Credit Ratings for UofL, UofL Foundation, and CHI Downgraded.

Financial stresses abound.

In the space of a week, Moody’s Investor Services released credit opinions for the University of Louisville and the University of Louisville Foundation; and Catholic Health Initiatives published its Annual Report for the Fiscal year ending June 30, 2016.  The results were not very pretty. The rating for the bulk of the University’s existing bonds dropped one grade to A1 with an outlook determined to be stable. The Foundation did not fare as well. Its rating dropped three steps to A3 with an outlook revised to negative. Catholic Health Initiatives disclosed operating and non-operating losses totaling $667 million. CHI had declines in its own bond ratings earlier this year, due largely to excessive debt reported to stand at $9 Billion as it seeks to partner or merge with another Catholic hospital chain. The drops in grade and financial losses are by themselves troubling.  However, language in the details of the reports links the organizations together, highlights the harmful consequences of recent management and political manipulations on the University, overestimates the health of current business relationships between the parties, and underestimates the impact of promised roll-backs to Medicaid and the Affordable Care Act on the financial health of our local hospitals and the University.  For these reasons, I fear that things are going to get worse before they get better.

University of Louisville.
The University’s rating keeps it in upper-medium investment grade, characterized as having a “strong capacity to meet its financial commitments but somewhat more susceptible to the adverse changes in circumstances and economic conditions.” The decline in rating will affect new bonds planned to finance improvement to the football stadium. The downgrade “reflects the university’s weakening operating, wealth and liquidity measures” at a time of “material governance and management transitions.” “Ongoing legal challenges and leadership changes add distraction and reputational risk to UofL’s forward operations.” Moody’s is well aware of the intervention by Governor Bevin in University governance.  It is apparent to Moody’s that the consequences of recent University management have hurt us.  No disagreement here!

Our dependence on clinical revenues is also identified as a challenge. The University did very well under Obamacare and Medicaid expansion. The changes promised at the federal and state level would be a body blow to the University (and its community) if or when they occur. Moody’s took a “strong affiliation with KentuckyOne Health” and its support of revenue growth and contributions to academic and research as a credit strength.  I believe that most folks at the Medical Center would disagree with this assessment!  Some do not even expect the partnership to survive its current dispute-resolution negotiations– although KentuckyOne indicated to Moody’s that “talks are moving in a promising direction.”

From Moody’s strictly financial viewpoint, decline in the growth of tuition revenue is not a good thing!  Students facing relentless increases in tuition and their bankrupting-level student debt might think differently. Moody’s report also expressed concern about the weakening support from both the Commonwealth and the University of Louisville Foundation. Moody’s understanding of the status of UofL’s endowment and its ability to maintain financial support to the University is not as favorable as what was presented at the Board of Trustees meeting earlier this week.

University of Louisville Foundation.
The Foundation’s rating drops it from high-grade status into the same upper-medium investment grade as its parent University. The same likelihood of meeting its financial commitments is awarded.  However, the negative outlook casts a shadow of pessimism on a future affecting $12 Million of debt outstanding. The downgrade takes into consideration the recent downgrade in the rating of the University itself, the Foundations “weakening operations and narrowing liquidity driven by financial market volatility, rising University support needs, debt reduction, and organizational restructuring.” It points out specifically “historical ineffectual board policies and oversight for complex real estate and investment strategies.”  It mentions that “increased scrutiny, including plans for a detailed forensic audit… adds uncertainty around the potential impact on future donor confidence and giving levels. [Major donors have already withdrawn support subject to the results of the audits and a move to greater transparency.]

Moody’s believes that the “new Board governance reviewing and implementing updated policies and procedures” will strengthen credit, as will “improvement in the credit quality of the University of Louisville with continued demonstration of strong strategic linkages between the two organizations.” The challenges that led to the negative outlook include ongoing uncertainty resulting from “significant and abrupt governance and leadership changes and continued scrutiny around the Foundation’s activities.” Moody’s believes that as the Foundation off-load’s its “various real estate and development activities to other newly created foundations and focuses on more traditional fundraising and endowment management activities” that the Foundation’s performance will improve.  That may well be so for the Foundation proper, but its problems will have only shifted elsewhere under the umbrella of the University’s corporate empire.

