Fiscal 2021 presented significant operating challenges for U.S. public colleges and universities. In response to the pandemic, many institutions provided instruction remotely, in a hybrid format, or in person with social distancing measures. This worsened demand pressures that existed well before the pandemic, as average and median enrollment declines more than doubled compared with fall 2019. However, highly rated institutions were fairly insulated from these effects and saw stable enrollment results, supported by their significant brand recognition. Despite enrollment declines, public colleges and universities posted strong operating surpluses thanks to expense cuts and emergency relief funding. In turn, surpluses and unprecedented market investment returns helped to strengthen balance sheets. State funding per FTE continued to increase and we expect will remain strong in fiscal 2022. Remaining relief funds will likely provide an operating cushion for fiscal 2022, but weakening market conditions, demand pressures, rising interest rates, and a tight labor market will continue to test institutions.

Chart 1

Rating Distribution And Characteristics

The sample size for our public college and university median ratios for fiscal 2021 is 145 ratings, ranging from 'AAA' to 'CC' (chart 2). Most of our ratings (47%) are in the 'A' category (chart 3). The 'AAA', 'BBB', and speculative-grade rating categories are relatively small, with sample sizes of seven, 15, and four schools, respectively. Changes in median metrics for these categories may therefore represent the variability associated with a small sample size, rather than wholesale differences in credit quality.

Chart 2

Chart 3

Consistent with our stable sector view published in January 2022, our outlook distribution is stronger than it was a year ago. See "Outlook For Global Not-For-Profit Higher Education: Out Of The Woods, But Not Yet In The Clear," published Jan. 20, 2022, on RatingsDirect. Over the past year, we revised six outlooks to positive, 24 to stable, and one to negative. As of June 15, 2022, the majority of institutions, 84%, had a stable outlook and 3% of issuers had a positive outlook (chart 4); 13% of institutions had a negative outlook compared with 32% on the same date in 2021.

Over the past year, upgrades have outpaced downgrades. We raised our ratings on seven schools and lowered our ratings on two between June 15, 2021, and June 15, 2022. Two of the upgrades were transitions to the 'BBB' category from speculative-grade ratings. We lowered the rating on one university to the 'A' category and the rating on another to the 'BBB' category. Rating actions included one outlook change and four upgrades after S&P Global Ratings raised its rating on Illinois' general obligation debt outstanding to 'BBB+' from 'BBB'. See "Various Rating Actions Taken On Illinois Public Universities Following State Upgrade," May 6, 2022. Although state funding in Illinois has improved, we maintain three speculative-grade ratings on institutions in the state because those schools continue to face considerable demographic pressures. In addition, we assigned a new rating to Dakota College at Bottineau, N.D., which is rated 'BBB'.

Chart 4

All data and ratings included in this report are as of June 15, 2022. We excluded the financial data for one institution that did not have a fiscal 2021 audit available as of this date. For several institutions that were awaiting their state's finalization of the audit process, we used draft audit information. In general, public universities follow standards issued by the Governmental Accounting Standards Board (GASB). However, a few public institutions report financials according to the Financial Accounting Standards Board (FASB). For comparability, we have excluded the financial ratios of public institutions using FASB reporting but have included enterprise profile data for these schools.

Although we rate other types of debt for public colleges and universities, such as housing or other auxiliary secured debt, the data in this report reflect the underlying credit characteristics of publicly rated universities, colleges, or systems. In addition, while we rate many community colleges and community college systems, we have included only our ratings on four-year institutions or systems that primarily constitute four-year programs to maintain data consistency and enable a meaningful comparison between similar entities.

We publish these medians as general benchmarks to observe broader industry trends. The credit analysis for any institution involves an assessment of qualitative factors that are beyond the scope of this article. Therefore, these medians should not be considered thresholds to achieve a particular rating.

In general, higher-rated colleges and universities have greater operating flexibility, thanks to stronger name recognition and selectivity, higher matriculation rates, lower tuition discounting, diverse revenue streams, and healthier available resources. Conversely, lower-rated colleges and universities tend to face greater demand and operating pressures, with a more geographically concentrated student draw, weaker operating margins, lower available resources, and a higher reliance on student-generated revenue and state funding.

In our assessment of the medians (tables 1 and 2), we observed the following trends:

• The pandemic exacerbated enrollment pressure for all but the most selective and highest-rated institutions. Although top-rated schools in the 'AAA' and 'AA' categories held enrollment effectively stable in fall 2020, schools rated in the 'A' category and below saw median enrollment declines exceeding 2.1%.
• With uncertainty due to the pandemic, many schools anticipated weaker matriculation rates and therefore accepted a higher percentage of applicants.
• Despite a drop in student-generated revenue, particularly auxiliary revenue, emergency relief funding helped many public colleges and universities across rating categories generate robust surpluses.
• Positive margins and strong market returns contributed to significant growth in median available resources relative to both debt and operations. In particular, the median ratio of adjusted unrestricted net assets (UNA) to debt increased by 30%.
• Endowments and foundations saw impressive growth, with median values increasing more than 27%.

