Fitch Affirms New Mexico State University's Revs at 'AA-'; Outlook Stable
The Rating Outlook is Stable.
SECURITY
Improvement revenue bonds are special obligations of the Regents of NMSU, payable from gross revenues of the university. State appropriations, ad valorem taxes, and restricted grants and contributions are specifically excluded from the pledge. There is no debt service reserve.
KEY RATING DRIVERS
STATE SUPPORT: NMSU's 'AA-' rating is supported by its position as one of three public research universities in New Mexico, its role as the state's designated land-grant institution, and a history of state capital and operating support to its five campuses.
ENROLLMENT PRESSURES: Full-time equivalent (FTE) enrollment has declined roughly 10% since fall 2009 (fiscal 2010) at NMSU, which is a state-wide trend. This is due in part to fewer high school graduates and some competition from a recently strong state economy and the oil-gas industry. While management is focusing on retention and admissions strategies, and to date has managed finances effectively through the decline, this is a rating concern.
MIXED OPERATING PERFORMANCE: The rating reflects modestly negative GAAP operating results in fiscals 2014 and 2013, but positive cash-based operations (before depreciation expense). NMSU is managing expenses in light of declining enrollment, and has benefited from modest increases in state operating appropriations. Institutional maximum annual debt service (MADS) coverage was positive 1.8x in fiscal 2014.
LOW DEBT BURDEN: The university's fixed rate debt is conservative with a declining debt service structure, and a low MADS burden of about 3% of fiscal 2014 operating revenues. Additional debt plans are modest and manageable.
ADEQUATE BALANCE SHEET CUSHION: NMSU's balance sheet ratios are consistent with peer Fitch-rated public universities. Fiscal 2014 available funds (AF; defined as unrestricted cash and investments) was somewhat low at 25% of operating expenses, but strong relative to pro forma debt (85%).
RATING SENSITIVITIES
MAINTAIN STABLE OPERATIONS: Maintenance of positive budgetary operations, which drives positive cash-flow and institutional debt coverage, is important given expectations of modestly negative GAAP operating margins going forward. Continued state operating support is also an important rating factor for NMSU. While Fitch expects NMSU to effectively manage operating expenses, significantly worsening GAAP operating deficits could pressure the rating.
ENROLLMENT: Enrollment declines are a continuing rating concern, although the university has managed its operations and expenses effectively through the current demographic cycle. To support the rating over time, NMSU needs to demonstrate stable or growing net tuition revenue.
BALANCE SHEET STRENGTH: Preservation of balance sheet ratios consistent with peer public 'AA-' universities is also needed to support the rating.
CREDIT PROFILE
Founded in 1888, NMSU is the state's designated land grant institution. The university consists of the main campus in Las Cruces, New Mexico (with about 13,575 FTE students in fall 2014) and four branch community college campuses (about 7,740 FTE students). FTE enrollment has declined since fall 2009 (fiscal 2010) at the Las Cruces campus, and since fall 2011 at the community colleges, for a total decline of about 10% over the period. This is due to fewer high school students, as well as job competition in the region's oil and gas industry. Approximately 70% of NMSU students are residents of New Mexico.
About 90% of students at the various campuses are undergraduates. Professional programs at the Las Cruces campus include engineering, business, nursing, public health, and science and agriculture programs supporting its land grant mission. The university's management has stabilized, with a new president and provost in place in the last two years. Under the main campus's strategic plan, management focus is on academic excellence, improved retention and graduation rates, enrollment growth, improving diversity, promoting research, supporting state and regional economic development and expense management.
A partnership has been announced with the Burrell College of Osteopathic Medicine, which will locate its medical school on the Las Cruces campus. The school is described by NMSU management as freestanding, privately funded, separately licensed and independently operated. The first class is planned for fall 2016.
SLIGHTLY NEGATIVE GAAP OPERATIONS
The fiscal 2014 operating margin, as adjusted by Fitch, was negative \$8.7 million, and slightly negative on a full accrual basis. This was comparable to fiscal 2013, with an adjusted negative \$6.8 net operating result, or a modestly negative 1.3% margin. Operations have been pressured by enrollment declines, but benefited from increased state aid. Also, like many public universities, NMSU does not budget for depreciation expense. On a cash-basis, before depreciation expense of about \$32 million, fiscal 2014 operations were positive, as they were in 2013. This is demonstrated by MADS coverage (on an institution-wide basis) in fiscal 2014 being about 1.8x, which Fitch considers acceptable. At this time, management reports that the fiscal 2015 operating budget remains balanced, and similar GAAP operating results are expected.
NMSU's revenue diversity provides some operating flexibility. Major operating revenues in fiscal 2014 include grant and contract revenues (a mix of research, land grant programs and scholarships at 39%), state operating appropriations (36%), and student tuition, fees and auxiliary revenue (17.5%). Federal grant and contract income has been pressured somewhat due to federal sequestration and the end of ARRA research grants; research expenditures dipped from \$119 million in fiscal 2011 to \$107 million in fiscal 2014, about 10% overall. Management reported that one long-running federal research grant will not be renewed, with fiscal impact starting in fiscal 2016; expense reductions will be enacted to closely match grant revenue.
