What do you think about bonds?
What do you think of this quote from a 2003 article printed by the Bond Buyer?
While the [University of California] faces possible cutbacks in funding from the state, which faces a budget shortfall of approximately $35 billion, strong and growing demand at all campuses should help the system weather the storm.
The UC system’s size, stature, and low tuition relative to its peers give it significant pricing flexibility if it needs to increase tuition rates, noted Standard & Poor’s, which downgraded the system to AA in February due to California’s budget problems.
Reading articles about bond ratings such as this one, the thing I learn about the most is how much I don’t know. What does growing demand refer to—students’ demand for education? Is a higher bond rating motivation to increase tuition? What’s the significance of having a good bond rating?
In order to understand the role of bonds in University of California finances, we first have to understand bonds and their role in university finances, in general. I’ve been meeting regularly with UC Berkeley graduate students Shaina Potts and John Stehlin (both geography) to research UC’s financial model.* For the next month or so, we’ll be focusing bonds. We’ve been reading articles about UC bonds and UC bond ratings from sources like Moodys, Reuters and Bond Buyer, focusing on the years 2003, 2004 and 2005. We plan to meet with UC CFO Peter Taylor, Berkeley Associate Vice Chancellor for Budget Erin Gore and UCSC Professor Bob Meister (political science) to discuss the role of bonds in UC finances.
Read a tutorial on bonds here.
The year 2004 was significant for UC finances because it was when the Compact for Higher Educationwas established, which the California Legislative Analyst’s Office said went against the Master Plan for Higher Education passed in 1960. 2004 was also when the Indenture for General Revenue Bonds to Finance and Refinance Debt for UC Projects, passed by the UC Regents in 2003, went into effect. Before the Bond Indenture, UC could issue its own bonds but they had to back the bonds with specific revenue sources. Being able to back bonds with general revenues is mean to increase the UC’s debt capacity. I don’t know what the UC’s motivation to increase its debt capacity was or what it hoped it could do by taking on more debt. I also don’t know how not specifying the exact revenue source of a bond helps to increase UC’s debt capacity. These are things I hope to find out from speaking with Taylor, Meister and Gore.
According to Meister’s open letter to students, “They Pledged Your Tuition,” 2004 marked a turning point in UC’s bond rating; UC’s bond rating greatly improved and is in fact now much higher than that of the state of California. (Read about UC’s bond rating of Aa1 in July 2009 here and California’s bond rating of Baa1 in July 2009 here.) Stehlin said articles from Moody’s reflect the improvement of UC’s bond rating in 2004 as well. I don’t know what a higher bond rating means for students and nor do I know what bonds can and cannot be spent on.
Through meeting with people who openly disagree about whether or not bonds are good for the university, I hope to gain a well-rounded perspective of the role of bonds in UC finances. I have trouble putting dialogue about UC bonds into context because I don’t know how “normal” UC’s bond situation is or what the impact of universities selling bonds is on students. As such, I can’t judge how “good” or “bad” bonds are. What do you think?
*Disclosure: Potts and Stehlin were involved in organizing the March 4 protests, making fliers and such. Stehlin wrote an OpEd that appeared in the Daily Californian the week of March 4. I met Stehlin and Potts in a research group primarily made up of Berkeley grad students in geography. The group, which was associated with the Fee Strike Work Group and involved in organizing protest materials and activities, researched various aspects of the UC budget crisis including non-monetary issues such as diversity. I don’t think the larger research group is meeting any more.
A better bond rating is clearly good for the University, because it means that money can be borrowed at less cost. The money saved that way may or may not make things better for students, but that’s a separate decision to be made.
This issue is “at what cost?” Has what the University has done to improve its bond rating had _other_ costs that are large enough to outweigh the savings?
That’s definitely worth investigating.
[...] by the UC Regents? [I realized after reading the Bond Indenture, which you can find a link to in last night's post, that the indenture introduced general revenue bonds but that UC could issue its own bonds before [...]