University debt breaks $1 billion mark

Correction appended

After hovering near the milestone for more than a year, the University’s debt crossed the $1 billion threshold this summer when officials borrowed an additional $50 million.

The debt now stands at $1.01 billion – nearly double what it was 10 years ago, at $533 million. Executive Vice President and Treasurer Lou Katz said the $50 million loan was taken out to ensure liquidity during a time when the market was essentially at an all-time low. This explanation closely mirrors the reasoning Katz gave in early 2009 when the University increased its debt by $200 million.

“What we try to do is look at what is an appropriate time to borrow money relative to the overall liquidity needs of the institution,” Katz said.

This jump puts the University’s debt level close to matching its endowment fund; the debt is only $129 million less than the $1.14 billion endowment. GW plans to spend about $60 million, or about 10.4 percent of its operating budget, on servicing its debt in the 2011 fiscal year, according to the University’s Capital Budget.

Despite the University’s large amount of debt, Moody’s Investors Service, a leading financial rating agency, says GW is in a healthy financial position. Moody’s gave the University an A1 rating – its fifth highest rating out of 10 possible “investment grades” – in a report this summer, concluding that GW’s financial outlook is stable. It cited a rising demand for University admission, which indicates a steady revenue stream from tuition payments as a reason for the strong rating.

The same report indicated that becoming less attractive to potential students, or significantly increasing debt without increasing financial resources, could bring GW’s rating down.

Because the University is approaching the maximum number of students allowed to live and study on GW’s Foggy Bottom and Mount Vernon campuses, tuition revenue may not increase dramatically unless the University decides to raise tuition costs. GW could also sidestep the enrollment cap by moving a significant number of students or increasing enrollment at the Virginia Science and Technology Campus or elsewhere.

But Katz disputed this point, saying that the University will continue to pay a significant portion of the debt through non-tuition sources, such as student housing revenue.

Michael Brandl, a senior lecturer of economics and finance at the University of Texas at Austin’s McCombs School of Business, said GW will need to find additional revenue streams to finance the debt service, especially if interest rates on the debt rise.

“They will either have to find additional sources of revenue and, or reallocate spending,” Brandl said. He said increasing fundraising or pushing professors to apply for more research grant funding were two attractive solutions to the problem.

The University has placed a high priority on increasing fundraising, as well as finding ways to save across the University, by launching the Innovation Task Force.

Katz said a large part of the $1 billion debt is on investment properties, or self-funding projects like residence halls, which pay for themselves with housing revenue.

“It’s not like all of our debt is coming out of the regular operations of the institution,” Katz said. “The overall balance we’re very comfortable with.”

In January, the University’s debt stood at $962 million after it had decreased by $10 million over the previous 10 months. Katz said then he expected the debt to rise as GW prepares to fund the Science and Engineering Complex, which will go before the Board of Trustees for approval at its upcoming meeting Oct. 15. The administration has since announced that the SEC is slated to cost $275 million.

Katz initially said in an interview with The Hatchet that he will not ask the Board during that time to take on additional debt to fund the SEC, but did not rule out borrowing additional money for it in the future, depending on the state of the market. When asked about it again, however, he said that there are no current plans to ask the Board for additional borrowing authority.

“We said that the cost of the project is $275 million, and it’s going to be funded from a combination of both internal and external debt,” Katz said.

-Emily Cahn contributed to this report

This article has been updated on Sept. 30, 2010 to reflect the following changes:
The graphic printed with this article has been taken offline because it is misleading in tone and factually incorrect. The graphic did not use the proper numerical values to explain the debt and left an impression that GW’s endowment has remained stagnant since 2000, which is untrue.

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