Washington Educational Facilities
Authority
University of Puget Sound; Private
Coll/Univ - General Obligation
Primary Credit Analyst:
Sussan S Corson, New York (1) 212-438-2014; sussan.corson@standardandpoors.com
Secondary Contact:
Charlene P Butterfield, New York (1) 212-438-2741; charlene.butterfield@standardandpoors.com
Table Of Contents
Rationale
Outlook
Enterprise Profile
Financial Profile
Related Criteria And Research
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Washington Educational Facilities Authority
University of Puget Sound; Private Coll/Univ General Obligation
Credit Profile
Washington Ed Fac Auth, Washington
University of Puget Sound, Washington
Washington Ed Fac Auth (Univ of Puget Sound) weekly rate demand rev bnds ser 2001
Long Term Rating
A+/A-1+/Stable
Affirmed
A+/Stable
Affirmed
Washington Hgr Ed Fac Auth, Washington
University of Puget Sound, Washington
Series 2012A
Long Term Rating
Rationale
Standard & Poor's Ratings Services affirmed its 'A+' long-term rating on the University of Puget Sound, Wash.'s
outstanding revenue bonds, issued by the Washington Education Facilities Authority. At the same time, Standard &
Poor's affirmed its 'A+/A-1+' long-term rating on the university's weekly rate demand revenue bonds, which were also
issued by the authority. The outlook on all ratings is stable.
The ratings reflect the university's good financial resources for the rating, growing endowment, and a return to positive
operations. We also favorably view the management team and the recent successful completion of a comprehensive
campaign. Balancing these strengths, in our view, is dependence on tuition revenue coupled with a low matriculation
rate and weaker selectivity compared with peer medians.
The 'A+' long-term rating reflects our view of the University of Puget Sound's:
• Good financial resources for the rating category,
• Restoration of growth in net tuition revenue and positive operating surpluses on a full accrual basis in the last
couple of years,
• Strong management team with good disclosure practices,
• Successful completion of a recent major capital campaign, and
• Good geographic student draw.
Offsetting credit factors include:
• A highly competitive market for students both regionally and nationally, which has resulted in a consistently low
matriculation rate; and
• Continued tuition dependence.
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The short-term rating on the $10.35 million series 2001 bonds, which are in a weekly mode, reflects our view of the
university's:
• Funds of $41 million identified as available on a same-day basis as of Sept. 30, 2015, providing variable-rate demand
debt service coverage of 4.0x;
• Financial policy to maintain sufficient bond coverage by same-day and next-day assets equal to at least 3.0x the
outstanding amount of unenhanced variable-rate bonds (although this is the official policy, practice has been to
maintain same-day assets in excess of 3.0x); and
• Timely security liquidity procedures, which conform to the indenture and ensure that bondholders will receive
immediately available funds on the purchase date.
At fiscal year-end June 30, 2015, about $73 million of total debt was outstanding, of which $38.5 million, or 53%, was
issued as variable-rate bonds. The series 2001 variable-rate demand bonds are currently in weekly mode and the
university provides self-liquidity for these bonds. The series 2012B debt was issued as direct placement debt that bears
interest at a variable rate tied to LIBOR with a mandatory tender after the first seven years. The university has also
entered into three interest rate swap agreements to synthetically fix its variable-rate debt. The series 2012B direct
placement debt has cash-to-debt and coverage covenants. We have reviewed the events of default and have not
identified a credit risk; acceleration of debt occurs seven days after event of default. The bonds are considered a
general obligation of the university.
Outlook
The stable outlook reflects our expectation that University of Puget Sound enrollment will be relatively stable, and that
financial resources will remain consistent with the rating category. To maintain the rating over the next two years, it is
important that the university's operating margins remain adequate, enrollment trends remain relatively stable, and
liquidity and resource ratios remain stable.
Although not expected, significantly higher tuition discounting and weakening of revenue trends or a drop in financial
resources affecting liquidity would be a credit risk. Material declines in coverage could result in a lower short-term
rating.
Given the competitive demand profile, it is unlikely that we would raise the rating during the next two years.
Enterprise Profile
The University of Puget Sound, founded in 1888 in Tacoma, is a private residential liberal arts institution with an
emphasis on undergraduate education. In recent years, it has introduced new programs, including biochemistry,
bioethics, biophysics, molecular and cellular biology, neuroscience, and Latina/Latino studies.
Demand and enrollment
Headcount enrollment is down slightly with a total of 2,774 enrolled for fall 2015, compared with 2,782 for fall 2014
and 2,853 enrolled for fall 2012. However, management met its overall goal for total enrollment in fall 2015 and
expects stable total enrollment over time as it plans to modestly reduce the size of the freshman class while targeting
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higher student retention rates. Retention and graduation rates remain an area of focus for management as well as
enrollment diversity and international recruitment. Management reports that the majority of students come from about
40 states outside Washington, and 37% of entering freshmen for fall 2015 came from California. Freshmen applications
increased significantly to 5,827 in fall 2015 from 5,583 for fall 2014 and 4,588 in 2013, which management attributes
the increase to a continued focus on branding and marketing and refinements to its application process. Student
quality for fall 2015 was strong with an average SAT score of 1209 compared with a national average of 1006.
