Southern Illinois University (SIU)’s descent to junk following the State of Illinois’ two-year budget impasse leaves projects and debt issuance on hold, President Randy Dunn said in an interview with Debtwire Municipals.
“We’re still climbing out of junk status, a notch away with the ratings agencies of getting out of junk,” Dunn said. “Until we can show a track record – sustained months of operations in the black and building back reserves and it will take a while to climb out – any debt issuance remains on hold until we get in a position where the market will look at us.”
One of those projects on hold is a proposed public-private partnership (P3) for a student housing facility on one of the SIU campuses, Dunn said.
“There’s also a chill on the P3 relationship – the same financials and pro-formas get done, and if developers are seeking financing themselves (for the project), it’s hampered by what the picture is, the situation we’re living with right now,” Dunn said. “They still need to get financing, and it ties back to what our numbers are, the chilling effects extend on even being able to do P3.”
Water flows down hill
It is uncertain if the junk-rated school could have market access if it attempted a transaction, a credit analyst said.
There is not a good parallel or precedent for SIU’s situation to draw a comparison, though the fact the state now has a budget in place could provide a marginal opportunity, the analyst said.
SIU’s financial future is correlated to the state’s FY19 budget, Dunn said. The university’s watching the state’s finances “very closely” ahead of FY19 budget negotiations as it worries about further cuts, he said.
“As a state, we’re in the early stages of trying to craft a budget for FY19, and part of the discussion there are questions of whether the state has sufficient cash to prevent any rescission to higher education funding,” Dunn said.
The FY18 budget agreement resulted in a 10% cut in higher education funding – a USD 18.9m cut in aid to SIU – and a cost shift of pension expenses to the universities, a USD 2.3m increase in expenses for SIU. The cut reduced state appropriations to higher education to FY15 levels.
Ideally, a FY19 budget would increase funding levels for higher education, but avoiding an impasse and maintaining FY18 funding levels would be seen as a win, Dunn said.
“If we could come through (FY19 negotiations) without an impasse and not lose any more ground, I’d probably take that as a win,” Dunn said. “We certainly don’t want to repeat the budget impasse. It’s hard to overstate how detrimental that would be to the recovery that all the universities are trying to create on their campuses.”
SIU, and Illinois’s other eight public universities endured several problems following the state’s two-year budget impasse. Both SIU and the state’s fiscal years begin 1 July. The budget impasse, which stretched from the start of FY16 to 6 July, six days after the start of FY18, led to uncertainty surrounding state higher education funding.
The uncertainty was both in the amount each university would ultimately receive and if the funding would come through, as reported. Several schools received junk credit ratings while draining their reserves to maintain operations.
The FY18 cost shift to universities requires them to assume pension costs for employees making more than USD 140,000 a year, which increases the university’s contribution by USD 2.3m, Dunn said. In FY16, the university made a USD 2.8m contribution to the State Universities Retirement System.
The state level impasse led to a decline in enrollment at most of Illinois’s public colleges and universities, according to data from the Illinois Board of Higher Education. SIU lost 11% of students at its campuses between 2015-16 and 2017-18, a decline of 2,994 students to 23,986 from 26,980.
The state level impasse also reduced levels of funding for the state’s nine colleges and universities, trends that could endure at the schools, said Jay Bergman, a board member of the Illinois Board of Higher Education (IBHE).
“If FY15 is the base, and they get about 10% less in FY18, things didn’t go back to the way they were, and probably never will,” Bergman said.
Higher education is a popular scapegoat in balancing state budgets, and could see further cuts in future budgets, an Illinois-focused credit analyst said.
“Illinois’s current budget isn’t balanced,” the credit analyst said. “Absent more rabbits out of the hat, they’ll either have to raise taxes further or cut spending … politically, (higher education is) the easiest thing to go after. K12 education is a political lighting rod, anything that’s Medicare-focused, they have time to vote and call legislators (to avoid cuts). You can’t cut pensions, debt service, OPEBs or health care. That leaves higher education as the biggest piece of the budget that you can realistically touch.”
SIU is rated Baa2/negative by Moody’s Investors Service and BB+/stable by S&P Global Ratings.
A USD 2.3m tranche of 5% Series 2015B Board of Trustees of Southern Illinois University revenue bonds due 2024 last traded in odd lots at 112 to yield 2.988% on 10 October, according to Electronic Municipal Market Access.
By Maria Amante