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The prospect of global non-profit higher education: empty chairs and empty tables
U.S. public finance credit outlook for 2021: Is it back on track?
2020 U.S. Higher Education Rating Action
2020 American Charter School Rating Action
California's fiscal year 2022 administrative budget cuts its annual deficit forecast by more than half
Although many schools have difficulty meeting enrollment and income targets before COVID-19, the epidemic has exacerbated these pressures and forced a fundamental shift in everyone’s business model. The effectiveness of vaccinations is critical to resuming in-person classes, but the challenges facing the industry have not affected all schools equally. Schools with weaker needs and financial status will be less flexible in operation and may face deterioration in credits.
Last year, colleges and universities were tested in an unparalleled way; we hope to see the impact for a long time. Almost all schools are facing a reduction in tuition and ancillary income, and the uneven economic recovery has increased budgetary pressure on all other sources of income, including possible reductions in fundraising for public institutions and state funding. Uncertainty in the timing of vaccinations for students and teachers, continued social distancing policies, and further outbreaks on campus will determine students' enrollment decisions before the fall of 2021. We believe that the update of revenue forecasts and the ability of the management team to adjust budgets will remain unchanged. critical. Although federal aid provides some financial support, the amount of these funds related to the increase in pandemic costs is still unknown and is likely to be uneven. Entering 2021, 39% of our rated colleges and universities will have a negative outlook on the outlook, which underscores our view that the increasing pressure on the industry will continue to put the low end of the rating range or have fallen into operation before COVID Distressed schools exert pressure. The following questions highlight what we believe will be the main driver of credit quality next year.
Obviously, the challenges facing the industry do not affect all institutions equally. Schools with relatively weak demand conditions are facing higher operational pressures, and since this COVID-10 sprint has evolved into a marathon, the credit quality gap between higher-rated institutions and "BBB" and below institutions continues The performance is more obvious. Downgrade the rating and revise the negative outlook on institutions with lower outlooks. These schools usually lack scale and scale, reputation, income diversity or balance sheets, and cannot compete as effectively as their parent organizations. Therefore, we believe that institutions with limited flexibility, whether in terms of financial operations, admissions, resources, or admissions, will face weak credit conditions in 2021 and beyond. In the higher education industry, the privatized (off-balance sheet or OBS) student housing sub-sector will continue to work hard to fill the beds, and in some cases, as social isolation continues, it will also need to supplement debt service reserves.
There is currently no reasonable way to predict the number of enrollments in this summer or fall. At that time, the school was worried about the outbreak of an epidemic on campus and is currently delaying students' return to campus in the spring semester. Many schools are still online or moved online after the winter vacation. We expect that the timing and availability of vaccines for students and teachers will drive admissions decisions through the fall of 2021.
We expect that the funding sources (including state operating grants, tuition income, auxiliary income, philanthropy, donations and other sources) that higher education institutions rely on will be mostly reduced this year. As many schools freeze tuition fees and the entire department’s enrollment rate drops, net tuition income will drop significantly in the foreseeable future.
Before the pandemic, many higher education institutions were already facing operational and financial challenges, and COVID-19 has exacerbated these pressures. Starting in 2021, of the 169 schools with poor prospects, most (60%) are rated as "BBB+" and below. Some of these prospects will become downgraded. However, relatively speaking, the world we rate represents a completely different community, and other schools with strong demand perform well. Despite the pandemic, there are still 266 colleges and universities that maintain a steady momentum of development. Many of them have steadily increased their enrollment in the fall of 2020 and made considerable profits. There is no "one size fits everyone".
Facing the expected decline in revenue, institutions have been cutting expenses. As the pandemic continues, many people have to take vacations and lay off workers. We expect that the revised budget may inspire more spending cuts. For more universities, overall financial operations will become more and more challenging, and schools with greater financial flexibility will do better. In the United States, most rated universities have investment grade ratings backed by healthy available resources, which has helped maintain credit stability over the past year.
