Moody’s Investor Service on Monday said the proposed $450 million in cuts to the University of Puerto Rico over the next three fiscal years are “credit negative because they will be very difficult for the university to absorb.”
“Moreover, while we expect the UPR to meet its debt service payments through July 1, the university is likely to default on subsequent payments absent a resumption of fund transfers to its trustees,” Moody’s said in an analysis.
The UPR’s debt currently has a CA/developing outlook classification from Moody’s.
On Mar. 13, the Puerto Rico Financial Oversight and Management Board approved a fiscal plan that includes $450 million of cuts to the UPR, which Gov. Ricardo Rosselló’s administration has been looking to reduce through savings.
“Assuming the $450 million funding reduction occurs in one year and with no other revenue growth or additional expense reductions, the effect on the UPR’s operations would be dramatically negative,” Moody’s predicted.
The cuts are part of a broader turnaround plan for the Commonwealth of Puerto Rico (Caa3/developing).
“The UPR currently relies on the government for nearly 80 percent of its $1.2 billion operating budget and is historically reliant on the commonwealth for liquidity,” Moody’s said.
For fiscal 2015 — the last year with an available audit — the UPR reported $937 million in total Commonwealth funding, including $834 million of Commonwealth formula appropriations.
“A $450 million reduction would cut commonwealth funding by nearly half. The UPR has limited offsetting revenue-raising capabilities. Revenue from student charges, its largest non-governmental revenue source, is difficult to increase given a highly price-sensitive student population,” Moody’s stated.
“Puerto Rico has seen year-over-year net out-migration, particularly among young residents and families, which has reduced the pool of potential students,” the agency noted, adding that the UPR “is highly reliant on need-based financial aid, reporting $167 million of federal Pell grants in fiscal 2015, compared with $47 million of net tuition revenues received from students.”
Last year, a pair of executive orders signed by then Gov. Alejandro García-Padilla suspended the UPR’s obligations to transfer pledged revenues to its trustees.
Originally in place until Jan. 31, 2017, the moratorium has been extended to May 1, 2017.
“Consequently, the trustees drew on the bond reserve accounts for its Dec. 1, 2016 and Jan. 3, 2017 interest payments totaling $12.4 million for debt service,” Moody’s explained.