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Fitch Affirms Montclair State University, NJ's Revs at 'AA-'; Outlook Stable.

New York: Fitch Ratings has affirmed the 'AA-' rating on approximately $400 million of New Jersey Educational Facilities Authority (NJEFA) revenue refunding bonds issued on behalf of Montclair State University (MSU).

The Rating Outlook is Stable.

SECURITY

The bonds are a general unsecured obligation of the university, payable from all legally available funds.

KEY RATING DRIVERS

HIGH LEVERAGE AND DEBT BURDEN: MSU's debt metrics remain moderately high for the rating category due to its need for debt-funded initiatives because of continually limited state capital support. Offsetting factors include adequate debt service coverage, sufficient balance sheet resources, and absence of near-term debt plans.

THINNING OPERATING PERFORMANCE: MSU's GAAP-based operating margins average 0.4% over a five year period (fiscals 2013-2017) and continue to be supported by enrollment growth, increases in student charges, and prudent expense management. MSU's competitive pricing position partially mitigates flat state operating support. Thinning margins since fiscal 2015 are primarily due growing depreciation expense as well as increasing pension expense. Pension expense has risen materially to $20.6 million in fiscal 2017 from $8.1 million in fiscal 2015.

HEALTHY ENROLLMENT: MSU maintains a healthy market position as the second largest postsecondary institution in New Jersey (on a headcount basis), with undergraduate and graduate programs offered across a wide range of disciplines. Total headcount enrollment has grown by a healthy 14.3% over the past five years, to 21,013 in fall 2017.

RATING SENSITIVITIES

OPERATING PERFORMANCE: Montclair State University's inability to manage reductions in state appropriations or tuition revenues in its budget and maintain break-even to positive GAAP-based operating margins could adversely affect the university's rating.

DEBT MANAGEABILITY: Rating stability is predicated on the maintenance of debt service coverage at or above existing levels given Montclair State University's high debt burden. The issuance of additional debt without a commensurate growth in financial resources and revenues would yield negative rating pressure.

CREDIT PROFILE

MSU is a public research university with its main 252 acre campus divided between the town of Montclair in Essex County and the municipalities of Little Falls and Clifton in Passaic County. The university also operates the New Jersey School of Conservation, a 240-acre environment education and research center in Stokes State Forest (Sussex County).

HIGH BUT MANAGEABLE LEVERAGE

Meaningful growth in the university's balance sheet resources over the past few years has increased MSU's capacity to absorb the high debt load.

MSU's debt burden (debt service as a percentage of operating revenues) remains above average for the 'AA' rating category but is expected to moderate somewhat over time, given lack of additional debt plans. This high debt burden is largely due to limited capital support provided by the state of New Jersey.

Due to implementation of GASB 68 pension accounting changes in fiscal 2015, unrestricted net assets have since been hampered by the recorded net pension liability. Fitch adjusts fiscal 2017 expendable restricted net assets for debt service of $20.4 million, which are included in non-expendable restricted.

Based on this adjustment, available funds (defined by Fitch as cash and investments less certain restricted net assets) totaled $157 million at fiscal-year end 2017, or 6.5% below the prior year level. The ongoing investment in campus infrastructure, followed by the fiscal 2017 conversion of cash to investments, in accordance with its investment policy, and investment losses the same year contributed to the decline.

The ratio of available funds to expenses and long-term debt ($482.8 million, inclusive of notes, bonds and capitalized leases) was 36% and 33%, respectively and is somewhat light for the 'AA' category. Public colleges and universities with a stronger available funds-to-debt ratio tend to receive more state support for capital expenditures.

MSU's overall weakening financial flexibility is a concern; however, the current rating and Stable Outlook is predicated on the expectation that MSU will gradually increase available funds as existing debt amortizes with no additional debt planned. Fitch expects MSU to achieve generally break-even operations excluding the non-cash pension expense, improved cash flow and manageable capital expenditures under MSU's $154 million preliminary 10-year capital budget (fiscal 2018-2027). With the expected use of $23 million in restricted bond funds and an estimated $20 million annually from available funds, liquidity ratios are expected to improve over the next few years.

