While Philadelphia was sending valentines to new Temple University President Neil D. Theobald to mark his inauguration, Moody's Investors Service was threatening to cut the North Philadelphia school's credit rating, currently Aa3 due to expected losses from Temple's hospitals, unless Theobald acts quickly to "separate" the hospitals from the school, or take other steps to stop the hospitals' "deep operating deficits" from draining the university's cash. (A lower credit rating typically means higher financing costs, since borrowers like Temple have to pay lenders and investors more when they are seen as higher-risk investments.)
"Poor operating performance and weak cash flow margins" at Temple University Health System will create "operating and liquidity pressures" and dealing with the financial threat will suck up a lot of Theobald's time, writes Moody's analyst Diane Viacava and her team in a report to clients. Temple may end up needing to bail out its hospitals if Pennsylvania Gov. Tom Corbett's administration keeps cutting healthcare payments, Viacava adds.
Temple hospitals suffer what Moody's calls "deep operating deficits", and Moody's cut their rating to Ba2, threatening further cuts, in July. Viacava says Temple data shows operating margins in the last fiscal year fell below 2 cents on every dollar, down from more than 4 cents a year earlier, and are still dropping.
Total Temple debt has more than doubled, to $1.26 billion, in the past five years, mostly due to medical-related borrowing. Even as Temple keeps hanging iron on new or expanded buildings, Pennsylvania's weak economy, which is churning out a "declining" number of high school students each year, will make it tougher for Temple to draw students, the report adds.
Temple's medical school benefits from having a teaching hospital system, which also brings in many millions for research. But if the university can't fix Temple Health's finances, it should consider a "separation" from its hospitals, the report said.Theobald's new administration "must determine what actions it will take to address TUHS's viability," Viacava concluded.