University of Alaska sees its bond rating downgraded after cuts, veto and inaction by Board of Regents

Hooding Ceremony at Wendy Williamson Saturday, May 4, 2013. (Photo by Erin Hooley/University of Alaska Anchorage Office of Advancement/Creative Commons)

Even more bad news for the University of Alaska today.

Moody’s Investor Services announced today that it has downgraded its rating of the bonds issued by the University of Alaska from a low-risk A1 rating to a moderate-risk Baa1 and Baa2 rating, which are just above speculative high-risk investments. The outlook for the University of Alaska was also revised from “stable” to “negative.”

The three-point drop is unprecedented in Moody’s rating system, according to a response from the University of Alaska, “which now makes UA the second lowest rated flagship university in the nation.”

In its announcement, the ratings agency said the decision was made based on “the severity and magnitude of the financial challenges confronting the University of Alaska following an over 40 percent cut in the university’s appropriations from the State of Alaska.” The review was initiated on July 2, just days after Gov. Michael J. Dunleavy vetoed $130 million from the university’s budget.

A divided Legislature, which approved a $5 million cut that’s in addition to the governor’s veto, attempted but failed to override the governor’s vetoes. There’s talk of attempts to restore funding through a negotiated deal between the factions of the Legislature and the governor but there’s been little public progress on such an avenue.

The Board of Regents opted on Monday to delay any action on the University of Alaska’s course while hoping that the Legislature and governor restore funding. University of Alaska President Jim Johnsen argued against such a course of action, noting that the longer the university takes to make cuts the larger the cuts that will be needed. He also said he was less than optimistic about funds being fully restored.

All of this was referenced in the Moody’s analysis of the University of Alaska’s financial outlook.

“The state legislature did not override the governor’s line item veto during the special session that ended on Friday, July 12 (sic), and UA’s board has not yet acted to declare financial exigency, which would enable it to more quickly make programmatic and faculty reductions,” explains the ratings agency (note that the window for overrides closed on July 12 not the special session, which is ongoing). “UA’s strategic position has been materially impaired by this funding reduction, as well as a cut to the state’s financial aid programs, and we expect a multi-year negative impact on enrollment, which was already declining, as well as the competitive position of University of Alaska’s research enterprise.”

The Moody’s announcement is essentially a message to investors that outstanding bonds have an increased risk of defaulting. Such a warning will be a significant problem if the University of Alaska hopes to issue any future bonds, meaning the system would get less favorable terms for its bond sales, Johnsen said in a statement.

“This is a direct result of the state’s budget cut and demonstrates what we have been saying—the 41 percent [$136 million] budget cut to the university continues to harm us every day,” he said. “Today’s news just amplifies the impact of the state’s funding cut—Moody’s downgrade harms our ability to bond or borrow money at favorable interest rates and to be viewed as financially stable.”

Moody’s Investor Services says the rating could be improved if funding is restored, but said ultimately the outlook and future ratings will be dependent on the action of the Board of Regents, which has so far taken no course of action other than offering platitudes about “belt-tightening” and asking Alaskans to show their support by enrolling in classes.

A stable outlook could be achieved, Moody’s explains, with a “Demonstrated ability to quickly and sustainably respond to funding reductions without depleting liquidity.”

Downgrades could come through the “inability to act quickly to right-size operations without depleting liquidity” or “any indication of reduced willingness to honor debt or other contractual obligations.”

The cost of doing nothing costs the University of Alaska about $11 million a month, according to presentations at Monday’s Board of Regents meeting. State funding for the University of Alaska would run out in February 2020 if no changes are made.

Despite those warnings, the Board of Regents is currently taking the slow-roll approach in hoping that the Legislature and governor restore funding. They’ll meet on July 30 to decide a course of action, which could include shuttering campuses, eliminating programs, firing tenured faculty and closing colleges.

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