Full details of the medians are available through our interactive dashboard, by clicking here: https://www.spglobal.com/ratings/en/research-insights/sector-intelligence/interactives/us-pf-highereducation-median-2023. The below image is a preview.

For many U.S. public higher education institutions, fiscal 2022 represented the first few miles on a long road to recovery from the pandemic. After remote, hybrid, or socially distanced instruction through much of fiscal 2021, many institutions returned to full on-campus operations for fiscal 2022, which brought life back to campuses in addition to important revenue streams, particularly auxiliary revenues. Federal relief funding--direct and indirect through state pass throughs--enabled institutions to maintain stable footing and prepare for the future. While these funds and prudent expense management helped public colleges and universities recognize positive operations in fiscal 2022, on average, fiscal 2023 has been bumpier due to rising expenses, with many hazards remaining.

The advent of comprehensive, engaging remote learning enabled institutions across the country to navigate the worst of the pandemic, but it also strengthened yet another competitive force in the higher education landscape. Furthermore, the increasing competition for students and growing demands for on-campus amenities and services are forcing many institutions to enhance offerings and undertake costly capital projects, raising expenses that often require state support or bond financing. S&P Global Ratings believes highly rated institutions particularly flagship, public research universities that were previously insulated from these competitive pressures because of strong operating surpluses, large endowments, and generally strong fundraising capabilities, have ample ability to address deferred maintenance needs and evolving student demands. Despite increased state support, we believe that other more regional and less-selective schools will require further programmatic innovation and expense-side belt-tightening to remain financially successful.

Rating Distribution And Characteristics

Chart 1

We maintained 141 ratings on U.S. public colleges and universities as of June 1, 2023. While these ratings ranged from 'AAA' to 'CC', more than 80% of institutions are rated in the 'A' or 'AA' category, with the 'AAA', 'BBB', and speculative grade categories consisting of only seven, 16, and three schools, respectively. Therefore, changes in median metrics for these categories might represent the variability associated with a small sample size, rather than wholesale differences in credit quality. Since our last medians report, published July 15, 2022, on RatingsDirect, we assigned ratings to one new public educational institution, Florida Polytechnical Institute. During this same period, we raised the ratings on four public universities, two of which are in Illinois, and which stemmed from, among other factors, the state's improving fiscal situation and the expectation for stable state support over the near term'. See "Various Rating Actions Taken On Illinois Public Universities Following State Upgrade," published May 6, 2022, on RatingsDirect. We also lowered the rating twice on one institution, once in August 2022 and again in February 2023. Subsequent to June 1, 2023, we upgraded Eastern Illinois University to 'BBB-' from 'BB+'. Since our last medians report, one rating was withdrawn and three institutions were reclassified internally and therefore they are no longer captured in this report. In addition, Vermont State Colleges redeemed its series 2013 bonds, the only series we rated, effective July 1, 2023. We no longer maintain a rating. Since our last medians report, one rating was withdrawn and four institutions were reclassified internally and therefore they are no longer captured in this report.

All data and ratings included in this report are as of June 1, 2023. We excluded the financial data for one institution that had not yet published a fiscal 2022 audit as of this date. For some 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, four public institutions report financials according to the Financial Accounting Standards Board (FASB). For comparability, we excluded the financial ratios of public institutions using FASB reporting but 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 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.

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Table 2

Enrollment And Demand Medians

Ongoing enrollment declines continue across the sector

Fall 2021 saw the fifth consecutive year of median declines in FTE enrollment for public colleges and universities. Prior to the pandemic, many institutions were already facing demographic pressures, with a declining number of students graduating from high school each year in many parts of the U.S. The pandemic intensified this pressure, with more students electing to delay or otherwise forgo a traditional four-year education due to increased health and safety risks and a lack of a traditional on-campus experience. While many institutions returned to campus for instruction for fall 2021, enrollment challenges persisted as for-profit institutions, two-year degree programs, entering the workforce, and other alternatives became increasingly attractive for students questioning the true value of a traditional four-year degree. The median enrollment decline of 1.9% is greater than any recorded in the past five years, although the average decline of 1.9% reflects a slight improvement year over year.

