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The outlook for nonprofit U.S. higher education continues to be stable heading into 2017, but issues lurk that could drag on the sector in the future, Moody’s Investors Service said Tuesday.
Expected revenue growth, strong demand and steady enrollment levels support the stable outlook for next year, an outlook that carries over from 2016, according to a new report from the ratings agency. Potential issues for the sector include rising costs and uncertainty about federal policy.
The outlook indicates Moody’s expected business conditions for the higher education sector in the next year to 18 months. Operating cash flow margins are projected in the 10 percent to 12 percent range for most public universities. Margins are projected between 12 percent and 14 percent for private universities.
Moody’s expects aggregate revenue growth for public and private universities to hold above 3 percent and credited higher education for its diverse funding streams. Tuition revenue is expected to increase modestly amid a focus on affordability, state appropriations are projected to rise incrementally, academic medical centers are expected to perform well and research funding appears stable.
Aggregate state funding is expected to grow 3 percent to 4 percent for the current fiscal year before slowing to between 1.5 percent and 2.5 percent growth in fiscal year 2018. But funding levels will vary substantially from state to state. States heavily reliant on the energy sector, like Louisiana and West Virginia, face high pressures on the amount they allocate to higher education. So do states with high pension liabilities, like Illinois, and those where policy decisions have eroded revenue growth, like Kansas.
Total enrollment growth is predicted to be modest, averaging 1.5 percent for the 2017 and 2018 fiscal years. A slow improvement in retention rates will help stabilize enrollment, Moody’s predicted, noting that retention rates rose by two percentage points for classes entering between 2009 and 2014 as institutions invested in retention efforts like more intensive counseling.
The higher education sector is highly exposed to investment markets’ performance. Moody’s noted two consecutive years of poor investment performance, ranking a potential third year of weak market performance as among the sector’s greatest downside risks. Another major downside risk was the potential for changes to federal policy or funding levels in either the higher education or health care space.
Those risks join pressures like rising pension liabilities and labor costs. Borrowing costs are also likely to be moderately higher going forward.
Colleges and universities with strong brands or value propositions to offer students will fare best, Moody’s said. Smaller institutions and regional institutions are expected to encounter more difficulty.
