OREANDA-NEWS. Fitch Ratings assigns an 'AA+' rating to the University System of Maryland's (USM or the System) \$95.075 million auxiliary facility and tuition revenue refunding bonds (AFTRB) series 2015A.

A competitive sale is expected on Feb. 18, 2015. Bond proceeds will refund all or part of the series 2005A and 2008A AFTRB debt for savings.

In addition, Fitch affirms the 'AA+' rating on approximately \$1.136 billion outstanding parity AFTRBs.

The Rating Outlook is Stable.

SECURITY

AFTRBs are a limited obligation of USM, payable from pledged trust estate revenues which are primarily tuition revenues and net auxiliary revenues.

KEY RATING DRIVERS

STABLE CREDIT CHARACTERISTICS: The 'AA+' rating reflects an overall stable credit profile, including a history of balanced operating performance, solid financial resource base for the rating category and stable enrollment. Fiscal 2014 operations were break-even largely due to non-recurring expenses and a mid-year appropriation cut.

STRONG STATE RELATIONSHIP: As the state of Maryland's (general obligation debt rated 'AAA' by Fitch) sole public university system, USM shares responsibility for the state's educational and workforce goals. The state has provided consistent capital and operating support to the system over time as a result of this linkage, which is a key credit strength.

CONSERVATIVE DEBT MANAGEMENT: Ongoing system capital needs to support infrastructure and provide enrollment capacity, with substantial state and cash capital funding resulting in modest expected annual debt issuance. Debt is conservatively structured, managed prudently with internal policies and a legislative debt limit, and represented a low 3% maximum annual debt service (MADS) burden in fiscal 2014.

RATING SENSITIVITY:

STABLE CREDIT PROFILE: USM's rating is sensitive to continued state operating and capital support, as well as continued positive operating performance.

CREDIT PROFILE

Established as a system in 1988, USM consists of 11 universities and one research institute. The system's flagship campus is located in College Park, MD, approximately 30 minutes outside of the District of Columbia. The University of Maryland - Baltimore (UMB) is the oldest member institution (est. 1807) and offers many professional and graduate education programs, including the system's medical, dental and pharmacy schools, and one of two law schools. The separately secured University of Maryland Medical System (revenue bonds rated 'A') is located at UMB. Three of the system's campuses are historically black institutions. Research is significant system-wide, with \$925 million of research expenditures reported in fiscal 2014, a similar amount as 2013.

System enrollment was 168,126 in fall 2014. The fastest growing institution is the on-line UM University College, with fall 2014 enrollment of 54,032, which is primarily non-traditional undergraduate and graduate students attending on line or at U.S. or international academic sites.

Positive Operating Performance

USM's 'AA+' rating is supported by a history of strong operating performance; the system reported an average surplus of 3% between fiscals 2009-2013. Fiscal 2014 operating results, however, were at break-even, as adjusted by Fitch, due to one-time expenditures, expense increases, and a mid-year state appropriation cut. These included an athletic conference exit fee, return of fund-balance to state government to avoid appropriation reductions, salary increases, and a mid-year appropriation cut. This is in contrast to a positive fiscal 2013 operating surplus of \$128 million (2.9% operating margin). Institutional MADS coverage in fiscal 2014 remained solid at 2.4x, compared to 3.1x in 2013.

Fiscal 2015 operations are again tight, but management projects a modest surplus. The university's initial 2015 operating appropriation (\$1.24 billion) was reduced by \$40 million and additional cuts are possible. The system has initiated cost containments, and in addition to a general 3% tuition increase for fiscal 2015, USM implemented a mid-year increase at four campuses. The system still expects to add modestly to its general fund balance.

System operating flexibility comes from a diverse revenue mix. Major fiscal 2014 operating revenues include student-generated revenues (39%), grants and contracts (23%) and state appropriations (24.5%).