Selectivity is lower than that of similarly rated institutions, although a 79% acceptance rate in fall 2014 and fall 2015
reflects some improvement in selectivity compared with 85% in fall 2013. In addition to what we consider relatively
low selectivity, the matriculation rate is low, in our opinion, and declined from 17% in fall 2013 to 14% in fall 2015,
reflecting the highly competitive regional and national markets. The overall tuition discount rate has remained
relatively stable at about 38% for the last two years and the freshman discount rate totaled 40% in fall 2015, which is in
line with management targets. Freshman retention rates remained relatively stable in fall 2015 at 86% and are in line
with peer medians.
While the undergraduate population accounts for about 90% of the student population, the university also offers
graduate programs. Graduate applications grew to 884 in fall 2015 from 869 the prior year. The acceptance rate was
29%, and the matriculation rate was 52%.
Management
We view the University of Puget Sound's management team favorably, as we consider the disclosure practices to be
very good. The current president, who has been with the university since 2003, has announced that he will be stepping
down at the end of this year and the university is searching for his replacement. There are no other changes in the
executive team, although there is an expected transition of the board chair in July 2016 due to normal rotation. In
addition, the team is completing a 10-year strategic plan that included a comprehensive fundraising campaign,
branding project and enrollment initiatives. Management expects the next long-term strategic plan will be shaped by
the new president, although the university remains focused on updating its branding and marketing, with the focus on
presenting a clear and consistent message and enhancing potential students' campus visits.
The management team also budgets conservatively, including contingencies in the budgeting process. Although
management does not budget for depreciation, it includes planned maintenance in its budget, which helps to offset
depreciate expense on a full accrual basis.
The University of Puget Sound board comprises up to 39 members who can serve three three-year terms. The
committees include: executive, academic and student affairs, development and alumni relations, finance and facilities,
audit, compensation, trusteeship, and honorary degree. The investment subcommittee has 10 members.
Financial Profile
Operations
The University of Puget Sound posted positive operating results on a full-accrual basis in fiscal 2014 and fiscal 2015
boosted by net tuition revenue growth and relatively stable operating expenses in fiscal 2014. In fiscal 2015, it posted
an almost $3 million operating surplus, or 1.86% net operating margin. The university remains dependent on student
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tuition and fees (at 73% of total adjusted revenues); tuition increased 3.6% to 3.7% annually in the past two years to
$44,740 for fall 2015 from $43,200 for fall 2014. Tuition rate increases along with a relatively stable tuition discount
rate, contributed to net tuition revenue growth despite relatively slightly declining enrollment. Management expects
fiscal 2016 operating results to be balanced on a budgetary basis, despite some expense pressure related to health care
costs. Because the budget does not include full depreciation costs, smaller budgeted operating margins could mean
weaker performance on a full accrual basis. However, management intends to continue to increase the planned major
maintenance budget by 10% per year to maintain expanded campus facilities, which, along with general conservative
budgeting, somewhat mitigates the lack of full depreciation costs in the budget.
The University of Puget Sound had approximately $73 million in debt outstanding as of June 30, 2015. For fiscal 2015,
the university had $240 million in expendable resources, representing a good 152% of operating expenses and 328% of
debt, which is well above peer medians. Expendable resource ratios improved from fiscal 2013 when they represented
134% of operations and 271% of debt. Cash and investments ratios also exceed peer medians and improved slightly,
with cash representing 231% of operations in fiscal 2015, compared with 209% in fiscal 2013. Cash and investments
represent 499% of debt, which we consider strong. Management has no plans to issue additional debt in the next three
years.
Endowment and fundraising
The University of Puget Sound's endowment had an estimated market value of $311 million as of Sept. 30, 2015 and
almost $322 million as of June 30, 2015. Endowment market value has grown in the previous few years as a result of
investment returns and a successful comprehensive campaign. There were no significant changes to the asset
allocation with 43% of the Sept. 30, 2015 value allocated to equities, 14% to absolute return, 10% to global fixed
income and cash, 19% to real assets, and 14% to private capital. As of June 30, 2015, management reports about $92.7
million of assets, or approximately 30% of endowment market value, as available the same or next day. Management
has targeted a level of highly liquid funds within the endowment to meet its self-liquidity needs and for overall
flexibility and officials expect to review these targets. The university has an endowment spending rate of 5% of a
trailing 36-month average market value, although the effective spending rate averaged 4.5% in the previous 10 years.
The team also designated a portion of operating surplus in the previous couple years for the endowment, which
lowered the effective spending rate. In fiscal 2015, about $12 million of endowment income contributed to operations,
or about 7.5% of revenue. The university has a line of credit of $5 million for working capital, which has never been
drawn. We do not anticipate any significant change to the endowment or liquidity practices in the next year.
