In the space of a week, Moody\u2019s Investor Services released credit opinions<\/a> for the University of Louisville and the University of Louisville Foundation; and Catholic Health Initiatives published its Annual Report<\/a> for the Fiscal year ending June 30, 2016.\u00a0 The results were not very pretty. The rating for the bulk of the University\u2019s existing bonds<\/a> dropped one grade to A1 with an outlook determined to be stable. The Foundation<\/a> 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.\u00a0 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. \u00a0For these reasons, I fear that things are going to get worse before they get better.<\/p>\n University of Louisville.<\/strong> 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\u2019s took a \u201cstrong affiliation with KentuckyOne Health\u201d and its support of revenue growth and contributions to academic and research as a credit strength.\u00a0 I believe that most folks at the Medical Center would disagree with this assessment! \u00a0Some do not even expect the partnership to survive its current dispute-resolution negotiations\u2013 although KentuckyOne indicated to Moody\u2019s that \u201ctalks are moving in a promising direction.\u201d<\/p>\n From Moody\u2019s strictly financial viewpoint, decline in the growth of tuition revenue is not a good thing! \u00a0Students facing relentless increases in tuition and their bankrupting-level student debt might think differently. Moody\u2019s report also expressed concern about the weakening support from both the Commonwealth and the University of Louisville Foundation. Moody\u2019s understanding of the status of UofL\u2019s endowment <\/a>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.<\/p>\n University of Louisville Foundation.<\/strong> Moody\u2019s believes that the \u201cnew Board governance reviewing and implementing updated policies and procedures\u201d will strengthen credit, as will \u201cimprovement in the credit quality of the University of Louisville with continued demonstration of strong strategic linkages between the two organizations.\u201d The challenges that led to the negative outlook include ongoing uncertainty resulting from \u201csignificant and abrupt governance and leadership changes and continued scrutiny around the Foundation\u2019s activities.\u201d Moody\u2019s believes that as the Foundation off-load\u2019s its \u201cvarious real estate and development activities to other newly created foundations and focuses on more traditional fundraising and endowment management activities\u201d that the Foundation\u2019s performance will improve.\u00a0 That may well be so for the Foundation proper, but its problems will have only shifted elsewhere under the umbrella of the University\u2019s corporate empire.<\/p>\n Moody\u2019s was not impressed with the operating or investing performance of the Foundation and its higher than average spend rate\u2013 the percent of endowment used to support University and Foundation activities.\u00a0 I would like to assume that Moody\u2019s had access to valid financial data in its review, but comments from at least two UofL Trustees at this week\u2019s Board meeting suggested that the Foundation\u2019s spend rate is more like an unrealistic 10%, is based on overstated assets, and that the real value of the University\u2019s endowment is roughly the same as it was in 2006!\u00a0It is unsettling to hear such divergent appraisals of our University\u2019s financial health.\u00a0 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?]<\/p>\n Catholic Health Initiatives.<\/strong> In 2016, Moody\u2019s downgraded CHI\u2019s debt rating to A3 with a negative rating, and Finch downgraded<\/a> 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.<\/p>\n
\nThe University\u2019s rating keeps it in upper-medium investment grade,<\/a> characterized as having a \u201cstrong capacity to meet its financial commitments but somewhat more susceptible to the adverse changes in circumstances and economic conditions.\u201d The decline in rating will affect new bonds planned to finance improvement to the football stadium. The downgrade \u201creflects the university\u2019s weakening operating, wealth and liquidity measures\u201d at a time of \u201cmaterial governance and management transitions.\u201d \u201cOngoing legal challenges and leadership changes add distraction and reputational risk to UofL\u2019s forward operations.\u201d Moody\u2019s is well aware of the intervention by Governor Bevin in University governance.\u00a0 It is apparent to Moody\u2019s that the consequences of recent University management have hurt us.\u00a0 No disagreement here!<\/p>\n
\nThe Foundation\u2019s 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.\u00a0 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 \u201cweakening operations and narrowing liquidity driven by financial market volatility, rising University support needs, debt reduction, and organizational restructuring.\u201d It points out specifically \u201chistorical ineffectual board policies and oversight for complex real estate and investment strategies.\u201d\u00a0 It mentions that \u201cincreased scrutiny, including plans for a detailed forensic audit\u2026 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.]<\/p>\n
\nThe annual report<\/a> for FY2016 ending June 30, 2016 is also available on CHI\u2019s 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\u2019s operations in Kentucky actually made money ($123 million) although this is not broken out by hospital.\u00a0 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: \u201coperations 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.\u201d I take this to mean that UofL did not get as much money as had been anticipated. UofL is saying the same thing.<\/p>\n