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Moody’s warns of credit declines for six schools, including SIU

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(DailyEgyptian.com file photo)

(DailyEgyptian.com file photo)

(DailyEgyptian.com file photo)

By Dawn Rhodes | Chicago Tribune

After nearly two years of state budget gridlock, Illinois’ public universities could soon face a tougher time borrowing money after a major credit agency downgraded the rating for one school and warned that six others could face the same fate.

In reports issued Tuesday, Moody’s Investors Service announced that it had bumped Northeastern Illinois University down two levels, from a Ba2 to a B1 rating, citing “weakened cash flow” in part caused by the state budget impasse, now in its 22nd month. The downgrade puts Northeastern’s credit three steps below what is commonly known as “junk” status.

Credit ratings are a sign of how likely a borrower is to pay back bonds. A “B” rating in the Moody’s scale indicates “high credit risk.” Lower credit ratings often mean paying higher interest rates to borrow money.

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“The downgrade is very disappointing but not surprising,” Northeastern’s interim President Richard J. Helldobler said in a statement. “The real tragedy here is that after a long history of fiscal responsibility and sound planning, the financial reputations of Northeastern Illinois University and other Illinois public universities are at stake, and this is really reflection of Springfield’s inaction regarding the state’s budget.”

Republican Gov. Bruce Rauner and the Democratic-controlled state legislature have been unable to agree on a state spending plan since July 2015. The two sides agreed on stopgap bills last summer, providing most schools with about 80 to 90 percent of the funding they had received in recent years.

But no state money has been allocated to the universities in 2017, meaning they have had to stretch out less than one year’s worth of funding over 22 months.

Moody’s said Tuesday that within the next 90 days, it will review the state’s other public universities for potential downgrades, including the University of Illinois, Illinois State University, Eastern Illinois University, Southern Illinois University, Northern Illinois University and Governors State University. Moody’s also will examine Northeastern for another potential downgrade in addition to the one announced Tuesday, officials said.

The agency will review the universities’ current fiscal health, actions taken to cope with the state funding shortfall, and plans for the next fiscal year that starts in July.

“The reviews will focus on each university’s exposure to continuing state budget pressure given failure of the state to adopt a budget for the current fiscal year and the resulting use of each university’s own liquidity to bridge the funding shortfall,” the agency said.

The agency warned that after the reviews, the universities could face rating downgrades “depending on liquidity and ongoing ability to adjust.”

Moody’s includes all University of Illinois and Southern Illinois campuses in one rating, and does not review Western Illinois or Chicago State universities.

Northeastern Illinois University, on Chicago’s Northwest Side, has been particularly hard hit by the budget impasse in recent months. The university shut down campus and furloughed all employees during its spring break, closing computer labs, the library and other academic services during that week. Students with state-funded campus jobs also were unable to report to work.

The campus also closed for two days last week and will be closed again May 1.

Northeastern received about $30.2 million through the two emergency bills, compared to about $37 million in 2015, the most recent year of full funding.

“With continued pressure on enrollment and sustained state funding uncertainty, the university has limited avenues by which it can improve its liquidity position over the medium term,” Moody’s wrote about Northeastern.

In a report last month, Moody’s warned that prolonging state operations without a budget could result in the state defaulting on loans, cutting pension contributions, and long-term damage to public universities and social service providers.

Analysts also said the timing for a budget agreement is critical with the end of the legislative session approaching, adding that state finances could begin to stabilize fairly quickly once Rauner and Democrats make a deal.

Moody’s downgraded Eastern Illinois and Governors State in June 2016, and pointed to the budget crisis as a major factor in those decisions. Eastern’s rating fell several notches after the agency noted the Charleston-based school spent nearly all of its cash by the end of last fiscal year and still had no imminent guarantee of state funding.

Governors State’s rating fell to “junk” status, with analysts pointing to its heavy dependence on state support as well as the ongoing challenges of transitioning from an upper-division school to a four-year institution.

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(c) 2017 the Chicago Tribune

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