|[August 19, 2014]
Fitch Affirms Midwestern State University, TX Revs at 'AA-'; Outlook Stable
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the 'AA-' rating on approximately $77.2
million of revenue financing system (RFS) revenue bonds issued by Texas
Public Finance Authority on behalf of Midwestern State University (MSU).
The Rating Outlook is Stable.
The bonds are secured by pledged revenues which include all legally
available funds of the university, including unrestricted fund and
reserve balances. Pledged revenues exclude state appropriations, gifts,
grants, and auxiliary student service fees.
KEY RATING DRIVERS
SOUND CREDIT ATTRIBUTES: Generally break-even to positive GAAP-based
margins, a satisfactory financial cushion and relatively steady
enrollment trends bolstered by good demand indicators are supporting
factors for the 'AA-' rating. Counterbalancing factors include a
moderately high debt burden and exposure to fluctuations in state
funding (Texas' GO bonds are rated 'AAA'/Outlook Stable by Fitch).
SATISFACTORY FINANCIAL PERFORMANCE: Timely budgetary measures to absorb
state funding reductions in fiscal years 2012 and 2013 positioned MSU to
continue generating satisfactory operating results in both fiscal years.
State funding improved modestly in for fiscal years 2014 and 2015;
however, rising costs are anticipated to result in a very modest
operating deficit in both fiscal years.
GENERALLY STABLE ENROLLMENT: Following some enrollment declines in
recent years, which was partly associated with the implementation of
more stringent academic standards for incoming students, total headcount
enrollment showed signs of stabilization in fall 2013, supported by the
largest incoming freshmen class in the university's history, and is
anticipated to show modest growth in fall 2014 according to the
MANAGEABLE LEVERAGE POSITION: Debt repayment over the past two years has
reduced the university's debt burden. Maximum annual debt service (MADS)
represented a still somewhat high, though more manageable, 8.4% of
fiscal 2013 operating revenues and was covered by 2 times (x) from net
operating income. Importantly, approximately one-third of MSU's debt
service is paid for by the state through the tuition revenue bond (TRB)
STABLE OPERATING PERFORMANCE: The Stable Outlook is predicated on
Fitch's expectation that the university will continue to register at or
near break-even GAAP-based financial performance.
Founded in 1922, MSU is located in Wichita Falls, approximately 120
northwest of the Dallas-Fort Worth (DFW) area, and is the only
designated public liberal arts university in the state of Texas. The
university's regional accreditation with the Southern Association of
Colleges and Schools Commission on Colleges was most recently
re-affirmed in 2013 for a 10-year term.
SATISFACTORY FINANCIAL PERFORMANCE
Despite a pressured state funding environment in the 2012-2013 biennium,
MSU generated GAAP-based operating margins of 1.3% and 1.1% in fiscal
2012 and 2013, respectively, driven by a mixture of cost containment and
revenue growth initiatives. Some examples of budgetary measures utilized
by the management team included reductions in discretionary expenses,
maintenance of position vacancies, and implementation of a 4.6% tuition
increase. Additionally, the university recorded above-average gift
revenues of approximately $6.7 million and $8.8 million in fiscal years
2012 and 2013, respectively.
Based on 10 months of unaudited financials, net operating income in
fiscal 2014 is trending somewhat behind the prior year. Operating
revenues continue to be on an upward trajectory, supported by a 1.6%
tuition increase; however, operating expenses are growing at a faster
pace, primarily as a result of rising costs associated with
compensation, fringe benefits, and student aid. Management expects to
utilize approximately $400,000 in institutional reserves to offset a
forecasted operating deficit, which is down from the originally budgeted
$700,000 and represents a minimal portion of annual Fitch-adjusted
operating revenues ($89.6 million in fiscal 2013) and financial
resources. Additionally, the audit is expected to reflect approximately
$1.1 million in expenses associated with gift revenues that were
recognized in previous fiscal years.
The operating budget for iscal 2015 is comparable to the current fiscal
year and is based on an estimated fall 2014 headcount enrollment of
5,975 students, up from the 5,870 recorded in fall 2013. Despite
realizing some cost-savings from a recently implemented voluntary early
retirement program, management is budgeting for $700,000 in
institutional reserves to balance the budget. The Stable Outlook is
predicated on Fitch's expectation that the university will continue to
register at or near break-even GAAP-based financial performance.
