While the national economy teeters on the brink of a recession, Boston University officials say the school’s fiscal prospects are stable due to improved credit scores and an expected increase in enrollment. A weakened economy, however, could hurt students’ ability to pay for rising tuition, officials worry.
More people choose to enroll in college rather than seek employment during an economic slowdown, because jobs are scarce, Joseph Mercurio, BU’s executive vice president, said. A weak student-loan market might make some believe they cannot afford the price of tuition, he added.
According to the Department of Education, 43 lenders recently left the federal loan program due to indebtedness, and the Bush administration last Wednesday sent a letter to Congress asking permission to buy federal student loans to guarantee students the ability to borrow money for college.
Mercurio said BU’s Financial Assistance Office is trying to reassure parents that enough loans will be granted for students to afford tuition.
Enrollment is expected to increase and will support tuition revenue, which contributes most heavily to BU’s $1.8 billion operating budget, College of Arts and Sciences economics professor Marianne Baxter said.
BU may fare well during a recession because the cost of running a university is stable and mostly comprised of faculty and staff labor fees, Baxter said.
In a letter to students announcing a 4.5 percent tuition hike for 2008-09 over the last academic year, President Robert Brown pointed to rising energy costs as a reason tuition was increased to $36,540. Energy costs have steadily risen since Sept. 11, 2001.
With national financial woes looming, Moody’s and Standard ‘ Poor’s, two of the world’s most influential credit rating agencies, upgraded BU’s credit score in late February. Fundraising efforts and slowing debt levels after years of heavy investment in campus facilities contributed to the upgraded rating, which indicates overall fiscal health.
Standard ‘ Poor’s increased BU’s bond rating from BBB+ to A-, while Moody’s affirmed its A3 rating, but revised the outlook from “stable” to “positive.” The agencies’ scores are equivalent, BU spokesman Colin Riley said.
“We attribute the improved rating and outlook to strong leadership, strong operational management and the attractiveness of the university to students, faculty and staff,” Riley said.
For BU, a high rating can reduce the cost of debt services, which is partially paid for by tuition, and of borrowing money for capital projects — such as the construction of student dormitories and academic buildings – and other plans associated with the university’s 10-year strategic plan.
Moody’s and Standard ‘ Poor’s revised their rating outlooks because of recent bond requests of about $200 million to finance capital projects on campus, including the construction of the Student Village Phase II and renovations at the College of Fine Arts and School of Law.
“I think it’s a validation of the strategic plan that President Robert Brown has put forth, and the progress that has been made to date,” Martin Howard, BU’s Financial Affairs and Treasurer vice president, said in a news statement.
Both credit agencies upgraded BU’s rating because they thought changes in BU’s governance and management would accelerate the university’s fundraising capacity. Standard ‘ Poor’s report also recognized the 2007 hiring of a chief investment officer to help manage the growing university endowment.
Although BU’s endowment of approximately $1.1 billion is modest compared to institutions of similar size, Moody’s noted a significant growth in the university’s annual fund contributions, which have grown by about $2.5 million over the past three fiscal years.
While a recession would make BU more susceptible to unpredictable investment returns, endowment spending is determined based on a five-year average of investment returns. This way, poor quarterly returns do not disastrously impact the amount of funding available for longer-term needs, including financial aid, professorships and individual colleges, Mercurio said.
“In fact, beneficiaries of the endowment will actually see an increase in the amount received because 2002, nationally a negative year for investing, is no longer included in the five-year average,” Mercurio said.
Both rating agencies recognized significant indebtedness of $1.2 billion and limited financial resources for a university of BU’s size – a challenge for senior management. Standard ‘ Poor’s said the university’s low alumni participation rate of just 9.7 percent was one of those factors that offset the revised ratings.
“Investors look very carefully at these ratings and the selective group of highly rated institutions,” Massachusetts Institute of Technology’s Vice President of Finance Israel Ruiz said. “Practically, in these days of turbulent credit markets, the higher the university’s credit rating, the best access to capital and liquidity sources to finance the university’s priorities.”
