Monday, July 27, 2009

Academic Debt: A Mind-Numbing High-Wire Act

I have been tracking the effects of the financial crisis on institutions of higher education in my post dated Dec. 9, 2008. The other day, I was reading about the struggle for survival of the country's largest lender to small and mid-sized businesses CIT Group Inc. Reuters has reported extensively on this case. The last update was posted on Jul. 24, 2009.  I began to wonder whether CIT's potential bankruptcy may affect academic institutions, about their debt load and their ratings.

Last September Commonfund Short Term Fund, a major investment fund for colleges and universities, was forced to close suddenly. The investors were left scrambling to recoup their money and Moody's issued a report on their credit worthiness in October. This report can be downloaded here. All assessed institutions maintained their excellent ratings.

However, some universities had borrowed enormous amounts of money, using self-liquidity backed VRDO/Commercial Paper. A Variable Rate Demand Obligation (VRDO) constitutes a debt security, such as a bond, with variable interest rates. A Commercial paper (CP) consists of unsecured promissory notes issued to meet short-term obligations, e.g. payroll. Both financial instruments provide the issuer with short-term liquidity.

The University of Michigan led Moody's list with $1,121,300,000.-. Among private research universities, Emory University and Vanderbilt University topped the list with $1,006,451,000.- and $646,135,000.-, respectively. Vanderbilt University kept borrowing heavily in the first half of this year. According to a Reuters report posted Feb. 23, the university issued $250 million in taxable notes. The post also lists $575.8 million in outstanding fixed-rate revenue bonds, $338.2 million in outstanding variable-rate revenue bonds, and $675 million in commercial paper. A Reuters post dated Mar. 9, 2009, reports that the university sought the issue of another $330 million in fixed-rate revenue bonds. Fitch Ratings assigned these issues 'AA'.

According to the Princeton Review, about 6,400 students are currently enrolled at Vanderbilt University. The university would need seven years to fulfill the outstanding financial obligations listed above from enrollment alone, provided all students paid full price, that is approximately $50,000.- per academic year.  This calculation does not include interests. In the face of the economic downturn and the associated losses in endowment, the scale of borrowing appears mind-numbing.


