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Fitch Downgrades New Jersey City University (NJ) Revs to 'A-'; Outlook Stable.

New York: Fitch Ratings has assigned an 'A-' rating to approximately $48.6 million of New Jersey Educational Facilities Authority revenue refunding bonds, New Jersey City University Issue, series 2016D.

In addition, Fitch downgrades $154.7 million of outstanding revenue and refunding bonds issued by the New Jersey Educational Facilities Authority on behalf of New Jersey City University (NJCU) to 'A-' from 'A'.

The Rating Outlook is Stable.

The series 2016D bonds are expected to sell via negotiation the week of May 2. Proceeds will advance refund certain maturities of the outstanding series 2008E bonds for savings and pay costs of issuance.


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


PRESSURED FINANCIAL PERFORMANCE: The downgrade to 'A-' reflects Fitch's expectation that weaker operating results and slim debt service coverage will be sustained going forward. The university expects to maintain budgetary balance, but operations will remain pressured by flat state appropriations (New Jersey rated 'A'/Outlook Stable), limited near-term flexibility to increase net tuition revenue and moderately high leverage. NJCU posted a slight deficit in fiscal 2015 and expects roughly breakeven 2016 results, down from moderate surpluses in recent years.

GENERALLY STABLE DEMAND: NJCU's competitive position is generally stable, supported by its affordability relative to peers and its local urban mission in a growing metropolitan area. Enrollment levels stabilized as expected in fall 2015 after a few years of modest declines. Strategic enrollment initiatives supported by substantial capital and programmatic investments should help NJCU maintain stable to moderately increasing enrollment over time.

SLIM BALANCE SHEET RESOURCES: Balance sheet resources provide modest financial cushion relative to operating expenses and debt. Available funds (cash and investments less certain restricted net assets) equal to 26% of operating expenses and 22% of debt are low compared to peers.

MODERATELY HIGH DEBT BURDEN: NJCU's debt burden is moderately high, with pro forma maximum annual debt service (MADS) consuming 8.3% of fiscal 2015 operating revenues. MADS coverage from operations is slim but should remain at or above 1x. The university has no additional debt plans at this time.


GENERALLY BALANCED OPERATIONS: The Stable Outlook reflects Fitch's view that New Jersey City University (NJCU) will manage effectively through moderate fluctuations in enrollment or state funding at the current rating level.

REVENUE GROWTH: Improved financial flexibility as NJCU's enrollment and other revenue-generating initiatives materialize could improve the rating over time.


Opened in 1929 and granted university status in 1998, NJCU is a four-year coeducational public university located in Jersey City, NJ. NJCU offers 43 baccalaureate degree programs in the arts and sciences, professional studies and teacher education. In addition, the graduate studies program offers 27 masters and two doctoral programs. NJCU has an urban mission and is primarily a commuter institution, attracting the majority of its students from surrounding counties. The university is accredited by the Middle States Commission on Higher Education, which last affirmed its accreditation in 2010 for a term of 10 years.


NJCU's financial performance has weakened somewhat; operations will likely remain generally balanced but pressured over the near term. The operating margin fell from 3% in fiscal 2014 to -4.4% as reported in fiscal 2015 largely due to inclusion of net pension expense in operations under GASB 68 beginning fiscal 2015. Fitch estimates that NJCU's operating margin declined to -0.6% on a basis comparable to the prior year. The decline in fiscal 2015 reflects lower fall 2014 enrollment and higher expenses to build out programmatic changes and recruiting capabilities. The university projects fiscal 2016 results will be slightly better than in fiscal 2015 and approximately breakeven on a comparable basis to fiscal 2014. Moderate growth in net student fee revenue from improved fall 2015 enrollment will be largely offset by a $2 million reduction in direct state operating appropriations for fiscal 2016.

