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Ask any high school junior taking the I-95 college visiting tour if he can spot the difference.

Penn has its distinguished faculty, its quota of computer labs and resource centers, more than its share of collegiate gothic buildings. Judging by its increasing selectivity, it has no shortage of applicants.

Penn also has the lowest credit rating in the Ivy League, the highest debt ratio and relatively few dollars per student.

"While our endowment in absolute terms is large, in relative terms to our overall operation, it's small," Penn's Treasurer and Senior Vice President for Finance Craig Carnaroli said.

The biggest burden on Penn's balance sheet is the Health System, which includes four hospitals -- the Hospital of the University of Pennsylvania, Phoenixville Hospital, Presbyterian Hospital and Pennsylvania Hospital -- which Penn owns and operates.

"Penn is unique in that the hospital is an operating division of the University -- and that is the issue," said John Nelson, a managing director at Moody's Investors Service.

Moody's rated Penn "A1," a notch below Brown and Cornell universities at "Aa1," and two notches below the rest of the Ivy League, Stanford University and the Massachusetts Institute of Technology, rated at a superlative "Aaa."

According to Moody's July 2003 report on the credit quality of the Ivy League, Penn was rated lower because the rating agency believes "it is highly likely that the University would support the Health System's debt" if it came to a serious crunch.

The "A3"-rated health system's debt is then dumped directly into Penn's column.

"Universities that own their hospitals, all things being equal, are rated lower than other universities," Nelson said, explaining that exposure to the volatile health care market -- especially in Pennsylvania -- is a significant liability.

According to Carnaroli, of Penn's $1.377 billion dollars of debt, $566 million is from the University's academic component, while the Health System accounts for $811 million.

"Unfortunately, the two best facts known about the Health System are its $800 million in debt and $300 million of losses," Carnaroli said.

Carnaroli pointed out that there are also advantages to keeping the Health System and the University separate.

"The Medical School is the largest school at the University, it generates the most research grants, and you can't have the kind of medical school we have without a first-rate clinical delivery system," Carnaroli said, adding that, since the two are joined at the hip, one central administration "can make a comprehensive decision about resource allocation rather than let two separate boards... fight it out."

University President Judith Rodin said that Penn will continue to "evaluate all of the University's components on a regular basis," noting that "when the Health System got into trouble, we had a conversation about that and we agreed to keep the Health System part of the University."

The system has since returned to profitability, now running in the black for the third quarter in a row after years of steady losses.

Business models at other universities run the gamut, from the University of Minnesota's decision to sever its ties with its hospital to Johns Hopkins University's relationship with hospitals with which it is affiliated but does not own.

Looking at the University as a whole, Rodin pointed out that the money Penn has spent hasn't disappeared.

"These were strategic decisions," she said. "They were patient trade-offs and the hiccup in the Health System was real, but it's all incorporated as part of an overall program for dealing with debt and... to continue to expand and remain one of the top five research universities in the nation."

According to Carnaroli, of the last $740 million spent on the 10 largest projects on the University's plate, 32 percent was financed with gifts and grants, 27 percent was financed internally and the rest was financed with external debt.

"Clearly as we look forward, we intend to have less reliance on debt," he said, adding that, given interest rates currently available, borrowing isn't necessarily such a bad strategy.

Penn's money has gone towards significant program and capital improvements that are not factored into resource calculations for nonprofit corporations.

It may, however, help convince Penn's alumni to donate. As the University gets better, so do their degrees.

"The value of people's degrees have risen -- the value of my degree is up," said Carnaroli, a Wharton alumnus. "People want to maintain that value appreciation."

Rodin noted that the universities Penn is trailing in the credit ratings will soon "have to pay the pied piper," themselves as their buildings and services need updating.

"Their cash resources may look fuller, but if we put dollar values on... the physical plant, they might not," Rodin said. "They have much more deferred maintenance than we do."

The rating also hasn't exactly crippled Penn as it competes for investors' dollars.

"Investors are not shying away from [purchasing] University of Pennsylvania debt at all," Nelson said, noting that the current economic climate levels the playing field somewhat, as, with interest rates low across the board, "the advantage or disadvantage of having a higher rating is less severe."

And, at the end of the day, there are worse places to be than the A1 category.

Penn's credit rating is "not low in absolute terms," Nelson said, adding that if the University "were dangerously leveraged, the rating would be five or six notches lower."

Rodin said that, overall, Penn is in a "very strong position" and only stands to strengthen.

"While we may be weaker relative to the Ivies... we're still very strongly in the A category," she said, adding that Penn "will be going back to Moody's and to Standard and Poor's before long and asking them to raise our debt rating."

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