For much of the last decade, the 16 campuses of the University of North Carolina were construction sites, part of an extraordinary building boom spurred, in part, by $3.1-billion in bonds approved by voters for a backlog of repairs and new construction at the state’s universities and community colleges.</p>
<p>Relatively low costs of borrowing made issuing multiyear bonds attractive in recent years to college leaders across the country, as well as elected officials and even the public. North Carolina’s public-bond offering, still the largest ever for higher education, was approved overwhelmingly in 2000, and voters in four other states passed multi-million-dollar bond measures in 2004.</p>
<p>But now Robert Nelson, the North Carolina system’s vice president for finance, is, like many of his public-university counterparts, watching from the sidelines as the nation’s credit markets seize up, trying to assess the impact on universities’ and state bonding agencies’ ability to issue debt. Already, California and Massachusetts have asked for federal help to cope with bills because municipal-bond markets remain largely closed.</p>
<p>“I’ve been talking to everyone I can talk to,” Mr. Nelson says, “to try to figure out what’s happening with this market.” Mr. Nelson says he is concerned about the uncertainty in the market and what interest rates would look like when bond issues resume.</p>
<p>Interviews with Mr. Nelson and finance and facilities administrators at more than a dozen state universities or college systems across the country suggest that, thus far, few public colleges have been forced to scale back, delay, or cancel long-term construction projects because of the current financial turmoil. And most of them say they expect to be able to borrow to pay for future construction, albeit at higher interest rates than in recent years.</p>
<p>‘Plain Vanilla’ Debt</p>
<p>Part of what has helped many public universities remain in good financial stead is their generally conservative approach to borrowing. While nearly 40 percent of the debt issued by private institutions rated by Moody’s Investors Service has variable rates of interest, public colleges are seen by analysts as less likely to have exposure to such debt. Some institutions, like the University of Maine, have hybrid arrangements in which rates are locked in for several yearsin Maine’s case, until 2012.</p>
<p>In North Carolina, most public universities have “plain-vanilla fixed-rate debt,” Mr. Nelson says. Only three of the largest campuses, East Carolina University, North Carolina State University, the University of North Carolina at Chapel Hill, hold variable-rate debt, which makes up 14 percent of the system’s total bonded indebtedness of $1.6-billion.</p>
<p>Colleen Nickles, the assistant vice chancellor at California State University, says that the 23-campus system, which has $2.7-billion in revenue-bond debt, could have paid less in recent years if it had borrowed at variable rates. (In California, as in many states, the state bonding authority issues debt for academic buildings and other facilities without a dedicated source of revenue, such as payments for room and board.)</p>
<p>“Yes, we paid a little more,” Ms. Nickles says, “but when you have a market turnaround like this, you feel pretty good about the decision.”</p>
<p>David W. Harris, the executive vice president for administration at the University of New Mexico, which has issued $475-million in fixed-rate bonds over the past five years, agrees. “I feel a lot better knowing where I sit,” he says.</p>
<p>Escalating Interest Rates</p>
<p>Still, some public institutions have felt the pinch from the sudden skyrocketing of variable-rate debt. The University of Massachusetts saw interest rates on $232.5-million it holds in such debt jump from 1.75 percent on September 10 to 5.5 percent on September 17, and then to 7.75 percent on September 24. That amounts to roughly $1-million in projected increases in annual costs, says Jack M. Wilson, the system’s president.</p>
<p>Michigan State University, which has most of its $500-million debt portfolio in variable-rate bonds, saw its interest rates increase from less than 2 percent to 8 percent over the same time period, says Glen J. Klein, the university’s director of investments and financial management. Part of the costs were mitigated by floating to fixed-rate “swap agreements” that offset the higher variable rates paid to bond holders.</p>
<p>But Mr. Klein also notes that, as of Wednesday, interest rates on the university’s bonds reset at a lower level, approximately 4.5 percent.</p>
<p>“It could be that, maybe, we’re past the worst of it,” he says.</p>
<p>And both Mr. Klein and Mr. Wilson say that the expense incurred by the fluctuations in interest rates are likely to pale when compared to the budgetary and economic pressures faced by their states and many others.</p>
<p>“One-million-dollars is never pocket change,” Mr. Wilson says, “but our bigger challenge is on the operating side.” The Massachusetts system could have to swallow midyear cuts, ordered by the governor, of up to $45-million.</p>
<p>Wait-and-See Attitude</p>
<p>Most university officials say they do not plan to issue bonds until after the new year and could afford to take a wait-and-see attitude. In West Virginia, for example, officials at the state’s Higher Education Policy Commission are monitoring the bond market to see if conditions are favorable to move ahead with a $78-million issue for construction projects at eight community and technical colleges, as planned, in December or January, says Dennis C. Taylor, vice chancellor for administration there.</p>
<p>It’s also uncertain what the impact will be on voters, who are being asked to approve higher-education bond measures on November’s ballot in two states, California and New Mexico.</p>
<p>And some states, mainly in the Northeast, have state dormitory authorities that allow private colleges to borrow funds tax-free for residence-hall construction and other needs. The state agencies could withdraw their support for such bond sales, although the Dormitory Authority of the State of New York late last month approved a series of new financing, including $253.5-million for projects at a half-dozen private colleges.</p>
<p>Le Moyne College, a private Jesuit institution in Syracuse, had planned to issue $12.5-million in bonds through the dormitory authority this month, to pay for already-completed residence halls and for renovations to academic and athletic facilities, says Roger W. Stackpoole, vice president for finance and administration. Now that sale is “indefinitely” delayed, says Mr. Stackpoole, who calls the dormitory authority critical to the college’s ability to borrow for capital projects.</p>
<p>Another outstanding question is what sort of interest rates colleges will receive when they do reenter the bond market. Mr. Nelson, of the North Carolina system, speculated that his institutions could see a return to interest rates of 6 percent or more. In the last couple of years, universities there have paid 4 percent to 4.5 percent for fixed-rate debt.</p>
<p>But with enrollment growth expected to continue to climb, Mr. Nelson says North Carolina institutions can’t afford to halt new construction. “We don’t let the cost of money drive what we build,” he says.</p>
<p>Indeed, at least two states, Kansas and Kentucky, have issued bonds for higher-education projects since the market turmoil began last month, each as part of more-comprehensive transactions for other parts of state government. Kentucky’s $390-million sale included $114-million for capital projects at Kentucky State University, the University of Louisville, and other campuses.</p>
<p>And Kansas’ $63-million issuance on September 18 included $20-million for a pharmacy school at the University of Kansas. Rebecca E. Floyd, executive vice president and general counsel for the Kansas Development Finance Authority, which sold the bonds, said the issuance received six bids and accepted one with an interest rate of 4.93 percent. But, she notes, “we were the only ones in the market that day.”</p>
<p>Ms. Floyd and other observers of the markets and their effect on colleges say that bonds issued for public higher education may ultimately prove to be good bets for investors because of colleges’ strong credit ratings and because they are guaranteed by states or by dedicated revenue sources.</p>
<p>“With the flight to quality,” says Ms. Nickles, of California State, “we maybe even will get some advantage.”