Wednesday, July 25, 2012

University Debt

This Penn State deal is terrible but it is getting way too much coverage. I was caught off guard during radio interview yesterday driving between fields I was scouting. The person said that the $60 million dollar fine was nothing compared to Penn State's debt of ONE BILLION dollars! I was shocked about that much debt until I started thinking of the bonds we floated at Blanchester Local Schools during the new building project we went through 15 years ago.

Multiply that debt against a major land grant university that represents the entire state and the figure is much bigger. Then I thought I wouldn't be surprised if Ohio State's is even bigger. It is.

"The amount of debt public colleges and universities carry has crept upward over the last decade, topping $60 billion in 2010 and 2011, according to data compiled by Moody’s. That amounted to about $13,000 per student in 2010. Moody’s draws a direct connection between decreased state funding and increased debt, and finance officials expect the amount of debt to increase further over the next few years as state appropriations stagnate or continue to decline."

"According to Sightlines’ data, the amount that colleges and universities spent on capital and maintenance peaked in 2009 but dropped significantly in 2010. Most colleges returned to 2008 spending levels in 2011, except for midsize public universities. “I think the places like Ohio State and Penn State, when states didn’t give them more money, went out and found that money’s cheap in the market,” Kadamus said, noting that interest rates are at historic lows. “If you’re a comprehensive public, you can’t get a lot of leverage out of the bond market. Those guys were not able to borrow, so state cuts are really having an impact on them.” At the same time, states have cut back on the amount of debt their issuing on behalf of institutions, leaving colleges and universities to fend for themselves."

"Century bonds are rare, primarily because they don’t make sense for most institutions. It would be risky to bet that any given institution is going to be around in 100 years and still in position to repay its bonds. But for historically strong universities -- many of which have already been around for hundreds of years -- the proposition is less risky for potential investors. That fact, plus the historically low interest rates, leads Chatas to think more universities will issue long-term bonds in the near future.

The century bond drove Ohio State’s debt load to more than $2.4 billion, six times what it was in 2001. Chatas said the increased debt load is not a concern for the university. “Ohio State has a lot more debt than it did 20 years ago, but it’s also a lot larger than it was 20 years ago,” he said, noting that the university plans to continue significant growth in enrollment and revenue over the next few years. “So long as an institution is planning to grow into its debt, then it really should not be a concern.” Debt-service payments at the university are roughly the same as they were a decade ago, in part because of the historically low interest rates. Ohio State’s bond had a 4.8 percent interest rate."

WOW! 100 year bonds and $2.4 billion in debt! Ohio State has a lot of valuable real estate but I am not sure it's worth $2.4 billion!

What do you think?

Ed

4 comments:

  1. This is insane, all the people who should be teaching us how to balance a budget and lead by example, like the government and the education departments, are doing right the opposite, taking us down into a debt spiral.

    Getting into debt should be restricted to industries or investments, and even only when they have a clear chance of repaying their debt in short of medium terms via sales. Individuals, universities or governments have nothing to sell that could recoup their debt.
    Buying a new car is just greed, buying a house over 30 years, or as is now possible, over 2 generations, is actually buying 3 houses, with the interest rates.

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  2. I agree. We live in an insane society. I don't which is worse, Europe or the US. Put them in a bag and pull one out and you have the same problems.

    Very few are teaching the principles of saving for a rainy day and living on less. I guess we will have to let everything crash and learn the hard way.

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