The attempt by Gov. Mike Dunleavy and a minority of legislators to dismantle the University of Alaska is having a serious impact already on Alaska. Dunleavy, who promised while running for office that he would not cut the UA budget, acted with his veto power to make the largest cut in the history of the university.

He is leading the effort to erode confidence in Alaska’s university. So far he has been successful..

The rating for bonds sold to support the dining facility in Fairbanks is now one step above that given to “non-investment grade” bonds. The immediate impact is that it makes it more expensive for the university to borrow money.

Just as important, it is a sign of instability. The three-notch reduction now gives the university the second lowest credit rating of any flagship university in the country, with Puerto Rico at the bottom.

“This is a direct result of the state’s budget cut and demonstrates what we have been saying -- the 41 percent [$136 million] budget cut to the university continues to harm us every day,” said UA President Jim Johnsen. “Today’s news just amplifies the impact of the state’s funding cut -- Moody’s downgrade harms our ability to bond or borrow money at favorable interest rates and to be viewed as financially stable.”

Here is the main text from Moody’s, a company that provides financial advice on bonds, about the early consequences of the severe financial problems created by Dunleavy and 23 Republican legislators

New York, July 17, 2019 -- Moody's Investors Service has downgraded University of Alaska's (AK) General Revenue Bonds to Baa1 from A1, with $270 million outstanding, and the Series 2012 Lease Revenue Bonds to Baa3 from A2, with $23 million outstanding. The Lease Revenue Bonds were issued through Community Properties Alaska, Inc. The outlook for both the general revenue bonds and the lease revenue bonds is negative. This concludes our rating review initiated on July 2, 2019.

The multi-notch downgrade for both the revenue bonds and the lease revenue bonds reflects the severity and magnitude of the financial challenges confronting University of Alaska (UA) following an over 40% cut in the university's appropriations from the State of Alaska (Aa3 stable) for the current fiscal year, 2020. The state legislature did not override the governor's line item veto during the special session that ended on Friday, July 12, and UA's board has not yet acted to declare financial exigency, which would enable it to more quickly make programmatic and faculty reductions.

With this unprecedented single year cut in state appropriations, there is a high likelihood of a material reduction in the university's liquidity over the next year as it uses cash to fund programs pending restructuring of operations, and for the associate costs of that restructuring. UA's strategic position has been materially impaired by this funding reduction, as well as a cut to the state's financial aid programs, and we expect a multi-year negative impact on enrollment, which was already declining, as well as the competitive position of University of Alaska's research enterprise.

The ratings incorporate the university's $253 million of unrestricted monthly liquidity, which provides moderate flexibility to undertake the radical changes that will be necessary to adjust to this funding reduction. Further, UA has demonstrated some ability to reduce expenses, over 10% from fiscal 2016 to 2018, with contingency plans developed for reductions of about half the ultimate size that was passed.

The widening of the notching between the lease revenue bonds and the general revenue bonds reflects the subordinated nature of the obligation with a heightened risk of non-appropriation due to the university's significant financial challenges and the single asset nature of the lease (a dining facility on the Fairbanks campus).

RATING OUTLOOK

The negative outlook reflects execution risk as University of Alaska implements significant changes to a complex and sprawling system. The university is confronting both an immediate operational and liquidity challenge as well as a multi-year period of redefinition even as it takes into consideration multiple stakeholders, both mission-related and political considerations, and contractual constraints to rapid expense reductions. With significant uncertainty around the pace of action and resulting impact on financial results and liquidity, future rating actions could be multi-notch.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Demonstrated ability to quickly and sustainably respond to funding reductions without depleting liquidity could return the outlook to stable.

- An upgrade would be dependent on evidenced ability to materially improve strategic position, either through restoration of stronger state support or through strengthening of other funding streams, such as tuition revenue and philanthropy.

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Inability to act quickly to right-size operations without depleting liquidity

- Any indication of reduced willingness to honor debt or other contractual obligations