University acquisition could tarnish Idaho’s rating

Idaho is in good shape, which is good news for consumers. But a recent report from Moody’s Ratings warns of a potential risk.

On March 4, Moody’s, the bond credit rating division of Moody’s Corporation, issued a report detailing the financial shape of the Gem State. However, the acquisition of the University of Phoenix by the University of Idaho could downgrade its rating.

In its report, Moody’s summarized Idaho’s AAA rating, stating that it “maintains a very strong credit position supported by a growing economy, healthy and stable finances, and low leverage and fixed costs. Idaho continues to be one of the strongest economic performers in the U.S. It ranks at or near the top of all states in terms of growth in population (including of prime working age residents), employment, GDP and income. The state’s economic expansion has driven significant growth in revenue over the past few years, which has supported growth in reserves and fund balance.”

The report stated that Idaho’s strong reserves are on pace to further increase in the current fiscal year, which will help the state weather any economic downturns.

It also stated that Idaho has one of the “lowest long-term liabilities burdens” of all the states in the nation, despite upcoming debt.

“The state will issue more debt in the coming years, particularly to finance expansion of and improvements to its transportation system, but this will not have a material impact on its credit profile given both the state’s currently low debt burden and likely further growth in the economy and revenue base. Similarly, fixed costs will remain low, and these low costs will continue to be a source of long-term operating flexibility for the state.”

However, the University of Idaho’s acquisition of the online school University of Phoenix could pose a risk to the state, the report detailed.

The report was presented to Idaho’s Credit Rating Enhancement Committee, which advises Gov. Brad Little and the Legislature on polices and actions to “enhance and preserve” the state’s credit rating. That in turn keeps low-cost financing available.

“Idaho taxpayers will pay increased costs if there is a downgrade to Idaho’s credit rating,” said Idaho State Treasurer Julie Ellsworth, chair and committee.

The Moody’s report stated, “The potential acquisition of the University of Phoenix, the for-profit university, by an entity related to the University of Idaho (A1 rating under review for possible downgrade) presents some operating risk to the state. … Because the university is a wholly owned business-type enterprise of the State of Idaho, the risks it assumes could become operating risks of the state.”

According to the report, University of Idaho is establishing a nonprofit organization which could issue nearly $700 million in bonds to finance the acquisition, then take on the task of managing University of Phoenix.

“The University of Idaho may guaranty a narrow portion of the annual debt service on the bonds. At the same time, as the sole member of the nonprofit organization, the University of Idaho could be exposed to significant operating risk even if its responsibility for debt service is strictly limited to the narrow guaranty.”

Because Idaho is in such good shape, the report added, the $700 million would be modest in comparison to the state’s revenue base and economy. The debt issuance would also not be a direct obligation to the state.

“However,” the report read, “any increased operating stress at the University of Idaho could result in greater fiscal support from the state given the close relationship between the two.”