDENT DEMAND FOR THIS CALIFORNIA STATEWIDE PUBLIC HIGHER EDUCATION SYSTEM

We continue to view California State University's key credit strength as its student market position as the largest four-year higher education system in the U.S. Fall 2010 enrollment stood at over 344,000 FTE students at its 23 campuses across the state, with substantial unmet student demand. Enrollment is down from 363,000 FTEs in Fall 2008 as The CSU reduced enrollment levels to manage recent substantial cuts in state funding. It is targeting an enrollment decline at its campuses among other cost reduction measures to cope with a $650 million reduction in state operating funds for FY 2012.

Also, the System implemented large increases in its student tuition - 32% in FY 2010, 10% in FY 2011 and 23% for the current FY 2012. Despite the dramatic increase in tuition over the past three years, demand remains high from both first time freshmen and transfers, as reflected by applications. Further, The CSU's tuition levels remain competitive compared to other public universities in the region. Further, the State's network of community colleges provide a feeder to the System's campuses. Given the demographics in California, The CSU's access mission for undergraduate education, and demand for its programs that are now expanding to masters level degrees, we expect enrollment for The CSU to remain very strong and for net tuition revenues to grow.

OPERATING PERFORMANCE: IMPROVED OPERATING PERFORMANCE REFLECTING SYSTEM MEASURES TAKEN TO BRIDGE STATE FUNDING CUTS

Moody's expects The CSU to continue to produce at least balanced operating performance and good cash flow to provide satisfactory debt service coverage. In FY 2010, the System experienced a $584 million or 20% reduction in state funding and implemented a number of actions to restore performance after a substantial operating loss, as calculated by Moody's in FY 2009 due to a $715.5 million reversion to the State in June 2009, the last month of the fiscal year. These actions included two increases in student fees (tuition) totaling 32%, an employee furlough plan of two days per month (effectively a 10% pay cut), required cost measures at individual campuses and reducing enrollment by about 40,000 students (10%) to manage enrollment to resources for the second half of the fiscal year. As a result, operating performance was strong, with an annual operating margin of 8.7% and an operating cash flow margin of 17.8%, reflecting very strong cash flow generation for debt service.

For the FY 2011, the State increased The CSU's funding to $2.79 billion from $2.35 billion the previous year, reflecting a partial restoration of a "one-time cut" in the FY 2010 general fund base, some funding for enrollment growth and enabling campuses to accept more students for Fall 2010 (FY 2011), and $106 million in federal fiscal stimulus (ARRA) funds. The CSU is projecting favorable operating performance and high single digit cash flow generation for FY 2011, although not at the level reported for FY 2010.

For the current FY 2012, the State of California's enacted budget included a $2.14 billion appropriation for The CSU, a $650 million cut in state operating funding compared to FY 2011, with the possibility of an additional $100 million reduction if State revenues do not meet budgeted levels. To fill the revenue shortfall, tuition was increased by 23% through two tuition increases for the year, as well as a planned reduction in enrollment and further expense reduction measures.

Given continued State budget pressures, we expect further reductions in state funding could occur. Nonetheless, we expect The CSU to continue to take such measures as needed, including further increases in student charges, reducing enrollment if necessary and implementation of other cost efficiencies, to manage through the difficult state funding environment with continued production of sufficient cash flow to comfortably handle debt service commitments.

Regarding revenue diversity, we expect student charges will continue to increase as the largest contributor to operating revenues, reflecting both strong student demand and the implemented fee increases. For FY 2010, state appropriations accounted for 36% of total operating revenues, down from 45% in FY 2008, while tuition and auxiliaries rose to 36% in FY 2010 from 32% in FY 2006. We view the declining reliance on state funding favorably as it provides The CSU greater autonomy in managing its revenues and providing greater control over its operating cash flow generation.

The State of California is currently rated A1 with a stable outlook. The state benefits from a large, diverse economy, high wealth, a moderate debt burden, and well-funded pension system. A volatile tax revenue structure and governance issues, particularly restrictions placed on the legislature in the budgeting process and a reluctance to build reserves during the last recovery, have made it difficult for the state to address economic and revenue downturns. Financial strength has deteriorated in the past three years and a weak economic recovery may mean that financial weakness is likely to continue. That said, long-term economic prospects are good, and long-term liabilities (debt, unfunded pension liabilities, and repayment of other obligations captured in negative audited balances) are moderate compared to many other states. For more information, please see Moody's report on the State of California dated September 8, 2011.

BALANCE SHEET POSITION: ADEQUATE FINANCIAL RESOURCES PROVIDE SYSTEM FINANCIAL FLEXIBILITY AND HEALTHY OPERATING LIQUIDITY; FUTURE CAPITAL NEEDS MODERATED

For FY 2010, California State University showed $3.06 billion of total financial resources, up over 40% from the prior year due to a very large increase in unrestricted financial resources to $1.75 billion from $892 million in FY 2009 driven by retained surplus. FY 2010 expendable financial resources of $2.33 billion cushion the $4.82 billion of proforma debt (including the current Series 2011A issue, an upcoming $76 million lease revenue bond to be issued by the State Public Works Board and assuming the fully authorized $200 million of commercial paper) by 0.5 times and annual operating expenses by 0.4 times or over four months of operating expenses. Although improved from FY 2009, The CSU's leverage position is thinner than many of the large universities or systems rated by Moody's. We note the System carries a $212 million liability for an unfunded OPEB obligation that depresses the $1.75 billion of unrestricted net assets. The CSU projects some growth in total financial resources for the recently completed FY 2011 from retained operating surpluses.

