Higher education in the U.S. has always been a relatively stable sector, and we've generally affirmed most of our ratings in any given year. However, during the past few years, downgrades have outnumbered upgrades by a significant ratio as schools' credit profiles have deteriorated driven by enrollment pressures and increasing costs. Despite growing state funding and a robust fundraising environment, higher education continues to face many of the same issues that have challenged it for the past few years. We believe that schools' sustained enrollment and revenue pressures will continue to stress the lower end of the rating spectrum in 2020. Our outlook for the sector remains negative for the third consecutive year, given the sector's challenging operating environment and our expectation that negative rating actions will outpace positive rating actions again this year.

Notably, pressures facing the industry are not affecting all institutions equally. We believe many institutions have adapted to the "new normal" of increased competition for students and limited tuition flexibility and are taking advantage of their individual strategic positions to continue operating successfully. Schools with broad national reach, brand recognition, and growing resources will likely be able to capitalize on opportunities to further strengthen their positions, while smaller schools with highly regional draws will struggle to differentiate their brands, which will require additional investment and resources. The credit quality split between higher-rated institutions and those in the 'BBB' category and below continues to manifest itself with more downgrades and negative outlook revisions to lower-rated institutions, which often lack the size and scale, reputation, revenue diversity, or balance sheet to compete as effectively as higher rated organizations. Consequently, we think that institutions with limited flexibility--whether that be in programming, financial operations, enrollment, resources, or student draw--will likely face weakened credit profiles in 2020. Should some of the broader uncertainties happen (such as an economic downturn or recession), endowment returns or fundraising efforts--or both--could decelerate, creating more credit stress overall.

Overview Of U.S. Sector Ratings

As of Dec. 31, 2019, S&P Global Ratings had 435 public ratings on U.S. private (288) and public (147) colleges and universities which are secured by a general obligation or the equivalent. Our U.S. higher education ratings range from 'AAA' to 'CC'. Comparable to last year, we have only four issuers rated at or below 'B+'. Approximately 42% of our ratings are in the 'A' category, and 30% are rated 'BBB+' or below (see chart 1). Approximately 7% of our rated universe is in the speculative grade category; this compares to a much smaller percentage of institutions rated non-investment grade a few years ago. Both the lower investment grade (BBB) rating category and non-investment grade categories (BB+ and below) have grown over the past few years as more regional institutions have been increasingly challenged by enrollment and operating pressures.

As depicted in chart 1, within our private university ratings, approximately 38% of our overall ratings are in the 'A' rating category, and a higher 41% are rated 'BBB+' or below. This compares to half of public university ratings falling within the 'A' rating category, and only 10% rated 'BBB+' or below. While 88% of U.S. higher education ratings currently carry a stable outlook (compared to 90% last year), negative outlooks (40) outpace positive (14) ones by 2.9 times (compared to 1.5 times last year), highlighting the pressures facing individual schools within the sector (chart 2).

However, we did affirm 88% of college and university ratings overall in 2019 (chart 3). Many schools struggled to meet enrollment projections in fall 2019 and are dealing with financial pressures. We expect schools will remain focused on recruitment and financial aid strategies in 2020, as well as cost containment or reduction, as sector pressures endure. In 2019, we lowered 17 ratings and raised 14 (chart 4). Notably, of the schools upgraded, three of them took place in the speculative grade category (Western Illinois University, Eastern Illinois University, and Sweet Briar College), and three were upgrades from one rating category to another: Boston University, Villanova University, and University of Alabama Huntsville were all upgraded to 'AA-' from 'A+', due to strengthening credit profiles, exemplifying the intensifying bifurcation within the sector.

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Our 435 U.S. higher education ratings span the country, with the majority located in the Northeast (154, or 35%) and an equal number located in the Midwest and the Southeast (106, or 24%, in each). As we assess risks and opportunities facing the sector, they can vary greatly by region and state. Chart 5 provides a view of the ratings and outlook distribution of our rated universe by region. We expect that competition for students, as well as the cost of living and labor costs, will continue to affect schools differently on a regional basis, in particular in areas affected by demographic changes, like the Northeast and the Midwest.

