A rendering of Emerson College’s renovations to the Little Building on Boylston Street. The renovations address overdue repairs to the nearly 100-year-old landmark.
What with all the opulent new dorms and hefty presidential pay packages, the ivory towers of Massachusetts’ higher education world would seem to be doing just dandy. But in fact, while they are hardly in danger of going broke, these are actually challenging times for the area’s colleges and universities.
College administrators across the Bay State are scrambling to keep the cash flowing in as enrollment falls amid a steady decline in the number of high school graduates in New England and across the country.
However, the financial incline that looms ahead is even steeper for a trio of colleges in Boston that have undertaken ambitious expansions in recent years, putting up new dorms, classrooms and performance space.
Artsy Emerson College, home to the next generation of the creative class; solid Suffolk, whose law school grads dominate Beacon Hill and which has been on the rise in the academic rankings; and tiny Emmanuel, a small Catholic college with close ties to the city’s health care and research sector, are vastly different institutions.
But they all share the burden of high debt loads coupled with declining or stagnant enrollment – that to be fair everyone in higher ed is dealing with right now – that has at times drawn unfavorable attention from credit agencies.
With its debt load having more than doubled to nearly $200 million, Emmanuel may face the steepest challenge as it pushes ahead with a new dorm tower.
Emerson has a mountain of debt totaling deal half a billion dollars to deal with as it pushes ahead with plans to renovate the historic Little Building and build a new dining hall.
Scott Van Voorhis
Counterintuitively, Suffolk, despite being hammered by negative headlines, is arguably weathering the demographic storm in the best shape of the three. The school’s top administrators have run a tight ship, which has not gone unnoticed on Wall Street, despite the warning last fall of a potential downgrade related to the well-documented leadership flux at the top.
“On both the domestic and international fronts we have been pretty aggressive in terms of changing up our approach,” said Michael Crowley, senior vice president of enrollment at Suffolk. “We have weathered the demographic storm pretty well.”
Small College, Big Debt
Emmanuel College took a hit last year when Moody’s Investor Service downgraded the college’s credit rating, effectively raising the school’s borrowing costs.
Moody’s cited Emmanuel’s “outsized leverage,” as well as it should.
Emmanuel has more than doubled its debt load, to $196 million, unveiling plans in June for a new dorm tower. The 18-story, 690-bed dorm tower, which will replace the existing, 220-bed Julie Hall, is slated to open in September 2018 and will be shared with students from the Massachusetts College of Pharmacy and Health Sciences.
Over the past several years, Emmanuel has also added new science and campus centers.
The college’s debt is now three times its annual cash flow, which stood at $63.2 million, down from $66.1 million in 2103. Enrollment has also fallen, from 2,166 four years ago to 2,104 today. The college is also heavily reliant on tuition, with the vast majority of students coming from Massachusetts.
Moody’s also warned that it may consider another downgrade should the dorm project be delayed, which, in turn, could take bite out of the Emmanuel’s revenue and cut into its reserves.
That said, the college has done a great job building up its financial reserves by leasing out parts of its valuable Fenway campus to research and drug companies. In fact, Emmanuel has enough cash to keep the lights on for nearly two years, significantly better than other colleges its size across the country, Moody’s noted.
Emerson Debt Balloons
Emerson took a credit rating hit of its own in November as the college rolled out plans for a major dorm expansion and renovation project.
Moody’s lowered its rating on a planned $213 million bond issued by the college to help pay for one new dorm project and the renovation of another in the historic Little Building.
Emerson will open a 345-bed dorm on Boylston this fall, after which it will begin renovating the Little Building, which will take 750 beds offline. There are also plans to build a new dining hall – a project that took a detour after Emerson was forced to drop ill-considered plans to press the old Colonial Theater into service as a collegiate mess hall.
The ratings service cited the combination of a “significant increase in debt” coupled with “minimal financial resource growth” as the reason for its downgrade.
The new debt will push Emerson’s total indebtedness past the half-billion dollar mark, even as revenue and enrollment top out.
Emerson now has debt to revenue ration of 2.7, with total debt of $507 million compared to $186 million in revenue, according to Moody’s. The college’s fundraising isn’t particularly impressive and Emerson relies on tuition for 90 percent of its revenue, Moody’s noted.
“With Emerson’s high dependence on student charges, even modest softening in the student market could negatively pressure the rating,” Moody’s said.
Still, this is hardly the same Emerson that came close to self-destructing back in 1980s under a half-baked plan to sell off its Boston campus and move to Lawrence.
In recent years Emerson has built a satellite campus in Los Angeles, with a strong national appeal that has 77 percent of its students coming from outside Massachusetts.
Emerson’s applications are up 50 percent over the last few years, with a record 10,000 students applying this past year alone, said Carole McFall, associate vice president of communications. The endowment has also been growing.
“A change in bond rating is not uncommon for colleges and universities that are undertaking large capital-intensive projects and using debt financing to help pay for the projects,” McFall wrote in an email. “Moody’s downgraded to Baa2, S&P stayed at the same rating of BBB+ and both upgraded the college’s outlook to stable, reinforcing that Emerson is financially strong, with record number of undergraduate applications and consistent operating surpluses and positive cash flows.”
Suffolk Lightens Load
S&P Global fired a warning shot at Suffolk this fall that made for some predictable headlines. The ratings agency put the university on notice by changing its outlook from positive to negative, citing enrollment declines and turnover at the top that has seen five different presidents (including interims) in five years.
But the ratings outlook – a step short of a downgrade – and the negative press it generated may have obscured steady but significant progress Suffolk has made in recent years, both in getting a handle on its debt load and meeting the challenge of a declining pool of potential students.
Suffolk has a significantly lower debt to revenue ratio compared to Emerson or Emmanuel, with tuition and other operating income weighing in at $224 million compared to $344 million in debt. The debt, among other things, has paid for a new academic building and renovations.
Enrollment has been up the past two years, at 8,046 in 2015, one of the largest incoming classes in years, and 7,560 in 2016. The total number of students stood at 7,452 in 2014.
Suffolk’s admissions office has used predictive analytics to more effectively target potential students in Massachusetts while further bolstering its foreign student contingent, which, at 23 percent, is the one of the highest in the country.
Suffolk has also produced budget surpluses year after year, including $8 million in 2016, despite a flattening out in enrollment, while also boosting its unrestricted assets by $35 million to $286 million, a 15 percent gain. Sharper procurement policies and a decision to self-insure when it comes to health benefits have helped produce these savings, officials say.
Hardly seems like a portrait of a college adrift or in turmoil, whatever the office politics.
The Bigger Picture
So what to make of these mounting debt loads, especially at Emerson and Emmanuel? Well, higher education is one tough business to be in right now.
While a logical response to falling enrollment would be to put the kibosh on new expansion and renovation plans, the competition for students has become so fierce that colleges can’t afford to stand still.
Basically it’s grow or go, move forward or get run over. Colleges like Emerson and Suffolk, with strong brands and in a strong market like Boston, despite some short-term turbulence, hardly face an existential threat.
One has to wonder about all the other private colleges in out of the way markets across the country, though. There are going to be a lot of closures in the coming years, but despite the challenges local schools face, don’t count on it happening in Boston.
