Tuition Caps Could Hurt University Bond Ratings, Moody's Warns

By JOSH KELLER

State-mandated limits on tuition increases may hurt the bond ratings of public universities, because institutions under such restrictions lose the ability to use those increases to offset dips in state and donor support, according to a report to be released this week by Moody's Investors Service.

Tuition caps typically limit the amount universities can raise tuition each year to a small percentage or to the inflation rate. They have become popular among governors and state lawmakers as a way to respond to concerns over the rising cost of attending college. At least 18 states have passed some kind of tuition limit in the past three years, according to the report, and many other states are now considering similar legislation.

The Moody's report warns that those caps make university budgets more inflexible and more vulnerable to shifts in state support. The company rates the bonds of about 200 public colleges and systems in the United States.

Dennis Gephart, an editor of the report, said that tuition caps could throw off the traditional balance of support between state appropriations and tuition that public universities rely on.

"In many states, there usually is kind of a covenant between legislators and universities," said Mr. Gephart. "They might say, 'Yes, we're cutting your state appropriation this year, but we believe you're able to pass along those costs to your students.'" But a tuition cap could make it more likely for those two revenue sources to be constrained at the same time, he said, leading to "deep and lasting stress" on universities.

Universities with lower bond ratings must issue bonds at higher interest rates, and have more trouble financing large construction projects.

Mr. Gephart added that many institutions were raising enough money from donors to offset any long-term harm from tuition caps. And he said that looser tuition caps, such as those that allow relatively large annual increases or tie the limits to additional state funds, may not have much of an effect.

Source:  The Chronicle of Higher Education, March 27, 2007 (www.chronicle.com)