|[July 29, 2014]
Fitch Affirms Texas Southern University's RFS Revenue Bonds at 'BBB+'; Outlook Revised to Negative
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed its 'BBB+' rating on the series 2011 and 2013
revenue financing system (RFS) revenue bonds issued by Texas Public
Finance Authority (TX) for Texas Southern University (TSU).
The Rating Outlook is revised to Negative from Stable.
RFS debt is secured by pledged revenues, which include a broad mix of
income, receipts, rentals, fees and pledged tuition from TSU. The RFS
bond pledge specifically excludes state operating appropriations.
KEY RATING DRIVERS
Weakening Credit Characteristics: The 'BBB+' rating remains supported by
TSU's generally break-even operating results in fiscal years 2012 and
2013, slim but adequate available funds ratios, and state operating and
capital support from Texas (rated 'AAA' by Fitch). The Negative Outlook
is driven by a significant 9% enrollment decline in fiscal 2014,
resulting in operating deficits and budget stress, and significant
enrollment and budget uncertainty for fiscal 2015.
Enrollment Pressures Continue: TSU's enrollment dropped 9% in fall 2013,
which management attributes to changes in federal PELL eligibility
rules, tighter federal student loan underwriting standards, and overly
optimistic budget expectations.
High But Manageable Debt Burden: TSU maintains a high debt burden,
although Fitch views a long history of state debt service support for
about 46% of debt as being a partially mitigating factor.
Enrollment and Operating Performance: TSU's failure to regrow and
stabilize enrollment in fall 2014 and return to break-even operations on
a full accrual basis in fiscal 2015 will lead to a downgrade.
High Debt Burden: Any increase in debt without parallel growth in
operating performance, increased revenues or growth in available funds
would trigger a negative rating action due to TSU's high debt burden and
projected stressed operations in fiscal 2014 and 2015.
Dependence on Federal Funding Programs: TSU students are highly
dependent on federal grants and loans to pay tuition, and therefore
changes in program rules and regulations have greater affect on the
university than many other institutions.
Established in 1947, TSU is a public four-year university. Located on a
single campus approximately three miles from downtown Houston, TSU is
one of the largest historically black colleges and universities (HBCU)
in the U.S. The university serves a mix of undergraduate, graduate and
professional schools. Most students commute or live off campus, as the
university provided housing for only about 16% of its students as of
fall 2013. TSU offers professional programs in pharmacy, business and
the Thurgood Marshall School of Law.
TSU received a full 10-year accreditation with SACS, effective December
2011, following two probationary periods since 2007. A new management
team and board were installed in 2007. There has been some recent change
in the senior management team. A new provost was appointed from within
the faculty in calendar 2014, and the current CFO will retire at the end
of fiscal 2014 - a search is underway.
Enrollment Pressures Remain
Although TSU's management team stabilized enrollment between fiscal 2010
and 2012, headcount fell by about 9% in fall 2013 (fiscal 2014) to about
8,703. FTE enrollment fell by similar levels. Factors causing TSU
enrollment dips have also negatively impacted other HBCU institutions,
and include enrollment losses from older, nontraditional undergraduate
students due to Pell grant restrictions imposed in 2012, as well as
tightened underwriting standards for Parent-Plus loans.
In recent years, the number of TSU's new freshmen applications has
grown, but that growth has not translated into matriculating and
persisting students. TSU management had predicted stable enrollment for
fall 2013, but it fell 9%. Enrollment dipped a much more modest 1% in
fall 2012 (fiscal 2013), following a 1% increase in fall 2011. For the
fall 2014 enrollment cycle, management reports tightened enrollment and
budget assumptions, and enhancing recruitment and admissions activities.
The university's fiscal 2015 budget is targeting fall 2014 enrollment
growth of 400 new undergraduate nd transfer students, which assumes
enrollment growth of roughly 5%. TSU management reports that enrollment
is on target as of mid-July, 2014. Fitch considers the university's
enrollment volatility a significant credit issue, and will monitor
actual enrollment results for fall 2014. Failure to meet or exceed
enrollment targets would stress an already tight budget and lead to
negative rating actions.