Most Ivy League schools and universities and top schools are very selective and attract many students. Therefore, if applications or deposits decrease, there are more opportunities to adjust the number of students and fill seats. Considering the competitive environment of students, in terms of student needs and selectivity, the further you go, the more difficult it is to make up for the decline in enrollment and the gap. In addition, financial assistance decisions become critical and may affect operating budgets.
On average, schools rely on auxiliary income (housing, catering, sports, and other income) within the scope of our assessment, which accounts for about 10% of total operating income (although some income is much higher). With this fall’s social distancing strategy and low-density housing and catering systems, coupled with limited sports and related income (in most cases), the school’s auxiliary income will be particularly low. Schools that rely on auxiliary income for most budgets will be the most pressured-in some cases, we may see schools need to re-evaluate sports or auxiliary products.
Last year, in our evaluation of the privatized student housing project, we saw an unprecedented rating and outlook movement. Currently, the prospects of all these projects are negative. By 2020, 21 (35%) student housing projects will be downgraded to 60. According to factors such as housing demand in the spring and summer semesters, the need to use reserves, the debt service level in fiscal 2021, and the most important thing is to obtain the support of the institutions it serves. We expect the pressure on the rating of the OBS student housing project this year to continue .
Historically, enrollment in the two-year program has grown significantly in an economic downturn, but this pandemic and economic recovery are unparalleled. The sudden start and end of the economy, the reduction of curriculum and overall health and safety issues have led to a substantial decline in community college enrollment in the fall of 2020, and this trend is expected to continue. Schools report that COVID-19 has damaged students’ learning opportunities and affordability, and that there are overall difficulties in effectively converting vocational and technical courses into online formats. Although this will put income pressure on this sub-sector of the institution, nearly 65% of the ratings in our community colleges fall into the two highest-scoring categories, and these ratings usually remain stable over time. These inherent grading stability stems from the stable property tax revenues of these colleges (an important source of income), while state and tuition revenues vary according to state budgets and admission trends. Moreover, these universities have material cost flexibility and can solve the problem of insufficient income.
If this year's COVID vaccination work can revive the economy and stabilize income, while providing herd immunity for students, faculty, and staff, then face-to-face student enrollment will benefit, and university funding will also benefit. More students on campus will also mean more students generate auxiliary income.
According to data from S&P Global Economics, if the reopening in promising treatment and vaccine news is earlier than expected, the US economy may rebound in 2021, and the government will in some form The direct income substitution provides additional federal support.
Health-related measures, such as social distance and COVID infection rates, vary geographically. These regional factors, especially the distribution of vaccines, are likely to continue to affect the needs of students. Public universities are also affected by the financial situation of their states. From a reserve perspective, some states have better positions. Finally, due to the decline in the number of high school graduates, population pressures are expected to continue, and institutions in certain areas of the country are prepared to face more pressure on admissions after the pandemic.
The measures taken by states to control the spread of the virus vary widely, because each state determines its vaccine distribution. Some states provide college students with early vaccinations, but the qualifications and timing of non-health care workers will vary. The scope of the interstate economic recovery is also very wide.
With the reopening of the economy, the budget gap in many states is still large, so budget cuts are necessary to align revenue and expenditure. The funding for higher education may be reduced or delayed mid-year. The amount, form, and timing of additional federal assistance that Washington may provide to the state government will affect how much or how much.
Before the pandemic, the country’s university enrollment rate has been declining, with the biggest impact being small and medium private universities. The US population is changing; the number of high school graduates is flat, and in some cases is declining, because the birth rate was low about 20 years ago. These demographic trends are expected to continue and are expected to decline significantly in the mid-2020s. Schools struggling with COVID before enrollment may continue to face a decline. At the same time, most schools that have received high ratings and popularity continue to experience strong demand and enrollment growth. In addition, due to the pandemic, the number of babies born by 2020 will be greatly reduced, which will greatly increase the pressure on the population in the future.
The ability of universities to predict, respond to events and proactively manage expenses accordingly is crucial. COVID has forced universities to reassess the thoughtful operational and capital plans that have been implemented for several years. In just a few months, the plan had to be adjusted in countless ways. Operational challenges will continue to attract management's attention, especially innovative ways to manage enrollment fluctuations, control costs and improve efficiency. We believe that schools with lower scores will not have greater flexibility to absorb the sharp cuts, and given the current situation, credits that are challenged or unable to make the required investment may accelerate consolidation or closure.
