Fitch Rates Wayne State University, Michigan's $53MM Revs 'AA-'; Affirms Outstanding

Business Wire, August 11, 2006

NEW YORK -- Fitch rates the $53,000,000 Board of Governors of Wayne State University (WSU or the university) general revenue bonds, series 2006 'AA-'. In addition, Fitch affirms its underlying 'AA-' rating on approximately $300 million of outstanding insured parity bonds listed below. The series 2006 bonds are expected to be insured by a 'AAA' rated bond insurer and will be sold the week of August 21, 2006 through negotiation by UBS Investment Bank. The Rating Outlook is Stable.

The bond proceeds will be used to finance campus steam boiler plants, renovations to a building for its public safety unit and student recreation center, fund capitalized interest and to pay costs of issuance expenses. The bonds are secured by a pledge of unrestricted general revenues.

The 'AA-' rating is primarily supported by WSU's revenue diversity, manageable debt burden and stable enrollment despite large tuition increases. WSU's largest funding sources are gifts, grants and contract revenues which combined represent 43% of fiscal 2005 operating revenues. The second and third largest funding sources are state appropriations and tuition and fees at 31% and 18% respectively. During the four fiscal years 2002-2005, state appropriations have represented a declining percentage of operating revenues while the other sources have grown.

In addition to revenue growth during the four fiscal years, debt has nearly doubled to $360 million, including the series 2006 issuance. Fitch considers the debt burden manageable. After the issuance of the series 2006 bonds, maximum annual debt service (MADS) of $23.8 million, would represent a modest use of 3.3% of fiscal 2005 operating revenues. Management has disclosed plans to possibly issue up to $70 million of additional debt within the next year. With this additional debt, pro forma MADS as a percent of revenue increases to 4.0%. Critical to WSU's ability to repay the debt and maintenance of the rating is WSU's ability to sustain current enrollment levels. WSU has implemented undergraduate tuition annual increases of 2% to 18% since fall 2000 to offset state appropriation reductions. During this period, headcount enrollment has grown by 9% from 30,408 to 33,137. Enrollment for fall 2005 of 33,137 was relatively level to the prior fall even after an 18% tuition increase that occurred in fall 2005.

The most significant areas of concern are the uncertainty of future reductions in state appropriations, a decline in the matriculation rate in fall 2005 and certain management practices related to debt and capital planning that are weaker than practices of other 'AA' Fitch rated public universities. State appropriations for operations fell by 19% from $257 million in fiscal 2002 to $216 million in fiscal 2006. For fiscal 2007, the state legislature has approved a 2.5% increase.

To mitigate the funding reductions through fiscal 2006, WSU reduced expenses through non-academic staff hiring freezes, staff reductions and tuition increases. With the tuition increases, WSU has been able to maintain its enrollment but the freshmen matriculation rate for fall 2005 was significantly impacted. For fall 2004, the percent of accepted students that enrolled was 51%. For fall 2005, the rate was 42%. Given the importance of maintaining enrollment and the financial condition of the state, Fitch is concerned that any future reduction in state appropriations would likely result in further tuition increases on a student body that appears to be price sensitive. WSU's student draw is very concentrated with approximately 90% of the university's students from Michigan, and 81% are from the Detroit metropolitan area.

To reduce the geographical concentration, management is proactively recruiting students from other states and Canada. While Fitch views the enrollment management practices as proactive, it is concerned that the university lacks a formal capital improvement plan (CIP) and a swap policy. Since fiscal 2001, WSU has executed eight swaps. Presently, WSU does not have a board - approved swap policy. Management plans to submit a draft swap policy to the board for its consideration and adoption later in 2006. Fitch believes that a board approved CIP is needed especially during a time period when state funding for capital projects is being reduced. To avoid significant deferred maintenance, Fitch would like to see a plan that addresses the capital needs as well as their timing and funding sources.

Fitch rates the state's general obligation (GO) debt 'AA' with a Negative Outlook. The Negative Outlook reflects Fitch's belief that Michigan will face increasing financial pressures from the loss of manufacturing jobs and looming challenges for the auto sector. The university is vulnerable to negative demographic factors including the decline in the city's K-12 enrollment levels for the last three years. Fitch rates Detroit's GO debt 'BBB' and has it on Negative Rating Watch.

WSU Bonds Outstanding:

Board of Governors of Wayne State University General Revenue Select Auction Variable-Rate Bonds: