Law Schools

Law School Gets Slapped With 'Negative Outlook' By Credit Rating Agency

This school needs tuition revenue growth to fix its financial situation.

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While the administrations at quite a few law schools are jubilant right now, optimistic that both enrollment and employment statistics are up, the administration of at least one law school seems to be stuck in a Groundhog Day time loop. Why’s that?

Moody’s Investor Service just affirmed the school’s negative financial outlook, effectively forcing the school into do-over mode to counteract the bad news during its efforts to recruit students.

The law school in question is New York Law School, a standalone school whose bonds were downgraded from Baa1 to Baa3 in 2013, and reaffirmed as Baa3 ever since, most recently last week, based on “tuition pricing challenges and operating deficits.” Here’s the rationale Moody’s provided for New York Law’s continued negative outlook:

The rating also considers tuition pricing challenges and operating deficits that will continue for the foreseeable future, leading to a likely deterioration of spendable cash and investments. Despite an increase in number of applications for law schools nationally, net tuition revenue remains pressured, resulting in a weak average operating deficit of 26% over the last three years. The school’s operating performance improved in fiscal 2018, primarily due to expense reduction and profit sharing from sale of condominium units on land once owned by the school. However, funding operating expenses over at least the next several years will require extraordinary endowment spending.

RATING OUTLOOK

The negative outlook reflects our expectations that NYLS’s operating performance will remain pressured which will result in some erosion of spendable cash and investments. With extraordinary spending from the financial reserves well above the industry standard 5% of a trailing average, the school has heightened exposure to investment market losses.

Law school spokeswoman Elizabeth Thomas is highlighting the positive parts of Moody’s assessment, noting that the credit rating speaks of New York Law’s “strong leadership team, focus on strategic planning, and recent successes amid a challenging environment for legal education.” Not only that, but “[t]he rating also recognizes the high value of the school’s Tribeca campus and its large endowment.”

According to Moody’s, New York Law School’s finances could be improved with “[s]ustained growth of net tuition revenue” and “[s]trategic initiatives that could offer operating equilibrium.” If the value of law school’s real estate were to falter, however, it’s likely that Moody’s would downgrade its credit rating once again.

Best of luck to New York Law School as it tries to overcome this negative credit rating. Hopefully we don’t see any tuition hikes to account for the tuition revenue growth the school apparently needs, but unfortunately, this could become a reality in the future.

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New York Law School Still Faces Financial Challenges, Moody’s Finds [Law.com]

Staci ZaretskyStaci Zaretsky is a senior editor at Above the Law, where she’s worked since 2011. She’d love to hear from you, so please feel free to email her with any tips, questions, comments, or critiques. You can follow her on Twitter or connect with her on LinkedIn.

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