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What We Are Watching For In 2020

Demographics

Over the past few years college enrollment nationwide has fallen, and while every sector has felt the decline, it has been most challenging for small- to medium-sized private colleges. U.S. demographics are also shifting, and the number of high school graduates is flat--and in some cases declining--because of lower birth rates about 20 years ago, driven by economic uncertainty. These declines in the Northeast and Midwest have had a negative impact on many regional public institutions whose student enrollment is primarily in-state, as well as private institutions with more regional student bodies. These demographic trends are expected to continue, so the trend of fewer students coming from high school isn't going away anytime soon. Forecasts for high school graduates by the Western Interstate Commission for Higher Education and other researchers such as Nathan D. Grawe of Carleton College, indicate that the aftershocks of the birth dearth are expected to cause a sharp decline in high school graduates, and thus affect college and university enrollment materially, in the mid-2020s, as shown in chart 6. Projections vary by region and geography, but will likely pressure enrollments nationally. While higher rated institutions with a national draw will likely be less affected by these declines, most other schools are expecting to face falloffs of a material nature. In New England, high school graduates are expected to be down over 20% in every state except for Massachusetts in the mid-2020s. While most schools continue to recruit outside their states and work to expand their reach through branding and marketing strategies to offset enrollment declines, in our opinion this is a serious risk that we expect to challenge countless institutions in the future.

Chart 6

Compounding the issue, the recent declines in new international students has also caused some surprises and created some pressures for certain institutions. Overseas students have become increasingly important to colleges and universities over time--in addition to global cultures and perspectives, they bring much-needed revenues to schools and their communities. Despite the strong increase in international enrollment at schools in the U.S. in the preceding 10 years, the number of new overseas students has been declining now for four consecutive years. There are many factors at work, but visa delays and denials, and the shifting political climate in the U.S. are the primary drivers. Any federal policy changes that limit or decrease international enrollment could cause additional credit stress for some institutions. Many schools are now partnering with foreign governments and universities to offer collaborative degree programs. Given projected demographics for domestic students in the long term, these efforts may help offset potential enrollment declines. Looking forward, we expect colleges and universities will continue to carefully manage their recruitment process and tuition strategies to expand geographic outreach and attract students from shrinking prospective pools. We also believe schools will continue to explore innovative ways to diversify revenue sources and reduce reliance on student-generated revenues

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Pressured operating environment

Students' continued expectations of increased college affordability and lower tuition at the same time they demand enhanced facilities, services, and general college experience have left many institutions at a difficult operational crossroads. Colleges and universities struggle to effectively communicate their value proposition while trying to moderate tuition increases and maintain or lower tuition discount rates. Amid these operating pressures, institutions are challenged by continued competition for a shrinking pool of students. Tuition for all types of schools continues to rise, exacerbating public concerns about college affordability and student debt (which has surpassed $1.5 trillion). However, the strong correlation of earnings and employment with educational achievement will continue to support demand for higher education, in our opinion. In the near future, as higher education institutions compete on both price and quality, and this trend takes hold, greater industry consolidation will likely occur as the fundamental economics underpinning the industry shifts (similar to what we saw in the health care sector).

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We expect that financial operations and ability to achieve enrollment goals will become increasingly difficult for a growing number of colleges and universities, and those that succeed will reframe the conversation and challenge the value proposition for potential students and parents. The smallest and lowest-rated private colleges and universities in the past few years have faced and continue to face the disproportionately largest share of the pressure. Indicative of these financial pressures, a handful of not-for-profit private colleges and universities were unfortunately forced to close in 2019. Given the longstanding and stable nature of this industry, these school closures generated a lot of attention and concern. While some of these institutions were able to find a merger partner or form a business combination, retaining some of their faculty, history and legacy, others were left to shut their doors permanently. None of the schools that have closed recently were rated by S&P Global Ratings, but we look at available data to identify indicators of stress. Most of these institutions were located in highly competitive regions for higher education, and almost all were small (well under 1,000 students in some cases). Historical precedent indicates that consistent enrollment declines can lead to material financial challenges, especially when an institution does not benefit from strong fundraising or endowment. To read more of our research on how financial metrics and ratios have changed over time, please see "Recession, Recovery, Rivalry: 10 Years of U.S. Higher Education Medians," published July 2, 2019 on RatingsDirect. Given the projected persistence of challenging demographics for high school graduates, schools will continue to compete for a reduced pool of students. While some struggling colleges or universities with valuable real estate, brand, or institutional core competencies will be able to secure an affiliation, merger or acquisition, S&P Global Ratings expects we will see more closures, in particular among smaller, more regional private liberal arts colleges (see"Consolidation or Closure: The Future of Higher Education?," March 14, 2019).

