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Moody’s downgrades college bond issue to junk

Last month, Moody’s Investors Service downgraded a debt issue of Rider University (Lawrenceville, NJ) from Ba1 to Ba2. The change in the school’s credit rating reflects a new college bond issue, which increased the school’s debt from $89M to $110M.

If you know anything about Moody’s ratings, you’ll know that a bond rating of Ba1 is “non-investment grade.” That’s a polite way of saying it’s “junk.” So a downgrade from Ba1 to Ba2 really means that the school’s already-junky debt has gotten slightly more junky. “Junk” is a bit of a misnomer. The term really reflects the risk investors take when they buy a junk bond. A rating of Ba1 or below falls in the bottom half of Moody’s ratings scale. The hard, hopeless bottom is still in the hazy distance.

I bring this up because Moody’s had this to say about Rider University’s current financial strategy in its ratings report:

“The university has relied more heavily on credit to fund operations in recent years.”

According to a university spokesperson, “The university has budgeted debt repayment as part of normal operations.”

The university has budgeted debt repayment as part of normal operations.

This is exactly the same strategy that the Washtenaw Community College trustees have pursued over the past two decades. They take on capital debt and repay it with operating funds.

This is a poor strategy, akin to using a credit card to pay the mortgage. As a private institution, Rider University does not have the power of taxation. WCC does. The trustees simply choose not to use it. Instead, they prefer to take money the taxpayers provided for operating the school and use it to pay debts.

College bond issues should not operationalize debt

Not using WCC’s taxation powers to pay for college bond issues puts the school at risk. It decreases the money available for legitimate operating expenses. And reliance on this kind of debt is a sign of fiscal weakness.

Moody’s has rated WCC’s college bond issues as investment grade, so few worries there. Right now, the outstanding debt mostly arises from the Health and Fitness Center. But the Trustees authorized another college bond issue to fund the construction of the “Advanced Transportation Center” prior to the pandemic. (Those bonds have not been issued yet.) The Trustees also plan to authorize tens of millions more in another college bond issue to pay for an extensive renovation to the SC Building. WCC intends to guarantee repayment of both issues using operational funds.

Debt isn’t an operational expense. By using operational funds to guarantee the repayment of millions of dollars in bond debt, the WCC trustees have betrayed the trust of the voters. In 2016 and 2020, the voters authorized substantial millages for WCC for the purpose of paying for its operations. Diverting that money to debt is a misuse of that money and a misrepresentation to the public of the intended use of the millage proceeds.

The continued reliance on operational funds to pay for capital projects puts the long-term financial health of WCC at risk. This strategy is like the City of Ypsilanti’s Water Street boondoggle and could have similar consequences. This is especially troubling considering the administration’s prediction that enrollment will continue to decline. Declining student enrollment will either mean declining tuition revenues or massive tuition increases in the future.

Operationalizing debt is a spiral staircase. The strategy lacks common sense and will mortgage the futures of thousands of Washtenaw County residents.

Photo Credit: soomness , via Flickr