NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'AA' rating on approximately $59.7 million of Montgomery County Revenue Authority (MCRA) lease revenue bonds (the bonds) issued on behalf of Montgomery College (MC), consisting of:
--Tax-exempt and taxable lease revenue bonds (Montgomery College Goldenrod Building Acquisition) series 2011A and series 2011 B;
--Lease revenue bonds, series 2008 A;
--Lease revenue bonds, series 2005 A.
The Rating Outlook is revised to Negative.
SECURITY
The series 2011 A and B bonds are secured by general obligation of the college. The series 2008 A are secured by transportation fee revenues, and the series 2005 A bonds are secured by facility fee revenues. The series 2008 and series 2005 are additionally secured by a debt service reserve funded to maximum annual debt service (MADS).
KEY RATING DRIVERS
RATING AFFIRMED: The 'AA' rating is underpinned by MC's vital role in the Montgomery County, MD economy (the county; rated 'AAA'/Stable by Fitch), strong and consistent support from the state of Maryland (the state, also rated 'AAA'/Stable), increasing enrollment and adequate liquidity relative to debt. Counterbalancing factors include a history of negative operating performance, which further weakened in fiscal 2012, heavy dependence on state and county appropriations to drive the operating budget and inadequate coverage of maximum annual debt service (MADS) on the bonds.
SPECULATIVE IMPROVEMENT PLAN: The Negative Outlook reflects Fitch's view that the currently projected fiscal 2013 results and fiscal 2014 operating budget plan still result in a material accrual (GAAP) basis deficit, lower than fiscal 2012 but higher than in prior years, driven by escalating expenses combined with optimistic revenue assumptions which could exacerbate the existing imbalance. The assumptions underpinning the fiscal 2014 budget include modest improvement in tuition and fee revenues and improved state and county funding levels, which are counterbalanced by salary and benefit increases, coupled with the impact of the college's un-budgeted depreciation expense.
STABLE DEMAND: Consistent demand trends, with moderate annual growth, provide stable revenue support necessary to offset volatility in state and county funding in recent years. The college continues to meet its enrollment projections.
LIMITED BUT ADEQUATE LIQUIDITY: MC's growing liquidity continues to provide a limited cushion relative to operations, a feature not uncommon among community colleges. Available funds provide sound coverage of pro forma debt which is viewed favorably by Fitch and meets expectations for the 'AA' rating.
LOW DEBT BURDEN: The majority of MC's capital projects in recent years have been funded by state and county appropriations resulting in the college's very low MADS burden, despite diminished capital support in fiscal 2011 and fiscal 2012. However, weaker operations have resulted in maximum annual debt service (MADS) coverage from unrestricted operating revenues of under 1.0 times (x) which further supports the negative outlook.
RATING SENSITIVITIES
OPERATING IMBALANCE: Failure to meet operating expectations on a GAAP-basis, as presented in fiscal 2013 estimates provided to Fitch, and inability to show incremental progress in moving toward balanced operations in fiscal 2014 could negatively impact the rating.
STABLE ENROLLMENT: A material decline in enrollment driving deterioration in student-generated revenues without a corresponding growth in other revenue sources to fund operations could adversely impact the rating.
CREDIT PROFILE
MC is a two-year academic institution offering 75 associate degree programs and 60 certificate programs. In operation for more than 60 years, it is the second largest higher education institution in the state, after the University System of Maryland (tuition revenue bonds rated 'AA+'). The college operates three campuses located throughout the county in Takoma Park/Silver Spring, Rockville, and Germantown. Headcount enrollment at the college has increased 12.3% since fall 2008, reaching 27,453 in fall 2012.
HEAVY RELIANCE ON STATE AND COUNTY APPROPRIATIONS
The college fills an integral position in the higher education system of the state and the economic operation of the county. Local support from the state and county is a key revenue source for the college accounting for 54.2% of operating revenues in fiscal 2012, down from 58.2% in fiscal 2011. Appropriations at both the state and county level declined a total $4 million in fiscal 2012 versus $8.7 million in fiscal 2011, which is indicative of the tough fiscal climate affecting state and local budgets nationwide. The state and county have also historically provided significant capital appropriations (totaling $228.6 million over the past five years) to mitigate MC's space deficiency, which has contributed to a very low debt burden of 1.8%. The capital appropriations have also shown pressure, with capital appropriations declining $5.6 million, or 13.6%, in fiscal 2012 versus $14.6 million, or 26.2%, in fiscal 2011. Estimates for fiscal 2013 reflect modest improvement in support for operations (1.6%, or $2.3 million) with more significant growth expected for fiscal 2014, close to 4.4% or $6.3 million, from both the state and the county.
Student-generated revenues account for 29.1% of the college's generally stable and increasing revenue base. The decline in state and county appropriations is mitigated somewhat by the increase in tuition and fee revenues (net of institutional aid), which increased 3% to $64 million in fiscal 2012 due to stable demand and increasing tuition rates. Estimates for fiscal 2013 reflect strong growth (8.1%) in net tuition and fee revenues to $69.1 million due to growth in enrollment and a modest tuition rate increase. Further, federal grants and contracts more than doubled in the past five years to $35.5 million, accounting for a growing portion of operating revenues (13.5%), largely due to increased funding for federal pell grants ($30.4 million), and also due to increases in national science grants for stem programs and allied health programs. Fitch views positively the growth and consistency in both student-generated revenues and federal grants and contracts.
