I did not expect your lengthy dissertation on financial problems at state universities across our country – interesting reading.

with you closing remarks, perhaps, this was targeted at UH decision makers and our esteemed Legislature who seem to be, like most if not all Congressional members who care more about their office than the state they represent.

Members of Congress know that longevity produces more perks, including retirement, and thus their only focus is serving enough years to qualify for retirement.

It’s laughable that they pass laws that control our retirement while they sit and wait for theirs – same pay, same medical plan at no cost to them, etc. Heck no need worry about a 401K or IRA when they will collect their wages at 100%; not a reduced amount like the 99%.

For sure, there will NEVER be a Congress that will limit or change their perks – that’s why we need to continue to elect new faces every 8-10 years so they don’t qualify for full retirement.

Burdened by aging campuses, years of backlogged maintenance projects, increased competition for students (and the tuition revenue that comes with them), and little hope that states are going to fund the construction they need, either through appropriations or by issuing their own debt, public colleges and universities are likely to issue their own debt to finance the renovation of their facilities — a change that moves public institutions closer to their private counterparts, could change what institutions build and repair, and could pass more costs on to students.

For institutions that can take on more debt — those that have low debt loads or are growing enrollments and revenues, typically flagship universities — the financing change will have little impact on their bottom lines. They might have less money to spend on other priorities, but most expect revenues to keep pace with the amount of debt they’re assuming.

But most public institutions aren’t so lucky. Many can’t issue cheap debt, either because they’ve run up against statutory limits or because their internal finances won’t let them. And states, which traditionally issued bonds for institutions, are facing electorates that are increasingly skeptical of government debt. For institutions where growth is stagnant, particularly comprehensive public institutions in states with a shrinking number of traditional college-aged students, the financing change represents a real problem.

These institutions have few options. They can continue to hold off on projects, leading to an aging and potentially unsafe campus and more expensive renovations in the future. Or they can fund projects from their operating budgets, which could siphon off resources for other priorities, such as faculty salaries and student services.

In short, you’ve got aging campuses, less capital, more borrowing, colleges are running up against debt limits, backlogs are going up, and going up to a point of critical concern, where problems are cannot be ignored.

Long-Term Disinvestment

States historically were the financers of university construction projects. When systems such as the University of California, the State University of New York, and many others scaled up in the 1960s and 1970s, it was typically state governments that put up the capital through tax revenue and their own debt issuance.

The financial picture has grown more complicated since then, with states and institutions finding new ways to pay for construction. For her dissertation in 2010, Delphine Harris, now executive director of business process innovation at the University of Alabama, surveyed institutions on how they funded capital projects and maintenance. For most institutions, states still covered much of the construction and maintenance bill, whether by directly appropriating revenue, issuing their own debt, or covering the bill for university debt.

But most agree that the days of states footing the bill are over. In general, per-student state appropriations have declined in most states for about a decade, both for general education expenses and capital and maintenance projects. The decline accelerated in 2009, when most states cut higher education spending to cope with decreased revenue and increased entitlement costs and were unwilling to increase taxes to maintain former spending levels.

Overall appropriations on higher education decreased 3.8 percent nationwide between 2007 and 2012, according to the annual Grapevine report, which is put out by researchers at Illinois State University and the State Higher Education Executive Officers group. Declines were more dramatic in some states, including New Hampshire (32.8 percent), Arizona (31.9 percent), and South Carolina (23.8 percent). Because enrollment at most state institutions grew significantly over that time period, the decrease was even more significant when looked at on a per-student level.

There isn’t much data that breaks out capital spending from overall education appropriations, but several state universities and systems reported that spending on capital projects and maintenance were placed at the bottom of the priority list when lawmakers cut budgets.

Disinvestment couldn’t come at a less opportune time, facilities officials say. Most buildings have a lifespan of about 50 years before they must undergo significant renovations. And since many public university buildings were built in the 1960s, they’re coming due for renovation this decade.

About 18 percent of campus space at the public universities they track is more than 50 years old, or what they consider “high risk” space prone to building failure–Startling!

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.

Most new public university debt is concentrated at large flagships, which have diverse revenue streams and high student demand. That combination leads to high credit ratings that can help them secure debt at low interest rates.

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. .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.

Geoff Chatas, chief financial officer at Ohio State University, views the increase of debt issuance as one component of a rethought financial model for his institution. In October, Ohio State became the first public university to issue a 100-year bond, which totaled $500 million. Before Ohio State, only a handful of private institutions, including the Massachusetts Institute of Technology and the University of Southern California, had issued such long-term debt.

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.

The bond drives some change in the university’s funding model. The $500 million will enter a central bank at the university and be loaned out to different branches for whatever projects institution officials hope to fund. Those branches will pay interest back to the central bank, which will use that return to fund more projects.

The University of California system issued its own 100-year bond in February and found such demand that it increased its initial offer of $500 million to $860 million, which The Wall Street Journal reported to be the largest 100-year bond issued by a university since 1995. It too is working under a central banking model, splitting up the bond for different projects on each campus.