As the burden of unreserved pensions and other post-employment benefits liabilities increases, costs will be passed on to participating colleges and universities, which may put pressure on operating budgets. However, the state pension and OPEB challenges are not uniform. Although some states have large current and future cost obligations, while other states are at or near full financing and have limited upgrade risks, the effect of this obligation on credit may vary greatly. For schools participating in the definitive payment plan, many schools have postponed or reduced their payments in 2020 and 2021.
If the state's budget gap disappears as the economy reopens, there will be no need to cut higher education funding-and the distribution of vaccines across the country can enable teachers, faculty, and students to get early admission opportunities-comprehensive fall admissions applications are possible.
Many schools reported that more new students were delayed in enrollment last fall, which may mean an increase in enrollment in the fall of 2021, but university applications and federal financial aid requirements in the fall of 2021 lag behind in early December a year ago. Indicates that the low enrollment rate may continue. The rapid introduction of vaccines may be the key.
President Biden’s plan includes a series of policy initiatives that usually support higher education, but the timing and focus of each initiative will be important. Given that the pandemic in the past year has caused great damage to education and may have long-term consequences, it is important to appoint the Minister of Education and the main representative. Educational policies affecting international students, the exemption of student debt and Pell grants will be closely watched. Although we expect some limited changes in policy in 2021, we expect that the current focus will be on controlling the pandemic.
Under the leadership of the Biden administration, we may see a more cohesive national approach to COVID-19, including testing and contact tracing agreements, and coordinated vaccination campaigns, although no specific plan for this strategy has yet been provided. Until the pandemic is brought under control, we do not expect major changes in any higher education issues.
The Democrats will lead the education committees in the two Senates, which may give them greater influence. However, work will need to be done in the aisle to achieve major policy changes. Proposals such as free universities may still be tense.
The Federal Government Expenditure Act of December provided additional federal funding for federal higher education. It also edited the FAFSA (Free Application for Federal Student Aid), expanded the use of federal Pell grants, and provided access to historic black colleges and universities. Provided more funding. We expect more changes in higher education.
In recent years, the number of new overseas students has been declining, but by the fall of 2020, the number of new international students has dropped by 43%, which is shocking. Any changes in federal policy that support or increase visa requirements for international enrollment will be positive for US institutions. Given the long-term projected domestic student demographics, these efforts may help compensate for the potential decline in enrollment.
The Higher Education Emergency Relief Fund of the Coronavirus Aid, Relief and Economic Security (CARES) Act provided $14 billion in relief funds to institutions, and the December bill provided another $23 billion, but is that enough? As the virus and enrollment conditions develop, the support of the federal government will remain a key part of the overall financial health of universities. The lack of state government relief in the December bill may cause special harm to public universities because they rely heavily on state support and are preparing for further budget cuts in view of the economic impact of the pandemic . CARES relief and Medicare advance payments provide support for schools with healthcare operations. Although the number of patients has rebounded, as the pandemic continues, additional federal support may provide relief for those in desperate need.
Although we all hope to return to life before the pandemic as soon as possible, for higher education, many of the effects of the virus will continue into this year and beyond, just like many lessons and continuous industry changes, accelerated by COVID-19. A unique aspect of the pandemic is that it has caused disproportionate damage to the low-income population. The impact of this on higher education is that affordability will be further challenged, which is detrimental to the long-term economy. This may be a major ESG issue for higher education.
For most institutions, since the school transitioned from mid-March to the 2020 fiscal year and the work of virtualized online courses until the 2020 fiscal year, the financial impact of the pandemic on the 2020 fiscal year is not as severe as in the 2021 fiscal year. However, the results will be different, as some schools are already facing financial operational pressures prior to COVID-19, while other institutions have generated sustained surpluses. Institutions that are at a disadvantage relative to competition and balance sheet strength will feel the pressure earlier and may need to dilute reserves, which may result in a downgrade.
