Q & A with Peter Taylor, re: Bonds
The week before last I e-mailed UC CFO Peter Taylor with some questions I had following the Faculty Seminar session devoted to the Meister Controversy. Here are his responses to two of my questions.
Q: Did UC issue bonds at all before 2003, or did it do everything through the state until the Bond Indenture was passed 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 that.]
A: The University has been issuing its own revenue bonds since the
mid-1960s. Most recently, just prior to the establishment of the
General Revenue Bonds in 2003, the University of California issued bonds
for systemwide University projects (with the exception of the medical
centers) through a bond indenture established in 1991 called the
Multiple Purpose Project Revenue Bonds (MPP). This particular indenture
is being phased out with the General Revenue Bonds being the
University’s primary borrowing vehicle. The MPP bonds are secured by
net revenues from the financed projects versus the broader general
revenue pledge that is utilized presently under the GRB program. It’s
estimated that the university today saves about $29 million through
general revenue bonds (GRBs), compared to project revenue bonds (based
on approximately $5.8 billion in general revenue bonds outstanding).
Importantly, as part of the general revenue bond structure, the
University does not have to finance inefficient reserve funds or provide
mortgages on our facilities which add costs to the University’s debt
financing. This saves the UC millions of dollars in financing costs.
Q: How does bond rating impact students/ a student’s
experience on campus?
A: Bond ratings are viewed by the University as a means to an end. In
other words, maintaining the most advantageous rating assists the
University in borrowing at the lowest interest cost possible to be able
to build and maintain capital assets that help the University meet its
core mission of education and research. Borrowing for capital projects
allows the University to address its capital facility needs for core
academic and support space, correction and replacement of seismically
deficient facilities, student housing and recreational facilities and
renewal of existing capital assets. New and renewed capital assets
allow, for example, enrollment growth and expanded research
opportunities. These uses ultimately enhance a student’s overall
experience at the University of California.
Alternatively, what would be the impact if UC’s ratings were
significantly lower? Then the overall borrowing cost of any significant
building or retrofit project would go up. Those costs are often borne
by students, through their dormitory payment, reg. fees, and life safety
fees.
The real question is are the building projects undertaken at our
campuses there to benefit students? I believe the answer is yes.
Ultimately, however, the decision to pursue a project belongs at the
local level. Local campuses know best what facilities students, staff &
faculty need to pursue their goals. We work with them to help design
the most cost effective package of finance to accomplish those goals.
A comment on last night’s post by UC Berkeley Professor Bob Jacobsen (physics) echoes some of the things Taylor has said, such as why the University benefits from having a good bond rating. However, Jacobsen goes on to question whether the benefits of a high bond rating are outweighed by the costs of achieving that rating.
“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.”
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.
Hell-raisers, Standpatters, Peacekeepers and the Meister Controversy
People involved the University of California budget crisis controversies fall into three categories: the Hell-raiser who disagrees with seemingly all of the university’s financial decisions, the standpatter who defends those decisions like they’re his lifeline, and the peacekeeper trying to reconcile apparent opposites, which usually results in even more Hell-raising and fervent standpatting than before.
Okay, that’s oversimplifying things a bit—there’s a lot more nuance to these people than I’m admitting here. People change roles. The standpatter archetype best fits the stereotypical reactionary administrator, but some administrators dip their toes into peacekeeper or even Hell-raiser territory when they point out areas of improvement for UC. Likewise, the Hell-raiser sometimes finds common ground with the standpatter and emerges as a peacekeeper.
Still, there’s a grain of truth in these archetypes and they loosely fit people debating the crisis. Let’s apply them to this week’s episode of the Faculty Seminar on UC’s Financial Future*: the Meister Controversy. But first, some background information:
What is the Meister Controversy?
In October, UC Santa Cruz Professor Bob Meister wrote an open letter to students titled, “They Pledged Your Tuition,”** which stated that student fee hikes increase the university’s capacity to sell bonds, drawing an association between the university’s debt capacity and the debt taken on by students and their families.
“UC recently sold more than $1.6B in highly rated bonds one month after declaring an ‘extreme financial emergency,’ ” Meister wrote, adding, “[Student] tuition is UC’s #1 source of revenue to pay back bonds, ahead of new earnings from bond-funded projects, which do not even come second … Because UC pledges 100 percent of tuition to maintain its bond rating, it has also implicitly assured bond financiers that it will raise your tuition so it can borrow more.”
Meister’s assertion that student fees are pledged as collateral for bonds inspired students, faculty and others to question whether the UC ever actually used student fees to service bond debt. UC Berkeley Professor Emeritus Charles Schwartz (physics) summarizes this response in the write-up that accompanied his presentation Tuesday:
Student Fee revenues are put at risk, through the General Revenue Bonds program, to support construction projects throughout the University of California (UC); and top UC officials appear stubbornly negligent regarding their oversight responsibilities. When we asked whether students’ Educational Fees have ever been spent to pay for campus construction projects the official answer came in two contradictory parts:
a) To the best of our knowledge, there has never been such an occasion.
b) The University does not record the data needed to answer that question.
An overview of the meeting
The seminar was moderated by UC Berkeley Associate Vice Chancellor for Budget Erin Gore and started off with tame (but informative) presentations by Schwartz and UC Berkeley professors Stanley Klein (optometry) and Bob Jacobsen (physics).
UC Chief Financial Officer Peter Taylor was the last scheduled speaker and focused on claims that the UC may use student fees to service bond debt, which he attributed to UCSC Professor of Political Science Bob Meister’s paper. After he spoke, Meister was given an opportunity to respond.
“The Meister Controversy is about a controversy I didn’t actually raise because there is no data,” Meister said, explaining that the focus of his paper was on the relationship between the debt capacity of the UC and debt expectations for students and families, not on whether student fees might be used to finance construction.