Chart 2

Despite the pandemic, highly rated schools remained insulated from enrollment declines in fall 2021, with the 'AAA' rating category posting a solid 1.9% increase and the 'AA' rating category remaining flat. Despite modest FTE enrollment declines at three institutions, all seven within the 'AAA' rating category median saw year-over-year growth in first-year class size. The 'A' rating category, which comprises nearly 45% of all ratings, recorded a median 3.1% decline in FTE enrollment while greater losses of 3.2% and 7.9% were felt at the 'BBB' and speculative-grade categories, respectively. Across these categories, eight of 19 institutions saw FTE enrollment slip more than 5%, with only five seeing year-over-year increases.

Chart 3

Enrollment outcomes continued to vary by state in fall 2021 and were generally reflective of the migratory trends recorded across the U.S. in recent years. Public colleges and universities in Utah and Texas saw FTE enrollment rise 4.7% and 4.5%, respectively, while institutions in the Carolinas and the Northern Rockies also recorded healthy enrollment trends. Institutions in Alaska, Indiana, Missouri, and New York experienced the largest average enrollment declines.

Competition is becoming more apparent in demand metrics

Chart 4

In fall 2021, while some demand metrics remained stable year over year, others reflected an increasingly competitive market. In fall 2020, we noted that, due to the uncertainty of demand stemming from the pandemic, many public colleges and universities appeared to have relaxed selectivity to matriculate a stable first-year class. One year later, that strategy still seems to be in place as the median first-year acceptance rate rose to 77.8% in fall 2021 from 75.1% in fall 2020. This increase, however, was not uniform across all rating categories as the highest-rated institutions in the 'AAA' category lowered selectivity very slightly to a median 65.5% from 65.8% in fall 2020. Similarly, partially due to some rating movement within the category, the 'BBB' category saw first-year acceptance tighten modestly.

In our view, the increasing acceptance and use of the Common Application across the sector as well as the adoption of test-optional application processes at many institutions have made applying to college easier than ever. As such, while the absolute number of applications and growth in applications are certainly important metrics, the rate at which an institution converts that application into a first-year student is an increasingly important metric. With growing ease-of-application and rising competition, median first-year matriculation rates have steadily slid in recent years. Between fall 2017 and fall 2020, median first-year matriculation for public colleges and universities fell to 25.8% from 32.3%, with the metric falling three percentage points in fall 2020. Unlike many other metrics, median first-year matriculation fell across all rating categories, reflective of the competition with other public institutions as well as with private and for-profit institutions.

Although public colleges and universities are finding it harder to matriculate students, they are retaining and graduating them at a steady rate. Year-over-year changes to median retention are somewhat mixed across rating categories, although across public colleges and universities, the median retention rate of 80.2% reflects a nearly two-percentage-point decline from fall 2020, a rate that is largely in line with pre-pandemic levels. We note that the median graduation rate in fiscal 2022, which is a measure of completions in spring 2021, improved across the sector and improved across each individual rating category. In our view, this reflects a larger trend to enhance access to guidance, counseling, and coaching in an effort to improve student outcomes.

In response to the pandemic, many schools adopted a test-optional application process for fall 2020, which was largely extended to fall 2021 or made permanent by management. As a result, only 80% of institutions submitted average SAT scores, and only 85% submitted average ACT scores in response to our questionnaires. While this did not materially affect our median or average test scores, we believe test-optional applications could yield self-selectivity bias in test score reporting in the future. Given the recent ruling on affirmative action, we expect that colleges and universities will increase targeted recruitment and expand financial aid programs, while a broader move to test optionality is expected across the industry.

