Revenue Structure, Revenue Diversification, and Severe Economic Downturns: Using Ordered Response Models to Predict Public Research University Credit Ratings
Serna, Gabriel R.
Guido, Florence M.
Higher Education and Student Affairs Leadership
University of Northern Colorado
Type of Resources
Place of Publication
University of Northern Colorado
In a progressively more competitive market, postsecondary institutions across the country have undertaken large capital projects to remain viable and attract prospective students, faculty, and staff. In order to finance the construction of these plants, institutions of higher education have been turning to debt markets, specifically through the sale of long-term tax-exempt municipal bonds, at an increasing rate. When issuing debt via bonds, an institution’s credit rating becomes especially important given that it directly determines the interest rate and debt costs associated with borrowing, and the ability to find buyers. While the impact of credit ratings is broad, from fiscal sustainability to budgetary policies affecting access and affordability for students, the topic of institutional credit ratings, particularly public research university credit ratings, is largely unexamined in the higher education scholarly literature. Because there is a dearth of research on this topic, relatively little is known about how changes in institutional, state, and national factors impact changes in public research university credit ratings. Additionally, little analysis has been undertaken that can guide decision-makers around the incentives and difficulties that arise when credit rating optimization is a broad organizational and policy goal. This study explores how changes in known credit rating determinants impact public research university credit ratings employing a data set of 75 public research universities, spanning 12 consecutive years, and using two types of ordered response estimators. The results show that factors associated with increased market position, demand, and wealth are positively associated with higher credit ratings. However, association with an academic medical center is shown to negatively impact university credit ratings. Credit ratings are shown to be highly revenue dependent, although as revenue bases become less broad and more focused on state interests the impact becomes negative. On a related note, improved revenue diversification is also positively associated with higher credit ratings. High state credit ratings are positively associated with improved university credit ratings, as the former suggests increased ability to fund public institutions. Increased total debt burden is positively associated with higher credit ratings, while decreased debt servicing ability appears to work in the opposite direction. Furthermore, the impact of severe economic downturns, measured by The Great Recession, is positively associated with higher credit ratings. The spillover effects from this economic variable indicate increased emphasis being placed upon an institution’s ability to distinguish itself nationally, as well as generate revenues. Moreover, while large amounts of debt are still positively associated with higher credit ratings, the magnitude of the impact is lessened when accounting for the recession. This suggests increased caution around large debt loads during times of economic uncertainty. Finally, the results of the analysis suggest that while certain policies may improve an institution’s credit rating, it is important that decision makers and other senior administrators do not lose sight of the impacts that these capital planning policies have on student access and affordability, as well as public service and the public good.
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