The University of North Texas System’s financial outlook has been downgraded from stable to negative by two key bond rating agencies, moves that could impact the estimated $120 million expected to be needed later this year for the student union and housing projects on the Denton campus.
Both Fitch Ratings and Moody’s Investor Service revised the outlook and cited concerns with the university’s recent financial problems, which are being investigated by the Texas State Auditor’s Office, as well as management turnover and shrinking liquidity.
Chancellor Lee Jackson said the system is working to correct the financial concerns, including the recent hiring of a new vice chancellor of finance and the expected hiring soon of a chief financial officer for UNT in Denton. Outside auditors have been hired to help straighten irregularities that caused state funds to be used improperly for some staff benefits.
He believes the internal issues will be resolved within a year, but said other concerns voiced by the ratings agencies are out of the system’s control, including a decline in state funding for higher education and slow enrollment growth despite the fast pace of growth in the region.
“I was very pleased that both rating agencies preserved the strong UNT System AA rating,” he said. “They recognize that in spite of some current issues, we have underlying financial strengths, slow but steady enrollment growth and our revenue stream is fairly stable.”
While the downgraded outlook does not immediately impact the system’s credit rating, the agencies will now monitor the UNT System closely in the next one to two years before determining if its AA credit rating could be downgraded. Bond ratings generally impact the interest rates paid on bonds so the university could face higher interest rates on debt for future projects if the rating is downgraded.
Jackson anticipates that even without a credit downgrade, there could be a small adjustment to interest rates, but it will not become a significant cost factor. Suspending those projects would actually be more expensive, he said, because of penalties that the system would have to pay construction firms.
The system does not intend to seek any long-term debt until the financial issues are resolved in order to attract the best interest rates and keep the costs down, Jackson said.
“For the foreseeable remainder of this year, we will finance our two ongoing construction projects with options that are available to us other than 30-year bonds, and there are some I believe we will do that maintain the progress of these two projects that are very important to UNT in Denton,” he said.
UNT President Neal Smatresk said the construction projects will continue as planned.
“We’re going to press on in our projects,” Smatresk said. “There’s a hiccup here, but I don’t think it’s something that should stop our forward progress. We have some issues to deal with on the campus in terms of revenue flows and so forth. We’ll deal with them just like any other university’s dealt with revenue issues all along.”
The summaries published by both agencies shed some light onto the investigation of the financial reporting errors. UNT has acknowledged that some state funds were used improperly to pay benefits for some employees, but state auditors have not said how much if any the university might have to repay the state. The Fitch report notes that the system could have to repay a “significant sum under an accelerated time frame” but notes that those determinations have not been made.
“Fitch’s concern regarding the system’s financial profile is compounded by management’s recent discovery of certain internal administrative errors which may have resulted in UNT-Denton being historically overfunded by the State of Texas for employee benefits and could lead the state to seek reimbursement for previously expended funds,” the Fitch report states.
Jackson said the breadth of the financial issues have still not been determined as the system continues to go through records regarding “a few problem transactions,” Jackson said.
Additionally, the recent management turnover — in which several key finance officials abruptly resigned at UNT Denton and Dallas — was also cited as a concern by Fitch, and the report notes that some of the vacancies resulted from the administrative errors in financial reporting.
The Moody’s report takes issue with the expected $120 million of borrowing expected this year, stating that “with weak debt service coverage, the university will need to demonstrate additional revenue growth to absorb increased debt service.”
Earlier this week, the UNT System announced Janet Waldron from the University of Maine would be the next vice chancellor for finance. Waldron is a “deeply experienced leader who has perhaps been in even tougher financial situations” in Maine, Jackson said.
Additionally, they expect to name the next CFO for UNT Denton in the near future, Jackson said.
Long-term projects to improve the university’s financial reporting and management have also been underway in recent years and are set to be concluded in early summer 2016. The Board of Regents has hired two firms to audit the system, one to improve current procedures and one to conduct an external audit at the end of the year.
“Our processes were outdated and they had not kept up with the most modern, best practices — using elaborate computer systems but doing it in a mom-and-pop way in some cases, and we recognized that several years ago and started the process of improvement,” Jackson said. “What the events of recent months have illustrated are there are at least a few situations and transactions that were more significant than had been realized and which need to be addressed immediately, and that is what we are in the middle of doing now in addition to all of those long-term, two- and three-year improvements.”
Staff writer Holly Hacker with The Dallas Morning News contributed to this report.
JENNA DUNCAN can be reached at 940-566-6889 and via Twitter at @JennaFDuncan.