volume 42, number 3
Temple UniversityFaculty Herald

Understanding Temple Finances as We Wait for the Other Shoe to Drop

By Phil Yannella, Professor of English and American Studies


   As I write this, we are waiting to hear how much money Governor Corbett wants to cut from next year’s appropriations for the state-related universities, Temple, Penn State, the University of Pittsburgh, and Lincoln University. I do not know in any detail how the other universities will react to the announcements. But, because we have been through it so many times in years past, I will predict Temple’s reactions. They will be premised on the idea that Temple stands on the edge of a deep financial cliff from which it will plunge if we do not cut expenses, especially at the collegial and department levels. Consequently, this and that will be frozen, this and that real or alleged redundancy in the educational program will be attacked, some deans will be told to pare their budgets, some things will be reorganized, savings will be sought through increased class sizes and increased teaching workloads, promises will be made that administrative budgets will be cut, delegations of students will be bused to Harrisburg to attend rallies and to lobby legislators to give more money, other members of the Temple “family” will be asked to sign petitions, undergraduate tuition increases will be said to be inevitable, and so forth and so on.
    This essay has two parts. In the first part, I briefly summarize the major themes of the several articles on the budget that I published in the Faculty Herald over the past year or so. In the second part, I discuss the extremely important, sobering reports on Temple’s current financial situation by two financial agencies, Standard and Poor’s and Moody’s Investor Service.

Here is a summary of the main themes of my earlier articles:

I. Temple’s 2009-10 budget detail included tens of millions of dollars of vaguely described items and discretionary items that could be cut and a $30 million “Contingency” fund. Its 2010-2011, now deposited in Paley Library, also contained vaguely described items, discretionary items, and a “Contingency” fund of $33 million. By cutting some or all of the slushy items and using the “Contingency” fund, cuts to the educational program and increases in tuition could easily have been avoided in past years, but our Board of Trustees and central administration chose to preserve slushy budget items and the “Contingency” money. We do not have access to the current budget detail, but we can infer that it contains considerable slush and a “Contingency” fund.
II. Temple had an operating surplus of $94.2 million in 2010-11 We could have avoided a 10% undergraduate tuition increase and cuts to college budgets by having, say, a $40 million surplus instead of that $94.2 million surplus. I was not and am not arguing that Temple should break even or run deficits. Surpluses are great things to have. Running a smaller surplus and avoiding the collegial cuts and tuition increases would not have harmed our ratings by those outside financial agencies. But our Board of Trustees and Central Administration chose not to do that.
III. Asserting that it is building for the future, that building is absolutely essential to attract future students, our Board of Trustees and Central Administration have planned a number of costly construction projects. Part of the funding for the initial projects, perhaps $30 to $40 million in each of the last two years, has come from tuition money. Why should current students be “taxed” to create a more entertaining, prettier, and more convenient environment for future students? They should not, I would argue. What would our fiscal situation be if some of the projects, those not supported by donors or by State capital funds, were put on hold? A lot better, a lot less risky, I have argued. Our Board and Central Administration, though, chose construction.

    No member of Temple’s administration ever challenged my facts or anything else contained in my earlier articles. But from time to time I have heard it said that certain of my ideas, such as using the surpluses and the “Contingency” funds to avoid collegial cuts and tuition increases, cannot possibly be done because the University must satisfy outside financial agencies such as Moody’s that it has such money. In his recent “White Paper” on reorganization, for instance, Provost Englert remarked that one of our goals was to “maintain financial stability, including stable bond ratings (which are independent assessments of the financial health of an institution).” He extended this remark in an appendix that cited a recent Moody’s document about the top factors driving higher education financial ratings upgrades and downgrades, one of which states that universities should show “consistently strong operating performance and retention of surpluses.” However, Moody’s says nothing whatsoever about optimal surpluses or managing budgets so that they produce a meaningful surplus but do not cut essentials or increase tuition. Indeed, universities with higher ratings than Temple’s sometimes report significantly smaller surpluses as measured by surplus as a percentage of overall operating expenses.
    Moody’s and other outside financial agencies are important. Guidelines for understanding how bond ratings can be upgraded or downgraded are useful. But they are not as important, as relevant, or as crucial to understanding our situation as the actual ratings reports that the agencies produce. Standard and Poor’s issued a short report on its downgrade of the rating of the Temple University Health System (TUHS) in October 2011. Moody’s issued an extensive report on Temple in March 2011, when the University sought $120 million from bond investors to support construction projects. Some of the statements in the Moody’s report, I believe, support the arguments I have been making. Neither of these reports was cited by Provost Englert. Neither has been publicly cited by any other Temple official, so far as I know. I will guess that they have not been cited because they do not support the picture of fiscal prudence and smart management that officials try to project.

   The Standard and Poor’s report, which can be accessed here, explains that it has downgraded TUHS to BBB- because of the possibility, despite the efforts being made, that there may be “considerable operating loss in 2012.” In the S&P rating system, BBB- is “Considered [the] lowest investment grade by market participants.”
   The long and detailed March 2011 Moody’s report on Temple includes, among other things, discussions of TUHS, our debt, our core market, the risk involved in our current construction plans, the “elasticity” of our tuition rates, the future possibility of Temple being upgraded or downgraded, and our $1 billion in short-term, liquid investments. It summarizes its findings as follows:

    "The Aa3 rating for Temple University reflects its established market position as the largest Pennsylvania public university in southeast-ern Pennsylvania with good enrollment growth, strong University operating performance and good financial resource levels supporting debt and operations. These are offset by the weak operations and market challenges of Temple University Health System, proposed dramatic cuts in state funding and expected substantial capital plans [i.e., the 20/20 construction projects]. The negative outlook reflects potential operating and liquidity pressures on the University due to financial stress at Temple University Health System (TUHS) as well as the impact of the dramatic reductions in state operating funds. The MIG 1 [Moody’s Investor Grade 1] rating is based on Temple's market access for its notes issuance and its strong liquidity position."

    Most troubling to me in the Moody’s report are the comments on the potentially rippling effect of the TUHS situation, on the risks involved in the 20/20 construction, and on our tuition “elasticity” in relation to our core regional market.
    The report also comments on Temple’s $1 billion short-term investments. This $1 billion is separate from the “Contingency” fund, the annual surpluses, and the money that can be found in the budget detail. Drawing some money from the short-term investments, or even just taking some of the substantial interest earned from them, would be still another way – besides using the “Contingency fund, besides planning for smaller surpluses, besides shoveling the slush out of the budget detail -- to obviate any need to raise tuition again or to again cut collegial budgets.
    A copy of the Moody’s report that includes some marginal comments by me can be accessed by clicking here. The report, and many others on Temple’s financial situation, can be accessed at http://www.bondsonline.com.