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Budget Cuts Result in Moody’s Three-Step Downgrade to UA’s Credit Rating

Jul 17, 2019 | Monitor

FAIRBANKS—The credit rating committee of Moody’s Corporation decided to downgrade the credit rating of the University of Alaska from its current A1 rating to Baa1 with a negative outlook. In informing the university of the action, the committee said the downgrade is a result of the “material impairment” on the university’s financial outlook as well as the “significant execution risk,” caused by the significant reduction in state funding.

The decision drops UA’s credit by three notches, which now makes UA the second lowest rated flagship university in the nation.

“This is a direct result of the state’s budget cut and demonstrates what we have been saying—the 41 percent [$136 million] budget cut to the university continues to harm us every day,” said UA President Jim Johnsen. “Today’s news just amplifies the impact of the state’s funding cut—Moody’s downgrade harms our ability to bond or borrow money at favorable interest rates and to be viewed as financially stable.”

According to the information provided to the university, there has never been a three-point drop at one time in Moody’s institutional rating, and, more significantly, a rating of Baa1 is just two notches from being viewed as a non-investment grade debt.

If the Board of Regents votes to declare financial exigency, allowing more rapid downsizing, it would not impact today’s downgrade, Johnsen said, but it could change Moody’s outlook for UA to be more favorable.

UA currently has financial indebtedness on several of its buildings including the UAF Engineering Building, the UAA University Center, and the UAF Power Plant.

In its rationale for cutting the university budget, the governor’s Office of Management and Budget cited a 2017 Moody’s downgrade in UA’s bond rating. However, that downgrade was precipitated by the state’s poor financial condition and structural imbalance, and the state received a number of downgrades during that period.

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