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Moody’s cuts credit rating at KU and Emporia State

Uncertainties over the financial outlook for the state of Kansas has led Moody’s Investors Service to cut the debt rating for the University of Kansas and Emporia State University.

The credit service lowered its rating on the University of Kansas by one notch to Aa2 from Aa1, which is still considered high-grade. It also downgraded Emporia State’s debt to A2 from A1, which also is an upper investment-grade level.

Moody’s issued its reports shortly after it cut the state’s credit rating last week from its second-highest rating of Aa1 to its third-highest rating of Aa2. The downgrade was prompted by concerns about the outlook for the Kansas state budget, which has been stressed by massive income tax cuts and revenue shortfalls.

Moody’s evaluated credit ratings on six of the public universities in Kansas, but downgraded only the flagship university in Lawrence and Emporia State.

The other schools reviewed by Moody’s were Kansas State University, Wichita State University, Washburn University, and Pittsburg State University.

A lower credit rating theoretically could lead to higher borrowing costs.

Moody’s said the downgrade at the University of Kansas was based on its “thin operating performance and limited liquidity as it confronts a period of additional revenue pressures related to the state’s budgetary challenges, as well as declining enrollment.”

Notably, however, Moody’s issued a “stable” outlook for the university’s financial situation. That outlook, according to Moody’s, reflects the “expectations that the university will carefully balance identified strategic investments against constrained revenues, without significant further material reduction in liqudity, continued low leverage and sufficient debt service coerage by pledged revenue.”

University spokesman Joe Monaco said rating downgrades “are not uncommon, as universities nationwide face the same challenges of stagnant enrollment and tuition revenue, price sensitivity among consumers, and limits on public funding.”

And despite the downgrade, Monaco said Aa2 “is still a very strong rating that enables us to continue financing the projects and operations we need to serve students and the state.”

The university’s Aa2 rating is still the highest among public universities in the state, along with Kansas State University.

Emporia State’s downgrade partly reflects “deepening operating deficits resulting in insufficient cash flow to cover annual debt service,” Moody’s said.

The agency also noted the “rating incorporates the university’s vulnerability to state budgetary challenges given ESU’s relatively high dependence on state appropriations for operations.”

The downgrade affects $13 million in bonds. Moody’s said Emporia State’s rating remains under review while it evaluates financial projections for the 2015 fiscal year.

A university spokesman could not be reached for comment.