After issuing a review of Temple’s finances in July, the credit-rating agency Moody’s Investors Services upheld the university’s Aa3 rating while lowering its future outlook to negative from stable in a report released to the public on Oct. 17.
Moody’s issued the review due to “concern that the link between Temple University and the Temple University Health System may stress resources of the university with TUHS’s downgrade,” according to a July 16 report.
Earlier this year, Moody’s downgraded Temple University Health System’s credit rating from Ba1 stable to Ba2 negative after the system incurred financial losses greater than expected in the Fiscal Year 2013. The report cited a “fundamentally weak credit profile,” increased dependence of state funding and challenges within the industry as reasons for the downgrade. Fellow credit-rating agency Standard & Poor’s also issued a downgrade to TUHS, from BBB- to BB+, while the outlook remained stable.
Temple’s Health System was one of 10 health systems nationwide to receive a downgrade from the S&P in Fiscal Year 2013.
Ken Kaiser, Temple’s interim chief financial officer and treasurer, said the health system lost $8 million in the most recent fiscal year after projecting losses of $6 million.
While Temple and TUHS operate as legally separate entities with independent finances, Moody’s warned that financing by the university to cover the health systems’ losses would force the credit agency to downgrade the university’s rating.
Temple operates the various medical schools and the corresponding medical practice plan, while TUHS is a strictly clinical enterprise that operates several independent medical practices in the Philadelphia area. However, funds flow from TUHS to the university when medical faculty members are paid for clinical hours at Temple University and other hospitals.
“We don’t operate Temple University for the credit rating agencies,” Kaiser said. “With the outlook, it’s about partnering with the health system to make sure that their strategy over the next six months makes sense.”
In July 2012, TUHS used bonds to acquire the Fox Chase Cancer Center for $83.8 million, or 66 percent, of Fox Chase’s outstanding debt, Kaiser said. The acquisition of debt from the sale was one of the major borrowing purchases that led to TUHS’ credit downgrade, Kaiser said.
Since running on a loss last year, Kaiser said TUHS has adjusted its credit portfolio, and records show it will operate on a $34,000 surplus from its $1.47 billion budget for 2014.
“My sense is that [the health system is] at the bottom of where they’re going to be rating-wise and we will see improvement going forward,” Kaiser said.
In the report released Oct. 17, Moody’s cited a rise in the university’s enrollment and 3.5 percent three-year operating margin as reasons for maintaining the university’s credit rating, while warning that continued financial woes at TUHS were cause for the negative outlook on the university’s debt.
“TUHS operates in an extremely challenging market as a safety net provider to southeastern Pennsylvania that is highly indispensable in the City of Philadelphia,” Lead Analyst Diane Viacava wrote in the final Moody’s report, citing a high share of Medicaid patients and indigent-related revenue streams.
In his inaugural address on Oct. 18, President Theobald promised that increased funding for indigent health care would not come out of university tuition dollars.
According to the Moody’s report, the university’s debt was $518 million in Fiscal Year 2008, while the total debt of the consolidated enterprise that includes TUHS was $882 million, according to university financial statements. By 2013 debt at the university rose to $717 million, while total debt for the consolidated enterprise rose to $1.25 billion.
A downgrade for the health system increases its cost of capital on future borrowing, though Kaiser said it could have a more direct impact on the system’s reputation at a time when there are no current plans to borrow more money.
“The major impact for the health system is just in the signal it sends to the market, that it’s a vote of no confidence,” Kaiser said. “As they try to recruit doctors, does the doctor look at that and say ‘Maybe I don’t want to go work for Temple right now?’”
Kaiser said the university is waiting on the final report from S&P, though he remained hopeful, saying that Moody’s has tended to provide stricter ratings on the university and health system.
John Moritz can be reached at email@example.com or on Twitter @JohnMoritzTU.