Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation Primary Credit Analyst: Brian J Marshall, Dallas (1) 214-871-1414; brian.marshall@spglobal.com Secondary Contact: Jessica L Wood, Chicago (1) 312-233-7004; jessica.wood@spglobal.com Table Of Contents Rationale Outlook Enterprise Profile Financial Profile WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 1 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation Credit Profile Illinois Educl Fac Auth, Illinois Columbia Coll, Illinois Illinois Ed Fac Auth (Columbia Coll) adj var rate rev dem bnds ser 2000 Unenhanced Rating BBB+(SPUR)/Stable Affirmed Long Term Rating AA-/A-1 Affirmed Illinois Finance Authority, Illinois Columbia Coll, Illinois Illinois Finance Agency (Columbia Coll) Rev Rfdg Bnds (National) (Sec Mkt) Unenhanced Rating BBB+(SPUR)/Stable Affirmed Many issues are enhanced by bond insurance. Rationale S&P Global Ratings has affirmed its 'BBB+' underlying rating on Columbia College, Ill.'s' various revenue and revenue refunding bonds issued by the Illinois Finance Authority and Illinois Educational Facilities Authority. The outlook is stable. We assessed Columbia College's enterprise profile as adequate, characterized by declining enrollment, weak selectivity, and decreasing matriculation rates, as well as recent management turnover. These factors are tempered, in part, by management's projected stabilized total enrollment in fall 2018 based on current year-to-date applications and deposits, coupled with management's dedication to continue implementing strategic plans to improve the college's demand profile. We assessed Columbia College's financial profile as strong, characterized by healthy full accrual surpluses, robust available resources ratios following the sale of significant real-estate assets, and a low debt burden. Despite positive financial metrics and solid available resource ratios, we believe operations remain pressured as evidenced by the college's recent extraordinary endowment draw in fiscal 2017 with another one budgeted for fiscal 2018, followed by an endowment spend closer to routine levels and in accordance with leadership's financial plan. We view consistent extraordinary endowment spends a sign of material operational stress, and do not believe they are sustainable. Consequently, we could lower our view of the college's financial profile if officials are unable to continue to generate full accrual operating surpluses without a heavy reliance on endowment spending. Combined, we believe these credit factors lead to an indicative stand-alone credit profile of 'bbb+', and a final rating of 'BBB+'. At the same time, S&P Global Ratings affirmed its 'AA-/A-1' ratings on Columbia College's series 2000 adjustable-rate revenue demand bonds, issued by the Illinois Educational Facilities Authority, based on the application of criteria for WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 2 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation joint support. The long-term rating on the bonds is based on the application of low correlation, joint criteria using the 'BBB+' underlying rating on the university and the 'A+' long-term rating on BMO Harris Bank N.A., the letter of credit (LOC) provider. The short-term component of the rating is based solely on BMO Harris Bank. The rating reflects our assessment of Columbia College's following strengths: • Maintenance of full accrual operating surpluses despite ongoing enrollment pressures; • Healthy available resource ratios for the rating category; and • Low maximum annual debt service (MADS) burden of 3.22 % with no near-term debt plans. The rating also reflects our assessment of the following Columbia College weaknesses: • Eight consecutive years of enrollment declines resulting in multiple years of negative net tuition revenue; • High reliance on student-related charges; and • Considerable management turnover within recent years. Securing the bonds is a general obligation of the college. All numbers and ratios cited for fiscal 2017 are based on draft audited financial statements. Founded in 1890 with emphasis in oration, arts, and education, Columbia College has evolved into a private, four-year coeducational liberal arts college specializing in a wide variety of fine and performing arts, film, and other media-related programs. Located in downtown Chicago near the southern edge of the city's business district, Columbia College serves more than 7,000 students in 22 buildings that are situated among several prominent museums, performing arts centers, and publishing houses. The student body largely comprises full-time in-state undergraduates with fewer than 500 graduate-level students. Although nearly half of the students commute from within the Chicagoland area, management reports that the college's geographic reach has broadened in the Midwest and into the Southwestern part of the country, which has resulted in expanded college-sponsored housing. Outlook The stable outlook reflects our expectation that, in the next two years, enrollment will stabilize at about 7,000 students beginning in fall 2018 as part of management's remarketing efforts. At the same time, we expect Columbia College will maintain a healthy full accrual operating surplus in fiscal 2018 given its planned use of another extraordinary endowment draw of approximately 7%. We do not anticipate additional new debt and we expect the college will maintain its solid available resource ratios at levels consistent with fiscal 2017 during the outlook period. It also reflects our expectation that the colleges recently hired senior management officials will continue to transition smoothly. Downside scenario During the two-year outlook period, we could consider revising the outlook to negative if enrollment does not stabilize, demand metrics continue to weaken, or if the college needs to continue to rely on extraordinary endowment draws to generate positive full accrual operations. In addition, if the college's available resources deteriorate substantially from current levels, or if demand metrics continue to decrease from current levels, we believe this could negatively impact the rating. