A little more than a year after Atlanta’s water department almost shut off cash-strapped Morris Brown College’s water supply, the historically Black institution has mustered enough support from students, alumni and the African Methodist Episcopal Church to buoy hopes for a comeback.
“We haven’t had anything that dramatic since,” spokeswoman Bunnie Jackson Ransom says of the scramble by officials and alumni to raise $150,000 to keep the faucets working. But she says the school’s debt of about $30 million is “a big part” of the reason it hasn’t regained the accreditation it lost in 2002.
While not facing consequences as severe as Morris Brown’s, many American colleges and universities are grappling with increasing debt, yet another threat to the financial security they face in the aftermath of the worst recession since World War II.
American higher education is in debt to the tune of $109.7 billion and that’s just according to a survey in which only 654 of 842 participating institutions reported owing money. In fact, the average long-term debt load at American institutions jumped to $167.8 million as of 30 June 2009, up $22.2 million from a year earlier, according to a January report by the National Association of College and University Business Officers and Commonfund Institute.
“It’s a triple whammy,” says William F. Jarvis, managing director of the Commonfund Institute, which houses the education and research activities of Commonfund — a Connecticut-based investment group that manages approximately $25.5 billion for about 1,600 nonprofit institutions. University debt builds because students “can’t pay tuition so they come asking for financial aid, which is down because of (declining revenue from) endowments.”
The financial strains from the recession are acute at institutions such as many HBCUs that “are hugely dependent upon tuitions” and did not have sizable endowments to begin with, Jarvis adds.
Debt increases rapidly as endowments drop and deficit-racked state governments slash spending. The NACUBO-Commonfund survey noted that public schools carried the highest average debt of $616.8 million, more than five times that of smaller schools ($121.1 million). This added debt load stems from borrowing to meet short-term obligations and operating revenue needs as well as to finance long-term capital programs to build buildings and acquire equipment.
Hard data is available only for a few HBCUs. Facing a deadline to repay $30 million to the Bank of America, Shaw University restructured its loans with help from the U.S. Department of Education and U.S. Rep. Bob Etheridge (D-N.C.). The new deal announced in late March allows Shaw to stretch out repayments over 20 years, reduces collateral, and drops the interest rate by 2 percentage points to 4.1 percent, according to press reports. Spelman College’s debt is about $106 million, but it has an advantage since most of its debt was at a fixed rate of about 4 percent over a 20- to 25-year period, says Spelman CFO Robert “Danny” Flanigan. It did renegotiate rates for about $11 million in bonds by “shopping around,” Flanigan says.
Howard University is struggling with a debt of $218.4 million as it faces a “weakened core university operating performance,” according to a report last fall by Moody’s Investors Service. Moody’s gave the institution, which completed a successful $250 million capital campaign in 2007, a “negative” outlook.
Robert M. Tarola, Howard’s chief financial officer and treasurer, says some of the extra debt was to help pay for an early retirement program.
To raise cash, Howard is considering selling some of its “non-core” assets, such as off-campus buildings, Tarola says.
Regarded as an extreme measure, fire sales of assets can bring in needed cash. As the NACUBO report states, “We also remark that increasing numbers of colleges and universities appear to be mortgaging their campuses to access and secure lines of credit.”
Here are other approaches colleges use to handle debt:
Renegotiate interest rates on existing debts. In normal times, doing so would be easy since rates are low. However, many banks, says Jarvis, choose to eliminate bad debts before they embark on new lending. Moreover, only schools with “superior credit” will receive new loans or have the leverage to negotiate more favorable terms on existing loans.
Swap interest rates. A market exists to exchange loans. The NACUBO study reports that 71 percent of schools with assets of more than $1 billion use the swaps, while only about a third of those under $25 million in assets do so.
Issue bonds. Harvard and Princeton universities have sold bonds to replace variable rate bonds that investors no longer wanted and because of their drops in endowments, according to Bloomberg BusinessWeek. Selling bonds is labor-intensive and risky. For example, Dartmouth College saw its AAA bond rating, the highest possible rating, drop to AA+ just as it planned to raise $415 million in new debt. Bond ratings, like consumer credit scores, can affect the interest rate an institution pays to borrow.
Pinch pennies. As in any household, locking up the cookie jar in hard times can save money. Howard, for instance, has put all spending under the control of its Operations Committee and no spending over $50 can be made without a committee member’s approval.