  • According to Stephanie Strom's report with the title "Nonprofits Paying Price for Gamble on Finances" in The New York Times yesterday,  Harvard University and Yale University had issued tax-exempt bonds for 2.5 and 1.6 billion dollars, respectively, already at the end of fiscal year 2007 (09/24/09).
  • The accuracy of risk assessments by the major rating agencies has come under severe scrutiny lately. Rachelle Younglai reports in her post with the title "Moody's secretive nature described to Congress" dated Sep. 30, 2009, on Reuters that an investigative congressional committee was less than impressed. It should be noted that the rating agencies rely heavily in their judgment on the financial information provided by the rated entities (10/01/09).
  • Compared with Vanderbilt University, Yale University has borrowed substantially more. The university disclosed in its annual report for the fiscal year ending June, 2008, that it possessed 3.1 billion dollars in outstanding bonds and notes. However, the value of Yale's endowment for that year is listed at 23.0 billion dollars, whereas Vanderbilt's endowment hovered around 3 billion dollars at that time (10/16/09).
  • According to Dan Wilchins and Elinor Comlay's exhaustive report entitled "CIT bankcruptcy reassigned after recusal" on Reuters today,  CIT Group Inc has filed for bankruptcy. Michael de la Merced provides a detailed chronology of events entitled " CIT to test Speed of Bankruptcy Court" for The New York Times (11/01/09).
  • Mega-universities may suffer from huge campuses and high student to teacher ratios. However, some possess a great advantage in the current economic situation. That is, their endowments contribute less to total revenue than the endowments at private colleges and universities. Hence, the losses in revenue they incurred because of the financial crisis rendered their budgets less vulnerable. Similar to numerous private institutions, the endowment of Ohio State University (OSU) in Columbus, Ohio, lost 30 percent of its value since 2007 (OSU endowed funds management brochure). However, the income from endowment at OSU contributes just about as much as student fees and less than a fifth to the total budget of 4.35 billion dollars (OSU statistical summary). The loss in endowment could, therefore, be absorbed with minor disruptions of spending. According to a Reuters business wire release dated  Jan. 7, 2009. Fitch Ratings reports OSU's  outstanding bonds at 753.3 million dollars. The university could repay this amount with one year's income from student fees (11/05/09).
  • For-profit healthcare providers apparently did well in the past year. Some flush with cash are prepared to acquire financially distressed not-for-profit hospitals. Listen to yesterday's interview of Columbia/HCA's CEO Richard M. Bracken by National Public Radio's WPLN in a segment entitled "HCA Earnings Soar, Acquiring Struggling Non-Profits Emerges as Growth Option". I recall hearing similar pronouncements a dozen years ago, when then CEO Richard L. Scott unleashed a similar wave of acquisitions. After such take overs, teachers and basic scientists may quickly become an endangered species as the fate of Allegheny University of  Health Sciences, a merger of Hahnemann University and Medical College of Pennsylvania, so aptly illustrates (11/06/09).
  • In the wake of the financial crises and the ensuing restructuring of private research universities, leaders of medical schools and teaching hospitals are leaving their posts. Eric Neilson, M.D., the Chairman of the Dept. of Medicine at Vanderbilt University, with roughly 650 faculty members the largest department of the medical school, stepped down a month ago and has been replaced by an in-house successor. Leslie Hast reports on Neilson's achievements in her post entitled "Neilson reflects on tenure as Medicine chair" in the REPORTER on Mar. 26, 2010. Further retirements and departures of division chiefs can be anticipated. The Chairman of the Dept. of Biochemistry, who lauds Neilson's accomplishments in Hast's article, just announced that he will vacate his chair at the end of June according to Bill Snyder's article entitled "Waterman to end 18 fruitful years as Biochemistry chair" in the same issue of the REPORTER (03/30/10).
  • The head of Vanderbilt University's Division of Hematology/Oncology David Johnson, M.D., announced his departure. The director of the Blood & Marrow Transplant Program Friedrich Sch√ľning, M.D., will leave his post shortly (04/23/10).
  • The chairman of Vanderbilt's Department of Microbiology and Immunology stepped down. In the two years since E. Gordon Gee left his post as chancellor of Vanderbilt University, at least six Medical School directorships and chairs have been relinquished. None were replaced with new hires. As Kathy Whitney reports in her article for the REPORTER with the title "Spring Faculty Meeting provides updates on programs, initiatives" dated May 7, 2010, the vice chancellor for Health Affairs and dean of Vanderbilt University School of Medicine emphasized in his Spring faculty meeting address that the School of Medicine and the Medical Center are faring “very, very well as we rebuild our savings following the recession (05/13/10).”
  • According to Elizabeth Latt's post for Vanderbilt News with the title "Vanderbilt Board elects Mark Dalton to succeed Martha Ingram as chairman in 2011" dated Apr. 23, 2010, industrialist Martha Robinson Rivers Ingram is stepping down from her post as chairman of Vanderbilt University's Board of Trust. She will be replaced within a 12-month transition by co-chairman and CEO of Tudor Investment Corp. Mark F. Dalton (07/05/2010).
