Debt and Deferred Maintenance at Virginia Colleges

debt-revenueby James A. Bacon

Above, readers will find the chart I called for in yesterdays blog post: the debt burden of Virginia colleges and universities as a percentage of their budgeted revenues. The higher the debt-to-revenue ratio, the more leveraged the institution and, hence, the greater the risk of financial difficulties if and when student enrollments decline. This chart is useful because it suggests that we should start paying closer attention to Christopher Newport University and the University of Mary Washington, both of which have borrowed heavily to fund their building expansions.

Having a high debt/revenue ratio is not necessarily a worrisome sign. The University of Virginia also appears to have borrowed heavily, but (a) it has a multi-billion dollar endowment and a wealthy alumni base to fall back upon in times of trouble, and (b) there is such a high demand to attend the university that there is a negligible chance that it will see an involuntary decline in enrollment. By contrast, Norfolk State University, in the news recently for its eroding financial condition, has a modest debt load. Still, all other things being equal, a high debt-to-revenue ratio puts an institution at greater financial risk.

The debt figures, by the way, I took from the Joint Legislative Audit and Review Commission’s latest report on higher education. The figure denotes the outstanding principal and interest payments due over the next thirty years (FY 2014 to FY 2043). The revenue numbers come from the Virginia state budget “operating budget summary” combining both General Fund and Nongeneral Fund revenues.

Virginia State University and Norfolk State University are widely reported to be experiencing major financial difficulties, in large part reflecting their status as Historically Black Colleges and Universities fifty years after the formal end of racial segregation in America and the lower incomes of their student populations.

But, as Bacon’s Rebellion has been warning and the JLARC report confirms, rising tuition, fees and other expenses are outpacing the ability of students and their families to pay for colleges across the board, with the result that enrollment in Virginia colleges and universities declined last year. Declining enrollment translates into falling revenue, which can be especially devastating to institutions with high debt burdens.

My analysis suggests that Christopher Newport and Mary Washington, the two most highly leveraged public higher ed institutions in the state, could be among the most vulnerable. Neither is a prestige institution with strong pricing power and a large backlog of students clamoring to get in. In a positive sign, however, Christopher Newport’s enrollment did increase by 75 FTE students in 2013-2014 compared to the year before, according to State Council for Higher Education in Virginia data. On the other hand, Mary Washington’s enrollment declined by 138. I don’t want to make too much of one year’s enrollment data but if I were a board trustee at Mary Washington, I’d set a very high hurdle for any additional borrowing.

By contrast, Radford University serves a similar market niche, as a small/medium-sized liberal arts university appealing mainly to in-state students. Radford’s board has kept a very tight lid on debt, and the institution has the lowest debt/revenue ratio of all the colleges.

One more factor should should be considered in our analysis — deferred maintenance. Christopher Newport’s campus is so new that it has a negligible deferred maintenance backlog — about $0.5 million, according to JLARC. That contrasts to Virginia Tech’s $274.5 million backlog, the largest of any higher ed institution in Virginia. In theory, Christopher Newport won’t have major maintenance issues until it has paid off most of its 30-year debt. Mary Washington, by contrast, has racked up $42.5 million in deferred maintenance.

Deferred maintenance, Virginia public four-year institutions. Table credit: JLARC
Deferred maintenance, Virginia public four-year institutions. Table credit: JLARC

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4 responses to “Debt and Deferred Maintenance at Virginia Colleges”

  1. Jim, your point about “rising tuition, fees and other expenses are outpacing the ability of students and their families to pay for colleges across the board, with the result that enrollment in Virginia colleges and universities declined last year.” is very real to my wife and I. Even with both of us working it would be a stretch to help our son pay for college if he were to go to college this year. I don’t know what the cost will be in three years, when our son actually does start college, but I am sure it will be a lot higher, with the increases in cost outpacing our increase in income. (I am basing my numbers on what our High School counselor says is the representative “real” cost of college, after likely grants, tuition waivers, and maybe some scholarships, plus one-fourth of our 529 funds.)

    How families with several kids will be able to afford college without large amounts of loans (either by the parents or by the children) is beyond me.

    This is a topic for much future discussion with my Delegate and Senator.

  2. I’m not clear who is actually holding the debt. Is it the institution of the State?

    in terms of tuition and fees cost, there are quite a few Universities and Colleges that have quite modest rates in comparison to the “brand” institutions.

    I have to question what people are really after when they talk about “affordability”. It is certainly possible to get an affordable college education – people are not required to go with the high-priced spreads.

    That’s why I say the folks at the “brand” colleges are selling a product – and they know what it is worth – and folks looking for college have to be honest with themselves as to what they are really after.

    If you must attend a brand name college or die.. then so be it – but it IS a choice.

  3. LifeOnTheFallLine Avatar

    So, I’ll ignore the level of irony involved in a bunch of middle aged white men whose parents’ generation was more than willing to pay a much higher set of tax rates to assure their children got affordable access to quality public education and who went to school when the minimum wage had much more purchasing power than it does now waving their fingers about how these schools have failed by choosing to build out instead of providing affordable higher education.

    Especially in light of ESA landing a freaking probe on a comet while NASA has to cross its fingers that the third-party Space FedEx it’s been forced to employ doesn’t blow up and leave its payload floating in the Chesapeake Bay. Also of note, this September ISRO’s MOM successfully began orbiting Mars on its first attempt, making India the first country to enter Martian orbit on its first attempt.

    Why bring up ESA and ISRO? Well, almost every member state of ESA offers free post-secondary education, as does India. The tuition for a student in the UK to attend Oxford or Cambridge is about $14K a year. These governments support their students and their scientific communities.

    Meanwhile, we’re over here forcing our institutes of higher learning into irrational competition, and then we’re surprised when they respond in kind. Government support is dwindling, which means you have to attract a higher number of students both in- and preferably out-of-state. Well, what do superficial 18-year-olds like? Either really, really old buildings that lend an institution an air of antiquity or really, really new buildings with lots of amenities that turn your university into Club Med with a physics department.

    They also like sports! So the universities will continue to build teams whose fan bases may or may not pay back into the university what they spend on athletic programs, but will certainly line the pockets of that august racketeering organization the NCAA.

    But those of you who got your degrees in an era when support for state institutions was much higher and the pressure to attract students was much lower, please lecture everyone else on how badly they’re doing their jobs.

    1. I find LifeOnTheFallLine’s acerbic comments to be dead on and an appreciated perspective that challenges the traditional old white guy mentality.

      He is entirely correct that many Universities outside of the US – (as well as K-12) offer lean (inexpensive) but academically-strong educations without taxing the hell out of everyone for the “extras”.

      But American kids – 1. – fear the rigorous academics and 2. want amenities and 3. mom/dad want their kids to go to the “brand” schools.

      we blather on and on about economically development here at the same time we ignore the importance of rigorous academics and blame “genes” for our inability and refusal to educate kids who have “lazy” parents.

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