For U.S. public colleges and universities, fiscal 2023 tested their financial resilience as demand pressures continued and operating support from emergency federal money was spent by most institutions if it was not already depleted. Although there was more revenue support received from returning to normalized operations, this was more than offset by falling enrollment and increasing inflation. In fiscal 2023, the big differentiator for public institutions was the growth in state support, given improved state credit quality in the past few years. However, this wasn't enough to quell the operating pressures at smaller regional public universities with weaker credit quality. Although the trend was more muted than at private institutions, public colleges and universities continued to reflect bifurcated credit quality: Large flagship institutions with demand elasticity, sound resources, and excellent reputations held on to their strengths whereas regional institutions with weak selectivity and less financial flexibility faced credit stress.

Full details of the medians are available through our interactive dashboard, by clicking here.

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S&P Global Ratings had 145 ratings on U.S. public colleges and universities as of June 1, 2024. The ratings ranged from 'AAA' to 'CC', with more than 80% of institutions rated in the 'A' or 'AA' category, and the 'AAA', 'BBB', and speculative-grade categories consisting of only seven, 13, and two schools, respectively. Therefore, changes in median metrics for these categories might represent the variability associated with a small sample size, rather than wholesale differences in credit quality. Since our last medians report, we have raised the ratings on five public universities. Three of these upgrades reflected the upgrades on the states of Illinois and Ohio (see "U.S. Higher Education Rating Actions, 2023," published Jan. 23, 2024). We raised the ratings on Montana State University and Clemson University this year because the institutions saw positive enrollment trends, consistent surplus operations, and sustained heathy levels of financial resources. Of note, we didn't lower the ratings on any public colleges and universities and revised the outlook to negative on only one entity during the past year.

All data and ratings included in this report are as of June 1, 2024. We excluded the financial data for two institutions that had not yet published a fiscal 2023 audit as of this date. In general, public universities follow standards issued by the Governmental Accounting Standards Board. However, four public institutions report financials according to the Financial Accounting Standards Board (FASB). For comparability, we excluded the financial ratios of public institutions using FASB reporting but included enterprise risk profile data for these schools. Although we rate other types of debt for public colleges and universities, such as housing or other auxiliary-secured debt, the data in this report reflect the underlying credit characteristics of publicly rated universities, colleges, or systems. In addition, while we rate many community colleges and community college systems, we included our ratings on only four-year institutions or systems that primarily constitute four-year programs to maintain data consistency and enable a meaningful comparison between similar entities. 

S&P Global Ratings publishes these medians as general benchmarks to observe broader industry trends. The credit analysis for any institution involves an assessment of qualitative factors that are beyond the scope of this article. Therefore, these medians should not be considered thresholds to achieve a particular rating.

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Enrollment And Demand Medians

Enrollment declines slow across the sector

Fiscal 2023 saw the sixth consecutive year of median declines in full-time equivalent (FTE) enrollment for public colleges and universities, though they were slower than in recent years. The median enrollment drop of 0.7% in fall 2022 was less than the decreases in the previous two years. As public universities recover from the initial impact of the pandemic on enrollment, demographic pressures persist across the U.S., with fewer students graduating from high school each year in several regions.

Despite these pressures, highly selective schools remained insulated from enrollment decreases in fall 2022, with those in the 'AAA' rating category posting a median increase of 0.7% and those in the 'AA' rating categories remaining essentially flat. This represents the solid demand for these schools and their ability to draw from a wider student population than lower-rated, often very regional institutions. Schools in the 'A' and 'BBB' rating categories reported enrollment decreases on a median basis. Across all rating categories, 19 of 145 (13%) institutions saw FTE enrollment slip more than 5%, while 30 (21%) saw two consecutive years of growth; most of them are rated in the 'AA' category or higher. Preliminary fall 2023 data shows enrollment has continued to recover for rated public universities, with a median FTE enrollment change over one year that is stronger than in previous years.

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Since the start of the pandemic, public colleges and universities have faced uncertain demand and a shrinking applicant pool due to changes in the labor market as well as demographic pressures. This has resulted in many institutions choosing to accept more students with the aim of stabilizing their first-year class. Since fall 2020, the median freshman acceptance rate has weakened further, reaching a high of 79.6% in fall 2022 from 75.1% in fall 2020, and 71.8% in fall 2019. The increasing use of the Common Application and the adoption of test-optional application processes at many institutions in recent years have made applying to colleges easier, resulting in an increase in the average number of applications. This, in turn, has affected institutions' ability to matriculate students. Unlike many other metrics, median first-year matriculation fell across nearly all rating categories, reflective of the competition in the sector broadly. Although public colleges and universities are increasingly challenged in getting students to enroll, they have had better success in retaining and graduating them at a steady rate. In our view, these trends reflect enhanced focus at colleges and universities on initiatives to support student success and outcomes.

