Big capital spending backlog looms for higher education sector, Moody’s says

Colleges and universities face an estimated $750 billion to $950 billion in spending over the next decade for deferred maintenance, facility upgrades, and construction projects, with the growing backlog of capital needs posing “a significant credit risk” for the higher education sector, according to Moody’s Ratings. 

The rating agency said underinvestment in capital assets has left a substantial portion of colleges and universities it rates with “a large hidden liability.”  

“While this level of investment is unlikely to be met, institutions will continue to dedicate significant resources toward capital plans,” Moody’s said in a report Tuesday. “Spending will remain highest among the best-resourced institutions, but even those facing acute credit challenges will feel the need to undertake bold infrastructure initiatives.”

Schools risk losing their competitive standing if they can’t offer updated facilities, advanced technology and an attractive physical environment, it added. 

“Overall infrastructure investment for the sector will climb over the next two to three years as many colleges and universities move forward with plans they put on pause during the pandemic,” the report said. 

The University of California’s latest capital financial plan, which spans from 2023 to 2029, totals $30 billion just to meet the system’s “most urgent capital needs.” The Regents of the University of California this summer sold $1.68 billion of general revenue bonds, with proceeds earmarked to finance or refinance projects. The deal’s fixed-rate debt was rated Aa2 with a stable outlook by Moody’s.

“Even as interest rates have increased significantly from the historically low levels over the last decade, the institutions with strong credit quality are still able to borrow at attractive rates,” Moody’s said.

About 30% of its rated higher education portfolio consists of institutions with increasing credit woes and fewer options for capital financing outside of borrowing, which escalates credit risk.

“Enlisting the right capital strategy is particularly critical for these colleges and universities considering their numerous credit challenges, more limited resources, and heightened vulnerability to shifting sector dynamics,” the report said. 

Schools are also turning to alternative financing, such as public-private partnerships.

“Ohio State University (Aa1 stable) and University of Iowa (Aa1 stable) each monetized and entered into long-term concession agreements with private partners to operate and maintain their energy systems,” Moody’s said. “Along with the added system efficiencies gained through these arrangements, each university received a large upfront payment from the partner to fund strategic initiatives.”