Stable Enrollment

Tuition revenue is underpinned by solid enrollment. System headcount for fall 2014 was 168,126, up from 153,444 the prior year. The increase is partially due to an administrative change, whereby about 7,000 students taking on-line courses internationally are now counted in system enrollment. Growth was recorded for the UM University College, rebounding from declines in fall 2013, influenced in part by the October 2013 federal government shut-down (many UMUC students are older, non-traditional and live in the DC metro area). Management expects modest system enrollment growth to continue longer term.

State Support

State operating appropriations have historically represented about 24% of operating revenues. Despite modest or no growth in audited appropriations in recent years, Maryland initially increased fiscal 2014 operating appropriations a significant 9.7%, but then implemented a mid-year cut. Fiscal 2014 appropriations still increased a net 3%, to \$1.103 billion. The system periodically returns fund balance to the state to avoid base appropriation reductions, and that was done in both 2014 and 2015.

For the current fiscal year, 2015, the system absorbed another mid-year cut, but still projects a net increase close to 8% over 2014 (but below initial budget expectations). The proposed Maryland 2016 budget indicates a very modest increase for USM.

Separately, the state has a history of funding academic capital projects from grants or state GO bond proceeds, at levels that have ranged from \$180 million to \$150 million in each of the last five fiscal years. At this time, management projects that state capital funding will continue close to historical levels in the next several years, which Fitch considers a credit strength.

Solid Balance Sheet

The system's balance sheet cushion has grown over time due to operating surpluses and, to a lesser extent, favorable general market returns. Fitch views balance sheet ratios as consistent for the rating category. Available funds (AF; defined by Fitch as cash and investments less certain restricted net assets), was \$1.8 billion in fiscal 2014, down from \$2 billion in 2013 in part due to planned cash-funded capital projects and state appropriation give-backs. AF ratios equaled 41% of fiscal 2014 operating expense and a stronger 147% of outstanding debt.

Fitch's balance sheet ratios exclude significant foundation assets. The three largest component foundations, USM Foundation, USM College Park Foundation and USM Baltimore Foundation, had net assets at June 30, 2014 of \$947 million, of which about \$110 million was unrestricted. Foundation assets are not used for system operating cash flow, and are invested by the foundations in equities, alternative investments and fixed income.

Fundraising is primarily managed through the system's foundations, and as such most gifts and pledges are not reflected on the system's balance sheet, but on those of the component unit foundations. The system reported fundraising results of \$303 million in fiscal 2013, and \$257 million in fiscal 2014. The system is not currently in a comprehensive campaign.

The available funds-to-debt ratio above excludes \$333 million of non-recourse student housing debt. Including this debt, USM's fiscal 2014 available funds-to-debt ratio would weaken slightly to about 117%, which Fitch still considers adequate for the rating category.

Conservative Debt Structure

The system's debt burden is low, with a pro forma MADS burden (\$137 million) of about 3% based on fiscal 2014 operating revenues. The majority of debt is parity AFTR bonds. USM's debt structure is largely serial fixed rate, with a rapid 20-year amortization. A revolving loan program with \$35 million outstanding is the system's only variable-rate debt. This program is subject to a mandatory tender in 2018, at which time system management expects to either retire the balance with available funds or remarket.

As discussed above, USM has \$333 million of non-recourse public-private partnership debt related to housing at its various institutions. However, system management expects to enter into a debt service coverage agreement in relation to about \$29 million of outstanding UM-Baltimore non-recourse housing bonds. At that time Fitch will include related debt in USM's debt ratios, which is not expected to be a material change given the rapid amortization of parity AFTRB debt and existing manageable debt burden.

The system is subject to a legislative debt cap of \$1.4 billion for AFTRB debt and other long-term debt. The current outstanding debt relative to that cap is approximately \$1.2 billion. Fitch notes that AFTRB principal amortizes rapidly over 20 years, with the system retiring over \$75 million of debt annually. System management does not expect to issue new debt in fiscal 2015, or well into fiscal 2016. Fitch views the system's conservative policy of maintaining a low debt burden positively.