Higher education institutions have limited options for funding construction projects. Most often, they issue bonds and repay them over 20-30 years. In the last few years, institutions like the University of California, Harvard, MIT, the University of Virginia and the University of Pennsylvania have issued “century bonds.” These higher education bonds are large (think $500M – $2.5B) and have a repayment term of 100 years.
Century bonds are still relatively rare, but higher education bonds are not. And the market hasn’t been kind to higher education institutions lately. Even before the pandemic, bond rating agencies began dropping their ratings for higher education borrowers. The sector is facing some long-term revenue threats. They include declines in the traditional college-age population; the unimaginably large-and-growing problem of crumbling campus infrastructure; and unsustainable growth in college and university administrations. Lower ratings mean higher repayment costs and less favorable terms.
The pandemic has proven to be a challenge to institutions that have either privatized services, borrowed heavily for construction projects or both. Investors currently hold $14B in debts associated with student housing alone. In many cases, colleges and universities are ultimately on the hook for these debts, even when a private partner has “paid” for the construction. Colleges and universities that privatize student housing typically guarantee the private partner a certain occupancy rate. In exchange, the private partner fronts the cost of construction and/or improvements on behalf of the institution.
Since the arrival of COVID-19, student occupancy has plummeted, leaving colleges and universities scrambling for funds to meet those guarantees. As a result, you can read stories about universities using donations and endowment funds to satisfy the debts owed to private investors. Ensuring that private investors don’t lose money on higher education bonds has become these institutions’ highest priority.
Right and wrong ways to issue higher education bonds
For a community college – whose highest purpose is to put people into the workforce quickly – draining money away from operations to satisfy investors – is offensive. Community colleges cater to the lowest-income earners in the district. Skimping on operational costs (especially to pay debt) may mean extinguishing some students’ opportunity to succeed.
This is 100-percent avoidable. Community colleges have a debt-funding mechanism available to them that literally no other higher education institution has: tax-backed bonds. Community colleges can ask local taxpayers to authorize a separate tax stream exclusively for the purpose of repaying bonds. Using this mechanism funds a bond issue without taking one cent away from college operations. It satisfies the investors without torturing the institution.
Not using this mechanism to fund capital projects is the height of irresponsibility. But the WCC Board of Trustees goes beyond simply not using it. The Trustees refuse to use tax-funded higher education bonds out of fear that the voters will turn down a funding request.
Instead of developing projects that the voters can support, the Trustees approve silly vanity projects like the “Advanced Transportation Center” or maintenance nightmare known as the Health and Fitness Center. If put to a vote, taxpayers would never fund these projects because they are not central to the school’s mission.
If the Trustees cannot sell the taxpayers on funding a project, it is likely because the project is not worth funding. The Trustees should be willing to accept the collective wisdom of the taxpayers. Instead, they commit the institution to using tens of millions of operational dollars to pay debts. In the process, they convert educational opportunities for low-income students into investor profits.
WCC Trustees should respect the taxpayers’ wishes
We need Trustees on the WCC Board who understand that there is a right way and a wrong way to issue debt on behalf of the College. The right way works for all parties. The wrong way steals educational opportunities from the poorest residents.
Photo Credit: alif-abdulrahman , via Flickr