Financial Medians

Pressured operating margins reflect the exhaustion of pandemic relief funds, although more state funding provides some offset

Most higher education institutions entered fiscal 2023 expecting weaker financial performance given the exhaustion of federal relief funds, increases in expenses as campus activities returned to pre-pandemic levels, and inflation-related costs. This is evident through the weakening in sectorwide median net adjusted operating income to 0.3% in fiscal 2023 from 2.9% in fiscal 2022 and 3.7%, in fiscal 2021. However, in our view, this metric being in line with pre-pandemic levels indicates strong state support is offsetting student-derived revenues. Pressures associated with demand difficulties and higher expenses were most prevalent at schools in the 'BBB' rating category, with a median operating deficit of 4.6% in fiscal 2023, down materially from the near-breakeven median in the previous year.

With most states recording an improvement in credit quality since 2020, they have relayed more financial support to public higher education institutions through an increase in operating as well as capital appropriations. We observed this trend in several median metrics for fiscal 2023, such as increased median state operating appropriations to revenue of 22.9%, the highest level in the past six years. The shift in revenue mix is also reflected by a decrease in median student-generated revenues. State appropriations per FTE in fiscal 2023 were 11.6% higher than in fiscal 2022 as a result of increased state support as well as a drop in enrollment. With state budgets expected to remain stable in fiscal years 2024 and 2025 in the majority of states, we expect that state funding will continue to offset some demand pressures in the near term for several institutions, although smaller, regional public institutions will still require tight expense controls in parts of the country with unfavorable demographic trends.

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Gradual growth in financial resources supports mixed trends in debt issuances

Our key metric of a public higher education institution's balance-sheet strength is total cash and investments, including those held at related foundations. We assess this in combination with the level of restriction and the liquidity of the financial resources. Despite some movement in the investment markets, median financial resources in fiscal 2023 relative to adjusted operating expenses and debt improved modestly for almost all rating categories. Since the start of the pandemic, public colleges and universities have steadily invested in maintaining campus infrastructure, as represented by an improvement in the median average age of plant to 14.2 years in 2023 from 15.1 years in 2022. We expect investments in capital projects will continue in the near term as institutions try to remain attractive amid fierce competition and leverage favorable state funding.

What We're Watching

Enrollment challenges:   In line with broader sector trends, we anticipate public colleges and universities will face ongoing demand pressures in the near term. This trend will remain bifurcated, with large flagship and land-grant institutions being positioned more favorably through their wide brand recognition and broader reach. Conversely, we expect that smaller regional public universities will be hit harder by changes in demographics in their service areas. For fall 2024, delayed processing of the Free Application for Federal Student Aid has created heightened uncertainty for colleges and universities amid a rising percentage of prospective college students opting for trade schools or directly entering the labor market after high school.

State support:   According to the State Higher Education Executive Officers Association's annual Grapevine survey, state support (excluding federal relief) for higher education hit $126.5 billion in fiscal 2024, up 10% from fiscal 2023. For fiscal 2024, 41 states reported year-over-year increases in combined state and federal stimulus funding, with 20 states boosting support by more than 10%. Therefore, we expect that state governments will continue to support public higher education institutions as they navigate tough demand conditions, although some states, like Arizona and California, have announced cuts to the higher education budget for fiscal 2025. For more information, see "With The Fiscal 2025 Budget Deadline In Sight, U.S. States Navigate A New Revenue Environment," published June 25, 2024.

Evolving risk management:   The U.S. higher education industry continues to grapple with a multitude of emerging risks. These range from the need for changes to academic offerings based on labor market and student demand, the probable heightening of demographic pressures in certain regions of the country, evolving climate risks, and rising cyber security risks. After a wave of campus protests in 2024, several universities and senior leadership teams have faced heightened scrutiny. This has further contributed to the higher-than-normal presidential turnover at universities in the past few years. We will continue to monitor university enrollment, leadership responses, and potential fundraising implications for any credit impact related to these risks.

Pension and other postemployment benefit (OPEB) funding:   Fiscal 2023 and fiscal 2024 year-to-date investment returns have generally been favorable compared with fiscal 2022. As a result, we expect improvement in U.S. public pension funded ratios for fiscal 2024. However, conditions are less visible entering fiscal 2025, given uncertainty about monetary policy and the upcoming U.S. presidential election. For more information on U.S. public pension and OPEB credit characteristics, please see "Five U.S. Public Pension And OPEB Points To Watch In 2024," published Jan. 29, 2024.

Capital investments:   During the past few years, several universities have delayed capital projects due to high construction costs and increased interest rates. Although borrowing and construction projects were on the rise early in calendar year 2024, with election season on the horizon, future market activity remains uncertain at this time.

Continued credit bifurcation:  In this environment, we expect higher-rated colleges and universities with strong balance sheets, supportive state legislatures, and significant fundraising capabilities will continue to differentiate themselves, contributing to further bifurcation of credit quality within the sector.

Appendix

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