April 2, 2012

Moody’s Boosts University’s Fiscal Outlook to ‘Stable’

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A major credit rating agency improved its fiscal outlook for the University from “negative” to “stable” on Sunday, but also highlighted the financial risks associated with unforeseen costs of the New York City tech campus.

This revision “reflects a rebound in philanthropy, ongoing focus on expense containment and improved operating performance … and no additional direct debt anticipated in the next two years,” according to a press release from Moody’s Investors Service, the rating agency.

Cornell has a “very strong market position as an Ivy League [university] … with robust student demand, research activity and fundraising,” Moody’s wrote. “[But] these credit strengths are counterbalanced by the university’s high amount of debt and thinner operating cash flow than similarly rated peers.”

The rating agency also expressed concerns about the University’s increasing amount of debt, which rose 200 percent from Fiscal Year 2005 to Fiscal Year 2011, with the addition of $1.9 billion of direct debt.

According to Prof. Ronald Ehrenberg, industrial and labor relations, Cornell was able to improve its credit outlook because it “reduced administrative costs … [made] sure less of the endowment is invested in illiquid assets … [and was helped by the] recovery after the recession,” Ehrenberg wrote in an email.

However, Ehrenberg, who is also an economics department faculty member and teaches a microeconomics course about the University’s internal finances, echoed concerns about the potential impact of constructing the NYC Tech campus, as well as net tuition revenue growth, which has been slowed by increasing costs from more generous financial aid programs in the past few years.

Ehrenberg warned against accumulating large amounts of debt in constructing buildings at the tech campus.

“President Skorton has been staunch about not funding new buildings, unless there is a revenue stream associated with it,” Ehrenberg said. “The real issue is [if Cornell can] maintain fiscal discipline [and] not get into problems in the past that we’ve had, where buildings had large amounts of debt and no revenues to fund them.”

Despite concerns about the impact of the tech campus on University finances, Joanne DeStefano, vice president for finance and chief financial officer of the University, said she was “very pleased” with the new credit rating.

“I think [Moody’s has] confidence in the University’s ability to strengthen our balance sheet,” DeStefano said. “The fact that the full phase one of the [New York City] tech campus funding is in hand had a huge impact on the move from negative to stable.”

DeStefano said she believes the $350 million donation from Charles Feeney ’56 for the tech campus and recent efforts to increase the amount of cash available to the University significantly influenced the improved outlook revision, citing a Moody’s research comment — a brief analysis that rating agencies publish after major financial purchases or investments — issued on Dec. 19, shortly after Cornell’s announcement of Feeney’s donation and New York City’s announcement that the University has won the tech campus bid.

“Moody’s issued a statement saying the tech campus would have a long-term credit positive impact for Cornell … [but] they had concerns about the amount of debt we had on the balance sheet, and the fact that we had very thin operating cash flows margins.” DeStefano said.

Since the comment’s release, the ratings agency had a chance to more closely examine the implications of the donation and how it would impact the University’s financial health, DeStefano said.

“In May 2010 … [we issued] $285 million of debt [and] Moody’s put us on a negative outlook,” DeStefano said. “We gave [rating agencies] a plan of how we’re going to work out of our financial difficulties … and they’ve been able to evaluate what we said we would do, and everything we’ve said we have done.”

While Moody’s revised its outlook to “stable”, it kept Cornell’s Aa1 credit rating, which measures the creditworthiness of the borrower. Standard & Poor’s, the only other major credit rating agency that publishes research on the University, said Cornell’s fiscal outlook is “stable,” but downgraded its credit rating from AAA to AA in 2009.

The S&P’s last update was in July 2011. It is expected to update its rating again sometime this summer.

“In 2009, the University recognized that we had a deficit problem, and that we agreed that we were going to correct this problem in a five-year period, and not cut costs so drastically that it will impact our structural and research operations,” DeStefano said.

Tommy Bruce, vice president for University communications, echoed these sentiments and said he was hopeful for Cornell’s future financial soundness.

“Moody’s upgrade is welcome news and reflects the outstanding efforts of the university’s chief financial officer, Vice President DeStefano, together with President Skorton and Provost Fuchs and their senior leadership,” Bruce wrote in an email. “This news confirms the soundness of Cornell’s trajectory and the strategic plan President Skorton and Provost Fuchs have put in place to guide the University and streamline its administrative operations.”

Original Author: Andrew Hu

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