Environmental, Social and Governance (ESG) attributes are always at the forefront of credit discussions with higher education obligations. Colleges and universities are responding more and more frequently to incident risks, whether it is pandemic-related diseases, network security or social unrest. We believe that COVID-19 emphasizes that universities need strong management and governance controls more than ever. They need a sound enterprise risk management plan, which should be in place and executed quickly when an incident occurs.
In the past few years, the smallest and lowest-rated private universities and universities have disproportionately felt the pressure of the industry. The pandemic only expanded this kind of work pressure. Although some struggling universities that are struggling with valuable real estate, brand or institutional core competencies will have easier time to secure subordination, mergers or acquisitions, we expect we will see more closures, especially in larger scales. Small regional private liberal arts colleges. We can see that some schools selling land or buildings are a short-term solution. Given that the demographic data of high school graduates is expected to persist, schools will continue to compete to reduce the number of students.
If 2020 teaches us anything, we must always be prepared. During the year, many schools increased their credit lines as a defense against any unforeseen expenses. Others have issued debt (accounting for 30% of our rating agencies and many taxable borrowings from higher-rated agencies), or focused on liquidating assets, or shelved capital plans. Despite the pressure, we have not seen many schools receive special benefits from donations. Despite the major turmoil in the spring market, there are few changes in investment allocation. However, we expect that in the next few years, the overall financial operations of universities will continue to face challenges, which will affect short-term and long-term plans in a meaningful way; capital plans can be adjusted more permanently. We expect that available cash will remain a priority, and stable municipal markets and access to bank liquidity will also be important.
In the past decade, as institutions seek to add more features to their curriculum offerings and provide students with more flexibility while increasing enrollment and income, the number of online higher education courses has increased. In March, the ability of universities to successfully establish online or hybrid courses becomes critical. We expect that changing industry dynamics and evolving technology will continue to inspire schools to invest to expand their online footprint. We may see more programs completely shifted online after the pandemic, especially in graduate fields (although not all courses are easily available online).
Due to the pandemic, test sites were closed or their capacity was reduced. As a result, hundreds of universities suspended the prerequisites for the test. Last fall, students ran into trouble taking exams and questioned the future of exam requirements because some large university systems recently announced that they will phase out exams used in admissions.
There is no doubt that COVID-19 and the events of 2020 have changed the school's view on the use of campus space. We hope that universities will continue to reconsider campus space and efficiency, and for a long time after the pandemic is over, we will see more strategies aimed at reducing classroom or office space to save costs.
The COVID-19 pandemic has brought major and novel challenges to universities outside the United States, threatening enrollment and government funding, and therefore brings greater downside credit risk in 2021. However, the pressure distribution is uneven.
The universities we assessed outside the United States are also facing many of the same recent challenges brought about by the COVID-19 pandemic-namely, uncertain enrollment, especially for international students; significant reduction in activities in auxiliary income generating departments, which is Suppress operating margins; and a highly unpredictable recovery trajectory. Therefore, in May 2020, we revised our views on non-US higher education fields to negative. However, rating universities in Australia, Canada, and the United Kingdom have reliable investment grade ratings and are usually supported by a strong level of available resources. Helped to maintain credit stability in the past year.
The exposure rate of Australian universities in foreign markets is higher than that of Canadian and British universities. In the academic year ending in December, the enrollment rate of onshore international students has dropped sharply, which has weakened the income of universities, and we expect this trend to continue in 2021.
In the past ten years, international student enrollment accounted for 57% of Canada’s total enrollment growth and has been the main source of income. Although the international enrollment of Canada's top universities has not fallen as sharply as feared in 2020, any decline will have a significant impact on income, and domestic demand will not be enough to offset it.
Although the lock-in measures continue, the risks still exist. By 2020, the enrollment rate of leading universities in the UK has also been proven. Whether the UK’s departure from the EU will significantly reduce its attractiveness to EU students remains to be seen, but since they only account for 5% of the UK’s total enrollment, it has little impact on the industry.
International students are not a meaningful contribution to the admissions of top Mexican universities. However, among our non-US rated countries, they are the most dependent on state funding, and government revenues are too high and the expected slow economic recovery will threaten this source of funding.
