Fitch Affirms Midwestern State University, TX Revs at 'AA-'; Outlook Stable

Fitch Ratings has affirmed the 'AA-' rating on approximately $77.2 million of revenue financing system (RFS) revenue bonds issued by Texas Public Finance Authority on behalf of Midwestern State University (MSU).

The Rating Outlook is Stable.

SECURITY

The bonds are secured by pledged revenues which include all legally available funds of the university, including unrestricted fund and reserve balances. Pledged revenues exclude state appropriations, gifts, grants, and auxiliary student service fees.

KEY RATING DRIVERS

SOUND CREDIT ATTRIBUTES: Generally break-even to positive GAAP-based margins, a satisfactory financial cushion and relatively steady enrollment trends bolstered by good demand indicators are supporting factors for the 'AA-' rating. Counterbalancing factors include a moderately high debt burden and exposure to fluctuations in state funding (Texas' GO bonds are rated 'AAA'/Outlook Stable by Fitch).

SATISFACTORY FINANCIAL PERFORMANCE: Timely budgetary measures to absorb state funding reductions in fiscal years 2012 and 2013 positioned MSU to continue generating satisfactory operating results in both fiscal years. State funding improved modestly in for fiscal years 2014 and 2015; however, rising costs are anticipated to result in a very modest operating deficit in both fiscal years.

GENERALLY STABLE ENROLLMENT: Following some enrollment declines in recent years, which was partly associated with the implementation of more stringent academic standards for incoming students, total headcount enrollment showed signs of stabilization in fall 2013, supported by the largest incoming freshmen class in the university's history, and is anticipated to show modest growth in fall 2014 according to the management team.

MANAGEABLE LEVERAGE POSITION: Debt repayment over the past two years has reduced the university's debt burden. Maximum annual debt service (MADS) represented a still somewhat high, though more manageable, 8.4% of fiscal 2013 operating revenues and was covered by 2 times (x) from net operating income. Importantly, approximately one-third of MSU's debt service is paid for by the state through the tuition revenue bond (TRB) program.

RATING SENSITIVITIES

STABLE OPERATING PERFORMANCE: The Stable Outlook is predicated on Fitch's expectation that the university will continue to register at or near break-even GAAP-based financial performance.

CREDIT PROFILE

Founded in 1922, MSU is located in Wichita Falls, approximately 120 northwest of the Dallas-Fort Worth (DFW) area, and is the only designated public liberal arts university in the state of Texas. The university's regional accreditation with the Southern Association of Colleges and Schools Commission on Colleges was most recently re-affirmed in 2013 for a 10-year term.

SATISFACTORY FINANCIAL PERFORMANCE

Despite a pressured state funding environment in the 2012-2013 biennium, MSU generated GAAP-based operating margins of 1.3% and 1.1% in fiscal 2012 and 2013, respectively, driven by a mixture of cost containment and revenue growth initiatives. Some examples of budgetary measures utilized by the management team included reductions in discretionary expenses, maintenance of position vacancies, and implementation of a 4.6% tuition increase. Additionally, the university recorded above-average gift revenues of approximately $6.7 million and $8.8 million in fiscal years 2012 and 2013, respectively.

Based on 10 months of unaudited financials, net operating income in fiscal 2014 is trending somewhat behind the prior year. Operating revenues continue to be on an upward trajectory, supported by a 1.6% tuition increase; however, operating expenses are growing at a faster pace, primarily as a result of rising costs associated with compensation, fringe benefits, and student aid. Management expects to utilize approximately $400,000 in institutional reserves to offset a forecasted operating deficit, which is down from the originally budgeted $700,000 and represents a minimal portion of annual Fitch-adjusted operating revenues ($89.6 million in fiscal 2013) and financial resources. Additionally, the audit is expected to reflect approximately $1.1 million in expenses associated with gift revenues that were recognized in previous fiscal years.

The operating budget for fiscal 2015 is comparable to the current fiscal year and is based on an estimated fall 2014 headcount enrollment of 5,975 students, up from the 5,870 recorded in fall 2013. Despite realizing some cost-savings from a recently implemented voluntary early retirement program, management is budgeting for $700,000 in institutional reserves to balance the budget. The Stable Outlook is predicated on Fitch's expectation that the university will continue to register at or near break-even GAAP-based financial performance.

