U. won't feel UPHS pinch yet

Penn officials say that the financial crisis in the Health System will not hinder the University's larger plans. When a wholly owned subsidiary corporation that represents more than half of your total budget posts an estimated $150 to $200 million in losses, it is bound to be a source of concern. But Penn officials say that the University of Pennsylvania Health System's recent history of heavy fiscal losses is not yet having a significant effect on the University's overall financial health. According to Executive Vice President John Fry, work on all of the University's current projects will continue as planned. But Fry conceded that the Health System's "financial health will be taken into account" in future planning and will have "a major impact going forward." The Health System, which with the Medical School included constitutes about 70 percent of the total University budget, reportedly lost between $150 million and $200 million in the fiscal year that ended June 30. The Health System had previously posted losses of $90 million for FY98 and is planning to make significant layoffs in order to trim its losses. Vice President for Finance Kathy Engebretson said there hasn't really been an impact on the University yet. "No University resources are really at risk," she said. Engebretson added, however, that officials still have to be mindful of some dangers. The Health System's financial troubles have already led to one downgrade of the University's bond rating, which means that Penn must pay a higher interest rate when borrowing money. Last March, Moody's Investor Service downgraded the University's bond rating from Aa2 to Aa3 because of the Health System, which has seen its own bond issues downgraded over the last 15 months. Another review of the University's rating could occur within the next month. However, Engrebetson emphasized that the downgrade hasn't affected the University because of the country's relatively low interest rates. "There's not much difference between Aa2 and Aa3," Engebretson said. Another bond rating agency, Standard & Poor's, maintained the University's rating at its present Aa2 level while downgrading UPHS to an A rating last July. "Despite the health service component of the University, we still feel the University exhibits strong credit characteristics that warrant it to being in the Aa2 category," S&P; spokesperson Christina Pretto said. She added that the company is "quite comfortable" leaving the University's rating unchanged because of its strong national reputation, "excellent" management and $3 billion endowment. In addition, since 1994 the University has had a financial firewall in place which stipulates that the Health System's debt can only be covered by Health System revenues, protecting Penn should UPHS default on its obligations. The firewall, which has never been tested in court, provides an additional measure of protection for the University should the Health System's present problems deepen. Another area Engebretson said might be affected is the Medical School. For the past two years, the Health System has transferred $90 million each year to the school. But this past year, that amount dropped to $40 million. University Budget Director Mike Masch said that this drop is not something to worry about. Most of the $180 million transferred in 1997 and 1998 was used for construction projects -- all of which have been finished prior to the most recent fiscal year. Therefore, Masch said that extra money is not currently a necessity for the school. "There's not reason at this point for anyone to conclude that there has to be an adverse impact on the school," he said. Another source of possible concern is the subvention pool, which is used by the provost to cover special projects and is funded partly by the net income of each of Penn's 12 schools. Though the Medical School is among the biggest contributors to the pool, Masch said it will be unaffected because the amount it puts in is still small relative to the entire pool. The pool also consists of a percent of tuition money and a portion of research grants.