The current issue of The Nation has an excellent article on the growing danger of institutional debt. (Sadly, the piece is available online only to subscribers.) Higher education institutions are increasingly turning to borrowing to make up for declines in public funding and construction projects. The cost of this approach goes beyond interest payments. As I have pointed out in the past, it shifts the highest priority of the institution from education to debt payment.
As the pandemic drags on, it puts growing financial pressure on colleges and universities. Enrollment declines have reduced tuition revenues. State budgets (Michigan not included) are also sagging. Layoffs, consolidations, program closures and tuition hikes are all at least in play as these institutions attempt to close impossibly large budget holes while also trying to keep the lights on.
Investors have a special interest in higher education institutions. They have both the unrestricted ability to issue bonds and raise tuition by any amount for any reason. They can’t really go bankrupt in the way that other borrowers can. In many cases, the State government, or local taxpayers (in the case of community college) are ultimately on the hook for institutional debt.
Higher education institutions usually use bond issues to pay for construction projects, but they also borrow for other reasons. These “other reasons” can include covering operating deficits. That should worry both the Washtenaw County taxpayers and WCC students.
Paying off institutional debt isn’t WCC’s mission
WCC is one of the best-funded community colleges in the State of Michigan. Yet, it is running a structural deficit. As I’ve said in the past, there is a difference between a cyclical deficit and a structural deficit. A cyclical deficit simply means that the institution spent more than it took in during a budget cycle. Despite its best efforts, it took in less money than expected, or it encountered some unplanned expense.
A structural deficit is different. A structural deficit occurs when a public institution takes in the maximum amount of money it can take in during a normal, positive economy, but its spending still exceeds its revenues. It has committed to greater expenses than its revenues will support even when it has maximized its revenues.
Reliance on institutional debt should worry the taxpayers and the students because we happen to be the two largest sources of income for WCC. When the Administration does not adequately control its spending (and the Trustees refuse to intervene), the easiest, fastest and most painless way (initially) to acquire more cash is to borrow it.
General Obligation bonds (which the WCC Trustees are fond of issuing) use future tax revenues and student tuition as collateral. Before WCC can spend a dime on its operation, it has to pay its institutional debt.
Enriching investors isn’t really why the Washtenaw County taxpayers built WCC or authorized its multiple operating millages. And committing students to paying higher tuition for years or decades because the Administration can’t or won’t control its spending is both sickening and abusive.
Especially when 16% of Washtenaw County’s population lives in poverty, and thousands of residents would go to school if only they could afford to.
Photo Credit: Chris Potter, via Flickr