Importantly, the 83rd state legislative session passed a law requiring
four-year public institutions to provide a fixed tuition plan option.
MSU decided to transition to offering solely a four-year fixed tuition
plan and implemented tuition increases for academic year 2014-2015
ranging from 4% to 6% depending a student's year course of study. During
the first year of administering the plan, freshmen and sophomores will
have twelve consecutive semesters (including summers) of fixed tuition,
while juniors and seniors/graduate students will have nine semesters and
six semesters, respectively. Thereafter, any new student (freshmen or
otherwise) at MSU will have 12 consecutive semesters of fixed tuition.
In Fitch's view, fixed-tuition plans could limit the rate of growth in
net tuition and fees, a significant revenue stream, and potentially
reduce MSU's flexibility in reacting to reduced state support, although
some comfort is gained from the university's continued ability to adjust
room & housing and several mandatory fees, as needed.
MAINTENANCE OF SATISFACTORY FINANCIAL CUSHION
Generally break-even to positive operating performance has allowed MSU
to maintain a sound balance sheet cushion. In fiscal 2013, available
funds (defined by Fitch as cash and investments minus non-expendable net
assets and expendable net assets reserved for capital projects) totaled
approximately $50.8 million. This covered fiscal 2013 operating expenses
and pro forma debt by an adequate 57.3% and 64.5%, respectively. Both
metrics are in line with other public colleges and universities rated in
the 'AA' category by Fitch.
The state recently passed Senate Bill 1019, which allows institutions
with endowment funds of less than $25 million to pool its investments
with another governing board that has oversight of investment funds in
excess of $25 million. The university entered into an agreement with the
Texas A&M University system (TAMUS which is rated 'AA+'/Outlook Stable
by Fitch) to invest its idle cash, and in September 2013, the university
transferred $18 million to be invested in the TAMUS' cash concentration
pool. Management reported that funds with TAMUS can be divested with a
30-day notice and is keeping sufficient funds at the university level to
meet working capital needs through a one-to-two month period.
GENERALLY STABLE ENROLLMENT
Following some enrollment declines in recent years, which were partly
associated with the implementation of more stringent academic standards
for incoming students, total headcount enrollment showed signs of
stabilization in fall 2013, supported by the largest incoming freshmen
class in the university's history, and is anticipated to show modest
growth in fall 2014 according to the management team.
Management reported that approximately 15% of total fall 2013 headcount
enrollment pursued entirely online degrees and is actively exploring new
online programmatic additions. Fully online degree programs have helped
MSU deal with capacity constraints, which is viewed favorably. Fitch
recognizes, however, that there is some reputational risk associated
with poor program execution and will continue to monitor this aspect of
the credit for any indication of such a risk developing.
Population growth around the university is expected to remain flat
during the next decade. In response, management embarked on a strategy
starting for fall 2013 to increase recruitment from the DFW area, which
was successful and yielded the majority of the growth in freshmen
enrollment. According to management, preliminary fall 2014 admissions
statistics indicate that the university was able to sustain growth from
the DFW area.
MANAGEABLE LEVERAGE POSITION
Debt repayment over the past two years has reduced the university's debt
burden. Maximum annual debt service (MADS) represented a still somewhat
high, though more manageable, 8.4% of fiscal 2013 operating revenues and
was covered by 2 times (x) from net operating income. Importantly,
approximately one-third of MSU's debt service is paid for by the state
through the tuition revenue bond (TRB) program. The university's debt
portfolio carries no exposure to variable rate debt or related interest
The university may issue non-TRB bonds over the near term for a new
residence hall. Management reported that student housing is
oversubscribed by around 300 students at present time, in part because
increased recruiting in the DFW area has resulted in greater housing
participation and retention. The construction of a new housing facility
to accommodate existing, rather than forecasted, student demand is
viewed favorably by Fitch.
Management will request $73 million in TRB funding in the 84th
legislative session for a new College of Health Sciences & Human
Services building ($61 million) and deferred maintenance ($12 million).
In the event the TRBs are not approved, MSU will defer or delay the
project until funding becomes available.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. College and University Rating Criteria' (May 12, 2014);
--'Fitch Rates Midwestern State University Revs at 'AA-'; Outlook
Stable' (Aug. 30, 2012).
Applicable Criteria and Related Research:
U.S. College and University Rating Criteria
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