Financial Medians

Operating performance showed strength

While demographic challenges, pandemic uncertainty, and rising competition affected enrollment and student-demand metrics for all public colleges and universities, financial operations generally remained strong through fiscal 2022, with a median operating surplus of 2.9%, down from a historic high of 3.7% in fiscal 2021. While higher-rated institutions fared better than their lower-rated peers, institutions in the 'BBB' and speculative grade rating categories fared reasonably well, recording median operating deficits of 0.6% and 0.3%, respectively, with only four institutions recording deficits greater than 3.0%. This relative operating success is partially attributed to the recognition of federal relief funds, expense reductions, and rebounding auxiliary revenues. For fiscal 2023, we expect median operating margins across all rating categories will tighten as institutions exhaust their federal relief funding and inflationary and labor market pressures increase expenses.

Chart 5

As public colleges and universities returned to campus in fall 2021, auxiliary revenues (housing, dining, event, athletics, etc.) began to rebound. As a percent of total adjusted operating revenue, median auxiliary revenue jumped to 8.5% in fiscal 2022 from 6.6% recorded fiscal 2021. While still below pre-pandemic levels of over 10%, the increase reflects the start of a recovery. We understand this recovery continued into fiscal 2023 but have heard that some institutions that draw a high percentage of students from local areas are finding it difficult to refill residence halls. Operations were further buoyed by the remaining pandemic-relief funding from the Higher Education Emergency Relief Fund. As states saw tourism and tax inflows return, some schools received additional relief funding from state governments, while others applied for and received Federal Emergency Management Agency relief and other grants. See "Federal Funds Kept U.S. Colleges And Universities Afloat; Some May Sink When They're Gone," published June 2, 2022. This increased auxiliary, federal relief, and grant revenue offset rising expenses in fiscal 2022, stemming from both a return to full on-campus operations and macroeconomic pressures. During fiscal 2022, many institutions saw utility and supply costs escalate due to inflation and also found a competitive labor market requiring increases in compensation. Somewhat offsetting these increases, labor market challenges are also making hiring for vacant roles difficult which has kept compensation and benefit expense lower than it otherwise might be.

We note that public colleges and universities vary in their audit presentation of operations. S&P Global Ratings adjusts 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 benefits (OPEB)-related expenses, particularly considering GASB Statements Nos. 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 6

Student-generated revenue rebounds for some

After falling to a five-year low of 41.9% in fiscal 2021, median student-generated revenue dependence rose slightly to 42.3% in fiscal 2022, driven largely by the rebound in auxiliary revenue. While auxiliary revenue, which bounced back nicely in fiscal 2022, constitutes part of total student-generated revenue, net tuition revenue, which is the larger of the two pieces, has been slower to recover due to sectorwide enrollment challenges and rising tuition discounting. To date, the 'AAA' and 'AA' rating categories, which saw median FTE enrollment growth and stability in fall 2021, each recorded year-over-year increases in median student-generated revenue. The 'A' and 'BBB' rating categories both reported declines in FTE enrollment and in median student-generated revenues. Finally, as federal relief funds are expended through fiscal years 2023 and 2024, we expect FTE enrollment will slowly strengthen toward pre-pandemic levels.

Chart 7

Chart 8

State appropriations continued to increase

For all institutions at the height of the pandemic, federal relief helped support unexpected expense increases and, in many cases, more than offset lost auxiliary or other revenue. In fiscal 2022, median state appropriation dependence declined slightly to 20.7%, but generally remained in line with historical medians. While a year-over-year decline might come as a surprise given increased support from many states, we note that auxiliary revenue has recovered almost as quickly as it fell. Furthermore, many institutions classified federal relief funding as nonoperating revenue, while we include it in our calculation of adjusted operating revenue, but typically under other revenues. As remaining federal relief funds (which appear to be minimal, per our conversations with our rated universe) are exhausted in fiscal years 2023 and 2024, we expect state appropriation dependence will increase, particularly given that two-thirds of state budgets for fiscal 2023 reflect growth in higher education funding, many of which suggest double-digit increases.

While state appropriation dependence slipped in fiscal 2021, median state appropriations per FTE enrollment rose by 10.2%, continuing a seven-year trend of increases and nearly tripling the average increase recorded over the past three years. This marked increase is a product of a several factors including the passing through of federal relief funds by state legislatures and a general increase in state operating support for higher education, but also a steady decline in FTE enrollment at public colleges and universities. Over the next few years, we expect an increase in the absolute value of state operating appropriations across many states, but we also anticipate enrollment challenges will fuel further growth in this metric.

