Moody's Ratings downgraded the ratings of two private universities in California this week as higher education continues to struggle with declining enrollment and lower revenues nationally.

Moody's downgraded the University of La Verne's rating from A to Baa1 on Thursday, affecting $101 million in municipal bonds issued by the university in eastern Los Angeles County. On Monday, the University of San Francisco's rating was downgraded from A2 to A3 and its outlook was lowered from stable to negative, affecting $302 million in outstanding debt.

Both schools have been hit by enrollment declines, but the University of San Francisco, a Jesuit university, was penalized by Moody's for “inconsistent admissions strategies and resulting operating deficiencies,” which analysts said were due to challenges in financial strategy, risk management, management credibility and track record. All of these criteria are governance considerations under Moody's ESG framework and drivers of the rating action, Moody's said.

Although USF is protected by its size and graduate programs, its admissions strategy as well as the competitive environment in the state have contributed to the enrollment decline, said Deborah Roane, vice president and chief credit officer at Moody's. Only 8.6% of admitted students choose to pursue graduate school, which is a low number and speaks to the competitive environment, Roane said.

According to Moody's, USF had 8,808 full-time students in fall 2023 and generated operating revenues of $409 million in fiscal year 2023.

In the case of the University of La Verne, declining enrollment numbers have led to a decline in net tuition revenue, “resulting in continued poorer operating performance than historical averages,” the report said.

Moody's has downgraded its outlook for La Verne from negative to stable at the new, lower rating.

Located about 35 miles east of Los Angeles, the University of La Verne was originally founded in 1891 and had a total of 5,411 full-time students in fall 2023, according to Moody's.

According to a report by Best Colleges, college enrollment nationwide has declined 7.4 percent over the past decade, a decline of 1.5 million students.

California's highly competitive student market, which includes many strong public systems and private alternatives, as well as a price-conscious student population and evolving consumer preferences, will continue to pose an obstacle to a sustained restoration of net tuition revenue growth in La Verne, Moody's analysts said.

Moody's revised its outlook for the higher education sector to stable from negative in December, predicting that the imbalance between revenue and expenditure growth would ease. Fitch was less optimistic in its forecast, predicting that enrollment and financial challenges would worsen in 2024, which “could weaken operating margins and strain financial flexibility.”

“As for the stable outlook, it is difficult to provide a forecast for a sector that is characterized by many variables and individual factors,” said Emily Raimes, associate managing director at Moody's.

“We have parts that are doing really well, parts that are doing well, and parts that are having problems,” she said.

“Enrollment is going well at large public universities, highly selective universities and small private universities, but part of the sector continues to struggle,” Raimes said. “Small private colleges, particularly those that are not top tier, will likely continue to struggle with enrollment.”

In its forecast for 2024 in December, S&P Global Ratings painted a two-part outlook: Strong institutions are likely to succeed, while less selective universities face challenges.

Moody's outlook does not necessarily say anything about the number of upgrades or downgrades, but rather about the general business conditions of the sector, Raimes said.

Nearly half of Moody's outlook revisions on higher education loans have been improved, Raimes said, but 90 percent of the rating actions have been downgrades and only 10 percent have been upgrades.

“Our view [ahead of the outlook release] was that we had hit rock bottom in terms of the economic conditions for higher education. While there were still challenges, conditions were not getting worse. Overall, we are still broadly confident.”

The forecast report predicted that spending would again exceed revenue, making for another tough year, but the gap would gradually close, Raimes said.

But there have also been unexpected developments, such as the pro-Palestinian protests and delays in the payment of financial aid to students, she said.