Moody's cuts credit rating for Pennsylvania state colleges

Moody's Investors Service has cut the credit rating on $1.5 billion borrowed by West Chester University, Cheyney University, and the 12 other Pennsylvania State System of Higher Education colleges to Aa3, from Aa2.

The state-owned colleges face "weakening state support" under Gov. Corbett, along with "declining enrollment" - the number of full-time students dropped below 107,000 this fall, from 112,000 a year ago - and "weak" applications from feeder high schools, especially in depressed parts of Western Pennsylvania. Moody's also cited "political limitations on the system's ability to raise tuition and fees, and challenges in reducing expenditures" under negotiated labor contracts.

Moody's separately cited "demographic decline," along with expected multimillion-dollar payments from the Jerry Sandusky child sex-abuse case, in cutting Pennsylvania State University's bond rating a notch, to Aa1. The rating service previously had warned that a downgrade of the state-related university was likely.

The state-system schools face "very large and growing liability" for unfunded pensions and health-care benefits promised to retired professors and other staff, along with the Commonwealth of Pennsylvania's credit-rating downgrade last July, which left the state rating at Aa2, Moody's added.

The state-owned colleges' debt load has risen significantly since 2004, partly because of new dormitories built at local campuses to lure more students. The debt contributes to the colleges' "high leverage" compared with tuition income and other revenues. Still, Moody's concluded, current cash flow is enough to make bond payments.