Relationship with state may cost University money in the long run

The University’s relationship with the state of Illinois could cost the University money in years to come, Comptroller Walter Knorr said at the Board of Trustees meeting Thursday.

The state’s fiscal condition has depleted one of the University’s top revenue streams — state appropriations — and may soon place a new financial burden on the University in the form of pension reform, Knorr said.

Because of this, the University may also have to pay more for future construction following having its credit rating lowered to Aa3 by Moody’s Investors Service on Aug. 9. Aa3 is the lowest credit rating among Big Ten universities, but it is still considered a high-quality, low-risk investment.

“The Moody’s rating was disappointing but expected,” University spokesman Tom Hardy said. “The debt ratings for all but one of the public universities in Illinois (have been) downgraded.”

Knorr said Moody’s pinned the lowered rating on the state for its fiscal troubles, including billions of dollars in backlog on bills and looming pension reform.

“They commended the University for its financial management, given the circumstances,” Hardy said.

While Hardy expressed disappointment in the lowered rating, University finance professor Timothy Johnson said he didn’t believe the score would be terribly debilitating to the University.

“I think the thing to keep in mind is that Moody’s … doesn’t have any information that the public doesn’t already have,” Johnson said. “Stating their opinion is more or less like anybody else stating their opinion; it’s not like they’re revealing any new information.”

Knorr said at the Audit, Budget, Finance and Facilities Committee meeting that the bonds sold for construction on the hospital in Chicago received a higher interest rate than initially anticipated, though he wasn’t sure if it had to do with the downgrade or if it was reflective of the bond market at the time.

Hardy also said it’s possible that future projects will be affected by the credit rating. He cited two specific renovations, including work on the State Farm Center and residential facilities at the Urbana campus.

“I think the question is whether or not (the projects) will be slightly more expensive because of having to pay a higher debt service,” he said.

Additionally, the Urbana campus’s strategic plan for 2013-2016 calls for a $70 million investment in infrastructure.

The Urbana-Champaign Senate Executive Committee’s Task Force on Faculty Concerns applauded the $70 million investment and called on the University for an even larger upgrade to its facilities in order to maintain a healthy Urbana campus and needs reliable funds for upgrades, a recommendation that would include a one-time cost of $213 million, in addition to $43 million annually.

Overall, the lower rating could have increased costs for all of these investments.

The Moody’s report gave the University a negative outlook, saying it was reflective of the decreasing revenue and potential expense pressures from federal and state funding for Medicare and Medicaid.

Although Moody’s downgraded the credit rating, the company said there were strengths that contributed to the credit score as well, including bond security and University of Illinois Health Services Facilities System’s close, integrated relationship with the University.

The Moody’s report said the credit score will not likely return to stable given the negative outlook for both the University and the state. However, if the state’s current fiscal affairs were to improve, the University’s rating would positively reflect this change. The rating could sink lower if a few different factors occurred, such as a significant reduction in Medicaid funding or a large increase in debt.

One of the reasons for the downgrade was the likelihood that the University will take over the responsibility for pensions from the state. Hardy said universities or school districts may need to absorb the “normal cost,” or pension, in the future, which would greatly increase the University’s expenses.

“If that would be happen, it would be phased in over time — it would be gradual,” he said. “That should give public universities the opportunity to plan how it would absorb those costs.”

Johnson said the scores are based on the relationship of the University to the state as a whole and the status of possible pension reform, and Hardy agreed that Illinois is one of the states that is currently struggling the most fiscally, so the University was bound to be affected by its location.

“The fact of the matter is we are a public university in a state that has some critical fiscal issues that it has yet to address,” Hardy said. “We’re going to keep our exceptional financial management that we’ve been exercising during the last four to five years of fiscal difficulty that the state has had, and we’ll continue to manage our way through the situation.”

Brittany and Johnathan can be reached at [email protected]