  • According to Jeff Lockridge's report in today's Tennessean entitled ''Vandy coach says it was time to retire", Vanderbilt Commodores' highly-commended Head Football Coach Bobby Johnson stepped down abruptly from his post yesterday, three weeks before the new season begins. He is replaced by Assistant Head Coach Robbie Caldwell, emblematic for a common trend in U.S. higher education. Everywhere these days, long-standing leaders with expensive pay packages are being replaced with less costly in-house promotions (07/15/10).
  • In his article for The New York Times with the title "In Case of Emergency: What Not to Do" dated Aug. 21, 2010, Peter S. Goodman quotes the communications strategist Eric Dezenhall observing wisely: "A corporation in crisis is not a corporation. It is a collection of panicked individuals motivated by self-preservation.” We only need to substitute 'corporation' with 'institution of higher learning' to understand the situation in which many universities and colleges find them themselves today (08/22/10).
  • According to Getahn Ward's report with the title "Children's Hospital Chief is leaving" posted online in The Tennessean today, the CEO of Vanderbilt University's Monroe Carell Jr. Children's Hospital, Kevin B. Churchwell, is leaving. This is the second senior academic medical officer departing from Vanderbilt University in a bit more than a year. In June of last year, Vice Chancellor of Health Affairs Harry Jacobson stepped down. Like Commodores Coach Johnson, who abruptly took his retirement two months ago, Dr. Churchwell will be replaced by his assistant (09/21/10).
  • Jennifer Brooks' report in The Tennessean with the title "Gifts to Vanderbilt endowment soar as other charities struggle" published online today, Vanderbilt University's endowment lost 300 million dollars or 8.6 percent in the past fiscal year. On the other hand, the university succeeded in raising 84 million dollars in donations, an amount approximately equivalent to the anticipated losses in Medicare payments in the coming year (10/21/10).
  • According to Lauren Etter's post with the title "More Get $1 Million to Lead Colleges" published online in The Wall Street Journal today, the Chancellor of Vanderbilt University Nick Zeppos was the country's second-highest paid university leader in 2008, earning $2.8 million dollars. He was promoted in-house, after E. Gorden Gee left Vanderbilt University for Ohio State University in 2007 (11/14/10).
  • Tamar Lewin reports in her article with the title "Private-College Presidents Getting Higher Salaries" published online Dec. 4, 2011, in The New York Times that according to The Chronicle of Higher Education Vanderbilt University's Chancellor Nick Zeppos garnered $1,843,746.- in 2009. According to a broadcast by Nashville National Public Radio (WPLN) with the title "Zeppos Commits to Cut Pay" on Mar. 12, 2009, the Chancellor had promised to voluntarily accept reduced pay after the sudden, painful loss in endowment investment value of roughly 30 percent in the wake of the financial crisis of 2008 (12/12/2011).
  • More than a decade of expansion have come to an end: Vanderbilt University is in the process of eliminating more than 1,000 jobs in mass lay-offs at its medical center this fiscal year. Vice Chancellor of Health Affairs, Dean of the Medical School and CEO Jeffrey Balser chose not to mince words. According to The Tennessean's post with the title "Vanderbilt University Medical Center eliminates 275 jobs of 1,000 to be cut" published online Sep. 20, 2013, Balser noted: “Some have been concerned that VUMC has been ‘too transparent’ about the need to reduce staffing,...” At the end of the day for-profit TriStar Centennial Health may stand ready to absorb Vanderbilt's operation at a good price, while the current leadership will be rewarded with golden parachutes(02/21/2013).
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  1. In fairness, your comment about the ability for Vanderbilt to pay back its debt solely from student tuitions doesn't accurately reflect Vanderbilt's operations. Net tuition (after scholarships) only makes up $200mm (7%) of its operating revenues. Being a large research university with a medical system, Vanderbilt generates nearly $400mm in Grants and Contracts as well as nearly $2,000mm in healthcare services. The majority of that debt issued was likely to build up its healthcare system which may also present concerns but the sheer size of its healthcare operations make the amount of debt outstanding look more manageable then when just considering tuitions.

  2. Your points are well taken. I struck this comparison primarily because so many in the debate about the cost of higher education presume that student money more than covers the institutional cost.

    As you point out correctly, this presumption does certainly not pertain to health care-providing research universities. These institutions yield greater income from government-funded research and health care services. About a third of Vanderbilt's employees work in the health care sector alone.

    Unfortunately, the federal stimulus money is running out. A great debate about government spending and the rising national debt is raging in Congress. Unemployment is at historically high levels. As a consequence, the number of people who can afford health care is shrinking. Hence, the universities' income from research and health care is facing an uncertain future. One can only hope that already financially strained institutions will manage their resources wisely.