Downgrading Elite Colleges

Over the past year and a half, the credit ratings of several prestigious liberal arts colleges have been downgraded or assigned a negative outlook by Moody’s Investors Service.

(Note: This article has been updated from an earlier version to note that these ratings were issued over the last 18 months, not the past several months.)

These are institutions -- Haverford College, Morehouse College, Oberlin College and Wellesley College – that top students seek out, yet they are showing small but noticeable signs of fiscal stress several years after the end of the recession. Their downgraded ratings are still better than those of plenty of other institutions, and Moody's has issued plenty of gloomy projects about  colleges during the economic downturn. But the recent actions are notable because they affect colleges that are by many measures -- money, prestige, history -- among the most fortunate in the country.

“We do see pressure on small private colleges as a group and that’s primarily because they don’t have a lot of different things they can do, so they are primarily dependent on tuition revenue,” said a Moody’s analyst, Edie Behr.

Moody's has pointed out the fiscal dangers of colleges relying on a small number of revenue streams.

That is not an easy task, said Oberlin’s vice president for finance, Ronald Watts.

“It’s like a car dealership being sales-of-car dependent,” Watts said. “I mean, it’s our industry, what do you want us to do?”

There are three basic sources of revenue for these colleges: tuition, donations and money from endowment growth, though Oberlin is thinking about trying to use its campus for more summer programs of some kind.

Since spring 2012, Moody’s has downgraded Morehouse, Haverford and Wellesley, and changed Oberlin’s ratings outlook to negative. It also assigned Morehouse a negative outlook. it changed morehouse's to negative, too, right? dl

Morehouse, a historically black college with about 2,400 male undergraduates, has the worst rating of the four. That’s in part because it alone was cited by Moody’s for declining enrollments.

“Morehouse clearly has a market niche as a historically black college and university, probably the preeminent all-male HBCU,” Behr said. “But they are small and they have experienced three years of net tuition [revenue] declines, so they’ve really got a difficult situation. They’ve had a management turnover. They have very thin cash flow.”

Moody’s downgraded Morehouse’s long-term credit rating last summer to A3, which is still upper-medium grade. The firm also gave the college a negative outlook.

The college has furloughed faculty and staff. A Morehouse spokeswoman did not make anyone available to talk about the college's situation.

Robert Zemsky, a professor at the University of Pennsylvania and a consultant, said liberal arts colleges are trying to offer a wide range of options to students while keeping classes small. This, he said, cannot last.

“Liberal arts colleges in particular have to get control of their curricula and consolidate them and that will shrink the base they have to cover economically,” he said. Zemsky said he had done consulting for one of the institutions covered in this article.

Haverford and Oberlin officials are both unsure how much the changes will actually affect them. Lower ratings -- but not changes to an outlook -- can drive up the costs of borrowing. But neither institution plans to incur new debt in the near term.

Oberlin, in Ohio, got knocked by the ratings agency on Aug. 5 for faring poorly since the recession compared to some of its peers. The college received a high-quality Aa2 grade but had its outlook changed to negative. Moody’s said the institution, which borrowed $15 million in August and may borrow another $17 million this year, is increasingly leveraged and investing cash in capital projects.

Watts said the college grew its endowment by about $45 million in the 2013 budget year and is working to cut spending. But Watts said the endowment, which he said ranges from $500 to $700 million, is smaller than the endowments of other colleges in Oberlin's peer group.

He said building new facilities is good for the institution in the long run and that putting money into the upkeep of its century-old buildings is a good investment.

“My argument is that your deferred maintenance does not go away by not investing in the buildings,” Watts said.

Moody’s downgraded Wellesley to a high-quality Aa1 rating in March 2012 on $240 million of outstanding debt, at least some of which is being used to fund a renovation of the campus.

“Ultimately, we believe that investing in renewing the physical plant of the college -- even as we increase support in the operating budget to methodically move toward fully funding depreciation -- is the responsible thing to do and is the best way to strengthen Wellesley College,” Ben Hammond, Wellesley's vice president for finance and administration, said in a statement.

Haverford was downgraded to a still-high-quality grade of Aa3. The college continues to suffer from the economic downturn, during which the value of its endowment fell by 35 percent, in part because the college sold off assets at the bottom of the market. Some other institutions borrowed cash so they could hold onto investments for when the markets rebounded.

“We did not borrow for liquidity, we sold for liquidity, and that did not help us,” said Haverford's vice president for finance and administration, Dick Wynn.

Wynn said he believes the college did well during the 2013 budget year but Moody’s looked at the results of its 2012 budget year.

Watts and Wynn both noted their colleges had slightly better ratings or outlooks from Standard & Poor’s, an indication of what some say is evidence of the more conservative and ratios-based approach that Moody's is taking to higher ed ratings.

Not all prestigious liberal arts colleges are facing negative ratings actions. Reed College, for instance, maintained an Aa2 rating in a recent review by Moody’s.

“I think it’s just as notable in this economic environment to note that the majority of our rating actions are affirming the outlook of the universities in our ratings universe,” said Moody’s analyst Karen Kedem.