Cash Seen as a Curse for Pennsylvania Universities in Rating Cut

Pennsylvania Governor Tom Wolf pledged to restore $90 million to the state’s largest higher-education system. The problem is that the funds would come with strings attached: the schools have to freeze tuition.

After the Pennsylvania State System of Higher Education agreed to the Democratic governor’s request this month, Fitch Ratings cut the schools’ bond grade to a five-year low. The timing isn’t ideal, given that the system is selling about $95 million of tax-free municipal bonds Thursday.

Promising to hold tuition in check may make it difficult for the 109,000-student system to raise fees even if the Republican-led legislature doesn’t approve the windfall.

“It puts them in a tricky spot,” said Ryan Greene, a director at Fitch in New York. “It’s shifted some of the political burden to the system of having to increase rates if in fact they don’t get the funding.”

Pennsylvania’s system of 14 universities, from Monroe County’s East Stroudsburg to Edinboro in Erie County, are among schools nationwide dealing with the fallout from state-budget cuts even as the economy revives. Average state spending on higher education was down 23 percent from before the recession, according to a May 2014 report from the Washington-based Center on Budget and Policy Priorities, which tracks the impact of spending cuts.

Funding Cut

A week after the system’s board voted April 9 to freeze tuition in exchange for the aid, Fitch cut it to AA-, the fourth-highest and the schools’ lowest since April 2010. The company said rising expenses and declining enrollment contributed to the reduction.

In 2012, Pennsylvania cut the system’s funding by $90 million to about $413 million, where it has remained.

Wolf, who beat incumbent Republican Tom Corbett in November, pledged to restore the lost aid over the next two years, starting with about $45 million in the year beginning in July.

Legislative leaders are criticizing the budget proposal for its reliance on increases in income and sales taxes and new levies on natural-gas producers.

James Dillon, vice chancellor for administration and finance for the universities, said the system can still raise tuition if the legislature doesn’t agree. This year’s cost for a Pennsylvania resident enrolled full-time for an undergraduate degree is $6,820.

‘Good Credit’

The downgrade won’t significantly affect the bond deal, which will refinance debt, Dillon said.

“Investors understand what we are and who we are,” he said from Harrisburg, the state capital. “We are a well-run organization and we’re still very much a good credit.”

In April 2014, the system priced six-year bonds to yield 1.8 percent, about 0.2 percentage point above top-rated munis, according to data compiled by Bloomberg. The spread has averaged about 0.35 percentage point in trading this year.

The schools may get pinched as Pennsylvania deals with expenses such as growing pension obligations, said Scott McGough, director of fixed income in Philadelphia at Glenmede Trust Co.

The state had its credit grade cut by each of the three biggest rating companies last year, and lawmakers balanced the $29 billion budget for the year through June with $2 billion of one-time measures. They’re working to close a deficit of at least $1.5 billion for next year.

“When the state comes under stress, you see that they’re going to end up cutting even if they’re committed to education,” said McGough, who helps manage about $2.5 billion of munis. “The stress gets pushed down.”

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