Both the Ohio State and University of California bonds were taxable, unusual because most university bonds are tax-exempt. Peter Taylor, chief financial officer at the University of California, said the taxable bond offers some flexibility that tax-exempt bonds, which can be spent only on nonprofit activities, cannot. For example, he said, there’s a building on Berkeley’s campus that is a mixture of academic offices and retail stores, and renovating that building with a tax-exempt bond would be a logistical pain.

Century bonds probably won’t be the main form of debt issued by universities over the next few years, since most institutions don’t inspire the same levels of confidence among investors that top-tier research universities do. But finance officials believe shorter-term forms of debt will continue to be attractive. “While interest rates remain low, debt will likely remain a highly attractive option for public universities,” Behr wrote.

Not Everybody’s Solution

Regional public universities, (like UH) whose capital spending didn’t bounce back in 2011, are the ones most imperiled by the change in finance. They tend to have lower credit ratings, which means they cannot issue debt as cheaply as larger universities can.

Changing Priorities

Increased reliance on borrowing could change what universities decide to finance. When states doled out a few million dollars to fund a new academic building, institutions didn’t have to worry about what kind of revenue that building generated.

But the considerations change when the institution has to pay off a building over 30 or 50 years. Those buying the debt like to know that there’s a direct funding source that will lead to the debt being repaid, so most debt-funded projects have specific fees associated with them. Projects such as residence and dining halls and parking, which collect specific fees, tend to get priority.

For that reason, many expect the increase in debt issuance to result in more student fees — even for projects not directly tied to student use — and higher tuition. “There is some concern about the impact on students, in terms of fees and things,” Wilda said. “If we’re assuming debt, someone needs to pay for it. Under our current funding model, obviously a portion of that will be passed down to students.”

Competition also plays a dual role in university debt. With the loss of state appropriations, colleges and universities need new sources of revenue to cover their obligations. To draw students (who bring tuition) and faculty members (who draw grant revenue), the institution needs facilities to attract those individuals. To pay for those facilities, however, the institution has to take on more debt.

Capital improvements are now more oriented toward attracting students and faculty. This market-driven need to generate student-based revenues means that public universities will have to continually update and, in some cases, expand their facilities, which ultimately necessitates more borrowing, especially given declines in state funding. Hello–better facilities, the better position you are to attract more students….

Other Solutions

Given that debt is taking on new prominence in the university funding equation, public institutions are trying to find new ways to fund it.

In Arizona, state lawmakers voted in 2009 to give public universities there the authority to create stadium districts to fund the expansion and renovation of athletic facilities, allowing the universities to lease land near the facilities to commercial vendors. Those vendors would be exempt from property taxes, since they are on university land, but would then pay a “tax” to the university. The university would use that revenue to finance its debt.

Arizona State University was the first to capitalize on the new legislation. In November, Maricopa County, where the university is based, approved a plan to let the university collect revenue from a 300-acre site adjacent to the campus. The first project to be funded through the will be a major renovation of Sun Devil Stadium that could cost $300 million. In time, the university hopes to develop the land into something of a mecca for amateur sports.

Other institutions have tried to find ways to continue to grow and pay for renovations without taking on as much debt. The most prominent avenue for this has been to strike public-private partnerships, whereby private developers get the capital to construct facilities and then universities strike long-term leases to occupy the space. It also allows for alternative uses of space, such as for-profit ventures, that might be prohibited under tax-exempt bond funding.

According to a 2010 report, the University of California has about 60 such partnerships. In that report, university officials note that the primary motivation for most university-developer partnerships is access to capital, but the system, which has significant access to capital (as evidenced by the century bond), also sees other benefits. There are likely companies out there that can build and operate residence halls at a lower cost and faster than the university can. Ohio State has also considered this approach with parking.

There is one more solution to the maintenance/appropriations/debt issue that a handful of campuses have started to consider. If state funding no longer covers renovation, if institutions don’t have the capacity to issue debt, and if the demand isn’t there to fund projects through general renovation, why not take the costly projects off the books?

The University of Maine system’s Board of Regents recently asked system administrators to give board members an accounting of the space that could be removed either through sale or demolition, and the space that will become available soon. “When you’re faced with this challenge, you really have three options: renovate, demolish and sell,” said Rebecca Wyke, vice chancellor for finance and administration and treasurer for the Maine system. “I think the board has clearly demonstrated that is will to consider all combination of options.”

Hawaii, BORs, and legislature, your move and please give us confidence that you are viewing this at once with an application of applied research, best practices, sustainablity and a long-term comprehensive approach which has purposely mitigated politcal grandstanding.

any recommendations to assist UH with their financial crisis?

how about the US Government?

how about the State of Hawaii?

then if we cant cant make ends meet with the people of hawaii’s money, let’s reach in their other pocket and raise tuition, ticket prices, student fees and things like that. maybe the next president at UH doesn’t need to be an academic…just a person who can add and subtract properly but has smart friends.