The university is highly reliant on state support (33.3% of operating revenues). Appropriations have been essentially flat in recent years despite budget growth over that time. In addition, an increasing portion of the total state appropriation has also gone to offset growing fringe benefit expenses (non-cash, paid on the university's behalf by the state), effectively decreasing direct base appropriations for NJCU's operating expenses over time. The base amount was cut by $2 million for fiscal 2016 after being held flat for the four prior years. In light of the state's financial pressures, Fitch expects direct operating support to remain generally flat.

NJCU has become more reliant on net student fees, its largest revenues source (40.2% in fiscal 2015) as a result of flat state appropriations. Grants and contracts (24.1%, primarily federal and state student aid) are also closely tied to enrollment trends. Modest net tuition revenue growth will likely continue, constrained by a price-sensitive student population. Management has a good track record of maintaining budgetary balance, and Fitch expects the university will manage effectively through moderate fluctuations in enrollment or state funding at the current rating level.


NJCU's competitive position is generally stable, supported by its affordability relative to peers and its local urban mission in a growing metropolitan area. Enrollment levels have stabilized as expected after a few years of modest declines. Full-time equivalent (FTE) enrollment increased 1.7% to 6,476 in fall 2015, roughly in line with the fall 2011 level but still below its peak. Fitch expects incremental growth to continue based on a reasonable enrollment strategy supported by recent capital projects, including student housing and academic facilities related to programs that are positioned to drive enrollment over time.

The university has improved its marketing and recruiting capabilities in recent years and has made programmatic changes to align with market demand and areas of strength. A focus on practical education and proximity to New York are differentiating factors for NJCU. A new scholarship program launching for fall 2016 will fund the gap between tuition charges and federal and state aid awards for students with a household income of $60,000 or less to eliminate debt needs. The program is expected to be funded largely through gifts and reallocation of existing institutional aid for the first year but could limit net tuition revenue growth over time. In addition, NJCU is targeting incremental growth in residential students through international partnerships and targeted regional recruiting.


The university's balance sheet resources to support operations and debt are modest. Available funds totaling $40 million as of June 30, 2015 were down slightly from the prior year. Available funds provide limited coverage of fiscal 2015 operating expenses ($153.6 million) and total debt ($182.6 million) of 26.1% and 21.9%, respectively. This level of financial cushion is low relative to peers.

The university benefits from the resources and support of the NJCU Foundation, which held approximately $10 million in cash and investments as of June 30, 2015. Fitch does not include these funds in its calculation of available funds, as most are subject to externally imposed restrictions that limit the university's access to the funds for general purposes. The university does not have a historically established fundraising track record or culture, but annual giving is improving and the university is contemplating its first capital campaign.


NJCU's debt burden is moderately high. Pro forma MADS ($12.7 million, occurring in fiscal 2016) equals 8.3% of fiscal 2015 operating revenues, limiting budget flexibility somewhat given a tight budget. This debt burden is typical of public university peers in New Jersey, which have historically received limited capital support from the state. Debt service coverage from operations is slim but manageable for the rating level. MADS coverage dipped to 1x in fiscal 2015; actual current-year coverage was 1.1x. Fitch expects NJCU's MADS coverage to remain slim but sufficient going forward.

The university maintains a conservative debt structure, a credit positive. NJCU's debt portfolio is all fixed rate and moderately front-loaded. In addition, the university prudently implemented a facilities fee in fiscal 2012 to help offset additional debt service costs ahead of recent and current capital projects. Several large projects remain under construction, but the university has no plans at this time for additional debt or major projects.

Debt related to an off-balance sheet 425-bed student housing project is secured by project revenues and is non-recourse to the university. The project is slated to open for fall 2016 and also includes the renovation and operation of NJCU's existing housing facilities by a third party. The ratio of available funds to debt would drop to a low 17% including all project debt. Because the student housing is strategically important and highly connected to NJCU, Fitch would consider poor occupancy or operation of the student housing project a credit risk for NJCU.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:1U2NJ
Date:May 10, 2016
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