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Ratings Agency Affirms “AA-” Debt Rating For Maine’s Universities

November 24, 2015
Contact:  Dan Demeritt
(207) 441-6962

S&P Downgrade of UMS long-term outlook reflects challenges
specific to Maine and national trends in not-for-profit higher education sector

BANGOR, MAINE – Standard and Poor’s Ratings Services affirmed its “AA-” long-term rating and underlying rating (SPUR) on the University of Maine System’s (UMS) outstanding revenue debt this week. In a move that reflects the demographic, economic and competitive challenges facing Maine’s universities as well as national trends in the not-for-profit higher education sector, the firm revised its outlook on the system from stable to negative.

In citing its decision to maintain the debt rating S&P cited, “adequate financial operating performance and financial resources, with manageable debt and a low maximum annual debt service burden.” The decision to revise the outlook is tied to enrollment pressure that can impact net tuition revenue, concerns about declines in adjusted unrestricted net assets, and recent transitions in leadership at four of the system’s seven universities.

“S&P has affirmed our “AA-” rating, reflecting the university system’s commitment to sound fiscal management” said Dan Demeritt, spokesperson for the University of Maine System. “The agency’s decision to revise its long-term outlook is a realistic assessment of the long-standing demographic, fiscal and competitive challenges that led Chancellor Page and the Board of Trustees to launch a change initiative that will administratively and academically align our seven institutions into one university.”

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UMS Chancellor James Page commented directly on the issues of leadership transition and enrollment referenced in the S&P report.

“This is a time of great challenge and needed change in public higher education,” said UMS Chancellor James Page. “Our presidents are all proven public servants with a deep understanding of, and commitment to, public education and to Maine.”

“Our enrollment challenges directly reflect the decade-long decline in the number of students graduating from Maine high schools,” continued Chancellor Page. “We are going to build enrollment by maintaining our best-in-the-nation commitment to affordability, through expanded commitments to adult learning, and through campus initiatives like the $1 million in new scholarships available at USM and the recruitment strategy at UMaine that has resulted in the largest fall applicant pool in the history of our flagship university.”

Debt ratings impact the cost of financing university activities and investments with debt related instruments. Because S&P has affirmed its “AA-” rating, experts in the field believe the cost of borrowing will not change.

“With the “AA-” rating unchanged, I would expect that the negative outlook will not have an impact on the System’s 2015 issue interest rate,” said Jeremy Bass with Public Financial Management, the firm that advises UMS on debt financing. “If the System were to be downgraded in the future to “A+” the interest rate on future borrowings would increase. The current difference between “AA-“ and “ A+” is approximately 0.15% in interest cost.”

While the decision to revise the outlook on UMS is tied to Maine and system specific challenges, there are similar concerns facing the U.S. not-for-profit higher education sector. Standard and Poor’s Rating Services issued a sector report on January 15, 2015 entitled, Upping the Ante: Costs of Luring Top Students Keep the Outlook Negative on U.S. Not-For-Profit Higher Education Sector.

The summary of the report finds, ““Standard & Poor’s Ratings Services’ 2015 outlook for the U.S. not-for-profit higher education sector remains negative as colleges and universities struggle to balance the demands of their expenditures while addressing student affordability and access. We believe this tug-of-war in an increasingly competitive market will continue to compress overall operating performance and put an additional strain on these institutions’ financial resources . . .”