<p>In addition to their taxable bonds issued last week, Harvard issued another $1 billion in non-taxable bonds at yields ranging from 3.15 to 5.8% yesterday. MIT also issued $266 million in non-taxable bonds at similar rates. Both are rated AAA.<br> Bloomberg.com:</a> Worldwide</p>
<p>Because the tax code caps how much each state can issue in non-taxable bonds each year, the universities are limited in how much they can raise through non-taxable means. The non-taxable bonds also have to be tied to specific capital projects and can't be used for general operating purposes, to mortgage other assets such as land or property, to meet capital calls on private equity or to cancel interest rate swap agreements. for these purposes, the universities need to issue taxable bonds. (Still exempt from state taxes). Unlike many regular munis, these so-called taxable munis issued by wealthy universities are in high demand and sell very easily, especially now that short term Treasuries have negative yields. </p>
<p>Smaller issuers with lower credit ratings may be squeezed out altogether.</p>
<p>I dont agree with you at all Cellar dweller. You can't continue to borrow against cash flow budget shortfalls. Colleges don't have any physical collateral-who would be interested in buying a college building? Harvard has to make up its $500million to 1billion annual cash shortfall within a year. </p>
<p>If you look at Yale's numbers it seems that they have had no problem spending their increased endowment income. They've done that by paying big time for superstar (in their mind) professors and debt from building binges. Yes, they have been raiding teachers and paying outrageous sums but that has officially stopped for good. They have to cut these salaries and positions and I really think you are going to see them flood back to State Universities. Schools like Florida are thriving with a small endowment and with in state students paying almost nothing. All they will have to do is start charging students a little and they will be fine.</p>
<p>"Colleges don't have any physical collateral-who would be interested in buying a college building?"</p>
<p>Are you kidding? Real estate around Harvard's campus is worth a fortune! I don't believe it will ever come to this, but if they sold off Adams House to a condo developer they'd make tens of millions. Heck, it would be worth millions just as a parking lot.</p>
<p>^ not to mention the Longwood campus, AKA Harvard Medical School. </p>
<p>Or try a little gem like Dumbarton Oaks, in Washington, DC. A similar but smaller property was recently listed for about $15 million. (yes, Harvard owns the place - a gift many years ago.)</p>
<p>Hanna you are right-I should not have said that they do not have any collateral. Most do have some land that could be sold and developed and some other buildings that might be able to be used for non-college things. Still you just should not fund a serious cash flow deficit with debt-you are just digging yourself a bigger hole. Its hard to understand why Harvard with a $28Billion endowment would have to borrow money.</p>
<p>I'm no expert on the question, but my best understanding is that they are borrowing cash because if they sold investments right now to raise cash, they'd take a huge loss on the value of those investments. In other words, Harvard doesn't have $28 billion, it has a bunch of stuff that's WORTH $28 billion, and if they hang onto it through this downturn, it will regain a lot of its lost value. Sell it now, and they take a bath.</p>
<p>Looks like Yale is looking at an even more challenging situation than Haravard. According to a 12/8 article in Business New haven Yale was planning on their endowment funding 44% of operating expenses next year(1.16billion). I guess Yale is making an announcement this week on their endowment results-should be interesting.</p>
<p>I just talked to an acquaintance at Harvard yesterday about the borrowing. The reasoning at the time was that the endowment was having great returns, far higher than the interest on the money that was being borrowed (lots of new buildings have gone up on the Harvard campus in the last few years). Even if the interest will go up when the loans are re-negotiated, it was still a smart decision to invest the endowment and borrow money.</p>
<p>^ Interesting insights in the Economist. These big endowments are awash in red ink. It looks gruesome until you stop and think about how fast they've made money over the last decade. If they've got the cash and the guts to invest now while assets are cheap, they could come roaring back when the markets recover.</p>
<p>So many money managers, endowment and otherwise, forgot a basic principle of investing: </p>
<ul>
<li> It is easy to design portfolios that do well when the market is going up. It is easy to design portfolios that won't do as badly when the market is going down. It is devilishly difficult to design a portfolio that does well in both kinds of markets. And it is tough for mere mortals to predict when markets truly turn.</li>
</ul>
<p>There was an assumption over the past years that it was possible to find asset classes with uncorrelated returns (that's the principle behind higher returns with lower risks). Problem is the dataset used to find these assets just has not covered enough time.</p>
<p>Buy at Dow 12,500. 12,000. 11,500. 11,000. 10,500. 10,000 .9,500. Never stop. ;)</p>
<p>Always buy. Stocks go up 10-11% a year. ;)</p>
<p>Better. Buy illiquid assets. Use debt. Forget cash. Leverage yourself as much as possible. </p>
<p>Better still. Buy illiquid assets. Buy so much of these assets you make the market. When you are maxed out (and you should always max out), "and the price of that asset has gone up because of your buying it", then tout what you have done publicly. This will bring the speculators into the market. Because speculators love rising prices. Just make sure you dump your assets to the speculators. Because if you don't, when the speculation stops, it's all air below. The prices of the illiquid assets are going to crash. If buying illiquid assets works, people will think you are a genius. If this doesn't work, people have short memories and will think you are a genius anyway. Just for playing the game. </p>
<p>
[quote]
NEW HAVEN, Conn. (AP) -- Yale University says its nearly $23 billion endowment has dropped 25 percent to about $17 billion in recent months due to the recession.</p>
<p>Yale normally provides an annual update on its endowment, but Yale President Richard Levin provided the update Tuesday amid concerns over the effect of the nation's financial turmoil.</p>
<p>Yale said in September that its endowment earned a 4.5 percent return in the fiscal year ending June 30, bringing total assets to $22.9 billion.</p>
<p>Levin says the endowment is still very large, and that Yale will continue to recruit faculty and maintain its improvements to financial aid announced last year. He said Yale will restrain salary growth and take other steps in light of the decline.