Campus lockdowns (except Australia), online course delivery and travel restrictions may continue to inhibit demand in 2021, especially for international students with higher fees.
Governments around the world are dealing with a severe decline in income, and we expect support for higher education institutions to stagnate, which will increase the institutions’ reliance on student-derived income.
In view of the above situation, coupled with the additional expenditure required to strengthen safety and cleaning measures, the technology investment used to provide distance learning solutions and the activities in the field of auxiliary income generation have significantly reduced, we expect that despite the substantial increase in operating and operating costs, Operating profit margins will decline in 2021. The management team’s efforts to cut capital costs.
The distribution of ratings among non-US universities is still concentrated in the "AA" category, which reflects their overall strong demand characteristics and healthy balance sheets. If the enrollment rate declines more than current expectations, universities will see further declines in operating profit margins and liquidity, and the possibility of downgrades is increasing.
The delivery of multiple effective vaccines has brought hope that global campuses can resume normal activities, possibly as early as the end of 2021, but more likely in early 2022.
In addition, vaccine delays, successive waves of infections or other obstacles to the mobility of international students may have more serious impacts on admissions and university finances than we currently estimate.
Although many governments have introduced programs to provide direct support to students, so far, no direct government has provided substantial government support directly to rated non-US universities to address the impact of COVID-19. Any meaningful contribution will help maintain financial indicators.
As of December 31, 2020, Standard & Poor's Global Ratings has 436 public ratings in private (288) and public (148) universities in the United States, and these public ratings are guaranteed by general obligations or equivalent obligations. About 9% of our rated universe is in the speculative grade category; in contrast, a few years ago, the proportion of institutions rated as non-investment grade is much smaller. In the past few years, as more and more regional institutions are increasingly challenged by admissions and operational pressures, lower investment grade ('BBB') rating categories and non-investment grade categories ('BB + 'And below) have all grown.
In our private university ratings, approximately 43% are rated "BBB+" or below. In contrast, nearly 47% of public university ratings fall into the "A" category, and only 13% have a rating of "BBB+" or below. Compared with last year, by 2020, 88% of US higher education ratings have a stable outlook, and by 2021, the negative outlook (169) exceeds the positive (1) by an incredible amount. Among them, 122 in the revision of the negative outlook is the multiple rating actions taken in April 2020 due to the pandemic. In 2020, we lowered 34 ratings, increased 4 ratings, and added 8 new public ratings. Three of the four ratings occurred in the first quarter before COVID.
Thanks to the funding capacity and end-of-end grants that provide a balance sheet buffer, the higher education sector, especially the rated universe, has general flexibility and credit stability over time. Although this provides a certain degree of flexibility for most schools, the longer the epidemic and economic recovery, the more reserves the school needs to invest in. To a certain extent, the sharp cuts in state funding or the delay in the introduction of vaccines have affected the summer and fall enrollment rates of many schools, and we expect that we will see continued deterioration in credit. The table below shows that, over time, among the institutions of higher learning we rate, there have been only six defaults in the industry (according to the definition of Standard & Poor’s Global Ratings, failure to repay the principal and interest on schedule), of which three Private institutions, three of which are student housing projects.
As of December 31, 2020, S&P Global Ratings has rated 19 public universities outside the United States: 8 in Canada, 4 in Australia and the UK, and 3 in Mexico. Currently, there are six non-US universities, two of which are in Australia, the United Kingdom, and Mexico, each with negative outlooks, while the remaining (68%) have stable outlooks (see Figure 12). Consistent with the overall negative industry views, we have no positive reviews from non-US universities. In contrast, 84% of ratings last year remained stable on the outlook for 2020. Last year, despite the increase in the number of negative outlooks, mainly reflecting the increasing pandemic-related risks, the issuer’s credit rating remained stable and concentrated in the “AA” category led by public universities in Australia and Canada (Figure 11). The United Kingdom has three public universities with an "A" rating, one of which is located in Canada (all rated as "A+"). The three evaluated universities in Mexico all have non-investment grade evaluations.
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