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One of the metrics we assess in our analysis is net tuition revenue (NTR, or gross tuition minus institutional financial aid) which makes up the most substantial portion of the majority of college and university budgets. While this is only one data point and cannot be looked at in isolation, during the past few years we have seen declining NTR throughout our rated universe, one indicator of the current pressures on the sector. A growing number of schools are generating negative NTR: over 30% of our rated universe in fiscal 2018, almost double the 20% we saw in fiscal 2013 (chart 6). When we look at only our rated private universities, this percentage and trend is more pronounced. Smaller schools (less than 1,400 FTE) are also facing more significant enrollment declines and having a more difficult time managing their tuition discount strategy than larger schools: the percentage of small, private schools experiencing three consecutive years of NTR declines is more than triple that of larger schools. Initial indications from fiscal 2019 audits show continued deterioration of NTR throughout the sector, especially at smaller, private institutions facing demographic pressures and increasing competition--although there are also pockets of positive growth. We expect this to continue in fiscal 2020.

Disruption caused by event risk

Environmental, social, and governance (ESG) attributes continue to come to the forefront of credit discussions with higher education obligors. On March 28, 2019, we published "When U.S. Public Finance Ratings Change, ESG Factors Are Often The Reason" and highlighted that 58% of the ESG-related higher education rating actions taken in the prior two years were driven by social factors, while 37% were driven by governance factors, and only 5% were due to environmental reasons. Unsurprisingly, enrollment levels, as discussed in the section above, were key factors for colleges and universities, due to the declining number of high school graduates and increasing competition for students. Additionally, colleges and universities are grappling with event risk with increasing frequency, whether from campus shootings, management and governance controversies, racial tensions, or sexual assault. These crisis incidents create difficult assessments in terms of their impact on credit quality, with some not resulting in an immediate rating action and many not triggering any credit action at all owing to some combination of factors that can substantially mitigate the associated risks. In our opinion, these factors include strong management and governance controls; a sound enterprise risk management program that is in place and followed promptly; and ample financial resources, which may include insurance coverage for the specific risk. Higher education continues to face substantial cybersecurity risks, and as a result it is not surprising that we have seen schools raising the profile of their senior technology leadership and some investing in cyber insurance. (For more on how we view cybersecurity risk, see "For U.S. Municipal Issuers, Proper Governance Can Mitigate The Credit Risks From Cyberattacks," June 3, 2019.)

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While most crisis events represent a significant operational challenge and potentially an immediate headline risk, testing an institution's tactical responsiveness, the long-term effect on a college or university's creditworthiness often takes several months to manifest. Consequently, it is not the actual event but the institution's ability to respond and adapt in light of it that determines whether there will be any credit implications. As risks to higher education institutions arise from less traditional areas--scandals, lawsuits, cybersecurity breaches--we believe management and governance need to identify key risks and develop risk mitigation strategies. (For more on how we evaluate event risks and governance factors in our analysis, see "U.S. Higher Education is Learning to Manage its Own Risk," Dec. 2, 2019.)

Pension costs and contributions stress budgets

Many public colleges and universities participate in their respective state's pension plan, and some private universities maintain defined benefit plans. As the burden of unfunded pension and other postemployment benefit liabilities increases, the cost is passed on to participating colleges and universities, which can pressure operating budgets. The lower-for-longer economic forecast coupled with the living-for-longer demographic trend has made some state pension plans credit-drivers. Compounding this, many state pension plans prudently continue to lower their assumed asset return assumption in order to reduce market risk, and accept that this leads to higher costs. However, pension and OPEB challenges are not uniform across the states. While some states have very large current and future cost obligations, others are at or close to being fully funded with limited risk of escalation, so the effect on credit from this obligation can vary greatly. On Oct. 7. 2019, S&P Global Ratings published a "guidance" document, "Assessing U.S. Public Finance Pension And Other Postemployment Obligations For GO Debt, Local Government GO Ratings, And State Ratings." This document lays out our views of risk associated with various pension metrics, including assumptions in the measurement of liability and methods used to fund that liability over time. The map below indicates fiscal 2018 pension funding levels.

