Research

Community Colleges Get Moody's Downgrade

• By Dian Schaffhauser
• 12/14/20

Moody's has given a negative outlook to community colleges for 2021, matching the negative outlook it had already issued for four-year public and private universities. According to the bond credit rating company, the negative outlook was prompted by several drivers, including declining enrollment, which will hit tuition revenue, and expected reductions in state aid.

The research by Moody's found that net tuition revenue, which is the "largest revenue source" for community colleges, was expected to fall alongside a decline in enrollment of between 5 and 15 percent. The revenue shortfall can't be made up through tuition increases, given colleges' "affordability and accessibility missions," the outlook stated.

Higher ed could also face declining state aid, the report noted, although the cuts may not be as deep as in previous economic downturns, since so many states are "using reserves or issuing deficit bonds" to offset declines.

On the positive side, Moody's said "flexible operating models and sound liquidity" will help community colleges through the "near-term strains." For example, these schools' reliance on part-time faculty enables them to "scale their academic labor force" to fit enrollment; and because so many schools are operating remotely, many should be able to reduce expenses related to utilities and other services. Also, the company expected stable albeit "flat" property revenues, which will keep local funding sources steady.

The report suggested that the outlook could change to "stable" if enrollment were to rebound and state funding stayed in place and if the country saw "a significant improvement in the containment of the coronavirus and its effects on public health."

The Dec. 8, 2020 report, "2021 outlook moves to negative as enrollment declines weaken tuition revenue," is available to Moody's subscribers.