DEMAND PROVIDES STABILITY
Stable demand trends reflect moderate average annual growth of 2.2% in FTEs from 2008-2012. The college consistently meets its projections for enrollment credit hours and benefits from partnerships with other higher education institutions in the state to allow students to easily transfer from associate degree programs into baccalaureate degree programs. Enrollment credit hours in fiscal 2012 grew to 541,309 versus projected 535,781 and fiscal 2013 projections reflect continued growth to 548,803 credit hours.
The college is the largest feeder source into the University System of Maryland and has articulation agreements with all of the state's public institutions to encourage students to pursue Baccalaureate degrees. The top three transfer institutions are UM College Park, UM University College, and UM Baltimore County. County residents' tuition and fees at MC is approximately 56% of the average for in-state public institutions making it an affordable option at $4,452 for the 2012-2013 academic year. Fitch views MC's market position positively given the strong metropolitan service area it serves.
GROWING OPERATING DEFICIT
MC's annual operating margin (on a GAAP basis) continues to demonstrate a systemic mismatch between annual revenues and expenses. The college has historically generated annual operating deficits when including capital fund expenses not capitalized to support facility needs and annual mandatory funding of other post-employee benefit (OPEB) liabilities. MC's operating deficit grew to -9.1% in fiscal 2012 from -4.1% in fiscal 2011, providing an average annual deficit of -3.2% over the past five fiscal years. Excluding non-capitalized expenses ($8.1 million) from operation and maintenance of plant, MC's adjusted operating deficit improves to -5.8% in fiscal 2012 and is closer to break-even in fiscal 2011 and fiscal 2010. The growing deficit in fiscal 2012 is attributable primarily to weakened state and county appropriations and a one-time bonus payment made to employees. Additionally, the county requires the college to reserve monies from the current budget to fund future budgeting periods which could impact operations.
Fitch views the college's eroding margin in fiscal 2012 as a key credit concern and the college's continued imbalanced operating profile is the primary driver of the Negative Outlook. Indications for fiscal 2013 indicate potential for improvement. Estimates reflect an improved margin of negative 5.7% (or -2.2% on an adjusted basis) due to increased revenues from student-generated revenues and improved state and county appropriations. Expenses stabilized as a function keeping payroll costs down with no salary increases or added positions and implementation of an early retirement program in fiscal 2012. The college also decreased non-essential costs in communications, travel and utilities. In the event estimates do not materialize in fiscal 2013, and the college fails to move toward balanced operations in fiscal 2014, inclusive of non-capitalized expenses, a negative rating action is likely to occur. To maintain the 'AA' rating, Fitch expects sustained improvements in the college's operating margin, inclusive of the non-capitalized expenses, annually required OPEB contributions and non-budgeted items including depreciation.
OPERATIONS IMPACT DEBT COVERAGE
The college's weakened operations in fiscal 2012 resulted in negative net income available for debt service, providing negative 1.7x MADS coverage after historically adequate coverage of 1.1x in both fiscal 2010 and fiscal 2011. However, coverage is somewhat understated because debt service on the series 2011 A and B bonds is approximately equal to annual lease payments currently paid for use of the facility purchased with bond proceeds and operating revenues from the county's lease payments (guaranteed for the term of the bonds) offset approximately 50% of combined debt service under the lease agreement. Further, the mandatory fees pledged to both the series 2005 bonds ($5.00 per credit hour facilities fee) and the series 2008 A bonds ($4.00 per credit hour transportation fee) are anticipated to generate 1.15x coverage and 1.82x coverage of actual debt service on the respective obligations in fiscal 2012. In addition to student transportation fees, other revenues pledged to debt service on the series 2008A bonds include faculty parking fees, parking fines, and interest earned on the Transportation Enterprise Fund. Projections provided reflect similar coverage levels from these revenue sources in fiscal 2013.
GROWING LIQUIDITY LEVELS
Continued support for capital projects from the county and state have allowed the college to continue to improve its previously somewhat light balance sheet resources. Available funds, defined by Fitch as cash and investments not permanently restricted, grew 1.7% and 22.9% in fiscal 2012 and fiscal 2011, respectively, as state/county funds for capital projects completed or nearing completion were received. Over the past five fiscal years, available funds have increased a total of 73.7% to $89 million.
Despite the recent improvements, available funds represent just 30.9% of total operating expenses, somewhat low for the 'AA' rating. However, due to the college's low debt burden, available funds represent a more robust 149.1% of total long-term debt. MADS, which totals $4.6 million due in fiscal 2028, on all of MC's outstanding bonds represent a very low 1.8% of fiscal 2012 operating revenues which is viewed favorably by Fitch.
The college expects to issue debt for approximately $16 million in the next 18 months to fund construction of a parking garage payable from a mandatory transportation fee pledged to the bonds on parity to the series 2008A bonds. Available funds as a percentage of total pro forma debt drops slightly to 117.6% if we conservatively include the college's additional debt plans. Fitch stills finds this level to be adequate to maintain the 'AA' rating.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Revenue Supported Rating Criteria' (June 3, 2013);
--'U.S. College and University Rating Criteria' (May 10, 2013);
--'Fitch Rates Montgomery College (MD) Lease Revs 'AA'; Outlook Stable', dated June 29, 2011.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=709499
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=708049
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793816
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