Table 1

Table 2

Enrollment And Demand Medians

Ongoing enrollment declines were exacerbated by the pandemic

Fall 2020 was the fourth consecutive year of median declines in FTE enrollment for public colleges and universities. Before the pandemic, many institutions faced challenging demographic trends with fewer students graduating from high school each year in many parts of the U.S. The pandemic only intensified demand pressure. With increased health and safety risks and many institutions offering hybrid or remote instruction rather than a traditional on-campus experience, fewer students enrolled. The median enrollment decline of 1.5% was a percentage point below the decline in fall 2019. The average decline of 2.1% was more than double the rate of decline in fall 2019. In particular, graduate and professional students opted to enroll at lower rates, and undergraduates made up a larger share of the median student body.

Highly rated schools were fairly insulated from enrollment declines and median and average enrollment changes were effectively flat for institutions in the 'AAA' and 'AA' rating categories. FTE declines were heavily concentrated among colleges and universities rated 'A' and below, which saw average drops exceeding 2.1%. Enrollment stability in fall 2020 was highly correlated with several demand factors: stronger selectivity; better graduation and retention rates; and a lower average age of plant. In addition, stronger enrollment outcomes were positively correlated with the size of the student body, which tends to vary by rating category (chart 5).

Chart 5

Enrollment outcomes also varied by state (chart 6). Public colleges and universities in Connecticut, Utah, and sunbelt states, such as Arizona, Florida, and Texas, saw gains in average FTE enrollment. Institutions in Alaska, Colorado, Missouri, and Vermont experienced the largest average enrollment declines.

Chart 6

Selectivity weakened while other demand metrics held stable

Although some median demand metrics weakened in fall 2020, some enterprise factors showed surprising stability. Because institutions faced uncertain demand, many public colleges and universities appear to have relaxed selectivity. In particular, highly selective schools in the 'AAA' and 'AA' rating categories leveraged the ability to admit more students from their applicant pools to achieve stable enrollment. Accepting more students proved to be an appropriate strategy, as median matriculation rates continued a declining trend, with a larger drop in fall 2020 than in previous years.

In response to the pandemic, many schools adopted a test-optional application process for fall 2020. This did not affect our median and average ACT scores, while both median and average SAT scores declined.

Although we expected more first-year students would choose to not return to campus during the pandemic, the median retention rate was relatively stable. Another unanticipated result was a small drop in the median percentage of in-state students. Although we predicted that more students would opt to attend institutions closer to home during the pandemic, the median school saw a modest increase in domestic geographic diversity in fall 2020. However, restricted travel and immigration spurred a decline in international students' attendance. Median international student FTE enrollment declined to 3.8% in fall 2020 from 4.8% in fall 2019. Consistent with past reports, 'AAA' and 'AA' category schools benefit from greater geographic diversity, with a higher percentage of out-of-state and international students (chart 7).

The median graduation rate in fiscal 2021, which is a measure of completions in spring 2020, was stable, likely reflecting that many graduating students began their final semester before the pandemic's wider spread in the U.S.

Chart 7

Financial Medians

Operating performance showed strength

Despite the interruptions and uncertainty caused by the pandemic, many public colleges and universities generated strong operating results in fiscal 2021. This was true across rating categories (chart 8). The sectorwide median operating surplus of 3.7% was a robust increase from the median surplus of 0.5% in fiscal 2020.

Strong operations were helped by the three rounds of pandemic relief funding from the Higher Education Emergency Relief Funds, which provided significant institutional support. Some schools received additional relief funding from state governments, Payment Protection Plan loans, and other grant sources. See "Federal Funds Kept U.S. Colleges And Universities Afloat; Some May Sink When They're Gone," published June 2, 2022. To withstand a period of uncertainty, many institutions also pursued significant expense measures, such as furloughs and reduced retirement contributions. For some schools, work force reductions were a temporary means to balance budgets. For others, the pandemic may have served as an opportunity to right-size operations to meet persistently lower demand.

Public colleges and universities vary in their audit presentation of operations. We adjust operations to normalize or reduce variability from one-time revenues and expenses. We also adjust for noncash items, including investment-related gains and losses and pension and other postemployment benefit (OPEB)-related expenses, particularly considering GASB Statements No. 68 and 75. Institutions varied in their presentation of emergency relief funding, often including these funds under nonoperating revenue. We include emergency relief funds in our calculation of adjusted operating revenue, typically under other revenues, as these resources were distributed across the sector, helped replace reduced auxiliary revenues, and funded operating expenses incurred as a result of the pandemic.

Chart 8

Student-generated revenue fell as fewer students returned to campus

Student-generated revenues made up a materially lower share of total revenue for public colleges and universities across rating categories in fiscal 2021, dropping to a median of 41.9% from 46.4% in fiscal 2020. In particular, with fewer students living on campus, auxiliary revenues fell to just 6.6% in fiscal 2021 from a median of approximately 10% of total revenues before the pandemic.. In addition, net tuition revenue fell for many schools due to lower enrollment and higher tuition discounting. Institutions in the 'AAA' rating category were generally insulated from the negative impacts of declining student revenues because these schools tend to have greater revenue diversity and are less reliant on tuition and auxiliary fees (chart 9).