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For colleges and universities that participate in state plans with low funded ratios, schools are generally seeing increasing required pension and other post retirement contributions which can stress budgets as they grow year over year. Notably, in Kentucky, we have seen this pressure budgets for regional universities that we rate (Western Kentucky University, Eastern Kentucky University, and Northern Kentucky University), as their required pension and OPEB contributions had nearly doubled over five years, to almost 50% of covered payroll in fiscal 2019. In the fall, the Kentucky legislature passed 2019 House Bill 1, which froze required contributions in order to provide pension relief--a positive credit factor; however, in our view, pension expenses remain a credit concern.

We work closely with our state analysts to assess a forward-looking view of changes in assets and liabilities, funded ratios, and funding discipline. Per our higher education criteria, we view low pension plan funding ratios and a failure to cash-fund actuarially determined contributions or statutorily required contributions in full negatively. Our assessment includes a forward-looking view of changes in assets and liabilities, funded ratios, and funding discipline. We expect to see possible rising pension and retirement obligation costs for schools in certain states, which could further soften operating margins. We evaluate each individual school's financial flexibility and ability to manage any additional cost burden on a case-by-case basis. In some instances, rising pensions costs do affect a school's overall credit profile and rating. We expect this risk will remain an important credit factor.

Economy at peak of the cycle?

Colleges and universities have been feeling the effects of economic recovery through annual increases in state operating appropriations for the past eight years, with fiscal 2020 seeing the largest annual percentage increase since fiscal year 2015 (according to the annual Grapevine survey, a joint project of the Center for the Study of Education Policy at Illinois State University and the State Higher Education Executive Officers Association). For fiscal 2020, only three states (Alaska, Hawaii, and New York) reported a year-over-year decline in state funding for higher education.

However, while state funding has been growing, the increases haven't been as big as the decreases felt during the recession. Nationally, spending from states' general funds has surpassed pre-recession levels after adjusting for inflation, but states' recoveries have varied widely, as has their support of higher education. Funding for higher education still remains below pre-recession levels in many states, and some schools are still coping with the lingering effects of funding cuts on their finances. Public colleges and universities continue to moderate their tuition increases, while considering other ways to raise revenues and lower costs such as completing extensive reviews of all business operations on campuses, using external consulting firms to make recommendations on efficiencies, or, in some cases, consolidating or eliminating programs.

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As the new decade begins, U.S. state credit is generally strong. Possibly nearing the end of the longest economic expansion in modern history, states are delicately balancing service delivery costs, building reserves, and mitigating future risks like climate change. However, S&P Global Economics' economists think that this economic cycle is either in--or fast-approaching--its latter stages. According to our recent economic forecasts, expected spending under the recently enacted Bipartisan Budget Act of 2019, favorable financial conditions (thanks to interest-rate cuts by the Federal Reserve), and an apparent calming of the trade seas, at least for now, support slightly above-trend GDP growth next year. S&P Global Economics now sees 2020 real GDP growth at 1.9%, up from 1.7% in our September forecast--and near our 1.8% estimate of the potential growth rate. We've also lowered our estimate of the risk of recession in the next 12 months to 25%-30%, from 30%-35% (although it remains near the top of the new range). This compares to 15%-20% at this same time last year. For more on our 2020 economic projections, see "Fewer Signs Of Scrooge-ing Up U.S. Growth In The New Year," Dec. 4, 2019).

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The impacts from slower economic growth could vary greatly by state, but for some, it could mean reductions in state funding. While the majority of public universities rely on net tuition revenue for a greater percentage of their overall budget than state funds, these state appropriations still make up a considerable portion of schools' operating budgets, and strain on these resources can have major negative impacts. Notably, the University of Alaska (A+/Stable) is facing a $25 million cut in state operating appropriations in fiscal 2020, with another $25 million cut expected for fiscal 2021 and an additional $20 million cut in fiscal 2022. While these cuts are significant, they were a big improvement from the governor's original proposal to cut $134 million (or 41%) from UA's fiscal 2020 appropriation. The stress of this potential material funding cut caused significant distraction to UA management, which has had to implement a combination of cost reduction and revenue-enhancing efforts to align the budget with these lower amounts. While this example is unique and is not indicative of sector-wide current trends, it does highlight how important state funding is for public colleges and universities, and how material an impact even small cuts in funding can have.

Strong market returns, fundraising, and research support

With the growing student debt crisis and issues of affordability continuing to stress the sector, positive market trends leading to strong endowment returns for higher education in recent years--more than enough to offset schools' endowment draw needs--has been a positive credit factor. Fiscal 2019 market returns continued to be positive, although less robust than in prior years. After the only decade without a recession and the highest S&P earnings growth in U.S. history, expectations for market performance in fiscal 2020 (and correspondingly, endowment returns) remain positive.

