Political Penndit | Giving the University more credit

Last week, Moody’s Investors Service reaffirmed Penn’s debt rating of Aa2. The University’s rating remains at the highest level it has ever been. But Penn’s rating is still lower than those of all other Ivy League institutions, and the University of Pennsylvania Health System may be responsible.

For those not studying finance, let’s begin with a brief lesson on credit ratings. A corporation’s rating is a measure of its dependability in repaying the money it owes. A high rating for the University signals to investors that it is reliable and allows it to borrow money at lower interest rates. Moody’s assigns ratings on a scale with Aaa representing the best credit worthiness, followed by Aa1, Aa2 and Aa3 as the next best ratings.

Thankfully, Penn’s rating was not lowered in the wake of the endowment’s 17-percent decline from $6.2 billion in 2008 to $5.2 billion in 2009.

“[Last year] overall was very stressful,” said Stephen Golding, Penn’s vice president for finance and treasurer. “The fact that they affirmed our ratings was a positive thing.”

But although Penn is among the highest-rated schools in the nation, its credit rating is the lowest among members of the Ivy League. Brown and Cornell universities and Dartmouth College are rated Aa1; Columbia, Harvard, Princeton and Yale universities received the perfect Aaa rating.

Moody’s and Golding both partially attributed Penn’s lower rating to its smaller endowment compared to the other schools. But Penn’s endowment is about the same size as Columbia’s $5.9 billion and is much larger than Brown’s $2 billion.

A more apt reason for the lower rating — and the greatest risk for Penn’s financial future — is its dependence on UPHS for revenue. Hospital and physician practices revenues account for 56.6 percent of Penn’s total operating revenues, according to the University’s 2009 financial report. Although UPHS revenues rose by 5 percent in 2009, deriving the majority of the school’s revenues from patient care is still a risky practice.

UPHS’s volatile financial history is a cause for concern. It is only recently that UPHS became so profitable for Penn; it had operating losses of $198 million in 1998 and $200 million in 1999. It was around this time that Moody’s lowered Penn’s credit rating from Aa2 to Aa3.

But under Arthur Rubenstein, executive vice president of UPHS and dean of the School of Medicine, UPHS exhibited a turnaround and became the driving force behind the University’s financial success. Moody’s restoration of Penn’s Aa2 rating in 2007 was driven in large part by UPHS’s earnings.

Being dependent on UPHS for more than half of Penn’s revenues can be risky, but “the ability of having a strong health system and teaching hospital associated with the University is a strength not only in terms of revenue, but also in terms of research,” Golding said. “It’s a two-edged sword.”

Although UPHS is performing strongly at the moment, its future profitability is a potential problem. It’s unclear what effect the recent healthcare bill’s passage will have on hospital systems. Additionally, Rubenstein announced earlier this month that he will retire from his positions when his term ends in June 2011, adding more uncertainty to the mix.

Pressure from competitors could hurt UPHS as well. “While we expect the Health System to continue to perform well, it does face healthy competition from other large academic medical centers” for some types of services, Moody’s report said.

For Penn to earn a higher credit rating in its next evaluation, UPHS must continue its stellar performance — but the University must also bring in more money by increasing fundraising and making more profitable investments. In the long run, it would be too risky for Penn to rely on UPHS for much of its revenues.

Prameet Kumar is a Wharton sophomore from New York. His e-mail address is kumar@dailypennsylvanian.com. Political Penndit appears on Wednesdays.

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