Chart 9

State appropriations continued to increase

As a share of total revenue, state appropriations increased slightly in fiscal 2021, but remained in line with past medians. Generally, reliance on state funding varies by rating category. The stronger the rating, the lower the dependence on revenue from the state. Median state appropriations per FTE continued a positive six-year trend, increasing by 3.6% in fiscal 2021. Although some of this growth might have included one-time relief funds, including funds transferred through states as part of the American Rescue Plan Act, we expect continued growth in funding per FTE in fiscal 2022, as many states posted stronger-than-expected financial results during the pandemic.

Strong markets helped foundations and endowments

Foundations and endowments benefited from an extremely strong market in fiscal 2021. In addition, many colleges and universities reported solid fundraising momentum despite the pandemic. The median endowment and foundation value increased more than 27%, with impressive growth across rating categories (table 3).

Table 3

The National Association of College and University Business Officers (NACUBO) reported large net annualized average market returns of 30.6% in fiscal 2021, compared with just 1.8% in fiscal 2020. The NACUBO study covered 720 public and private U.S. college and university endowments, while our median report includes only 145 public universities, and our medians reflect overall endowment values, not just investment returns.

Financial resources increased due to strong operations and market returns

Financial resources, as measured by cash and investments and adjusted UNA, are a key measure of relative balance-sheet strength. Following the implementation of GASB Statements No. 68 and 75, most public college and university audits include net pension and OPEB liabilities in UNA. The valuation of these liabilities can fluctuate considerably year to year based on the assumptions used. In our analysis, we adjust UNA by adding back the net pension and OPEB liabilities, and the net difference between deferred outflows and deferred inflows of resources for pension and OPEB liabilities. These adjustments allow for a normalized comparison of balance-sheet strength over time and between institutions. Although most of the public institutions we rate have a pension or OPEB liability reflected in their audit, a small number do not, and we do not make adjustments for these institutions. We also include any available debt service reserve funds in our calculation of adjusted UNA relative to debt.

Thanks to strong operations and robust market performance, available resources, as measured by cash and investments, and UNA increased significantly in fiscal 2021 (chart 10). In particular, the median ratio of adjusted UNA to debt increased by 30%.

Chart 10

Debt metrics were stable overall

In fiscal 2021, public colleges and universities continued to take advantage of low interest rates by issuing new debt or refinancing existing debt. After a 9% increase in fiscal 2020, median debt outstanding for public colleges and universities increased by a smaller 4% in fiscal 2021. Maximum annual debt service as a percentage of operating expenses held flat. The increase in total debt was concentrated at the 'AAA' rating category (table 4). Compared with fiscal 2020, debt per FTE was stable (chart 11). Following the implementation of GASB Statement No. 87, Leases in fiscal 2022, we expect there will be a nominal increase in debt as institutions include the present value of future minimum lease payments in liabilities.

Although we would expect increasing debt levels to translate into campus renovations and improvements, the median average age of plant continued to creep upward in fiscal 2021, with only modest differences across rating categories. Institutions with outdated facilities could face difficulty marketing to a smaller pool of potential students, with an increased cost of financing renovations in the near term.

Table 4

Chart 11

What We're Watching

Fall 2022 enrollment

Although our data indicate that enrollment declines were more moderate in fall 2021, as fewer traditional students seek higher education, competition remains tight. We anticipate colleges and universities will continue efforts to attract nontraditional, graduate, and international students to offset the lower number of domestic high school graduates.

Changing admissions policies

Many institutions dropped testing requirements during the pandemic. We anticipate more colleges and universities will transition permanently to test-optional admissions policies following trials, which could continue to spur increased applications. For example, the University of California System recently dropped testing requirements, citing improvements in educational quality and equity.

Operations after relief funding

We expect many institutions will post solid operations in fiscal 2022, with support from remaining relief funds. Some colleges and universities will also continue to benefit from expense measures implemented during the pandemic that right-sized operations. However, we expect schools will face a tougher operating environment in fiscal 2023, particularly in a tight labor market with inflation nearing a 40-year high.

Market volatility

S&P Global Economics' U.S. real-time economic trackers indicate that inflationary pressures and rising interest rates have softened economic activity. Public colleges and universities saw impressive growth in investments in fiscal 2021. But those large gains might not be sustained as institutions face added risks from a potential bear market.

State support and pension funding

Although most state funding trends remain positive for fiscal 2022, this momentum could slow if the risk of a recession comes to fruition. In addition, while many state pension plans saw improved funding ratios in fiscal 2021, we believe current market volatility could impair their funded status in fiscal 2022. This could lead to rising pension contributions for colleges and universities, which can be burdensome for schools with less operating flexibility.

Capital investments

Changes in total enrollment, shifts to virtual instruction, and remote work are causing institutions to revisit campus master plans. As interest rates rise, colleges and universities may also alter plans for investments in high-demand programming, marketing, and campus improvements that attract students. In this environment, we expect higher-rated colleges and universities with deep pockets will continue to differentiate themselves and improve their demand profile, as we continue to see bifurcation of credit quality within the sector.

Table 5

Table 6