Fitch Downgrades Tx Southern U bonds

Fitch Downgrades Texas Southern Univ (Texas) Revs to 'BBB': Outlook Revised to Negative

Fitch Ratings downgrades the underlying rating on Texas Public Finance Authority Texas Southern University's (TSU) revenue bonds series 1998A1, 1998A2, 1998B, 1998C, 2002, 2003 and 2004 to 'BBB' from 'BBB+'. The Rating Outlook is revised to Negative from Stable.

The change in the rating outlook is due to weak internal controls evidenced by financial activities that led to the Aug. 1 indictments of the president and chief financial officer. In Fitch's reports on TSU, dated May 22, 2003 and March 22, 2004, the history of weak management prior to 1999 was discussed. However, in Oct. 1999 a new president was hired and a new CFO was hired in Dec. 2000. Fitch viewed the turnover as needed in order to address the university's financial concerns but identified the limited history of prudent financial management as a concern. Financial management of TSU remains a major concern for the rating. To address the internal control issues, TSU is in the process of implementing an enterprises-wide risk management program which requires the manager of each university operation to document the potential risks in his/her area, the probability of risk occurring, the impact should it occur and assessing the controls in place to eliminate the risk. While Fitch views the risk management program as a positive action, we remain concerned that weak internal controls could impact the integrity of the financial statements. In our initial rating of TSU in 2003, Fitch concluded that the reliability of the 1998 financial statements could not be adequately assessed and therefore relied on the financial statements of fiscal years 1999 and thereafter. TSU is in the process of hiring an independent audit firm to audit the financial statements of fiscal years 2005 and 2006. Future rating action will be impacted by the independent audit results and full implementation of the risk management program.

The rating downgrade is due to the expected issuance of $46.5 million of additional debt over the next three years. TSU currently has $149.6 million of debt outstanding. Approximately $40 million is revenue debt supported primarily by student fees, $71.1 million for which the state has in most years reimbursed TSU for debt service and $38.5 of debt supported by funds constitutionally appropriated to TSU. The additional debt of $46.5 million would be similar to the outstanding $71.1 million in that TSU pays the debt service but is reimbursed by the state. However, the state has not always fully appropriated an amount sufficient to cover debt service. In fiscal years 2004 and 2005, the appropriation for debt service reimbursement of $3.1 million was only 60% of the debt service amount. TSU handled the shortfall partially through tuition and fee increases and enrollment growth. Fitch estimates that additional bonds of $46.5 million would result in additional annual debt service of $3.7 million for 20 years. Fitch believes TSU's ability to handle a significant shortfall in state funding for debt service would be restricted given the limited existing levels of liquidity.

Other concerns include a projected decline in operating performance for fiscal 2006, the ability to collect approximately $20 million of outstanding capital campaign pledges and continued state funding in fiscal 2008 and beyond for programs implemented as a result of an agreement with the Office of Civil Rights to address disparities associated with segregation.

Credit strengths include increasing enrollment and the significant level of state support for the operations of TSU. Approximately 39% of the university's fiscal 2005 operating income was from the State of Texas (whose general obligation bonds are rated 'AA+' by Fitch Ratings). Headcount enrollment for fall 2005 was 11,903, a 47% increase since fall 2001. However, enrollment for the upcoming fall 2006 semester is expected to decline by 7% in part due to 21% increase in tuition and fees.

Located in Houston, TSU was established in 1947.

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