In June 2015, the university successfully completed its comprehensive campaign, raising $131.6 million, which
exceeded its goal of $125 million. A large portion of funds raised (43%) were directed to the endowment and about
30% is designated for facilities, including the bulk of the construction costs for an athletics and aquatics center which is
currently underway and slated for completion in summer 2016. The university has invested in its facilities and has
funded the bulk of recent projects with cash and philanthropy and only a moderate amount of debt. A new admissions
welcome center is also currently under consideration, but would depend upon future fundraising. The university
previously adopted a 20-year campus master plan, which could be updated with the next strategic plan and president.
Management does not expect to issue additional debt in the next three years.
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Contingent liabilities
The university has three swap agreements, one with Societe Generale and two with Bank of New York Mellon. The
swaps had a negative mark-to-market value of $13.3 million as of Oct. 30, 2015. Basis risk exists given that the floating
leg of the swap is linked to the LIBOR swap rate. There is a moderate degree of collateralization and termination risk
as the university is required to post collateral when its rating falls below 'BBB' for the 2005 swap and below 'BBB-' for
the 2006 swaps.
University of Puget Sound -- Selected Statistics
--Fiscal year ended June 30--
Medians
2016
2015
2014
2013
2012
Private Colleges &
Universities 'A' 2014
Headcount
2,774
2,782
2,812
2,853
2,918
MNR
Full-time equivalent
Enrollment and demand
2,721
2,723
2,778
2,815
2,857
3,434
Freshman acceptance rate (%)
79.2
79.3
85.2
82.6
75.7
64.5
Freshman matriculation rate (%)
14.1
14.9
17.1
17.1
18.4
21.2
Undergraduates as a % of total
enrollment (%)
89.3
90.6
90.5
90.4
90.7
80.9
Freshman retention (%)
86.3
87.3
86.7
86.4
88.0
86.3
Graduation rates (five years) (%)
N.A.
78.1
76.8
74.7
76.4
74.9
Adjusted operating revenue ($000s)
N.A.
161,188
156,258
150,541
148,734
MNR
Adjusted operating expense ($000s)
N.A.
158,250
152,304
152,013
148,460
MNR
Net operating income ($000s)
N.A.
2,938
3,954
(1,472)
274
MNR
Net operating margin (%)
N.A.
1.86
2.60
(0.97)
0.18
MNR
Change in unrestricted net assets
($000s)
N.A.
1,188
15,945
12,288
4,177
MNR
Tuition discount (%)
N.A.
37.7
38.6
39.2
38.2
35.4
Tuition dependence (%)
N.A.
72.7
71.9
73.0
72.7
MNR
Outstanding debt ($000s)
N.A.
73,292
74,285
75,206
60,769
90,765
Current debt service burden (%)
N.A.
3.18
3.33
2.85
2.80
4.00
Current MADS burden (%)
N.A.
3.14
3.26
3.28
3.25
MNR
Endowment market value ($000s)
N.A.
321,676
318,501
276,927
250,468
218,129
Cash and investments ($000s)
N.A.
365,630
364,044
318,310
291,548
MNR
Unrestricted net assets ($000s)
N.A.
241,973
240,785
224,840
212,552
MNR
Expendable resources ($000s)
N.A.
240,419
239,348
203,814
167,370
MNR
Cash and investments to operations
(%)
N.A.
231.0
239.0
209.4
196.4
150.6
Cash and investments to debt (%)
N.A.
498.9
490.1
423.3
479.8
266.7
Expendable resources to operations
(%)
N.A.
151.9
157.2
134.1
112.7
97.9
Expendable resources to debt (%)
N.A.
328.0
322.2
271.0
275.4
172.6
Income statement
Debt
Financial resource ratios
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University of Puget Sound -- Selected Statistics (cont.)
Average age of plant (years)
N.A.
10.6
10.6
7.6
7.1
13.3
N.A.--Not available. MNR--Median not reported. MADS--Maximum annual debt service. Total adjusted operating revenue = unrestricted revenue
less realized and unrealized gains/losses and financial aid. Total adjusted operating expense = unrestricted expense plus financial aid expense.
Net operating margin = 100*(net adjusted operating income/adjusted operating expense). Student dependence = 100*(gross tuition revenue +
auxiliary revenue)/adjusted operating revenue. Current debt service burden = 100*(current debt service expense/adjusted operating expenses).
Current MADS burden = 100*(maximum annual debt service expense/adjusted operating expenses). Cash and investments = cash + short-term
& long-term investments. Expendable resources = unrestricted net assets + temp. restricted net assets - (net PPE- outstanding debt). Average
age of plant = accumulated depreciation/depreciation & amortization expense.
Related Criteria And Research
Related Criteria
•
•
•
•
•
USPF Criteria: Higher Education, June 19, 2007
USPF Criteria: Commercial Paper, VRDO, And Self-Liquidity, July 3, 2007
USPF Criteria: Contingent Liquidity Risks, March 5, 2012
USPF Criteria: Assigning Issue Credit Ratings Of Operating Entities, May 20, 2015
Criteria: Use of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
• Alternative Financing: Disclosure Is Critical To Credit Analysis In Public Finance, Feb. 18, 2014
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