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Stimulus Spurs Campus Building

April 13, 2009

Little by little, the American Recovery and Reinvestment Act -- better known as the economic stimulus package -- is having an effect on college campuses. While the biggest ticket items, such as tens of billions in research and state stabilization dollars, are not yet flowing in any meaningful way, colleges have begun to take advantage of separate provisions in the new law designed to make it easier for them to borrow money to finance capital projects.

The University of Minnesota announced Friday that it would become the first college in the country to use the new Build America Bonds, which were created in the stimulus legislation to help state and local governments (and related entities) raise money for building projects by making it significantly cheaper for them to issue taxable bonds.

And several colleges, including the University of West Florida, are poised to take advantage of another provision in the financial recovery law that will make it easier for nonprofit colleges and hospitals to borrow money for capital projects directly from banks, rather than having to go to the financial markets.

In some cases, the two provisions will enable colleges that would otherwise have been unable to build (because the financial markets were constricted or they could not afford the costs of borrowing) to do so. In other cases, as at Minnesota, institutions will save significant money that they can use for other purposes.

"Lowering our borrowing costs, in our case by about $2 million over 20 years, translates into not having to raise tuition as much," says Richard Pfutzenreuter, vice president and chief financial officer at Minnesota.

Minnesota, as one of the country's largest public universities, is not among the colleges that have been most hampered by the credit crisis that have made it more difficult and, in some cases, impossible for government agencies to issue tax-exempt bonds for construction and other capital projects. The university has continued to find buyers for its twice-a-year issuances of tax-exempt bonds, but it has seen its costs of doing so rise significantly.

As Minnesota officials sought to raise about $85 million for a series of capital projects, including a new biosciences building, a residence hall on its Crookston campus, and an athletics renovation at its Duluth campus, they saw an opportunity to save money through the Build America Bonds program. Under the program, which the Internal Revenue Service explains here, the federal government agrees to rebate to state and local entities 35 percent of their interest costs on taxable bonds.

While the interest rate on taxable bonds tends to be higher than those charged on the tax-exempt bonds that universities and other nonprofit entities typically use (because, as the name implies, they don't have to pay tax on the interest they pay), the government program "will make the all-in interest cost [for taxable bonds issued through Build America] lower than under tax-exempt bonds," says Minnesota's Pfutzenreuter.

So next week, the university anticipates becoming the first postsecondary institution to go to the public markets with taxable bonds through the Build America program, with the help of Wachovia Securities and Wells Fargo Brokerage Securities. About $35 million of the university's $86 million offering will be in taxable bonds. The subsidies it will receive from the government on its debt service payments will save it $2 million, Pfutzenreuter says.

A Boon to Building, Through Banks

The other change in the stimulus legislation that is poised to spur campus construction has been a long time coming. Advocates for nonprofit organizations have been pushing for more than 20 years to undo a change made as part of the federal government's 1986 tax reform that barred banks from deducting interest payments or carrying costs on money they borrowed, except for relatively small loans they made to state or other entities that borrowed less than $10 million a year. (For more details, see this earlier article.)

That change took away one avenue for colleges that had historically depended for capital projects on state agencies that borrowed from banks, and their remaining options -- entering the public markets or paying significant more to cover the interest costs of the banks they borrowed from -- grew less feasible with the economic downturn.

The economic recovery measure, though, changed federal tax law to allow banks to deduct the interest on any loans as long as the ultimate recipient of the money -- an individual college, for instance -- does not borrow more than $30 million in a year.

The University of West Florida is among the first to take advantage of the change. To finance the construction of a much-needed, 250-student residence hall, the university, working through the local Escambia County Housing Authority, has qualified for a $15 million loan from BB&T that would have been impossible three months ago. Not only did the amount exceed the $10 million cap on the size of loans under the old tax law, but the university would have been required to pay as much as $100,000 to the county government, to cover the county's perceived costs of agreeing to forgo its own ability to borrow from banks, says Paula G. Drummond, a lawyer for the Escambia housing authority.

Financing the project through a bank-qualified loan will give the university a better interest rate than it would have received through the public markets, had it been able to interest investors in the project, and will save it the issuance and insurance costs, Drummond says.

"This whole thing is just made possible by the stimulus."

 

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