Enrollment drop spurs negative outlook on Oregon university’s bonds

Struggling with declining enrollment, Oregon’s Portland State University had its outlook revised to negative by Moody’s Investors Service, affecting $193 million of outstanding debt.

Enrollment declined by more than 20% over the past six years, and expectations of continued declines over the next four years at the downtown Portland university were cited by Moody’s in its Wednesday ratings report. Analysts also said weakening tuition revenue will strain operating performance, especially in light of elevated expense pressures.

As the state’s most diverse and only public urban research university, PSU “plays an important role in Oregon’s higher education system,” said Christina Williams, a PSU spokeswoman. “Like many regional universities, the pandemic took a toll on enrollment.”

Moody’s and Fitch Ratings said in separate reports in late 2022 they expect the university sector to continue to face challenges from declining enrollment as higher education struggles to recover from the pandemic.

The outlook revision generally means that Moody’s could downgrade the university’s A1 issuer rating if it doesn’t see improvement. It affirmed that rating in the report.

“The negative outlook reflects potential strain on EBIDA margins, driven by downward pressures on net tuition as a result of ongoing enrollment declines,” Moody’s said. “If budget right sizing measures take hold along with stabilization in enrollment, the outlook could revert to stable.”

In affirming the issuer rating, Moody’s said, it incorporates the university’s good brand and strategic positioning as Oregon’s only urban comprehensive public university with a sizeable and diverse revenue. It’s total cash and investments inclusive of foundation assets are strong and provide a buffer to operations and the debt levels are manageable, Moody’s said.

To continue to grow enrollment at the university Williams said “the university consistently markets its programs to first-year and transfer students and has developed sophisticated, data-driven tools to ensure student success.”

It is also partnering with regional community colleges to develop programs to streamline the transfer process and deliver career-oriented degrees,” Williams said.

PSU has 16,953 full-time equivalent students, of whom Moody’s said 80% are undergraduates. The university had $531 million of revenue in fiscal 2022.

A reduction from the pipeline from community colleges in recent years, fierce competition in the Oregon market and limited pricing power drove the enrollment declines, Moody’s analysts said.

“Efforts to right size the budget will take some time, potentially leading to thinner EBIDA (earnings before interest, depreciation and amortization, an after-tax measure of operating performance) margins over the next several years and a reduction in the university’s financial flexibility,” analysts said.

The state of Oregon issues general obligation bonds on behalf of PSU to support its capital renewal and construction projects. Bonds issued on behalf of PSU under Oregon Constitution Article XI-(F)(1) are repaid by the university with PSU revenue streams and thus give rise to a note payable to the state, according to the university’s 2022 audited financial report. The bonds are repaid by the state, which Moody’s rates Aa1 with a stable outlook.

“The university’s $193 million of outstanding debt is all fixed rate, regularly amortizing and includes state managed Article XI-F bonds, a small portion of Article XI-Q bonds, State Energy and Loan Program (SELP) and Certificate of Participation bonds,” Moody’s said. “About 8% of debt service on these bonds is funded through the state reflecting $15 million of the $24 million SELP bonds. The state also pays directly on the bulk of other XI-Q and XI-G bonds not recorded on the debt statement.”

The debt outstanding Moody’s refers to is almost entirely government obligation debt issued by the state, under the state’s credit rating, Williams said.

Although this debt is state issued GO debt, the repayment is the responsibility of the university. University paid debt also includes about $2.1 million of outstanding local improvement district assessments levied by the City of Portland, Williams said.

While PSU maintain an issuer rating with Moody’s, Williams said at this time, it has no rated issuances under its own rating.

“Any change in PSU’s outlook or rating will not impact interest rates or payment obligations of any debt currently in the institution’s portfolio,” she said.

During 2022, there was no new debt incurred by the university and during 2021, the state issued XI-F bonds totaling $53 million to defease $52 million to reduce future debt service payments, according to the financial report.

The university has no plans to issue bonds this year, Williams said.