Fitch Ratings has affirmed the 'AA' rating on approximately $30.3 million of mandatory student fee revenue bonds (the bonds) issued by the Florida Board of Governors (BOG), on behalf of Florida State University (FSU).
The Rating Outlook is Stable.
SECURITY
The bonds are secured by a first lien on gross revenues of a mandatory per credit hour student health fee (the fee) charged to all students at FSU's main campus in Tallahassee. Additional bondholder security is provided by a cash funded reserve equal to maximum annual debt service (MADS) on the bonds.
KEY RATING DRIVERS
STABLE CREDIT CHARACTERISTICS: The 'AA' rating primarily reflects the universal nature of the fee assessed to FSU's large, and relatively stable, main campus population. This fee, the primary source of pledged revenues for the bonds, provides consistently strong coverage of debt service.
LIMIITED FUTURE CAPITAL PLANS: The health and wellness center (the center) financed with the bonds is under construction. Once completed, Fitch expects it will be sufficient to meet FSU's needs for this type of facility through at least the intermediate term. Fitch does not expect additional debt financed capital needs.
FSU'S SOUND FINANCIAL PROFILE: FSU consistently generates a positive operating margin and maintains a solid balance sheet cushion. While revenues are diverse, state appropriations remain the largest component and continue to weaken. Fitch believes the university remains well positioned to absorb the reductions without significant effects on its credit profile.
CREDIT PROFILE
Pledged revenues totaled $12.7 million for fiscal 2011, up from $9.1 million in fiscal 2010. The increase resulted from a 41.2% increase in the fee. Prior to issuance of the bonds, the Florida state legislature authorized a substantial increase in the fee to support construction of the center.
Fiscal 2011 pledged revenues covered MADS by a strong 5 times (x). For fiscal 2012, FSU increased the fee 4.2%, with another 3.5% increase planned for fiscal 2013. These steady increases and anticipated stable enrollment should continue to strengthen debt service coverage for the bonds. FSU expects completion of the center this summer, on schedule and within budget.
FSU generated a 5.3% positive margin in fiscal 2011. According to management, a similar level of performance is projected for fiscal 2012. Fitch believes this level of performance is achievable given the consistency of past results. The state (general obligation bonds rated 'AAA' with a Negative Rating Outlook by Fitch) reduced operating appropriations modestly this year.
A more significant $65 million reduction is included in the state's fiscal 2013 budget; FSU plans to offset this expected cut primarily through use of reserves. The legislature based funding cuts to state universities primarily on their level of estimated operating reserves as of June 30, 2012.
At the end of fiscal 2011, FSU's available funds, defined as cash and investments not permanently restricted or otherwise unavailable for operating expenses, totaled $653 million. As a percentage of both operating expenses and total long-term debt, available funds represented a solid 68.7% and 266.6%, respectively.
The fiscal 2013 state budget will likely negatively affect FSU's balance sheet cushion in fiscal 2013, but Fitch anticipates gradual restoration of operating reserves through the university's regular generation of annual operating surpluses.
For the fourth consecutive year, FSU expects to request a 15% tuition and fee increase from the BOG for fiscal 2013. While the university anticipates approval, Fitch believes future increases could be limited. The governor, who can make up to six appointments to the 17-member BOG in January 2013, has repeatedly questioned the magnitude of public university tuition and fee increases.
Fitch expects FSU's management would respond to limits to future tuition increases with expense adjustments as it has done in prior years. In Fitch's view, such measures will continue to ensure balanced financial operations.
FSU is one of the largest and oldest of the 11 operating institutions in the State University System of Florida (a 12th institution was approved by the legislature this year and will be fully operational in fall 2014). In fall 2011, total headcount increased a modest 2.1% to 41,710 (76.4% undergraduates). Steady enrollment, despite double-digit percentage increases in tuition and fees in recent years, reflects the university's strong appeal. FSU reports that applications (undergraduate and graduate) for fall 2012 are up nearly 5% from the prior year.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
In addition to the sources of information identified in the Revenue-Supported Rating Criteria and U.S. College and University Rating Criteria, this action was informed by information from the state of Florida's Division of Bond Finance.
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria', dated June 20, 2011;
--'U.S. College and University Rating Criteria', dated July 14, 2011;
--'Fitch Rates Florida State University's Mandatory Student Fee Revs 'AA'; Outlook Stable', dated June 4, 2010.
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637130
U.S. College and University Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=640830
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