Part 3 | Debt Service Is Consuming More Education Dollars

May 11, 2008

Third of five articles
For release May 14 and thereafter (900 words)

By Andrea Neal

Despite the economic downturn affecting the housing market, construction continues apace on Indiana’s college campuses. It’s little wonder. Public universities have little incentive to stop building.

That’s because most projects are paid for through debt financing: a buy now, pay later approach that spreads out costs over time and thus minimizes the impact on taxpayers and students. It also masks long-term effects and contributes to the rising costs of higher ed in Indiana. Since 2001, state appropriations for debt service have increased 66 percent while funding for university operating expenses has increased 22 percent.

“I think one of the hidden costs – multi-million dollar costs people aren’t aware of at all – is debt servicing,” said Murray Sperber, professor emeritus at Indiana University. Sperber has written extensively about college sports and how they’ve diverted funds away from the core academic mission of big colleges.

The same is true of debt, which consumes a hefty chunk of the budgets at Indiana universities. This year debt service will cost IU $80.7 million, Purdue $56.8 million, University of Southern Indiana $13.5 million, Indiana State $11.8 million and Ball State $11.7 million. The public universities combined (including Ivy Tech and Vincennes) have over $1.6 billion in outstanding debt, the equivalent to the state operating appropriation for all of higher education in fiscal 2008.

Debt financing is the primary means by which state universities pay for new construction and major remodeling. It allows institutions to raise money by selling bonds to investors. In return, the investors are paid back principal and interest on their loans. Those costs are distributed in different ways depending on the project being funded. Taxpayers pay for academic buildings, which require legislative approval. Student fees, revenues from housing and dining systems and other university income pay for dorms, campus centers and recreational buildings.

Here’s a sampling of big-ticket items recently completed or in the pipeline: an $8.5 million science center upgrade at Indiana State, a $21 million communications building at Ball State, a $52 million science building at Indiana and a $53 million boiler project at Purdue.

Over the past decade, university officials have carried longer and longer lists to the Statehouse for approval. In 2001, they asked for $475 million in projects; in 2003 $618 million; and in 2005 $829 million. The pressure to build became so intense that the Indiana Commission for Higher Education set a guideline: Debt service should not exceed 10 percent of the state’s total higher education operating appropriation. “It was kind of like drawing a line in the sand,” said Stanley G. Jones, who heads the commission.

Yet in the last budget session, lawmakers blew right past the limit, committing 12 percent to debt service.

Part of the problem is the way the budget cycle works. Lawmakers approve projects a full budget cycle before they have to appropriate funds so there’s no immediate consequence to the state. As a result, university capital requests have become legislators’ version of congressional earmarks. Lawmakers want to bring home the bacon for Bloomington, West Lafayette, Terre Haute, Evansville and Hoosier cities with campus branches. And while lawmakers never authorize every university building request, they sometimes come close.

“We’re not suffering by having poor buildings. They’re very nice compared to other states,” Jones said.

The Commission for Higher Education takes a critical look at university requests before they go to the Statehouse, but lawmakers are under no obligation to follow the commission’s suggestions. In the 2007 budget session, the commission recommended only $154 million worth of new capital projects it deemed priorities. The legislature approved $538.6 million.

There are benefits to students of all his spending. Indiana campus facilities are first rate with high tech amenities. That’s not the case in some states where state subsidies are lower or the approval process more rigid. In Illinois, for example, all capital debt for university facilities is issued by the state rather than the institutions themselves, as occurs here. The Illinois legislature must authorize the debt by a majority vote and the appropriation to pay the debt by a two-thirds majority. In addition, all capital projects are planned and managed by the State Capital Development Board and not the universities. Illinois has authorized no new higher education capital projects in six years.

But debt financing is not the only way to cover capital costs. The April 18 Chronicle of Higher Education reported on creative programs that have leveraged private sector money and reduced debt loads felt by taxpayers and students.

“Student housing is now often built by for-profit companies, which pay for construction in return for charging students rent,” the Chronicle said.

Similar collaborations can occur with academic buildings. For example, Purdue University will rely almost entirely on gifts to pay for the new $12 million home of Department of Hospitality and Tourism Management. Of that, $4 million is from the Marriott Foundation. Even research facilities can be shared with the private sector. This will happen soon at a new nanotechnology center to be housed at the University of Notre Dame and linked to Purdue and other Midwest universities. IBM and the Nanotechnology Research Initiative have given $5 million toward the building’s $61 million price tag.

Bottom line: Indiana students and taxpayers are too deep in debt and that affects education. Said Jones, “The more that gets spent on debt service the less that gets spent on instruction.”

Andrea Neal, an adjunct scholar of the Indiana Policy Review Foundation and former editorial page editor of the Indianapolis Star, teaches history at St. Richards School in Indianapolis. Contact her at aneal@inpolicy.org.



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