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Credit ratings could drop without state funds

Temple faces the risk of downgraded credit ratings, which would make borrowing money more difficult.

Temple faces a credit rating downgrade from Moody’s and Standard & Poor’s rating services as a result of the ongoing budget impasse. Both organizations assess the value and risk of investing with Temple.

The impasse has resulted in a $175 million deficit for Temple, $145 million of which goes directly to the university and mostly subsidizes in-state tuition. The rest goes to the Temple University Health System.

Pennlive.com reported that Gov. Tom Wolf plans to veto the most current budget proposal, which was passed by the state House and Senate last week.

“Any institution that issues bonds is subject to credit ratings, which is any independent assessment of financial strength of the person issuing bonds,” said Ken Kaiser, Temple’s CFO and treasurer. “If Moody’s downgrades Temple, S&P will do the same thing.”

Moody’s rated Temple at an Aa3, right on the cusp of High Grade and Upper Medium Grade, in December, citing in its report Temple’s advantages and disadvantages an investor should be notified of.

“The Aa3 rating reflects its position as a large urban public research university with good student demand, good university operating cash flow supporting consolidated operations, and ample cash and investments,” the report read.

The report, however, gave Temple a negative outlook because of the “weak operations and marketing challenges” of TUHS, which was rated as a Ba2, one level past Highly Speculative. The report also included “uncertain commonwealth funding due to the budget impasse” as another factor for the negative outlook.

Should the budget impasse continue, Kaiser said Temple could be downgraded, which is difficult to build back up and sends a signal to the market that Temple is not on a good trajectory.

“If it were downgraded and the state figured out the budget, and we figured out next year’s budget, [Moody’s] would be hard-pressed to not increase the rating because the issue has been remedied,” he said. “If we’re downgraded and the state doesn’t come up with the money, it would be difficult for them to increase [the rating] because that is a large source of money. They want to make sure the plan we have in place is a sound one.”

Bonds and a line of credit are the two ways Temple borrows money to pay for day-to-day and long-term operations, Kaiser said.

The line of credit acts like an on-demand loan that allows the university to take money from PNC Bank to use for operations, which Temple then pays back when it has the cash on hand, Kaiser said.

Temple dipped into its line of credit last semester as a result of the impasse, and will most likely do that again this semester for the same reasons, he added.

“The university has $500-plus million in debt that it uses or has used to fund construction over the last 40 years,” he said. “It’s not an unusual amount of debt—it sounds like a lot but it’s right in line with our program.”

The credit acts as a safety net in case there are unforeseen issues with cash flow or an opportunity, he said.

“The most likely outcome would be at some point in the next four to six weeks they’ll figure out the budget and we’ll dodge the bullet,” Kaiser said. “I just can’t see Pennsylvania not supporting Pitt, Penn State, Temple and Lincoln. It’s such a doomsday scenario.”

Kaiser said if there isn’t some sort of decision from the state by June, however, the other three universities affected by the budget impasse will face the same issues Temple is.

“June is going to be the witching hour,” he said.

Julie Christie can be reached at julie.christie@temple.edu or on Twitter @ChristieJules.

Julie Christie

can be reached at julie.christie@temple.edu
Or you can follow Julie on Twitter @ChristieJules
Follow The Temple News @TheTempleNews

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