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Philanthropy has also proven an effective antidote to university operating pressures. Overall fundraising efforts have been very strong for the past few years, providing positive credit impacts for many institutions. Additionally, multiple large gifts have elevated universities to new financial heights, strengthening balance sheets and lessening financial operating risk. While fundraising ability is a small sub-factor within our criteria, we recognize that it could also be a catalyst to improve demand and enrollment metrics, enhance a school's reputation, and affect long-term credit quality. Many of our rated colleges and universities are currently in process with major comprehensive campaigns and we expect strong fundraising to continue in 2020. Beyond our outlook period, slowing economic growth could dampen philanthropy--but there are no signs of gift-giving fatigue at this time.

In terms of other revenues sources for colleges and universities, the outlook for research funding has brightened with both growth in grants and associated revenue providing needed revenue diversification. In addition, colleges and universities engaged in major research play a critical role in generating innovation-based economic growth and driving U.S. global innovation leadership. Within our rated universe, most research universities are rated on the higher end of the ratings distribution and this positive momentum has contributed to their continued strength. At the same time, smaller, more regional public and private colleges have more limited funding sources and revenue diversification, which can constrain financial flexibility.

Access to capital

Total municipal bond market issuance for college and university transactions increased approximately 55% to over $25 billion in 2019, following a decrease of about 50% in 2018 to $8.8 billion (due to federal tax reform's elimination of advanced refundings), according to Thomson Reuters data. During 2019, we saw many universities take advantage of low interest rates and favorable market conditions to pursue refundings and lock in interest rate savings over time. At the same time, numerous institutions issued material new debt issuance in order to lock in a low cost of capital, while increasing their overall debt outstanding.

Notably, five universities issued more than $1.63 billion in century bonds. Over the years, just over a dozen institutions in the higher education sector have issued century bonds--a small group, which made the flurry of activity this year unique. At the same time, interest rates for taxable bonds were not significantly higher than the rates on tax-exempt municipal bonds, and as a result we saw significant growth in taxable higher education bond issuance in 2019. Approximately 45% of higher education's $25 billion issuance was taxable. For the taxable issuance, approximately 75% ($8.7 billion) was issued with a municipal CUSIP, and 25% ($2.7 billion) was issued with a corporate CUSIP. With low interest rates and strong demand for municipal debt expected to continue, we believe the sector will likely face continued strong capital market activity in 2020.

Growing use of partnerships

Colleges and universities continue to explore creative ways of doing business to enhance their value propositions, differentiate themselves, and to combat the challenges of the current operating model. Partnerships of all kinds have become important tools for attracting new students and driving innovation. Many schools have conducted extensive reviews of their business operations--and are leveraging the expertise of consulting firms to make recommendations on programming decisions, cost efficiencies, and enrollment recruitment and retention--specifically as it relates to demographics, out of state students, and international students. Though quite a few schools are struggling to meet enrollment goals, colleges and universities still face a nearly unlimited pool of potential students--undergraduate, graduate, or professional students; part time or full time; first generation; international; degree completion; transfers; etc. According to U.S. Census data, the salary gap between those with a high school degree and those with a bachelor's degree remains significant in almost every state, and employment prospects for those with higher levels of education remain robust. Institutions, now more than ever, are being deliberate in their pursuit of enrollment and revenue growth. Attracting and retaining tomorrow's student has never been more important as a financial strategy or as an enterprise strategy.

As schools review their curriculum and programmatic offerings, the labor market and job prospects in the community are top of mind. The development of innovative programs to boost demand and access, new products including hybrid and online programs, and greater technology efforts are some examples of the investments schools are making in academic programming. An increased need for skilled workers who have at least some education beyond high school--whether that means an associate or bachelor's degree, or a professional credential--has motivated schools to add additional degree programs, many of which are online. While the number of high school graduates is projected to decline, there is a growing non-traditional population with a demand for degrees, through continuing education programs or online programs.