SUFFICIENT DEBT COVERAGE

Management's demonstrated ability to generate steady funds in support of debt service while undertaking sizeable capital projects is a credit strength. MSU has significantly increased its net investment in property, plant and equipment supported by debt. Even with such increase, maximum annual debt service (MADS) coverage levels remains acceptable ranging from 1.8x to 2.2x over the past five fiscal years.

Adjusted net income available for debt service (as calculated by Fitch) increased to $71 million in fiscal 2017 primarily due to the impact of pension-related accounting changes. MSU was required to record a $20.6 million pension expense which is spread across all functional categories in fiscal 2017. Fitch adjusts net income for the payment of debt service for this non-cash pension expense but not for the annually contractually required contribution ($4.2 million in 2017).

Further, while the pro forma MADS figure represents a high 7.6% of unrestricted operating revenues, Fitch expects MSU's heavy investment in growth programs, namely business, health/life science, and communication/media, to drive top-line revenue growth over time.

A privatized on-campus student housing project that opened in fall 2011 continues to register favorable occupancy results (near 100%). Since the project was financed with debt that is nonrecourse to the university and the university has not been required to provide any financial support, Fitch does not include the debt associated with the project (approximately $177.5 million) in its calculation of long-term debt.

THINNING OPERATING PERFORMANCE

Montclair's operating margin averaged 0.4% for fiscals 2013-2017, including negative 3.2% in the most recent fiscal year. Fitch expects the operating margin for public colleges and universities to be at least break-even on a GAAP basis. Before non-cash pension expense accruals, MSU's fiscal 2017 margin would be closer to 1.7%. MSU's generally healthy operating performance reflects strong revenue growth despite a flat state funding environment and the management team's financial expertise and consistent monitoring of the budget.

While MSU receives operating appropriations from the state of New Jersey (A/Stable), these annual payments have been relatively flat and are expected to remain so over the near term. However, headcount enrollment growth coupled with further adjustments in the rate structure, including a 2.8% increase in undergraduate tuition/fees in fall 2017, has helped support growth in total revenues overall.

MSU's competitive pricing position and the absence of a cap on tuition rates are viewed as key credit strengths, although pricing flexibility is somewhat limited by its mission to serve as an affordable educational option to state residents.

In fiscal 2015, MSU's total state annual appropriations increased by 3.5%. Though MSU's general operating appropriation has remained flat from fiscal 2011 to 2015 at $38.6 million, the state-paid fringe benefit continued to grow. In fiscal 2016, legislative appropriation declined $2.75 million, accounting for 1% of MSU's operating budget, and remains flat in fiscal 2017 and fiscal 2018, the fringe appropriation has decreased year over year since fiscal 2015.

Overall, MSU appears to be managing the appropriation fluctuations. However, given the university's declining but still significant reliance on state funding for operations (17.4% of unrestricted operating revenues in fiscal 2017), a material reduction in state funding for MSU could have a negative effect on the financial strength of the university.

This concern is mitigated somewhat by the university's satisfactory increased tuition revenues, from enrollment growth, modest tuition increases, effective expense management, and thinning but adequate level of unencumbered resources to help manage through short-term financial difficulties (the ratio of available funds to operating expenses in fiscal 2017 is 36%).

HEALTHY STUDENT ENROLLMENT TRENDS

Fitch considers student demand the primary determinant of the university's long-term viability. Between fall 2012 and fall 2017, total headcount increased 14.3% to 21,013, exceeding the university goal to enroll 20,000 students by 2016. Fall 2018 is expected to show another large incoming freshmen class.

Freshmen application volume grew 10.3% in fall 2017. MSU is accepting more students as reflected in higher acceptance rates. Acceptance rates reached 71% in fall 2017 from 54% in fall 2013 without apparent negative affect on student quality. Graduate enrollment has had strong growth (56%) between fall 2013 to fall 2017. However, undergraduate students make up the majority (about 80%) of MSU's student population.

The university continues to compete with nearby public universities; however, MSU's competitive tuition and fee rates remain a key strength for student recruitment. For academic year 2017-2018, the university's tuition/fees for in-state undergraduate students were among the lowest relative to other four-year colleges and universities in New Jersey. Fitch believes that the university's significant investment in its infrastructure supports enrollment growth, though shifting demographic trends and competitive pressure remain a challenge.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U2NJ
Date:Jul 3, 2018
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