Moody’s downgrades University of Alaska credit rating, citing financial challenges

A major credit ratings agency downgraded the University of Alaska’s credit rating Wednesday and called the 41% state funding cut the university system faces “unprecedented.”

Moody’s Investors Service downgraded UA’s rating by multiple grades for general revenue bonds and lease revenue bonds, and the outlook for both is negative, the agency said in a report.

The downgrades reflect “the severity and magnitude of the financial challenges confronting University of Alaska” if Gov. Mike Dunleavy’s budget vetoes stand, Moody’s said.

In dire language, the report warned that UA’s position has been “materially impaired by this funding reduction." Moody’s expects a multiyear negative impact on enrollment as well as on the “competitive position” of UA’s research enterprise.

“With this unprecedented single year cut in state appropriations, there is a high likelihood of a material reduction in the university’s liquidity over the next year as it uses cash to fund programs pending restructuring of operations, and for the associate costs of that restructuring,” the report said.

[University of Alaska governing board delays vote on whether to declare financial emergency]

The downgrade is a direct result of the state’s budget cut, UA President Jim Johnsen said in an emailed statement Wednesday afternoon.

“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," he said.

UA, which includes three separately accredited universities in Anchorage, Fairbanks and Juneau, faces a loss of about $135 million in state funding this year. Dunleavy vetoed an unprecedented $130 million in funding for the university system atop a $5 million cut approved by the state Legislature. In total, that’s about a 41% cut to state funding and roughly 17% of its total budget.

[Budget veto could put University of Alaska at risk of losing accreditation, agency warns]

Moody’s downgraded UA’s general revenue bonds three notches, from A1 to Baa1, and downgraded its lease revenue bonds four notches, from A2 to Baa3. UA currently has financial indebtedness on several buildings. Ratings such as those from Moody’s gauge an entity’s creditworthiness.

Downgrading ratings by several notches at once is “not a frequent event,” Moody’s analyst Diane Viacava said in an interview Wednesday afternoon. She called the rating action on UA “extremely significant” for a university system with a high reliance on state funding.

Such a large state budget cut "is providing them a major blow to operations, requiring them to stop and think and look seriously at how they need to position themselves within the state to function at this type of revenue level,” Viacava said.

Demonstrated ability to quickly and sustainably respond to funding cuts without depleting liquidity could return UA’s outlook to stable, Moody’s report said.

Another major agency, S&P Global Ratings, put UA on watch with “negative implications” in a report issued July 9, the day before the Legislature’s effort to override Dunleavy’s vetoes failed.

“In our opinion, if the governor’s veto passes, the system will face significant operating pressures in fiscal 2020, which would likely require material expense cuts,” S&P’s report said.

The UA Board of Regents on Monday postponed a vote on whether to declare a financial emergency for the system.