Moody's: Modest revenue growth supports stable outlook for US higher education in 2016

The outlook for four-year public and private US colleges and universities in 2016 is stable, reflecting the expectation that aggregate operating revenue will grow at or above 3% over the next 12-18 months, Moody's Investors Service says in "US Higher Education: 2016 Outlook - Moderate Revenue Growth Supports Sector Stability." The 2016 outlook's rated entities include approximately 230 public universities and 275 public universities.

All revenue streams are expected to rise modestly, and growth will be driven by at least inflationary increases in net tuition revenue and state funding, as well as expanded investment income and steady philanthropy. Moody's recent tuition survey says tuition revenue growth will be 2%-3%. State funding for public universities is expected to grow 2%-4%.

"On an aggregated sector basis, student charges remain the largest component of revenue for both public and private universities, and therefore our projections for net tuition revenue is a key component of our outlook," Pranav Sharma, a Moody's AVP -- Analyst says. "Sector-wide, our tuition survey indicates most universities will be able to grow tuition at or above inflationary levels."

Moody's says universities will continue to face the challenge to contain expenses, while attempting to invest sufficiently to remain to remain competitive.

"Most universities have already tackled the low hanging fruit of expense reductions and will be more fundamentally examining their programs and organizational structures. Some of these reductions are likely to be contentious," according to Eva Bogaty, Vice President - Senior Analyst. "This is particularly true for the portion of the sector that is challenged to grow net tuition revenue."

The sector's stability has also been buttressed by favorable investment returns in the last five years, which, combined with strong philanthropy have bolstered reserves and endowments. During the 12 to 18 month outlook period, reserves are expected to remain stable with some tolerance for potential volatility in the global financial markets.

Moody's says approximately 20%-30% of its rated colleges and universities will be challenged to achieve the 2%-3% revenue growth figures. Smaller colleges with limited scale and low revenue growth will remain fiscally challenged for the outlook period. Moody's has previously stated there will be a small increase in private college closures and mergers over the next few years.

Additionally, defined pension liabilities are a growing credit challenge for many public universities as the contribution requirements for many are increasing faster than inflation.

This report is part of a series of outlooks on a wide variety of sectors globally published by Moody's. For other reports in the series, go to www.moodys.com/2016outlooks.

The report is available to Moody's subscribers at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1009725.