Importantly, the 83rd state legislative session passed a law requiring four-year public institutions to provide a fixed tuition plan option. MSU decided to transition to offering solely a four-year fixed tuition plan and implemented tuition increases for academic year 2014-2015 ranging from 4% to 6% depending a student's year course of study. During the first year of administering the plan, freshmen and sophomores will have twelve consecutive semesters (including summers) of fixed tuition, while juniors and seniors/graduate students will have nine semesters and six semesters, respectively. Thereafter, any new student (freshmen or otherwise) at MSU will have 12 consecutive semesters of fixed tuition.

In Fitch's view, fixed-tuition plans could limit the rate of growth in net tuition and fees, a significant revenue stream, and potentially reduce MSU's flexibility in reacting to reduced state support, although some comfort is gained from the university's continued ability to adjust room & housing and several mandatory fees, as needed.

MAINTENANCE OF SATISFACTORY FINANCIAL CUSHION

Generally break-even to positive operating performance has allowed MSU to maintain a sound balance sheet cushion. In fiscal 2013, available funds (defined by Fitch as cash and investments minus non-expendable net assets and expendable net assets reserved for capital projects) totaled approximately $50.8 million. This covered fiscal 2013 operating expenses and pro forma debt by an adequate 57.3% and 64.5%, respectively. Both metrics are in line with other public colleges and universities rated in the 'AA' category by Fitch.

The state recently passed Senate Bill 1019, which allows institutions with endowment funds of less than $25 million to pool its investments with another governing board that has oversight of investment funds in excess of $25 million. The university entered into an agreement with the Texas A&M University system (TAMUS which is rated 'AA+'/Outlook Stable by Fitch) to invest its idle cash, and in September 2013, the university transferred $18 million to be invested in the TAMUS' cash concentration pool. Management reported that funds with TAMUS can be divested with a 30-day notice and is keeping sufficient funds at the university level to meet working capital needs through a one-to-two month period.

GENERALLY STABLE ENROLLMENT

Following some enrollment declines in recent years, which were partly associated with the implementation of more stringent academic standards for incoming students, total headcount enrollment showed signs of stabilization in fall 2013, supported by the largest incoming freshmen class in the university's history, and is anticipated to show modest growth in fall 2014 according to the management team.

Management reported that approximately 15% of total fall 2013 headcount enrollment pursued entirely online degrees and is actively exploring new online programmatic additions. Fully online degree programs have helped MSU deal with capacity constraints, which is viewed favorably. Fitch recognizes, however, that there is some reputational risk associated with poor program execution and will continue to monitor this aspect of the credit for any indication of such a risk developing.

Population growth around the university is expected to remain flat during the next decade. In response, management embarked on a strategy starting for fall 2013 to increase recruitment from the DFW area, which was successful and yielded the majority of the growth in freshmen enrollment. According to management, preliminary fall 2014 admissions statistics indicate that the university was able to sustain growth from the DFW area.

MANAGEABLE LEVERAGE POSITION

Debt repayment over the past two years has reduced the university's debt burden. Maximum annual debt service (MADS) represented a still somewhat high, though more manageable, 8.4% of fiscal 2013 operating revenues and was covered by 2 times (x) from net operating income. Importantly, approximately one-third of MSU's debt service is paid for by the state through the tuition revenue bond (TRB) program. The university's debt portfolio carries no exposure to variable rate debt or related interest rate hedges.

The university may issue non-TRB bonds over the near term for a new residence hall. Management reported that student housing is oversubscribed by around 300 students at present time, in part because increased recruiting in the DFW area has resulted in greater housing participation and retention. The construction of a new housing facility to accommodate existing, rather than forecasted, student demand is viewed favorably by Fitch.

Management will request $73 million in TRB funding in the 84th legislative session for a new College of Health Sciences & Human Services building ($61 million) and deferred maintenance ($12 million). In the event the TRBs are not approved, MSU will defer or delay the project until funding becomes available.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'U.S. College and University Rating Criteria' (May 12, 2014);

--'Fitch Rates Midwestern State University Revs at 'AA-'; Outlook Stable' (Aug. 30, 2012).

Applicable Criteria and Related Research:

U.S. College and University Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=748013

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=854094

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