The Power of Investment and Strong Financial Management

Wednesday, March 8, 2017

Last month, we updated to the Board of Trustees regarding our financial management and the strategic investments in infrastructure we are making to support the education, research, service and care we provide for the Commonwealth.

As a $3.5 billion flagship, land-grant university, we are constantly vigilant, looking for opportunities to more creatively leverage our assets and manage the resources with which we are entrusted by the state and the generosity of donors and partners.

Our strong financial management and prudent investment strategy is enabling us to build upon our momentum – momentum you are responsible for as faculty, students and staff. The ability to continue to invest has never been more important as our Strategic Plan outlines ambitious, but achievable, goals for gains in retention and graduation, expansion of research and care, and initiatives that continue to positively impact every corner of our Commonwealth.

Those goals – that plan – will be fueled, in part, by our ability to create and build infrastructure – classrooms, research labs, health care facilities, living spaces and dining halls – that supports success at all levels.

In 2012, an independent firm, Prager & Co., LLC, examined our debt capacity so we could plan and earn our way forward—invest in our campus infrastructure in a way that is both fiscally responsible and strategic. The result of their study confirmed that the University had an additional capacity of between $450 million and $650 million to invest in campus without jeopardizing our already strong credit ratings.

In 2015, Standard & Poor’s, one of the country’s major credit ratings agencies, upgraded the University of Kentucky’s credit rating, reflecting the institution’s increasing enrollment, strong health care system and growing reputation. Our credit rating upgrade from AA- to AA, occurred as many institutions across the country faced challenging financial circumstances and, in some cases, a downgrade in ratings. 

This result came from careful planning and years of strong financial management – the idea, as President Capilouto often says, “that success has many fathers and mothers.”

We worked with another independent firm, Kaufman Hall, to review our financial strength again in 2016. Their report concluded that, because of our financial stewardship and strategic approach, we could make investments through financing of debt of an additional $350 million to $450 million, while maintaining our AA2 and AA bond ratings from the major ratings agencies.  Kaufman Hall report concluded that “UK is highly rated by S&P and Moody’s … our independent analysts are bullish on UK (for several reasons) … excellent leadership and governance, execution of strategy, and diversity of revenue (i.e. UKHC), etc.” 

Why is this important?

Because, when rating agencies determine the quality of investment in the University of Kentucky, they look across a spectrum of measures including state appropriations, financial planning, governance, enrollment management, debt position, industry trends and market position, among others. In short, that means that both fiscal responsibility and our ability to invest and improve in our brand affect our bond rating, which, in turn, determines the cost of investing in our campus. 

Think about the purchase of a house. You can purchase more house – and do more to maintain it – if you have a strong credit history and the financial strength that tells creditors and lenders that you can make your payments and sustain your investments. The more you do to maintain that house through updates and thoughtful investments, the more the house is worth—in other words, the more value that it holds.

In that same vein, our $2.2 billion investment over the last five years under President Capilouto, and at the direction of our Board of Trustees, has been in those things we value most as an institution and a state—teaching, research, campus life and health care facilities. Those continued, strategic investments have effectively improved our bond rating. They’ve created value.

This is the power of our investment.  Moreover, because of our effective financial management and thoughtful, sustained approach to investment, we are paying down debt even as we have built.

As Kentucky’s indispensable institution, we transform the lives of our students and advance the Commonwealth we serve and beyond. The building blocks – the foundation for everything we do – are being built by you on this campus every day. Thank you for your role in that mission.

Eric N. Monday

@UKYMonday

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