Moody’s reaffirms Kean University’s negative outlook

UNION COUNTY — Late last week Moody’s Investor’s Services again rated Kean University’s financial outlook as negative because of declining enrollment and the potential for state budget challenges that might result in increased expenses.

According to Moody’s, the A2 rating, just one below the state, reflects the state university’s ability to generate strong cash flow despite declining revenue, combined with its role as a public university.

The investor’s firm noted Kean’s challenges ahead involve solving the dilemma of declining revenue, which is driven by student tuition. Moody’s suggested this latest rating “highlights the need for careful expense controls.”

Moody’s pointed out in the financial review that for the last two years Kean recorded “significant enrollment declines.”
For example, in the fall of 2013 full-time enrollment was down as low as 10,938, or 1,300 less than the 12,279 the university had in 2011. Declining enrollment, though, may continue to plague Kean, if recent enrollment numbers for the fall semester are any indication.
According to information obtained by LocalSource, 625 new students have registered so far for the fall semester.
“Student charges comprise nearly 60 percent of operating revenue,” Moody’s noted in the May 30 report, pointing out that “high debt burden is likely to continue with limited prospects for growth of financial reserves or revenue.”

The state university is approximately $338 million in debt, according to a recent statement by Marsha McCarthy, director of Media Relations for Kean.

Despite this debt, as recently as late last month Kean became involved in a court battle over the right to buy the 50-acre Merck property fronting Morris Avenue in Union.

The university is waging a legal battle for the right to accept the assignment of first refusal, which was handed over to the Kean Board of Trustees from the Kean family.

The Kean family originally sold the 50-acres to Schering Plough in 1986 but with the “right of first refusal” if it was ever sold. This means that if the property was ever sold, the Kean family had the first opportunity to buy back the acreage. Although the Kean family did not have the funds to buy the property, they “assigned” the right of first refusal to the Kean Board of Trustees. A developer, in negotiations with Merck to buy the property for $6.5 million, does not think the Kean family had the legal right to do this and subsequently filed a lawsuit against Kean, Merck and the township. At issue is how the university can afford to buy the Merck property given the fact its debt has nearly tripled since 2003 when it was $124 million, which caused its bond rating to be downgraded by Moody’s.

No one seems to be able to answer why the university has continued to build student housing and other expensive facilities on campus, such as the state of the art STEM building, despite this heavy debt load.

Ironically, the board of trustees has endorsed this path towards further development, and gave their blessing to the creation of a satellite campus in China.

Moody’s, though, did not see the China campus negatively; in fact, they felt this move helped differentiate Kean from other regional public universities and “contributes to a long-term demand for the university.” They saw this campus as “strengthening brand recognition.” One tenured assistant professor at the university, however, did not see it that way at all.

“The reference to the China campus being a brand differentiator is bogus. Except for Chinese students in China, the China campus won’t bring a single student to Kean. Students choose schools based on the school having the programs they want, cost, convenience and reputation,” said Assistant Professor of Philosophy Jesus Diaz. The assistant professor also noted there is a political influence at Kean, specifically naming Democrat State Sen. Raymond Lesniak among those who have
contributing to Kean’s continued negative rating.

“Lesniak’s, the board’s and Farahi’s misconduct has damaged our reputation; that’s why enrollment will continue to decline, as Moody’s expects,” Diaz added, pointing out that “the perpetrators are reaping their harvest. Every penny less that goes into Kean’s coffers makes Farahi less valuable to the Lesniak machine.”

The investors firm did note that all costs for the satellite campus will be reimbursed by the Chinese government, as per an agreement between the university and Wenzhou-Kean University. However, other costs, such as those related to the building of the facility, outfitting the satellite campus with furniture and books or financing the cost of Kean staff and employees going to China, are paid for by taxpayer dollars.

For example, as recently as two weeks ago, LocalSource received information from a Kean source that the university ordered $200,000 in furniture for the China campus.

Moody’s did, however, find strengths at Kean, noting that the university has a “strong cash flow” despite modest declines in operating revenue. They said this “demonstrates management’s focus on expense efficiencies.”

According to the investors firm, strengthening student demand and maintaining a “healthy operating performance” would result in a positive rating. By the same token, Kean’s rating could go down even further if there is deterioration of operating performance, particularly if Kean is unable to generate enough money to cover their debt service bills. Also negatively affecting the university’s rating, Moody’s said, is Kean’s ability to generate revenue.

McCarthy said in the last ten years the university has invested more than $500 million in the development and renovation of academic and research facilities, housing and athletic centers at the Union campus.

“These investments created an estimated 3,400 jobs,” she said, adding that Kean’s debt ranks “below that of the College of New Jersey, Ramapo College and Rowan University and at the midpoint among all eight peer institutions.”

“Our wise investments and strategic growth have allowed Kean to remain the most affordable comprehensive university in the state of New Jersey,” she added.