Moody’s Investor Service, an international company that provides advice to those looking to purchase stock and bonds, downgraded RPI’s bond rating from the A1 rating to A2. An organization’s bond rating is an indicator of financial strength, and while RPI remains a stable place to invest money, the shift will lead to RPI paying more interest in bonds over the next several years. Vice President for Finance Virginia Gregg said this shift has been anticipated for years, and that it is the natural result of trying to change so much on campus at the same time.
“We know that we’re taking short-term financial risk for long-term transformation,” Gregg said. “It takes extraordinary investment to make extraordinary transformation.”
According to the rating update issued by Moody’s, one of the main reasons for the shift are the plans to issue $70 million in bonds in the next few months and $90 million in bonds by 2007. Also contributing to the downgrade is the recent $20 million draw off the endowment principle to balance the budget for fiscal year 2005 that will likely be echoed in 2006. It warns that “the university has prioritized enhancing … student quality far above financial performance.” On the whole, however, the report does not criticize policies at RPI, but instead acknowledges that current trends will likely resort in a more stable investment in the long run.
“While Moody’s believes Rensselaer’s investment in capital and operations will likely enhance its reputation and student demand over the long-term,” the report summarizes, “near-term financial risks are significantly increased by the strategy and may lead to weak financial performance and credit pressure over the next two years.”
Gregg said the bonds that are going to be issued have been planned for years as part of Rensselaer Plan initiatives such as EMPAC and the East Campus Athletic Village. She said that before EMPAC construction began, they knew another financial source would be needed before it was finished, and the only question was whether it would come from an endowment draw or from issuing bonds.
In the end, Gregg said, it is less of a financial burden to issue bonds, especially considering the tax-exempt status the Institute enjoys when purchasing capital. All in all, Gregg said she does not expect the shift to have much of an impact, only raising the school’s interest rate by approximately 20 basis points, or 20 hundredths of a percent.
She said that the school was not surprised with the announcement because they had met with Moody’s last year to discuss plans and get their reaction. “It’s always better to be upfront with them than surprise them with financial results,” she explained.
Gregg went on to say that at the meeting, the Moody’s representatives “recognized what we’re doing” and understood the school’s practices. She said the main issue is that the Institute has so many “moving parts” that need to be balanced, and making fixes to one affects others, explaining reviewing and budgeting are done on an annual basis, but long-terms plans are also made.
“Nothing will happen as a result of [the downgrade], we’ll just continue to manage all the moving parts,” she explained.
In the long term, Gregg said there are various goals the administration has identified to reduce operating expenses and create operating revenues that will be met before the Institute can return to being controlled without the bonds and endowment draws. Beyond finishing the Rensselaer Plan projects, Gregg said the school is trying increase enrollment in the Education for Working Professionals graduate programs to the numbers they were at before various programs were retooled. They are also seeking to bring in more research money to support various programs at the school, and hoping to lower the net discount rate on tuition. The latter, the average amount of a student’s tuition that is paid by financial aid, they are hoping to bring down by diversifying the student body further.
“As we increase the number and background of students interested in Rensselaer,” she said, “it should happen naturally based on the diversification of the student profile.”
