Fitch Rates Pennsylvania State System of Higher Ed, Series AM Revs 'AA'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA' rating to the following series of bonds issued by the Pennsylvania Higher Educational Facilities Authority on behalf of the Pennsylvania State System of Higher Education (PASSHE, or the system):

--$118.4 million revenue bonds, series AM.

The series AM bonds (the bonds) are expected to sell competitively the week of June 27. Bond proceeds will be used to finance system capital plan projects; fund capitalized interest, and to pay costs of issuance.

In addition, Fitch affirms the 'AA' rating on PASSHE's $885.3 million of outstanding revenue bonds.

The Rating Outlook is Stable.

RATING RATIONALE:

--The 'AA' rating reflects PASSHE's steady but narrow financial performance evidenced by a generally breakeven to positive margin, which is supported by the stable system-wide enrollment and satisfactory balance sheet resources.

--While commonwealth appropriations have been stagnant in recent years and will likely decline substantially in fiscal 2012, PASSHE has already implemented cost-saving measures and retains some flexibility to further decrease expenses and increase tuition and fees.

KEY RATING DRIVERS:

--Timely management responses to likely declines in state operating appropriations, sufficient to maintain the system's financial stability;

--Issuance of additional debt commensurate with growth in financial resources available for repayment;

--Off-balance-sheet student housing projects of the system's component universities remaining financially self-supporting.

SECURITY:

Revenue bonds are an unsecured general obligation of the system.

CREDIT SUMMARY:

PASSHE's operating margin has been slightly positive to breakeven for four of the past five years, with the modestly negative margin in fiscal 2009 attributable to a delay in the allocation of federal American Recovery and Reinvestment Act (ARRA) money to 2010. In fiscal 2010, the system generated a 1% margin, and management anticipates similar results for the current fiscal year as all but two member schools are at or ahead of budgeted performance. The stable margin, as well as a conservative investment policy, allowed PASSHE to modestly grow its balance sheet resources in line with its expense base. Available funds of just over $1 billion at the end of fiscal 2010 covered 56.1% of operating expenses that year, up just slightly from 2006 at 53.6%. Conversely, coverage of debt from available funds declined as PASSHE increased the size of annual debt issuances in recent years; fiscal 2010 available funds cover pro forma debt by 1.03 times (x), which is in line with public colleges and universities rated 'AA' by Fitch. Fitch notes that the debt burden remains moderate with pro forma maximum annual debt service consuming a manageable 5.4% of fiscal 2010 operating revenues.

Commonwealth operating appropriations have been a key driver of financial performance, accounting for between 28%-30% of operating revenues. Federal ARRA grants have offset volatility in base funding from the commonwealth, but ARRA funds are not available for fiscal 2012 and PASSHE anticipates a significant commonwealth reduction beginning July 1. Prudently, PASSHE implemented expense management measures such as incentive programs to facilitate workforce reductions through early retirements or voluntary severance payments; recurring cost savings are anticipated beginning next year. PASSHE also reports that it retains limited revenue-raising potential due to its relatively affordable tuition and fees. Up until fiscal 2010, PASSHE's board had limited annual increases to the rate of inflation for four consecutive years. The magnitude of the increase for fiscal 2012 depends on the final commonwealth budget. The governor's original proposal called for an over 50% cut to higher education, but legislators reduced the cut to a still substantial 15% in a budget bill adopted by the lower house. Fitch will assess PASSHE's management responses to the final adopted budget. Appropriations cuts at the governor's proposed level, which are not currently anticipated, could constrain the system's financial flexibility.

Student-generated revenues remain the dominant source of operating revenues, accounting for 51.4% in fiscal 2010. Continued modest enrollment growth would help absorb some of the impacts of appropriations cuts. In fall 2010, full-time equivalents (FTE) grew 1.3% to 111,278, while the headcount of 119,513 represented PASSHE's highest-ever enrollment, and 14th consecutive year of growth. Preliminary data for fall 2011 indicates relatively flat enrollment, though management believes actual enrollment growth may accelerate once the commonwealth adopts a budget and PASSHE finalizes its tuition and fee increases for next fall.

PASSHE extensively utilizes off-balance sheet financing for student housing facilities, and the attendant credit risk remains manageable. The projects are built by private developers and financed with tax-exempt bonds issued through separate foundations. While there is no legal recourse to PASSHE or its universities on those financings, most of the projects are essential to campus life, and Fitch believes management would act to ensure their stability if necessary. Management reports that occupancy at the housing projects generally remains at or above 96%. While several of the financings utilized variable-rate structures that have experienced some volatility, neither PASSHE, nor its universities, has ever had to provide any direct financial support.

PASSHE includes 14 state-owned universities, four branch campuses, several regional centers, and the McKeever Environmental Learning Center, all of which are located throughout the commonwealth of Pennsylvania. The universities were originally founded as teacher training institutions and education studies remains an important discipline at PASSHE schools. PASSHE is now the largest provider of higher education in the commonwealth.

Additional information is available at 'www.fitchratings.com'

Applicable Criteria and Related Research:

--'Revenue-Supported Rating Criteria', dated Oct. 8, 2010;

--'College and University Rating Criteria', dated Dec. 29, 2009.

For information on Build America Bonds, visit www.fitchratings.com/BABs.

Applicable Criteria and Related Research:

Revenue-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=564565

College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493170

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