By Dick Hall-Sizemore
Almost totally overlooked or ignored among capital projects in the budget bill are those higher ed projects financed with revenue bonds. They are probably ignored because their passage does not affect the state’s debt capacity and tax revenues are not needed for debt service. Nevertheless, they do have an impact on Virginia citizens.
For most higher ed institutions, these bonds are issued by the Virginia College Building Authority (VCBA). The debt service is covered by revenue from a variety of non-tax sources, such as room and board fees, parking fees, donors, and general student fees. The issuance of these bonds has to be approved by the General Assembly.
Due to their size and financial strength, four institutions are authorized to issue bonds for revenue capital projects on their own, without coming to the General Assembly for approval. They are: University of Virginia, Virginia Tech, William and Mary, and VCU. Because the state has a higher bond rating and, thus, gets lower interest rates, Tech, W&M, and VCU usually use VCBA for their revenue bonds, rather than issue them on their own authority. Conversely, UVa chooses to issue its own bonds, rather than use VCBA financing, for its projects.
The Governor has proposed, in the introduced budget bill, the authorization of an astounding $692.3 million in revenue bonds in the next biennium. “Astounding” is the appropriate adjective because that sum dwarfs the amounts authorized in previous biennia. In 2016-2018, $335.2 million was authorized; in 2018-2020, the total was $263.2 million. The authorization proposed in 2020 exceeds the total amount authorized over the last four years.
To be fair, four projects account for more than 50 percent of the total amount being requested. Their total exceeds that of each of the prior two biennia. Not surprisingly, these projects are related to the promise to produce additional computer science and IT graduates and, therefore, to the Amazon headquarters project in Northern Virginia.
One of the most prominent public issues has been the rising cost of a college education and the resulting increase in student debt. As we have discussed on this blog, the main component in rising higher ed costs has been fees. The boom in construction on college campuses has been a main contributor to the increase in fees.
The policy of the state is to use tax-supported debt for facilities directly related to educational activities, such as classroom and administration buildings. For other facilities, revenue bonds, with the debt service covered by fees and other non-tax sources, are used. For residential buildings, room and board fees support the debt service. For other facilities, general student fees, private donations, or revenue generated by those facilities are used.
One has to dig in order to tie any rise in student fees to the construction of a specific facility. Institutions are required to submit financial information related to a project proposed for revenue bonds, including data on the effect on student fees, to the Department of the Treasury for review prior to their budget submittal to DPB. This information is not readily available to the public and is usually not included in budget submissions, which are available on-line. However, several budget submissions in this budget cycle did include that information and thus provide a glimpse of the extent to which individual projects affect fees.
Following is a description of several projects for which revenue bond funding was requested. These projects were selected due to their size and the insights they can provide into this type of financing.
James Madison University
- Project: Renovation of Eagle Hall
- Bond authorization request: $49 million
This is a typical request for the renovation of an existing residential building. The justification provided by JMU is a stark example of higher ed’s claim of what they must do to attract students. JMU needs to modernize this building “to meet the demands and evolution of student housing…and meet the demands of today’s students.”
The residential hall currently has 434 beds. A typical floor has 54 double bed rooms with a communal bathroom and one study room. The building also has a recreation room/kitchenette and a shared laundry.
After renovation, the building would have 404 beds. This decrease in capacity is ironic because later in the submission, the university said, generally, it would need “not to remove any existing housing.” Each floor of the renovated building would have 52 double bed rooms with a “pod-style” restroom core. (The prevalence of co-ed dorms means that communal bathrooms have to go.) On alternate floors, there would be a “social lounge with kitchenette”, as well as a social lounge with study room. On the first and ground floors, there would be a large student lounge, a multipurpose room, modernized laundry area, game room, and a large open seating area.
The submission did not specify how much student housing fees would have to increase as a result of the issuance of bonds for this renovation.
