The University of California’s debt has ballooned to $17.2 billion since the start of the recession, more than doubling as the system borrowed to repair buildings, fund pensions, and build medical centers and student housing.
In the past decade, as states have cut support for capital projects, public universities across the U.S. have piled on debt to repair old buildings and build new ones. But some, including Gov. Jerry Brown, have expressed wariness about all the borrowing. Along with access to needed cash, UC is locking itself into more costs — and is fast approaching its limit for borrowing cheaply from the market.
But with the board of regents this week considering UC’s first-ever debt policy, university leaders insist the borrowing spree is strategic, given unusually low interest rates and federal tax exemptions on university financing.
“If we had not taken advantage of that and had to build buildings out of our operating budget, it would have been a risky or foolish way of doing it,” university CFO Nathan Brostrom said in an interview this week.
Financial reports show UC paid more than $558 million in interest alone in the 2014-15 year — roughly $2,200 per student. That figure does not include the $104 million UC reported it paid in interest on medical center-related borrowing, which Brostrom says is covered by the centers’ revenues.
Nationally, public colleges’ debts doubled between 2003 and 2012, while their annual spending on interest rose by 45 percent per student, according to a paper published this year in the Oxford University Press journal, the Socio-Economic Review.
On Wednesday, some regents expressed concern about the university’s debt capacity and borrowing to support the UC-managed pension fund, which got into deep trouble when the markets tanked — after UC took a pension-contribution holiday lasting nearly two decades. In 2011, UC issued $937 million in bonds to shore up the fund.
“I think that’s still the major vulnerability for UC,” said Regent Russ Gould, a partner at a financial services firm who serves on the regents’ new Finance and Capital Strategies Committee.
Last year, the governor expressed broader reservations about the system’s debt levels.
“Borrowing has limits because then you have more fixed commitments and your revenue is not so fixed,” Brown said at a regents meeting last year. “I know rich people have lots of debts, that they borrowed a lot and made a lot, but that’s how a lot of people go bankrupt, too.”
But on one key measure of debt risk, Brostrom said, UC is on firm footing. The percentage of UC’s budget eaten up by debt payments — now at 3.7 percent of its operating budget — has remained relatively flat in the face of increased borrowing, he said, largely because of low interest rates.
UC’s proposed debt policy, which will be up for a vote in November, sets parameters for university borrowing, such as limiting debt service to 6 percent of its operating budget.
Moody’s downgraded the university’s credit rating in 2014, citing its operating deficits and rising fixed costs, but Brostrom said the lower rating for its general revenue bonds — Aa2, the third highest rating — has had a “negligible” effect on the university’s borrowing costs because the interest rates are so low. The agency’s outlook for the university is stable.
Big debts aren’t necessarily bad for universities, experts say.
“The increased debt is tolerable as long as the university shows corresponding growth in revenue,” said Thomas L. Harnisch, director of state relations and policy analysis at the American Association of State Colleges and Universities. “I would liken it to the national debt. It’s much bigger than it was 15 years ago, but the economy is much bigger than it was 15 years ago.”
Charlie Eaton, a former graduate student at UC Berkeley and now a Stanford research fellow, was the lead author of the Oxford journal article on the role of financing in higher education. UC began borrowing in earnest in the mid-2000s, he said, as part of a growth strategy recommended by advisers from the now-defunct financial services firm Lehman Brothers.
Eaton argues the university used up its debt capacity too quickly and didn’t spend enough of the money on projects needed to expand its enrollment — now a key priority for the state.
“We borrowed too much when interest rates were too high, and not enough borrowing was channeled to increase enrollment,” Eaton said. “If we hadn’t loaded up on debt for some of the wrong things prior to 2008, we’d have more capacity to borrow now.”
