Faculty leaders cast doubt on GW’s plans to pay back $1.4 billion debt

Media Credit: Elise Apelian | Senior Staff Photographer
Economics professor Donald Parsons, who is on the Faculty Senate finance committee, has spent months writing a report on the risks of the University’s debt load on its long-term financial health.

The University will spend more than ever this year paying off its $1.4-billion debt, a cost that now has faculty leaders worried about financial strain and overextended ambitions.

GW is expected to pay $60 million this year to cover the interest on loans, about the same amount it will earn from its endowment. The yearly debt payments have quadrupled since 2003, surpassing many of GW’s competitor schools and carving out about 10 percent of net tuition revenue.

Anthony Yezer, an economics professor on the Faculty Senate’s fiscal planning and budgeting committee, warned that by taking on so much debt, the University has no room for error. GW has tried to fundraise more than ever and pull in more government subsidies for research to help pay off the debt, but such revenue-raising plans have not met expectations this year.

“If something bad were to happen and our operating surplus was cut, it’s not clear what plan B is,” Yezer said. “If I were a trustee, I would be really concerned about this.”

University President Steven Knapp said he – and the Board of Trustees – are confident that GW’s long-term financial outlook is strong.

He pointed out that the University borrowed or refinanced most of its debt to lock in record-low interest rates several years ago. That strategy, which is duplicated by colleges around the country, is usually sound if there are enough financial resources to pay back the debt, financial analysts say.

“We’re assuming that we’re still going to have students, we’re going to continue to have tuition, we’re going to continue to have all the things that make the University operate,” Knapp said. “We’re very prudent, very conservative in our approach to these things.”

Media Credit: Hatchet File Photo by Miranda Houchins
The $275 million Science and Engineering Hall will open in January 2015.

It’s not uncommon for universities to finance construction projects with debt, and administrators maintain GW has no immediate plans to pile on more. GW began its borrowing binge shortly after the financial crisis, mostly to help fund the largest building in the school’s history, the $275-million Science and Engineering Hall. Campus construction costs have totaled more than a half-billion dollars since 2007.

But even as borrowing skids to a halt, members of the Faculty Senate planning and budget committee have concerns about how paying back that debt will cut into other programs, like faculty hiring and financial aid.

Economics professor Donald Parsons, who is on the committee, has spent months writing a report on the University’s long-term financial plans, which he argues lack strategies to pay loans back in full. He argues that those plans could hurt future students.

“It’s exactly the same thing we’re confronting with the federal government. How much can we lay on later generations?” Parsons said. “We borrow money to essentially encourage that future generations pay for some of our current services.”

Brian Biles, a public health professor and longtime member of the finance committee, said the University has been too optimistic about how quickly it can pull in government subsidies from research grants – known as indirect cost recoveries – to pay for buildings like the Science and Engineering Hall.

Though University researchers have earned more grants in recent years and Knapp said he is expecting a big boost in research reimbursements, the subsidies that go directly into GW’s coffers have been mostly flat over the last four years.

Media Credit: Nick Rice | Visual Director

The Faculty Senate finance committee estimated that about 60 new professors would each need to bring in $500,000 a year in federal funding to cover construction and maintenance for the science and engineering building.

Biles said he doubts GW can reach that number because of flat federal research budgets. He said the University will be able to cover the costs eventually, but warned it will take away from other programs at the institution.

A financial strategy
GW maintains a strong A1 rating from the Moody’s Investor Service – which allows the University to take advantage of lower interest rates. The credit rating agency cites a growing fundraising operation, experienced administrators and solid student demand as evidence of financial strength.

Until this past year, the University has seen five years of record fundraising hauls, which administrators and trustees say are strong indicators of solid financial growth. The fundraising office has also said a few large donations could be announced this year to kick off the likely $1-billion fundraising drive.

Still, fundraising to pay for the engineering and public health buildings have barely offset the debt GW accumulated to cover upfront costs.

Media Credit: Hatchet File Photo
Executive Vice President and Treasurer Lou Katz says the University’s financial plan benefits from a mix of sources.

Administrators point to another savvy financial deal in defense of borrowing: developing The Avenue. The retail, office and apartment complex will put about $150 million into the science building across the street.

“If we had more money, we’d do things even faster. But we’re not using [fundraising] as the predominant source,” said Executive Vice President and Treasurer Lou Katz. “If it was the predominant source of payment, that would really affect what we were doing.”

‘They’re playing with fire’
Moody’s and Standard & Poor’s, though, both pointed last year to the University’s annual debt payments as cause for concern. The difference between GW’s operating costs and revenue last year was about $187,000 – a thin margin compared to the $16 million cushion in 2012.

Richard Vedder, an economics professor at Ohio University who specializes in higher education finance, said administrators were “playing with fire” with their plan to match debt payments with endowment payouts.

Media Credit: Nick Rice | Visual Director

“The endowment is, in a net sense, zero. That’s not a way to run a university,” said Vedder, who is also the director of the Center for College Affordability and Productivity.

It could also be difficult to pay to maintain or upgrade those newer buildings after several years of use, said Noel Radomski, the director of the Wisconsin Center for the Advancement of Postsecondary Education.

With the market changing and interest rates on the rise, Radomski said GW’s costs would soon spike. He added that with little flexibility in a university’s revenue stream, “that’s a lot of risk.”

“You start living in the present, but you start negatively impacting the future,” he said.

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