We note that The CSU has substantially greater operating liquidity, both in operating funds and other funds that it can access when necessary. Based on Moody's new liquidity ratios analyzing monthly and annual liquidity, The CSU demonstrates healthy liquidity for its rating level and its debt structure. At June 30, 2010, the System maintained $2.23 billion of unrestricted funds available within one month or 141 days cash on hand. The CSU reported as of August 8, 2011 that it had about $2.44 billion of investments that are readily available in liquid investments; further, it could borrow against additional funds held in affiliated organizations, if necessary.

The System's access mission for California high school students, particularly for lower-income or under-represented students, has resulted in it serving a more non-traditional, commuter student population. It is therefore, not surprising that fundraising amounts to a comparatively modest amount for The CSU's size. Gift revenues vary across the System, with some campuses more active fundraisers than others. For FY 2010, total gift revenues were $192 million. The System is planning to further develop its fundraising activities, which should result in growth in gift revenues over time as the economy recovers.

To meet the growing student demand, The CSU will continue to have significant capital needs for both academic and auxiliary facilities. Favorably, the State continues to support the System's capital needs through the State Public Works Board bond issuance with $804 million outstanding and an additional $76 million expected to be issued in October 2011. The System is legally obligated to pay debt service on the State Public Works Board bonds and the bonds are included in The CSU's debt totals. However, we factor into our analysis that the State of California has historically fully funded the debt service, even during the recent years when the State has experienced fiscal difficulty. The System does not budget for debt service on these bonds.

The CSU has refinanced, when market conditions permit, the previously issued senior lien and auxiliary system debt into the Systemwide debt financing program, effectively centralizing The CSU's debt management. We expect The CSU to have additional financing needs for housing and other student related services, although the magnitude and timing are uncertain. With the increase in SRBs, the System will need to continue to grow pledged net revenues in order to support debt service; with its strong enrollment trends and student demand for the services provided, we believe that such growth will continue. The debt structure is conservative, with fixed rates associated with the entire direct debt portfolio.

Outlook

The stable outlook for The California State University is based on our expectations of continued exceptional student demand, sound financial performance with at least balanced operating performance and favorable cash flow providing continued favorable debt service coverage, and continued ability to manage through any reductions in State support for the System.

WHAT COULD MAKE THE RATING GO UP

Continued growth in financial resources and sustained improvement in philanthropic support; consistently positive operating performance and strong operating cash flow; ability to continue to grow net tuition revenues with no negative impact on student demand.

WHAT COULD MAKE THE RATING GO DOWN

Decline in The CSU's liquidity from continued state funding cuts or payment deferrals; inability to increase student tuition and fee revenues or implement further expense control initiatives to offset state funding cuts that result in weakened operating cash flow and debt service coverage, as well as a weakened student market position; downgrade of State of California G.O. rating; additional borrowing without compensating resource and revenue growth

KEY INDICATORS (Fall 2010 enrollment, FY 2010 financial statements)

Total Enrollment: 344,327 Full-Time Equivalent Students

Total Proforma Direct Debt: $4.82 billion (including current Series 2011A issue and CP program at $200 million backed by LOC)

Total Proforma Comprehensive Debt: $4.97 billion

Total Financial Resources: $3.06 billion

Expendable Financial Resources: $2.33 billion

Monthly Liquidity: $2.23 billion

Monthly Days Cash on Hand (unrestricted funds available within 1 month divided by operating expenses excluding depreciation, divided by 365 days): 141 days

Expendable Resources to Proforma Debt: 0.5 times

Expendable Resources to Operations: 0.4 times

Proforma Debt-to-Revenues: 0.7 times

Average Operating Margin: 1.2%

Reliance on the State: 34.8%

Reliance on Tuition & Auxiliaries: 35.5%

State of California G.O. Rating: A1, stable outlook

RATED DEBT

Systemwide Revenue Bonds: Aa2

Student Housing Revenue Bonds: Aa2

State Public Works Board Bonds issued for the benefit of California State University: Aa3

Commercial Paper program: P-1 (rating based on LOC from State Street Bank and Trust, JP Morgan; termination date of June 2012)

CONTACTS

California State University: Robert Eaton, Senior Director, Financing and Treasury, 562-951-4572

Underwriter: Barclays Capital; John Augustine, 212-526-5436; Richard King, 206-344-5838

PRINCIPAL RATING METHODOLOGY

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education Methodology published in August 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service's information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Diane F. Viacava
Analyst
Public Finance Group
Moody's Investors Service

Edith Behr
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Aa2 RATING TO CALIFORNIA STATE UNIVERSITY'S $438 MILLION OF SYSTEMWIDE REVENUE BONDS, SERIES 2011A; AFFIRMS RATINGS ON OUTSTANDING LONG-TERM BONDS; OUTLOOK IS STABLE
No Related Data.
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