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Community colleges pose a growing financial risk

Our current political and economic climates draw two distinct pictures of community colleges right now. On one hand, politicians hail them as the saviors of the economy and the engines of workforce development. On the other hand, their enrollment is in near free-fall. Some community colleges – like Eastern Gateway Community College, Lakeland Community College, and the Connecticut State Community College system – are fighting a losing battle to keep their doors open.

Every person who lives in a community college district should pay closer attention to the latter scenario. It comes with a hard dose of truth because it highlights the widening gaps between what politicians say and what they do.. While they laud the community college mission, they do not provide sufficient funding to support it. That prompts community college trustees to seek out alternative funding sources, and it increases the number of community college bond issues.

More importantly, state laws regarding community college debts vary, but often assign the host county the responsibility for a community college’s debts. And community colleges can rack up some real debt in short order.

State laws often give community college trustees broad authority, which includes issuing bonds without seeking voter approval. Depending upon how the trustees issue them, community college bonds could seek a special voter-approved tax, or the trustees can issue bonds by pledging to guarantee repayment from the college’s general fund. This method requires absolutely no voter input, and there are no dollar limits on the size of community college bond issues.

Community colleges can mortgage their general funds

Therein lies the problem. Community colleges issue any number of multi-million-dollar bonds based on their projected revenues. Trustees can create so many community college bond issues that the college’s general fund cannot both guarantee the bond repayment(s) and operate the college. And the revenue projections might never come to pass. Bad revenue projections don’t relieve the community college of its obligation to repay bonds.

And institutional investors particularly favor community college bond issues, often because they must restrict the type of the bonds they can buy. Community colleges are agencies of their state and the state ultimately backs or assigns their debts. That’s appealing as a matter of financial safety. Ironically, the bond issue that’s “safe” for investors is risky to its issuer.

In the case of Jefferson County – home to EGCC – Ohio state law appears to transfer EGCC’s bond debts to the county. This seems to have caught county commissioners there by surprise. And why wouldn’t it? The county has no “seat at the table” at EGCC. Until the point that the EGCC Board announced that it was prepared to dissolve the college, probably no one in Jefferson County even thought about EGCC’s mounting, unpayable debts or how large they are. Defaulting on these bonds is not an option. Because Ohio state law directs the county to assume the debt, the county has no choice in the matter. But I promise you that Jefferson County doesn’t have a cool $70M laying around to cover EGCC’s poorly timed bonds. Some of those grenades will remain live until 2050.

In the case of Lake County -home to Lakeland Community College – at least the State Auditor is trying to draw attention to the growing financial risk.

State legislatures should limit community college trustees’ authority to issue bonds

Lawmakers need to do something (fast) about the growing risk associated with a community college’s general-obligation bonds. We cannot rely on bond rating agencies to determine whether a bond issue is safe. Or how much debt community college trustees have taken on using the assumption that their enrollment is just going to keep growing. As community college enrollment spirals downward, some community colleges aren’t going to survive, but you can bet that their bond debt will keep calm and carry on.

Placing dollar limits on the size of any bond issue that the district voters did not approve is one step. Limiting the number of active non-voter-approved bond issues a community college can have at one time is another.

Community college trustees have demonstrated over and over that they do not exercise the oversight that they’re supposed to. Their lax approach leads to careless and ill-advised borrowing that the institution’s revenues cannot support.

Community college operating funds achieve their greatest effect(s) when institutions focus them on instruction. When debt repayment becomes the overriding priority of an institution’s trustees, the institution cannot fulfill its mission to the community it is supposed to serve. Worse, this risky approach to bond issues creates a hidden liability that an unsuspecting community may be unexpectedly required to address.

Photo Credit: Tom Woodward , via Flickr