Over the past decade, there has been a significant change in the online education landscape, as universities have worked with partners on strategies to build online or hybrid classes and add more versatility to their program offerings. Online post-secondary offerings continue to expand at an accelerating rate as institutions look for ways to offer more flexibility to students while increasing enrollments and revenues. However, while online programming can provide some solutions to the affordability, access and student outcome issues at the forefront of today's national discourse, the market is increasingly crowded. In our view, schools which already offer some variety of online or hybrid programs will be better positioned to face projected enrollment declines in traditional high schools graduate populations during the next few years.

There also remains strong demand for public-private partnerships (P3s) in higher education, particularly in housing; we saw increased activity in our rated privatized student housing transactions in 2019. While the higher education sector remains pressured, students continue to demand enhanced facilities and amenities, and these partnerships can provide efficiencies, access to expertise and improved services, and often, cost savings despite having a higher cost of capital. At the same time, we believe that there are certain risks that can make the success of these projects challenging, even those at universities with strong demand profiles. While students desire improved housing facilities on campus, affordability of such housing remains a concern. During the past two years, we have seen some new projects experience surprising weakness in opening occupancy as a result of inadequate marketing, over-priced beds, or other reasons. At the same time, demographic pressures can also affect housing occupancy. However, P3s continue to be widely used as a viable delivery method for colleges and universities to address their infrastructure needs. Beyond housing, higher education institutions utilize P3s for other traditional infrastructure, such as parking garages, dining facilities and, more recently, multi-use facilities and aging energy infrastructure. We expect this activity to continue.

Non-U.S. Not-For-Profit Universities

We expect credit stability in the majority of the 19 public universities rated outside the U.S. As of Jan. 10, 2020, 16 universities (84%) of our rated universe had a stable outlook (see chart 16). However, there is still concern about credit deterioration in three public universities. Two in the U.K.--King's College London and the University of Sheffield--and one in Mexico--Universidad Autonoma de Tamaulipas--have negative outlooks on their ratings. Due to funding uncertainties and spending dynamics, operating margins are at risk of further deterioration in 2020, which could lead to a downgrade. We do not have any university ratings with a positive outlook, which explains a less optimistic environment compared to last year when we had a couple of positive outlooks.

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Rating distribution is likely to remain concentrated in the 'AA' category, led by Australian and Canadian public universities (chart 17). The U.K. has the majority of 'A' category rated public universities outside the U.S., following by the Sept. 20, 2019, downgrade of Lancaster University to 'A+' from 'AA-'. Only one Canadian university is rated in the 'A' category--York University at A+/Stable. On June 28, 2019, we changed to stable from positive the outlook on the University of Nottingham's 'A+' rating. In the non-investment grade universe, we had only one upgrade during 2019: Universidad Autonoma de Nuevo Leon in Mexico.

We consider that government-funding trends for public institutions remain one of the main risks in 2020, as they may keep decreasing in a context of lower economic growth and more restricted fiscal policies. We have not changed our view of the likelihood of government support to rated public institutions, but we will closely monitor any change that could go beyond our base cases. Other risks could come through a disruption in international student enrollment trends due to geopolitical dynamics and Brexit, which in some countries such as Australia and the U.K. remain important revenue sources. Pension expenditures remain increasingly risky for institutions' finances, especially in those cases that do not have a funded scheme or a plan to have it soon. We expect increasing dependence on student fees in 2020, and also some governments capping the number of domestic students they fund, while relying more on international students fees. Capital programs are not expected to require significant debt increases, in general.

Australian universities with stable performance over 2020

S&P Global Ratings currently rates four public universities in Australia: the Australian National University (AA+/Stable/A-1+); the University of Melbourne (AA+/Stable/A-1+); the University of New South Wales (AA+/Stable/A-1+); and the University of Wollongong (AA/Stable/A-1+). The stable outlooks reflect our view that these universities will continue to experience solid demand from domestic and international students, continue to post robust operating surpluses, and maintain relatively high levels of financial resources.

Commonwealth grants are universities' largest source of revenue. Funding under the Commonwealth Grant Scheme (CGS), which supports domestic bachelor-level courses, for 2020 is expected to increase in line with adult population growth, if universities meet certain performance requirements. Over the past two years, CGS funding was capped at 2017 levels.

This funding change has had minimal impact on the four rated universities. This is partly because they have benefitted from several years of rapid growth in full-fee paying foreign students, particularly from China. University College London's Centre for Global Higher Education believes that Australia will overtake the U.K. in 2019 as the second-most popular destination for international students, behind only the United States. While this growth is allowing universities to post stronger surpluses and accumulate financial resources, we believe that it also makes them more vulnerable to potential shifts in foreign student demand. Nevertheless, our view is that all four universities would maintain sound financial performance if foreign demand were to ebb.

