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Education Dive
Moody's upgrades higher ed's outlook to stable
Hallie Busta
Dec. 11, 2019
Dive Brief:
Credit rating agency Moody's Investors Service expects U.S. higher ed
to find stability amid challenging business conditions, according to a
new report in which it raised its outlook for the sector to stable
after two consecutive years listing it as negative.
Large, comprehensive institutions will drive a 3% to 4% increase in
operating revenue across the entire sector in 2020, the report
forecasts. Colleges also can expect strong growth in income sources
including state funding, gifts, grants and contracts.
Several factors could disrupt the stable outlook, Moody's warns,
including the potential for a market downturn that reduces donations or
hurts investments, and policy changes that decrease international
student enrollment.
Dive Insight:
Business conditions "will remain difficult" for postsecondary
institutions for the next 12 to 18 months, but they "will not
deteriorate materially," Moody's analysts wrote in the report.
Some institutions are expected to fare better than others.
Large comprehensive universities, both public and private, can expect
operating revenue to increase 3.5% to 4.5% during the year, compared to
a 2% to 3% bump at small public and private institutions.
But tuition will continue to be a drag on revenue gains in 2020, the
analysts forecast, increasing 1% at public institutions and 2.3% at
privates. State funding, donations, grants and contracts, meanwhile,
will rise around 3% for the year, helping to stabilize colleges' income
streams.
The report comes as the closures — or potential closures — of small
independent colleges have made headlines, and as institutions react to
a slowdown in traditional enrollment and a decrease in the number of
new international students.
"There's a pretty strong narrative that higher education is in crisis,
when the real picture is much more nuanced, and the Moody's report
reflects that," said Robert Kelchen, an associate professor of higher
education at Seton Hall University, in an interview with Education
Dive. "There are quite a few segments of higher ed that are doing quite
well, and there are other segments that are really struggling."
Moody's expects cash flow margins to be above 10% for about half to 60%
of public universities and at or above 12% for around 60% to 65% of
private schools. Those shares are down slightly over the last five
years but are still healthy, the report notes.
"If we're using cash flow margins as a proxy for operational health,
the majority of universities continue to generate good cash flow," said
Michael Osborn, a vice president-senior analyst at Moody's who led the
report, in an interview with Education Dive.
Moody's expects institutions will continue to streamline operations.
Small and midsize regional public colleges will be "among the most
constrained" in revenue growth in 2020 due to limited funding beyond
state appropriations and tuition, the report notes. In response to that
trend, several systems nationwide have sought to consolidate or
otherwise streamline their operations.
A report out this week from credit ratings agency Fitch Ratings and
shared with Education Dive was not as positive. The agency maintained a
negative outlook for the sector into 2020. It cited lower levels of
state support since the recession, along with slower tuition revenue
growth and fewer high school graduates as "key sector pressure points."
Other factors that could create financial challenges for colleges are
more interest in performance-based funding by governments and growing
scrutiny around outcomes, according to Fitch.
In their reports, Moody's and Fitch point to online learning as a way
colleges can reach beyond traditional markets, whether demographic or
geographic, to address current headwinds. Kelchen and Osborn note,
however, that the online learning market has become more saturated and
it can be expensive for colleges to gain a foothold.
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