Table 3

Strong markets support foundations and endowments

After benefitting from an extremely strong market in fiscal 2021, foundations and endowments slipped in fiscal 2022, but market values largely remained higher than pre-pandemic levels. Across the sector, the median university endowment market value fell approximately 4% to $298.4 million from $310.9 million, after rising nearly 28% in fiscal 2021. The National Association of College and University Business Officers' TIAA Study of Endowments, which surveys and reports on nearly 700 colleges, universities, and education-related foundations, cited an average endowment return of negative 8.0% for fiscal 2022, with endowments of more than $1 billion returning, on average, negative 4.5%, and endowments of less than $25 million returning, on average, negative 11.5%. This figure captures our view of the bifurcated higher education sector. Higher-rated institutions often maintain large endowments, with sophisticated investment management teams, either internal or outsourced, and have greater investment latitude than lower-rated institutions with smaller endowments. Furthermore, many higher-rated institutions also maintain experienced, expansive advancement teams capable of connecting with tens of thousands of alumni and stakeholders daily. The Council for Advancement and Support of Education's fiscal 2022 Voluntary Support of Education survey indicates that voluntary support for all higher education institutions was up 12.5% compared with the previous fiscal year. Of note, while support increased year over year across two-thirds of the reporting institutions, the top 20 fundraisers in fiscal 2022 received about $15.7 billion--more than a quarter of the total raised by all institutions in fiscal 2022. Of those 20, nine are public institutions.

Chart 9

Financial resources growth continues despite market volatility

With the adoption of revised criteria for global not-for-profit education providers on April 24, 2023, our analysis of public colleges and universities no longer considers adjusted unrestricted net assets (UNA) as a measure of financial resource strength. While our revised criteria still consider cash and investments, they also account for the cash and investments of college- or university-related foundations when analyzing the strength of an institution's financial resources. Generally, our view of what constitutes a college- or university-related foundation remains unchanged between our calculation of adjusted UNA and our calculation of cash and investments including foundation. With the inclusion of foundation assets, absolute financial resource values and financial resource metrics are stronger, as Table 2 illustrates. Over the coming years, data gathering will enable us to analyze the inclusion of foundation assets over time. For now, we can only gather that, across the rating spectrum, college and university foundations maintain material cash and investments.

In fiscal 2021, robust market returns bolstered the cash and investments of public colleges and universities across the sector, elevating financial resource metrics after years of relative stability. In fiscal 2022, market volatility generally pared back some of those fiscal 2021 gains, although we observed that some highly skilled endowment and investment management teams preserved and even improved on fiscal 2021 growth. Most public colleges and universities saw investments contract year over year but experienced generally healthy operating results and strong fundraising that yielded positive growth in financial resources by the end of the year. However, growing expense pressures and a return for many to full on-campus instruction in fall 2021 led to a rapid rebound in operating expenses. Therefore, median cash and investments to operations softened year over year. In addition, with the sectorwide decline in total debt outstanding, cash and investments to debt also improved in fiscal 2022.

Chart 10

Debt metrics stabilized overall

Over the past two years, low interest rates and high investor demand motivated many public colleges and universities to refund older, relatively expensive debt and accelerate capital projects. As a result, median total debt outstanding rose 9% in fiscal 2020, and another 4% in fiscal 2021. In fiscal 2020, with interest rates at their lowest levels in many years, 'AAA' through 'BBB' rating categories saw marked increases in median total debt outstanding, with only speculative-grade institutions recording a decline. By fiscal 2021, many institutions that sought to enter the market had already done so, resulting in declines in median total debt outstanding across all rating categories aside from 'AAA'. In fiscal 2022, median total debt outstanding fell 0.2% to $355.8 million. However, higher-rated institutions in the 'AAA' and 'AA' categories saw debt continue to climb during the year, the result of some making last-minute issuances ahead of rate hikes, but also the result of a recent accounting change that immediately affected public colleges and universities. With the implementation of GASB Statement No. 87, Leases (GASB 87), effective for periods subsequent to June 15, 2021, many public colleges and universities, particularly comprehensive institutions or those in major metropolitan areas, saw a material increase in lease liabilities in fiscal 2022.This increased liability does not reflect new leases, but rather updated accounting for those leases.

