Credit ratings fall, but sense of optimism remains

12 mins read

by Inji Kim

The Moody’s Investor’s Service recently downgraded the University’s revenue bonds to Ba3 from Baa3. The University’s credit outlook is negative since the rating is classified as junk bonds in Wall Street. President Baenninger sent students a detailed email to ensure them that this will be fixed. NJ.com published an article about the fall in ranking called “Pricey N.J. college gets stung by credit agency junk rating”, followed by a 146 comment thread with the top three comments asking why anyone would pay so much money to go to a liberal arts college. The Student Government President wrote a long post on Facebook elucidating some facts and additional questions that were raised by the article. This is a serious issue that students across campus are currently grappling with.

“I tried to read the article and the email, but I didn’t understand much,” said Ryann Callaghan (’19), and many Drewids seem to share her stance when it comes to understanding the complicated financial ratings of the University. Still, “junk rating” sounds pretty bad, especially if it is one of the words that define the college that you are attending. So what should you know about the salient series of events regarding the University’s finance? One of the comments in the NJ.com article summarizes the general climate of the comment thread, “The higher education bubble is about to burst.” Do the Drewids think ratings truly reflect what they are experiencing? As students, how do we address the general skepticism raised towards institutions like Drew?

First of all, Moody’s is a bond credit rating business that ranks the creditworthiness of borrowers by measuring expected investor loss in the event of default. The ratings are issued for financial lenders to help them make decisions about lending money to borrowers. Rohit Nagendra (’18) speculated, “Essentially, since the bond rating of the college decreased, it’s going make it harder for Drew to get capital through debt issuances.” So in simpler terms, if Drew was to borrow money in the future, these ratings will make a difference. However, Dean of College of Liberal Arts and Caspersen School of Graduate Studies Christopher Taylor has stated that “Drew is not planning to borrow money from banks or other lenders.” According to Moody’s, Drew has multiple loans and a direct bond placement with TD Bank N.A. The Series 2008I and 2010C Bonds and 2010 TD Bank Loan that are general obligations of the university. Additionally, the report states that Drew is budgeting for extraordinary draws from temporarily restricted funds over the next several years.

What we have to understand when we are trying to grasp the scope of the issue is the fact that this is not a simple, straightforward issue. It took years and years for Drew to reach this point, so obviously it will take awhile for it to be fixed. The Student Government President Jared Sutton (’18) explained, “Financial decisions made by former presidents and the former Board of Trustees (before President Baenninger ) crippled the school economically, including a proposal to cut programs, poor investment strategy during the 2008 Financial Crisis, and having an administrator-heavy organizational structure.” Recent changes by Mead Hall have streamlined the administrator-heavy structure in particular and Sutton was informed that the funds previously used for salaries would primarily go to university improvement.

Aside from the complexity of the issue, what threw off most students when they heard about the change in the ratings was the fact that the only news they have been hearing from the university regarding its financial situations has been pretty positive. “I don’t know, I thought enrollment was increasing and the things were finally being fine, at least that’s what the recent emails stated,” said a graduating student who wishes to stay anonymous. Dean Taylor offered clear and easy to follow answers when similar questions were brought to him in an interview with The Drew Acorn. In contrast to the general shock and ambiguity of the student body after hearing the news, the administration was not surprised that Moody’s lowered Drew’s rating. “In fact we expected it,” said Taylor. “It is true that we have seen success in enrollment, retention, student awards, etc, although we still run a deficit. Moody’s would like to see that deficit eliminated more quickly which is why it lowered its ratings for Drew.”

Taylor continued to explain that Drew’s rating primarily dropped because it has been running annual deficits for several years, “We were also experiencing declines in enrollment (i.e., revenues) when President Baenninger arrived in 2014.” Taylor explained that in order for the President to tackle the revenue issue, major causes of declining enrollment had to be addressed first. One such issue included the university’s notorious dining facilities, an issue that has recently been addressed with the opening of the new University Commons, which resulted in a more stabilized enrollment. But in addressing that problem, the liquid assets declined because the university used them to fix the problems. “The stabilization in enrollments is a move in the direction that will ultimately make Moody’s happy, but they would like to make sure that we can keep that up. In addition, the significant spending we had to do to improve our capacity to generate revenues by attracting students didn’t please Moody’s,” said Taylor. This is a problem that many Drewids pointed out as well. Chris Thurber (’18) said, “The cost savings proposed by the President look promising, but the line referring to tuition as the largest source of revenue for the university is unsettling. While tuition is of course the core source, and rates have risen considerably at the national level for private institutions, Drew is already the second most expensive school in the state of New Jersey.”

President Baenninger’s most recent statement sent out to the student body on March 28 explains several attempts to reduce expenses. The short-term goal of the institution is to find “operating efficiencies and cost savings to substantially reduce the deficit while enhancing academic programming.” Basically what this means is that now that the university has addressed the revenue generation problem, it is turning its attention to the expense side of the equation. “We have a plan to reduce expenses in a strategic way that won’t hurt the academic program. Through growth in our revenue stream made possible by the important investments we made, and now, by careful management of expenses, our Moody’s rating will improve in coming years,” said Taylor.

Though the future of the institution seems promising with a determined faculty continuing to progress towards a sustainable future, many students have noted their slight concerns about the situation. “I’m not worried about the future of the university, but I’m not particularly happy with the situation either,” explained Aylin Unel (’19). Unel noted that she does not think the financial rating reflects the quality of the education she has been receiving. “Though I’m only sophomore, I was able to participate in independent research programs and build strong ties with professors,” an opportunity that is not available for students who choose to go to larger schools. In addition to his previous comment, Thurber also noted the value proposition of the university. “Among the 14 schools to which I was accepted, Drew’s value proposition set it apart from contenders like NYU and Fordham. In addition to its New York semesters, tight alumni network and proximity to NYC, Drew offered the lowest cost of attendance with fantastic employment opportunities for a high return. With tuition in the tens-of-thousands, it is no longer sufficient to say that an education is priceless.”

Drew has now stopped the declining enrollments it was facing before President Baenninger arrived. “We addressed the main issues that were impeding our ability to enhance our revenue stream through a strategic investment plan and that we are now executing a plan that will eliminate our annual deficit, which is the main reason why Moody’s dropped Drew’s rating,” said Taylor. Thanks to growing revenue and cost management, the university anticipates to fix the deficit within the next three years.

Ultimately, Drewids hope the university finds a balance that appeases both students and creditors. Thurber noted that he would like to see that “those involved in such a decision exhaust all other options beyond putting the burden of prior years of mismanagement on students who put their faith in a brilliant institution known to punch well above its weight.” The quality of education and the prompt and clear response from the university regarding the issue are reasons why students remain to place confidence in the institution despite the declined ratings, and it is the university’s task to ensure that the students “never regret for a moment having chosen Drew University,” as President Baenninger stated in her email.

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