State operating appropriations, a significant component of university revenue at 36%, increased about 5% in each of fiscal years 2013, 2014 and 2015, following three years of cuts. Fiscal 2015 appropriations of \$205 million are almost back to fiscal 2009 levels of \$211 million. Management expects a modest increase in fiscal 2016, subject to final legislative approval. Student generated revenue (17.5%) is tied to enrollment, and given declines, net tuition and fee income has been somewhat flat in recent years. At this time, management is conservatively projecting enrollment for fall 2015 (fiscal year 2016), and reports that it will again strategically adjust expenses as needed. Positively, state support has increased in recent years, helping to balance enrollment declines. State capital support has also continued, with a general focus on building renovations rather than new construction. Fitch will continue to monitor NMSU's ability to manage effectively through economic and enrollment cycles.
DECLINING ENROLLMENT
Total university headcount in fall 2014 was 26,694, or FTE of 21,313. Of this, 10,865 headcount (7,738 FTE) was at the four community college campuses. Overall enrollment on a FTE basis has declined about 10% since fall 2009, which is a state-wide trend. In recent years declines have been seen at all NMSU campuses. Management continues initiatives for retention, admissions management and marketing, and is initiating a strong advising and monitoring program for fall 2015 freshmen. A new senior admissions manager position is expected to be filled shortly at the Las Cruces campus, which Fitch considers positively. To date, the university has managed through the current enrollment cycle; however, failure to grow net tuition revenue over time will pressure the operating budget, and limit opportunities for academic initiatives.
NMSU saw new student applications at the main campuses increase in fall 2014, up a significant 8,472 from 6,628 the prior year. However, that increase did not translate into new matriculated students. Despite a moderately selective 66% admit rate, first-time freshmen in fall 2014 were 1,862, down about 3% from the prior fall, and down significantly from fall 2009 matriculating freshman of 2,878. Management reports that applications for fall 2015 are again up from fall 2014 levels, and numerous marketing and admissions strategies are being used to support the entering class. From a budget perspective, however, the university is being very conservative on its enrollment projections, which Fitch considers prudent.
New Mexico has a Lottery Scholarship program for resident students that pay full tuition (but not other fees or auxiliary expenses) for students maintaining certain class-loads (15 credit hours per semester) and grade point averages. Most of those scholarship students are at the Las Cruces campus (roughly 44% of undergraduate enrollment). Fitch views this program positively. Even without the program, average tuition, fees, room and board at Las Cruces in the 2014/2015 academic year are about \$14,000, which Fitch considers competitive.
ADEQUATE BALANCE SHEET
NMSU's balance sheet ratios are slim relative to operating expenses, but are stronger relative to debt. AF, defined by Fitch as cash and investments not permanently restricted, totaled \$168 million in fiscal 2014, equal to a modest 30% of fiscal 2014 operating expenses, and a much stronger 105% of pro forma debt (about \$159 million). When Fitch adjusted AF for unspent bond proceeds, about \$32 million, AF is a lower \$135 million, or 24.5% of expenses and 85% of pro forma debt. This compares to adjusted fiscal 2013 AF of about \$132 million, equal to 24% of expenses and 92% of then-outstanding debt. Fitch considers these ratios to be comparable to other Fitch-rated 'AA-' public universities.
These AF ratios do not include restricted endowment, held either at the NMSU level or at its foundation. At June 30, 2014, endowment investments were \$109 million at the university, and about \$113 million at the NMSU foundation. The majority of these endowments were restricted.
LOW DEBT BURDEN
Fitch views NMSU's relatively low debt burden favorably. MADS debt burden in fiscal 2014 was \$17 million, equal to about 3% of fiscal 2014 operating revenues. Additional debt plans are moderate, in Fitch's view. Management expects that \$8.5 million of parity bonds could be issued in late calendar 2015 for student housing renovations. Other capital plans are largely driven by state-supported capital programs, either funded from state-issued GO bonds or severance taxes. State capital grants between 2010 and 2014 were about \$63 million; state grants in fiscal 2015 are projected at about \$48 million. Relatively stable state support for university capital projects is a positive credit attribute.
University debt service is all fixed rate, and has a conservative declining debt service structure. This structure contributes to a low debt burden, and provides some debt capacity.
NMSU completed a capital campaign in 2010, raising about \$258 million in gifts and pledges. With a new president and provost since 2013, as well as a new Vice President for development hired in 2014, fundraising activities are expected to increase. At this time NMSU is not in an active comprehensive campaign.
Fitch affirms the following ratings:
--\$7.12 million NMSU refunding and improvement revenue bonds, series 2006 at 'AA-';
--\$66.9 million NMSU refunding and improvement revenue bonds, series 2010A,B,C,D at 'AA-';
--\$53.3 million NMSU refunding and improvement revenue bonds, series 2013A,B at 'AA-'.
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