Canadian universities continue to be well-positioned to weather a challenging funding environment

We currently rate eight Canadian public universities: six in Ontario, one in British Columbia, and one in Quebec. Many of them are among the top-tier institutions in the country, and generally demonstrate superior market positions, strong balance sheets, and capable management teams. We expect that student demand will remain strong overall while high levels of available resources held by rated universities will help them weather a challenging funding environment and maintain strong creditworthiness in 2020.

Universities in Canada receive relatively robust levels of government funding, although the proportion of university revenues coming from governments has declined over the past decade and now stands at less than half on average. Many universities have increasingly turned to unregulated tuition revenue from international students to cover steadily increasing costs given provincially imposed limits on domestic tuition increases and provincial operating grants that we do not expect to increase materially in real terms in the next year.

We expect that Ontario will continue to wrestle with very large fiscal deficits, restricting its ability to increase funding to the sector. In addition, the provincial government imposed a 10% reduction to domestic tuition for fiscal 2020 and a freeze the following year. While we believe that these moves will exacerbate pressure on Ontario university budgets in the next several years and further the incentive to grow international enrolment, which makes up about a quarter of total enrolment at larger rated universities, we believe that the credit profiles of our rated universities will not materially degrade in 2020.

U.K. universities are still under financial pressure as Brexit uncertainties remain

We expect that the headwinds that have affected English universities over the last year to abate in 2020, creating a more stable operating environment. Uncertainty that surrounded certain financial headwinds such as the recommended lowering of tuition fees and the unfunded nature of the Universities Superannuation Scheme have weakened in our view. Furthermore, certain policy decisions such as the changes to the duration of the post-study work visa for international students, should help the U.K. retain its attractiveness as a place to study.

In 2020, we expect rising pension contributions for the Universities Superannuation Scheme to materialise as efforts are made to fund the deficit in the pension scheme. However, we believe this will be absorbed in our rated universities' operating expenditure without it materially deteriorating its creditworthiness. In our view, the agreed contribution rates reduce uncertainty of future unplanned increases in pension contributions for the time being. We also note that the government is yet to act on the recommendations from the 2019 Augar Review, which recommended lowering tuition fees for certain subjects. While we note that the recommendations in the review have not been rejected, we believe that it may not be among the government's main priorities for 2020.

Brexit-related uncertainties still remain, with the availability of EU research funding and academics still unknown in a post-Brexit U.K. That said, demand was strong in 2019, demonstrated by an increase in full-time equivalent enrollments and applications for our rated universities on the whole. Furthermore, the extension of the post-study work visa to two years from six months should help the U.K. retain its attractiveness to international students. The U.K. saw a marked decrease in appetite to study from Indian students when the duration was reduced to six months in 2012. We expect the trend of increasing demand to continue into 2020, supported by the high quality reputations associated with our four rated universities.

Mexican universities face increasing funding risks that will strain finances

We expect that stagnated government funding coupled with growing pressure to meet demand and quality goals will continue to strain universities finances. As the 2020 federal budget includes modest, no real growth, universities transfers, universities' ability to enhance financial management policies and mid-term planning continue to be critical to avoid further slippages in their financial performance. In our view, the ability of the three rated Mexican public universities to address a more challenging financial environment varies among them and have had a different result on its credit profile.

While the three rated Mexican universities have an adequate enterprise profile, with an overall solid enrollment and student demand profile, their financial profiles show contrasts in operating margins, from positive to negative, while they share a limited financial flexibility and revenues highly concentrated on federal and state transfers. On average, these transfers account for around 80% of total revenues, and student fees or other funds would not be able to counterbalance any significant reduction in government transfers. In our opinion, Mexican universities have room to improve their financial profile in coming years, mainly strengthening both their financial management policies and own resources but it is still to be seen, when considering their implementation challenges.

Debt burden is likely to continue to decrease in 2020, as only the Universidad Autónoma de Nuevo León has an outstanding balance of long-term debt as of 2019 year-end and none of the three rated universities has plans to borrow this year. However, given their limited levels of liquidity available to absorb revenue fluctuations, we believe that a significant drop in federal transfers could push public universities to increase borrowings in the form of bank loans mainly to finance infrastructure needs.