By Charles Compton
http://stream.publicbroadcasting.net/production/mp3/wkms/local-wkms-938197.mp3
Richmond, KY – Kentucky's universities are built on debt. Students borrow money so they can attend classes. And those classes are a conducted in buildings with a mortgage. Each year, the legislature authorizes tens of millions of dollars in new debt so state-owned colleges can build classroom buildings, dormitories and athletic facilities.
Big purchases, like a house or a car, require more money than most of us have in the bank. That's why we borrow money and that's why universities borrow.
So far, the Commonwealth has borrowed almost $54-million for a new science building at Eastern Kentucky University. Instead of going to a bank, state governments sell bonds. Investors who purchase government bonds invariably get their money back, on time and with interest. As a result, the interest rate is pretty low.
In Kentucky, state-owned universities themselves can also sell bonds. Debbie Newsom, who's Vice President for Financial Affairs at EKU, says they borrowed money so their students could have modern dorm rooms.
"The residence halls we have on campus were sort of new when I was a student, so there you go, but, they're 35-40 years old now, so, they need refurbishing, they're outdated," said Newsom.
While state universities can borrow money, there's a catch. By Kentucky law, the project must make money. EKU can borrow money for new dormitories because the dorm's tenants pay rent. And that rent money will pay off the debt.
In some ways, Newsom says, a university must think like a business. When borrowing, it looks at the bottom line. If the project can't make enough money to pay off the debt, then the project dies.
"You saw Walters Hall being renovated. That was a bond issue by itself, $10-million. And, there's an identified stream of revenues from residence hall fees that go to pay that, none of that comes from tuition money at all," said Newsom.
Currently, Eastern Kentucky University owes about $36-million. And its debt payments this year amount to $3.1-million dollars.
Western Kentucky University also borrows money. WKU is in the midst of a major building campaign. It's beautifying the campus, improving athletic facilities and adding classroom buildings.
This year, WKU will make over $12-million in payments on its debt. To put that in perspective, history professor Eric Reed says that's more money than some of the school's colleges receive. That, Reed says, is a sign of trouble.
"Frankly, our campus is getting really beautiful, but four or five years ago in the slush times, when we were raising tuition by a much larger percentage every year, all this expanded building could be done at the same time as expanding academic programs, but, now that money's tighter, the priorities seem to be not as clear," said Reed.
As WKU pays off its debt, Reed worries, there will be less money for academic programs.
Reed has another concern. Most of a state university's operating funds come from tuition and from the state, and those sources are either flat or declining. There's little new revenue, and, Reed says, that's been dedicated to paying off Western's loans.
"If you look at a lot of the new revenue streams we've had in the last several years, almost all of them have been created in order to finance debt, and finance building, different fees to charge to students for this, that and the other thing. And you know these are fees, that in a time when there's not alot money, these are fees and revenue streams that, in my opinion, should be devoted to academics," said Reed.
Officials at Western say their total debt payments amount to just 5% of the school's total expenses and they're easily manageable.
Debt, argues University of Kentucky Vice President Bob Wiseman, is a truly useful tool. If a business or a university or a government had to pay for projects up front, Wiseman says, they may take decades to complete. During that time, that building's not providing services and its not generating revenue.
"Knowing that a building is going to be out there for 30 or 40 years generating income, as it does in a hospital or does in a housing, can justify, well let's take on the debt and let's just pay for it over time because it does have a steady, reasonable expenditure. Otherwise, I think you wouldn't move forward as quickly as your need to," said Wiseman.
Moving forward can be costly. At UK, they've borrowed $750-million. Much of it has funded major upgrades at the hospital and other medical facilities. Wiseman defends the debt, saying it will help UK build a national reputation.
"The hospital is a teaching hospital and it's also the same doctors are associated with our research side of the coin. So, you're able to recruit better researchers. People that want to be in cutting edge facilities and practice in cutting edge facilities so it has to do more with our recruitment of professionals," said Wiseman.
If anything, Wiseman says the universities want more freedom in taking on debt.
Before a state-owned university can borrow money, it must first get permission from the state legislature. The General Assembly is ultimately responsible for that debt and wants control over it. But the process can take years, and sometimes, Wiseman says opportunities can be missed.
"When Good Samaritan Hospital was in their problems a few years back, if the General Assembly had not been in session at that time, and specifically able to authorize us to issue our own debt, we might have lost access to that facility and that was critical to our long range growth," said Wiseman.
For years, Nicholasville Representative Bob Damron has tried to put more of that power into the hands of a university's governing board. He'll re-introduce such legislation this winter.
"So it just gives the flexibility for the universities and their board of regents and the administration to actually operate the institution in an effective manner without having to go through the process of asking the legislature to opine on every management expenditure that they make," said Damron.
In large part, Damron says, the private sector already does a good job regulating debt. For example, the bond industry hires people who track a university's debt. If it borrows too much money, those people report it and the university finds itself paying a higher interest rate.
With easier access to credit, Damron believes universities can grow faster, bigger and better
"If you wanna' recruit top quality students, if UK wants to move to Top-20 status, if we wanna' move to top status in our regional universities for various programs, they require having quality facilities to attract the best students available," said Damron.
However, Damron's legislation regularly wins approval in the house, but, then dies in the state senate. The upper chamber has been very concerned about the state's overall debt load, and it shows no sign of relenting.
Meanwhile, at universities across the state, the construction continues. And the Commonwealth continues to borrow money for those projects. According to Kentucky's Finance Cabinet, the state and its universities this year will borrow over $44-million, and pay over $19-million in interest. In total, Kentucky has borrowed over a half billion dollars for its universities. It's a lot of money, but just a portion of what Kentucky owes. The state's total debt is about $32-billion.