College of William and Mary
- Project: Renovation of Kaplan Arena and Construction of Sports Performance Center
- Bond authorization request: $55 million
Kaplan arena is used for athletic competitions, as well as special college and community events. The college intends to finance this project with private donations and any new revenue it generates. However, the college covers its bases with the following statement: “In the event that private funds and new revenue do not fully cover the cost of the project, the university would look to other non-general fund revenue sources, such as student fees.”
George Mason University
- Project: Construct Institute for Digital Inovation and Garage
- Total cost: $242.5 million
- Tax-supported debt: $84 million
- Revenue bonds: $76.5 million
- Capital lease and commercial partners: $82 million
This new building would “include academic facilities supporting the university’s new School of Computing…as well as facilities that house, for example, accelerator/innovation and co-working programs, corporate innovation labs, conference and convening spaces, ground level retail, and residences.”
The proposed funding for this facility is complicated and the explanation is vague in places. For the academic portion, the cost of $84 million is included in the total of $2.7 billion requested in tax-supported debt. The university is requesting authorization of $76.5 million in revenue bond financing. The request does not specify the source of the revenue that would be used to cover the debt service. There is a passing reference to philanthropy, which might be a source. The project includes residences, so student room and board fees would presumably be another source. The remaining $82 million would come from commercial partners in the project.
It is worth noting that the General Assembly approved a project several years ago for which GMU planned to use revenue bonds to cover a portion of the cost. Private donations would be used to cover the debt service. When GMU could not get the sufficient donations or pledges, the state had to come to the project’s rescue with tax-supported debt. The legislature should carefully consider this proposal, which does not seem to be completely thought out or developed, to ensure that is does not get into another “bait and switch” situation.
Virginia Tech
Tech’s requests are unusual. For three of them, it has already chosen to use its own authority to begin them. Its board of visitors has approved them and they are underway. TheTech is limited to requesting only the financing of these projects with revenue bonds issued by VCBA because, “Compared to a standalone issuance [by Tech], issuing through the VCBA will reduce debt service and the savings will be passed along to students in the form of lower fees.” If the authority to use VCBA financing is not granted, Tech made it clear that it is “prepared to issue standalone debt.”
The claim of helping students with “savings” passed along in the form of “lower fees” is misleading. Fees will be higher in any case, just “less higher” if VCBA is used. For these projects, Tech did specify the fee increases needed:
Project: Construction of Creativity and Innovation District Living Learning Community project.
- Total cost: $105.5 million
- Available cash: $15.9 million (from balances in residential program fund)
- Bond authorization request: $89.6 million
- System-wide existing room and board fee impact: $253 annually
Project: Construction of Global Business and Analytic Complex Residence Halls
- Cost: $84 million
- Bond authorization request: $84 million
- System-wide existing room and board fee impact: $166 annually
Project: Construct Corps Leadership and Military Science Building
- Total cost: $52 million
- Available cash: $3.65 million
- Private gifts: $17 million
- Revenue bond authorization request: $31.35 million
Debt service on the revenue bonds would be financed through a combination of private gifts and a cadet facility fee of $250 annually.
The fourth project in this list for Tech is the Innovation Campus-Academic Building project approved by the General Assembly in 2019 as part of the Amazon deal. The total authorized cost was $275 million. Tax-supported financing of $168 million was authorized, with the remaining $107 million to be provided through private gifts.
Apparently, the raising of this $107 million has not proceeded as quickly as anticipated or else the prospective donors do not want to put up that much cash at once. Tech is now asking the state for a revenue bond authorization for the $107 million to enable it to “cash flow the timing of private gift receipts” with the debt authorization. In its submission, Tech declared that student fees would not be affected by the request to convert the $107 million from private gift revenue to revenue bond proceeds with the private gifts being used to pay the debt service on those bonds. Left unsaid is the fact that the school will need to raise more than $107 million because the debt service will include interest on that $107 million, as well as issuance costs.
