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Rating Action:

Moody's assigns Aa3 rating to State System of Higher Education's (PA) $32.0 million Revenue Bonds, Series AO; outlook is stable

Global Credit Research - 10 Jun 2013

Total $1.54 billion rated outstanding debt, including the current issue and rated privatized student housing debt

New York, June 10, 2013 --

Moody's Rating

Issue: Revenue Bonds, Series AO; Rating: Aa3; Sale Amount: $32,000,000; Expected Sale Date: 06-25-2013; Rating Description: Revenue: Public University Broad Pledge

Opinion

Moody's Investors Service has assigned a Aa3 rating to the State System of Higher Education's ("PASSHE" or "State System") $32.0 million Revenue Bonds, Series AO issued through the Pennsylvania Higher Educational Facilities Authority. The rating outlook is stable.

Moody's also rates privatized student housing debt for a number of SSHE member campuses, issued by the respective campus foundations.

SUMMARY RATING RATIONALE

The Aa3 rating and stable outlook reflect PASSHE's large scale as a system of 14 campuses located throughout the state, sufficient cash flow to cover debt service, and relatively healthy liquidity compared to operating expenses. The rating and outlook also incorporate the system's high leverage (including privatized student housing debt), very large and growing liability for employee retirement benefits and rising annual costs related to these benefits, weak demographic projections for high school graduates in the state, and the constrained revenue due to weakening state support, declining enrollment, political limitations on the system's ability to raise tuition and fees, and challenges in reducing expenditures in light of the pervasiveness of system labor unions.

STRENGTHS

*Established market position as Pennsylvania's state-supported public university system, with a large enrollment base located on 14 campuses throughout the Commonwealth, with enrollment of over 106.000 full time equivalent (FTE) students for fall 2012.

*Consistently favorable operating performance and cash flow generation, with a 3.0% three-year average operating surplus for fiscal years (FYs) 2010-2012 and operating cash flow margin of 15.6% for FY 2012.

*Good unrestricted liquidity, with 282 days monthly days cash for fiscal year end (FYE) 2012 and expected continued positive monthly liquidity for FY 2013.

*Rapid amortization of system debt with many issues having 20 year maturities.

CHALLENGES

*Enrollment and tuition revenue pressures from declining PASSHE student enrollment driven by the weak demographic trends and declining Commonwealth high school graduates, particularly in Western Pennsylvania counties and the highly competitive Pennsylvania student market. PASSHE reports a second consecutive enrollment decline to 106,812 full-time equivalents (FTEs) for the fall 2012 semester from 112,030 in fall 2010. Indications for the upcoming fall 2013 show enrollment to be slightly lower than the prior year.

*Unionized faculty and staff, severely constraining PASSHE's ability to manage expenses in the face of challenged enrollment growth, as well as driving rising pension and healthcare benefits that further pressure operating performance and balance sheet resources.

*High balance sheet leverage from substantial increase in debt since FY 2004, with total pro-forma debt rising to nearly $2.25 billion, driven largely by privatized student housing debt issued for replacement student residences on State System's university campuses.

*Expectations of constrained operating support from Commonwealth of Pennsylvania, with operating appropriations representing a significant 22% of total operating revenues in FY 2012.

*Growing burden from post-retirement benefits driving rising annual costs to fund pension and other post-retirement benefits (OPEB) that are projected to rise dramatically in the future, coupled with a high OPEB liability of $864 million at FY 2012 expected to continue to increase annually.

*Debt structure of member university foundations to fund replacement student housing includes variable rate debt requiring bank support or direct bank placement adding risk of liquidity demands of the foundations' own modest resources and potential expectations of PASSHE to step in to fund or assume management or ownership of the housing facility.

OUTLOOK

The stable outlook reflects expectations of continued positive operating performance and cash flow generation to fund the rising costs of retirement benefits and other expenses in the midst of expected declining enrollment; little additional debt related to both PASSHE and additional campus student housing projects.

WHAT COULD MAKE THE RATING GO UP

Not for the foreseeable future given the downgrade. Any upgrade could be driven by a substantial decline in the OPEB liability from benefits restructuring; consistently favorable operating performance and strong cash flow generation; increased student demand with higher non-resident student enrollment, translating to continued increases in net tuition per student.

WHAT COULD MAKE THE RATING GO DOWN

Stagnant or declining tuition revenues from continued enrollment declines or downward pressures on tuition increases; pressured operating cash flow from either the failure to respond to enrollment declines, constrained revenue growth or the rising OPEB and pension costs; failure to achieve significant gains in union contract negotiations, resulting in an inflexible expense structure or continued rise in OPEB liability and pension costs beyond current projections; substantially reduced or chronically delayed state funding resulting in weaker operating performance and deterioration of balance sheet cushion; downgrade in the rating of Commonwealth of Pennsylvania; further increase in debt, including student housing, without growth in financial resources or revenues.

PRINCIPAL METHODOLOGY USED

The principal methodology used in this rating was U.S. Not-for-Profit Private and Public Higher Education 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 certain 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 certain 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 certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Diane F. Viacava
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Mary Cooney
Asst Vice President - Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Aa3 rating to State System of Higher Education's (PA) $32.0 million Revenue Bonds, Series AO; outlook is stable
No Related Data.

 

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