Importantly, the accounting change also resulted in changes to maximum annual debt service (MADS) trends across the sector. For many years, median MADS as a percent of operating expense has been somewhat linear across the sector, with the 'AAA' rating category reporting the lowest percentage, and the 'BBB' rating category often recording the highest. However, with material debt issuances from high-rated institutions over recent years and GASB 87 disproportionately affecting these same institutions, the cross-rating-category dynamic for median MADS as a percent of operating expense has shifted for fiscal 2022. Finally, across the sector, total debt per FTE enrollment rose for the fifth consecutive year, reaching $19,554 in fiscal 2022. For higher-rated institutions, however, FTE enrollment increases in fall 2021 offset additional debt reported in fiscal 2022, leading to declines in the metric for the 'AAA' and 'AA' rating categories.

After slowly rising for more than five years, median average age of plant declined in fall 2022, fueled by modest improvements across 'AAA' and 'AA' rating categories. As discussed, the low-interest-rate environment led many public colleges and universities to accelerate capital projects, some of which might have already come to fruition in fiscal 2022. We expect 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.

What We're Watching

Increasing competition

U.S. public colleges and universities are competing against each other, in addition to private, for-profit, two-year, vocational, online, and other institutions for fewer high school graduates. We anticipate public institutions will continue efforts to attract nontraditional, graduate, and international students to offset the lower number of expected traditional domestic high school graduates.

Pension and OPEB funding

While favorable investment returns bolstered the funding status of many state pension plans in fiscal 2021, these gains were largely pared back in fiscal 2022, with the funding of many plans approaching fiscal 2020 levels. Given this reversal, we expect actuarially required pension contributions at many institutions will rise over the near term, which could stress institutions with limited operating flexibility.

Operations after relief funding

As public colleges and universities exhaust remaining federal relief funds, we expect operating performance, which has been positive in recent years despite a very challenging environment, will face some pressure. As operating revenues shrunk at many institutions during the height of the pandemic, some financially prudent senior leadership teams sought out operating efficiencies, made expense reductions, and put themselves in a position to excel after all federal relief funds were recognized. Others, however, faced a difficult operating environment in fiscal 2023, particularly given rising competition, a tight labor market, and inflationary challenges persisting.

State support

We expect state support for higher education will generally remain solid over the near term as state legislatures deploy excess federal relief funds distributed throughout the pandemic. According to the State Higher Education Executive Officers Association's annual Grapevine survey, state support for higher education hit $112.3 billion in fiscal 2023, up 6.6% from the previous year and up 27.5% over the past five years. For fiscal 2023, 38 states reported year-over-year increases in combined state and federal stimulus funding, with 14 states increasing support by more than 10%. Importantly, however, 45 states recorded year-over-year increases in state support excluding federal stimulus, indicative of, perhaps, renewed prioritization of higher education by state lawmakers and the recognition that, in many states, public higher education funding is relatively lower than it was before the Great Recession. We note, the amount of federal relief funds remaining in state coffers and the states' plan to distribute those funds to public higher education institutions beyond the short term are factors that vary significantly state to state. Across the board, however, state fiscal 2023 results and fiscal 2024 budgets suggest that two consecutive years of budget surpluses have generally positioned states well for what S&P Global Economics suggests could be a shallow slowdown over the next year. See "Economic Outlook U.S. Q3 2023: A Sticky Slowdown Means Higher For Longer" published June 26, 2023.

Capital investments

Changes in total enrollment, shifts to virtual instruction, and remote work are causing institutions to revisit campus master plans. As the cost of debt has increased, colleges and universities might 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 profiles, as we continue to see bifurcation of credit quality within the sector.

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