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 3 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation Upside scenario Given the college's ongoing enrollment declines, decreasing net tuition revenue, and pressured operations given recent extraordinary endowment draws, we view a positive rating action during the next two years as unlikely. Beyond the two-year outlook period, we could consider a positive rating action if Columbia College maintains operating results and available resources at or near current levels and is able to stabilize enrollment according to its plan. Enterprise Profile Industry risk Industry risk addresses the higher education sector's overall cyclicality and competitive risk and growth by applying various stress scenarios and evaluating barriers to entry, levels and trends of profitability, substitution risk, and growth trends observed in the industry. We believe the higher education sector represents a low credit risk when compared with other industries and sectors. Economic fundamentals In our view, the college has average geographic diversity, with 53% of students attending from within Illinois. As such, our assessment of Columbia College's economic fundamentals is anchored by Illinois' GDP per capita. Market position and demand A predominantly undergraduate, urban college with a unique academic niche, total enrollment at Columbia peaked in fall 2008 with 12,464 students and has since declined in each of the past seven fiscal years with total headcount for fall 2017 dipping to 7,312. During the past few years, management has focused on right-sizing the institution and expects total enrollment to stabilize at about 7,100 students in fall 2018. Management reports expected stabilization based on a projected 4% increase in freshman students based on current data. Recently, management has focused on rebranding the institution, is targeting its marketing efforts to students based on fit, and is tapering its curriculum to become more relevant to students and employers. Selectivity is over 91% for fall 2017, which is up from 88% in recent years, but remains modestly better than the 95% posted for fall 2010. The college's applications are down to 8,120 in fall 2017, compared with over 8,300 for both fall 2016 and fall 2015; this continues to compare favorably with 5,871 for fall 2010. Along with modest declines in selectivity and application growth, matriculation remained pressured through fall 2017, declining to 19% from over 29% in fall 2013. Management expects that matriculation could remain challenged during the next few years while it executes its targeted marketing and rebranding strategy. Officials report that applications as of January 2018 were up 8% (or 400 students), compared to the same time in 2017. College officials are targeting a 4% increase in freshmen enrollment for fall 2018 as a result of a marketing strategy that includes re-engaging with local junior colleges and local Chicago schools as part of Columbia's overall strategic plan. The college completed a $100 million capital campaign in 2014, the proceeds of which will be used for various strategic capital and academic initiatives. Historically, there has not been an established giving culture among the alumni, given its student and academic niche. As a result, the alumni participation rate in annual fund giving is typically less than 1%. We understand that while there are no current plans to launch a new campaign, the recently hired vice president of development is organizing a team to strategically position the college for potential future WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 4 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation campaigns. Management and governance The executive leadership of the college has undergone significant turnover in the past few years. Beginning in fiscal 2013, the college hired a new president, a new provost in 2014, and a vice president for enrollment in 2015. In January 2017, the college officially appointed a person to serve as both CFO and senior vice president for business affairs after previously serving as associate vice chancellor for business and financial services and CFO at the University of Wisconsin, Milwaukee. In addition, the college also appointed a vice president of development alumni relations starting March 2017. This is an expanded role within the college's management team that will center on fundraising activities for the college, strategic development in corporate foundation relations, and cultivating partnerships with Columbia College's alumni network. Columbia College is governed by a 33-member board of trustees serving staggered, three-year terms (there are no term limits). Financial Profile Financial management policies Columbia College has formal policies for endowment and investments. It operates according to a multiyear strategic plan, although it lacks a formal reserves and liquidity policy. The college meets standard annual disclosure requirements. The financial policies assessment reflects our opinion that, while there might be some areas of risk, the organization's overall financial policies are not likely to negatively affect its future ability to pay debt service. Our analysis of financial policies