Moody’s was not impressed with the operating or investing performance of the Foundation and its higher than average spend rate– the percent of endowment used to support University and Foundation activities.  I would like to assume that Moody’s had access to valid financial data in its review, but comments from at least two UofL Trustees at this week’s Board meeting suggested that the Foundation’s spend rate is more like an unrealistic 10%, is based on overstated assets, and that the real value of the University’s endowment is roughly the same as it was in 2006! It is unsettling to hear such divergent appraisals of our University’s financial health.  I trust that the multiple audits underway will clarify the actual financial status of the University, its endowment, and its affiliated corporations and foundations. [Where did the Billion dollars go?]

Catholic Health Initiatives.
The annual report for FY2016 ending June 30, 2016 is also available on CHI’s website. I cannot claim to have any particular expertise to interpret complicated financial statements, but the declaration on page 12 that the company had operating losses of $460 million and nonoperating losses of $206 million for a total loss of $667 million jumps out at me. It appears (page 23) that CHI’s operations in Kentucky actually made money ($123 million) although this is not broken out by hospital.  Patient services revenues have been decreasing. Given the current dispute between KentuckyOne and the University over promised financial transfers, it is interesting that CHI offsets its losses by cryptically (for me) noting that: “operations for the three months ended June 30, 2016 were also favorably impacted by a $36.2 million decrease in a contingent consideration liability as a result of changes in payment assumptions related to the University of Louisville affiliation at KentuckyOne Health.” I take this to mean that UofL did not get as much money as had been anticipated. UofL is saying the same thing.

In 2016, Moody’s downgraded CHI’s debt rating to A3 with a negative rating, and Finch downgraded its rating three steps to BBB+ with a negative outlook. The major issue appears to be the amount of debt that CHI has assumed which Modern Healthcare reports to be $9 Billion.

CHI is currently in talks to align or merge with Dignity Healthcare, another Catholic hospital and healthcare system.  According to Modern Healthcare’s analysis, Dignity has financial problems of its own with operating losses last year of $63 million on $12.6 million revenue.  It is said to also have an “outsized” total debt of $5.3 Billion.  While operations of the two healthcare systems may not to overlap geographically, it remains to be seen if their financial condition can be improved through savings from consolidation.  That hasn’t seemed to work very well in Kentucky.

Final thoughts.
It is against the above background of organizational and financial stresses, and of ongoing attempts at political manipulation that the University of Louisville must carve out its future. I am being given conflicting information about whether UofL will be able to continue its arrangement with KentuckyOne. I wish both parties well, but for reasons I have abundantly outlined, I personally do not believe it is either proper or feasible to continue to allow CHI/KentuckyOne to hold the University hostage to its religious ministry.  What was planned has not worked for either University Hospital or Jewish Hospital. Both parties are free to do their good works as separate entities. The University may have another chance to manage its own hospital or join with some other partner.

There be Heroes!
It is also clear that the previous casting of insults and aspersions on the most recent panel of Trustees appointed by former Governor Beshear were self-serving if not self-protecting.  These few new Trustees asked questions that needed to be asked. They have assumed real leadership.  We as a community owe them our gratitude. There are currently Trustees who have been serving on the Board for over a decade– longer than the statutory limit.  The debacle we are living with today grew on their watch and that of their former colleagues. They unavoidably share responsibility for what has brought us to this critical juncture. The forensic and other audits and disclosures occurring now may well assign more than blame on those involved.

For the time being, Governor Bevin should keep his word and add the full complement of Trustees to the current panel.  The University’s faculty and students are begging him to do so.  I do too. He also needs simultaneously to get his own Postsecondary Education Nominating Committee into compliance. To continue to use the composition of the UofL Board of Trustees as an excuse to accomplish political or personal goals while ignoring the improperly appointed Nominating Committee that the Governor himself assembled would be in my opinion hypocritical and further puts the reputation and accreditation of the University of Louisville at risk.  Governor Bevin, you are making things worse.

If I have made any errors of fact above, please let me know.  In particular, I welcome help in correcting my interpretation of CHI’s financial report.  Summaries of Moody’s reports are linked in the first paragraph of this article.

Peter Hasselbacher, MD
Emeritus Professor of Medicine, UofL
President, KHPI
December 1, 2016