More than 90% of TSU's students are from Texas, and many of those
students come from the competitive Houston region. Approximately 90% of
students receive some type of financial grants, loans or aid. Because
much of this aid is funded from federal programs, including Pell,
changes in program eligibility impact TSU proportionally more than other
Operating Strain for Fiscal 2014
TSU's operating margin is typically close to break-even on a GAAP basis,
and was only modestly negative in fiscal 2013. It was balanced on a cash
basis before depreciation expense. This contrasts to a positive 2.6%
margin in fiscal 2012. Fitch views balanced performance as consistent
with expectations for public universities.
The fall 2013 enrollment decline of 9% placed the budget for the fiscal
year ending Aug. 31, 2014 under significant stress. In combination with
a cut in state appropriations in the 2013/2014 biennium, management had
projected flat enrollment instead of a decline. Expenses were cut, some
lay-offs occurred, no salary increases were allowed, and operating
reserves were used to balance the budget. Cash flow was supported by
receipt of two non-recurring reimbursements, one for construction and
one from FEMA totaling $7.5 million.
Fiscal 2015 operations remain uncertain. The university projects a
fiscal 2015 deficit of $8.1 million assuming flat enrollment. The plan
to manage and balance this budget includes a 3.8% tuition increase,
enrolling 400 new students (and retaining existing students), and
reducing expenses an additional 3%. No increase in state operating
appropriations is expected. The ability of TSU to achieve its fiscal
2015 budget assumptions is uncertain. Fitch will review the budget
status once fall enrollment is known.
TSU's revenue diversity is similar to other smaller regional public
universities. In fiscal 2013, about 32% of operating revenues came from
the state, 37% from a mix of tuition, fees and auxiliary income and 21%
from federal grants and contracts (much of which was scholarship and
loan related). TSU does not have significant gift, research or endowment
Weakened and Slim Balance Sheet Ratios
Available funds, (AF; defined by Fitch as cash and investments less
restricted non-expendable and certain expendable net assets), declined
to $32 million at Aug. 31, 2013, down from $66 million in fiscal 2012.
This is due to a decline in cash and investments, which includes some
debt proceeds. Fiscal 2013 AF was a very slim 15.4% relative to
operating expenses and 14.9% relative to outstanding debt. Fitch
considers this balance sheet weak relative to other public universities.
Given TSU's use of operating reserves in fiscal 2014, Fitch does not
expect significant balance sheet improvement in the next several years.
High Debt Leverage
TSU's financial cushion provides very slim support for the university's
high but manageable debt burden. Given operating stress and enrollment
volatility, Fitch does not consider TSU to have any additional debt
capacity at the current rating.
Outstanding debt is approximately $218 million, including RFS parity
bonds, about $9 million of state-supported Higher Educational Assistance
Fund (HEAF) bonds and two parity loans of about $116 million from the
U.S. Department of Education's HBCU Capital Access Program. Fitch notes
that of total debt, approximately 48% is either HEAF constitutional
appropriation bonds or state-designated tuition revenue bonds, which
receive annual state appropriations for debt service on approved
academic capital projects.
Maximum annual debt service (MADS) of $25 million (due in fiscal 2014)
represented a high 12% of fiscal 2013 operating revenues. When adjusted
for HEAF debt, the MADS burden is still high but closer to 10%. Fitch
notes that TSU has a fixed-rate debt portfolio that is somewhat
front-loaded and matures within 22 years.
Outstanding debt includes a $55 million loan from the federal HBCU
Capital Access Program to construct an 800-bed residential facility on
TSU's campus. Upon completion in fall 2015, Fitch will assess the
self-supporting nature of all TSU housing. The university reports that a
proposed library project would be funded only with state capital
support, and no new debt is planned at this time.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 2014;
--'U.S. College and University Rating Criteria', dated May 2014;
--'Fitch Assigns Texas southern University's Series 2013 Rev Bonds
'BBB+'; Outlook Stable, dated July 31, 2013.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
U.S. College and University Rating Criteria
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