includes a review of the organization's financial reporting and disclosure, investment allocation and liquidity, debt profile, contingent liabilities, and legal structure, as well as a comparison of these policies to similar institutions. Currently, the college's management team is developing a financial and capital forecast to align with the Columbia College's five-year strategic plan. Although a formal debt management policy does not exist, the college has a practice of only using debt for capital expenditures never using derivatives as part of its debt portfolio. Columbia College also has an informal liquidity target $25 million, which it has well exceeded over the past five years. In our view, despite the heavy management turnover in the past few years, the tenured experience of the present management team along with the college's practices of full-accrual budgeting and willingness to adjust operating expenses in line with dwindling enrollment provide stability to the overall credit profile. Given Columbia College's dependence tuition, we believe college leadership's ability to design and implement dynamic financial and planning strategies that stabilize enrollment levels while maintaining favorable expendable resource ratios are key to rating stability. Financial performance Despite a seven-year decline in enrollment and negative net tuition revenue growth since fiscal 2013, Columbia College's operating performance has remained stable and a key credit strength. Management attributes its positive operating performance to conservative budgeting and expense controls. The college recorded an operating surplus of $5.4 million (a 2.7% margin) for fiscal 2017, compared with an $11.0 million gain (a 4.6% margin) in fiscal 2016. In our view, the college's revenue base is highly concentrated, with 93% of revenues derived from student-generated fees, rendering the college vulnerable to enrollment declines beyond those expected. Management has been reducing WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 5 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation expenses in the past three fiscal years in response to the revenue pressure, and plans to make further adjustments. For fiscal 2018, officials are budgeting for breakeven results due to recent enrollment declines, but report expectations of a modest surplus. However, management has historically managed positive operations with a fairly typical endowment draw of just under 5%, but in fiscal 2017 and expected fiscal 2018, management will have taken an extraordinary draw. On the expense side, officials continue to address these declines with personnel and staff reductions through reductions in force, attrition, and voluntary separation packages as the new team works to stabilize enrollment levels. College officials also report that negotiations with part-time faculty are moving in a positive direction since the strike in November 2017 and that no material financial impact is projected. Financial resources Columbia College's available resources ratios, in our view, are healthy compared with rating category medians and support the rating. Total cash and investments of $282 million are equal to a sound 143% of operating expenses and a healthy 337% of debt outstanding. The increase in cash is primarily attributable to the recent sale of real-estate assets totaling $42 million. Officials expect to add another $17 million at fiscal year-end 2018 following the recent sale of two additional real-estate assets. Management has reported that it plans to monetize another asset early next year with proceeds to go into the endowment. While officials are still discussing the final allocation of the fiscal 2017 and fiscal 2018 asset sales, college officials expect to maintain favorable liquidity and not materially draw on the aforementioned cash in the near term. Available resources, as measured by expendable resources, were also solid at $223 million, equal to a healthy 113% of expenses and a favorable 267% of debt outstanding. As of Aug. 31, 2017, the endowment was valued at $173 million. Approximately 55% of the endowment was invested in international and domestic equities, 38% in alternative investments, and 7% in fixed income. On a daily basis, management indicates that 11% of the endowment is liquid, and a higher 45% is liquid on a monthly basis, which we consider solid. The endowment spending policy allows for 7% of a rolling three-year market value average. For fiscal 2015 and fiscal 2016, endowment spending remained under 5%, but increased to over 6% in fiscal 2017 to combat a trend of declining net tuition revenues. While management has budgeted for breakeven operating results for fiscal 2018 following another year of extraordinary endowment spending near 7%, officials currently expect to end the year with a modest surplus. Officials are projecting to reduce endowment spending back to about 5% in fiscal 2019 as part of the college's financial plan. We would view a continued reliance on heavy endowment spending as a negative credit factor. Debt and contingent liabilities Debt outstanding, including capital leases, as of Aug. 31, 2017, totaled $83 million, of which $17.1 million in variable-rate debt supported by an LOC, and $57 million is in series 2015A and B bonds, while $3.89 million is a private placement of refunded series 2003 bonds. Columbia College has contingent liability risk exposures from the private placement and variable-rate demand bonds, with payment provisions that change on the occurrence of certain events. Specifically, events of default are tied to nonpayment of debt service and violation of covenants--including debt service coverage above 1.2x and liquidity requirements of 70% cash to debt. There could be an event of acceleration of the debt if not cured within 30 days, which could pose a liquidity risk. In our opinion, the college's $100 million of investments available within 30 days mitigates the risk related to its contingent liabilities. While officials have no plans to issue additional debt, the college has plans to complete a $50 million new student center debt free. While funding is WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 6 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation still being finalized, the project is expected to be supported by a combination of charitable gifts and cash on hand. In our opinion, Columbia College's MADS burden remains low at 3.22% of adjusted operating expenses in fiscal 2017 (when the $17.1 million bullet payment is smoothed). Management indicates that it has no plans to issue additional debt during the next two years, which we believe adds stability to the rating. Columbia College, in partnership with two other Chicago higher education institutions, is a member of the Education Advancement Fund (EAF) joint student housing venture. The venture issued $151 million of nonrecourse project debt in 2002 to construct student housing in Chicago's south loop business district, a few blocks north of Columbia College's 344-bed dormitory and near the academic facilities of several other public and private higher education institutions. Columbia College's several (not joint) guaranty represented its initial 40% share of the project that expired in July 2006 and has not been extended. Management reports that the college sold the property associated with the EAF project during fiscal 2017 and used proceeds to retire the EAF debt and added the remaining $42 million sale proceeds to Columbia College's balance sheet. Since there is no financial obligation or guarantee for the project, the college's portion of the EAF debt has not historically been included in the debt-burden computation for rating purposes. The college has short-term leases with several private developments that provide additional student housing near its campus. Management reports that Columbia College does not own the land in these projects, has no contractual or housing referral agreements with the private owners, and has put no money into the projects. Columbia College Enterprise And Financial Statistics Medians for 'BBB' rated private colleges and universities --Fiscal year ended Aug. 31-2018 2017 2016 2015 2014 2016 Headcount (no.) 7,312 8,120 8,961 9,442 10,142 MNR Full-time equivalent (no.) Enrollment and demand 6,879 7,654 8,344 8,699 9,312 2,642 Freshman acceptance rate (%) 91.6 88.1 88.1 88.5 85.0 72.5 Freshman matriculation rate (%) 19.4 21.2 24.5 24.7 29.8 MNR Undergraduates as a % of total enrollment (%) 96.1 100.0 96.1 95.4 95.4 73.4 Freshman retention (%) 66.0 70.4 69.1 71.0 67.5 78.6 Graduation rates (six years) (%) 43.8 44.5 41.9 N.A. N.A. MNR Adjusted operating revenue ($000s) N.A. 239,762 250,699 260,373 260,046 MNR Adjusted operating expense ($000s) N.A. 234,511 239,748 251,875 253,538 MNR Net operating income ($000s) N.A. 5,251 10,951 8,498 6,508 MNR Net operating margin (%) N.A. 2.24 4.57 3.37 2.57 0.78 Change in unrestricted net assets ($000s) N.A. 64,508 7,077 (1,557) 17,810 MNR Tuition discount (%) N.A. 19.2 19.2 17.3 15.5 38.0 Tuition dependence (%) N.A. 80.3 81.8 79.6 83.1 MNR Student dependence (%) N.A. 91.8 92.8 90.4 93.8 89.4 Income statement WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 7 Illinois Educational Facilities Authority Illinois Finance Authority Columbia College; Joint Criteria; Private Coll/Univ - General Obligation Columbia College Enterprise And Financial Statistics (cont.) Medians for 'BBB' rated private colleges and universities --Fiscal year ended Aug. 31-2018 2017 2016 2015 2014 2016 Health care operations dependence (%) N.A. N.A. N.A. N.A. N.A. MNR Research dependence (%) N.A. 1.5 1.5 4.1 1.6 MNR Endowment and investment income dependence (%) N.A. 4.2 3.0 2.8 1.6 MNR Outstanding debt ($000s) N.A. 81,645 83,041 87,338 92,392 54,629 Proposed debt ($000s) N.A. N.A. N.A. N.A. N.A. MNR Total pro forma debt ($000s) N.A. 81,645 N.A. N.A. N.A. MNR Pro forma MADS N.A. N.A. N.A. N.A. N.A. MNR Current debt service burden (%) N.A. 2.98 2.42 3.34 2.61 MNR Current MADS burden (%) N.A. 3.22 2.97 2.96 2.94 4.17 Pro forma MADS burden (%) N.A. N.A. N.A. N.A. N.A. MNR Endowment market value ($000s) N.A. 173,049 141,980 131,641 142,622 63,098 Cash and investments ($000s) N.A. 282,081 221,738 191,909 198,714 MNR Unrestricted net assets ($000s) N.A. 347,062 282,554 275,477 277,034 MNR Expendable resources ($000s) N.A. 223,165 163,398 159,238 163,732 MNR Cash and investments to operations (%) N.A. 120.3 92.5 76.2 78.4 79.2 Cash and investments to debt (%) N.A. 345.5 267.0 219.7 215.1 150.7 Cash and investments to pro forma debt (%) N.A. 345.5 N.A. N.A. N.A. MNR Expendable resources to operations (%) N.A. 95.2 68.2 63.2 64.6 49.4 Expendable resources to debt (%) N.A. 273.3 196.8 182.3 177.2 83.1 Expendable resources to pro forma debt (%) N.A. 273.3 N.A. N.A. N.A. MNR Average age of plant (years) N.A. 14.3 14.2 13.5 12.0 13.5 Debt Financial resource ratios 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 and long-term investments. Expendable resources = unrestricted net assets + temp. restricted net assets - (net PPE- outstanding debt). Average age of plant = accumulated depreciation/depreciation and amortization expense. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT FEBRUARY 1, 2018 8 Copyright © 2018 by Standard & Poor’s Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. 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