Yes, those last two portions of the meeting were just as intriguing they sound.
Here I will summarize each presentation separately, in the order it was given. I advise you to read the summaries of Taylor’s and Meister’s presentations together because those speakers responded to each other.
The Peacekeepers
UC Berkeley Professor Emeritus Charles Schwartz (physics)
Schwartz’s presentation focused on the Meister Controversy and served as an introduction for the presentations that followed. (See his write-up, which contains all the information he shared.) He and Klein presented proposals for how the university manages financing for construction projects. (Professor Alan Schoenfeld (education) co-authored the proposal. Klein wrote the amendment to proposal 2 at the bottom of the page.)
Read the proposals here:
Seeing Schwartz in the position of peacekeeper is surprising for anyone familiar with his reputation for (very loudly) blowing the whistle on non-transparent UC practices. Taylor, who said he agreed with parts of the professors’ proposal, observed this change of tone and remarked to Schwartz, “Either I’m getting old or you’re getting more mellow.” I doubt Schwartz is going be pigeonholed as a peacekeeper, though.
UC Berkeley Professor Stanley Klein (optometry)
Klein presented on the dilemma of trying to balance transparency with fungibility, or the ability to transfer funding between different expenses. (See his power point presentation here.)
Klein asserted that fungibility and transparency are not mutually exclusive. (This is completely the opposite of what Schwartz said during the Transparency 101 presentation in seminar a few weeks ago.)
According to Klein, fungibility can be a good thing because having fewer funds that apply to more purposes saves money by necessitating fewer administrators to oversee funding allocation than would be needed if university finances were split up into a greater number of funds.
He added, however, that fungibility can lead to confusion. For example, pledged external sources, or collateral for debt, are not the same as repayment sources for debt.
“When there’s confusion there are problems,” he said.
Klein presented the proposals he, Schwartz and Shoenfeld came up with as a way of finding equilibrium between transparency and fungibility and thus get faculty and administrators “on the same page.”
“There might be ways that we can have our cake and eat it too,” he said.
In addition to the two proposals, Klein suggested an amendment that included tapping into endowments to fund some construction projects and taxing high-salaried employees.
UC Berkeley Professor Bob Jacobsen (physics)
Jacobsen found information about the entire life cycles of nine construction projects at UC Berkeley. He presented on how renovations of Barrows and Stanley hall were funded and executed. (See his power point presentation here.)
In his presentation, Jacobsen emphasized the high degree of detail in the UC’s documents related to construction.
“They don’t stint on this stuff,” he said, explaining that whenever the regents use state money, they say exactly where it is coming from and who has pledged it.***
Jacobsen explained different types of funds that go toward construction (further explanation in his power point):
- University Opportunity Fund—an agreement with the state that dictates how federal reimbursement funds for construction must be allocated.
- Research Overhead—reimbursement money from the state for research conducted in a building and as a result of its construction can go toward funding that construction project
- Funds that function somewhat like endowments—i.e. they are invested the way endowments are but the principal part of the fund (the non-interest part) can be spent by the university.
The Standpatter and the Hell-raiser
UC Chief Financial Officer Peter Taylor
See Taylor’s power point presentation here for data about bonds and construction and other interesting points of information.
Taylor has been CFO of UC for about 11 months now. The UCLA alumnus said he spent 17 years as an investment banker before coming to UC.
Taylor complained about people taking “pot shots” at the UC without giving administrators a chance to respond, but added that Schwartz is diligent about trying to get the facts right.
Then he dug into Meister.
“Let me be crystal clear for probably the 800th time,” Taylor said. “We do not use student tuition to pay for construction debt service.”
Taylor said student fee hikes and increases in bond debt are not interdependent, later adding that Meister never used any evidence to prove student fees are used to pay for construction.
“Why is this paper posted on the web giving students and parents wrong information?” he asked.
Taylor explained that student payments go toward debt accrued by auxiliary enterprises such as housing and parking, but clarified that those payments are not student fees. I think he was referring to students paying to live in the dorms, etc.
The CFO went on to defend the university’s construction projects in response to claims that money spent on them could be allocated elsewhere. He said that if capital projects aren’t built, the university won’t gain revenue from them.
“It is inaccurate to say that 80 percent of those revenues [from building projects] are going to show up without building those projects,” he said.
I’ll have to ask for some clarification about the building revenue arguments. I think he was responding to claims that money spent on buildings could go elsewhere by explaining that the money that would, theoretically, go elsewhere is actually the revenue from the projects once they are fully built and in use.
Taylor ended his presentation by addressing transparency issues. He said Schwartz, Klein and Schoenfeld’s proposal for “regular, detailed reporting regarding debt service coverage” (quoted from the proposal) was satisfied by an item passed by the UC Regents about a year ago. According to Taylor, the item**** will be implemented by no later than the July UC Regents meeting.
“Going forward [the capital projects approval process] will be clearer and easier to understand,” he said. “Through additional transparency people will feel a little more comfortable and at ease.”
UCSC Professor Bob Meister
Meister’s main beef was that a controversy was being attributed to him that he claims he didn’t start.
“I never said that there was data showing how construction funds were actually serviced,” he said. “My interest is in the relationship between UC’s debt capacity, which is necessary in order to privatize the way it wants to, and individual student and family debt capacity in society.”
Meister called this relationship the “kernel of privatization”:
“UC’s financial plan for growth is a reflection … of what is wrong with that model of financing education.”
Meister spoke extensively about the Bond Indenture authorized by the UC Regents in July 2003 that went into effect in 2004. In his paper, he writes:
By pledging “General Revenues” as security for each UC revenue bond, the Regents are pledging everything that they can, including tution. This means that when any source of General Revenue goes up—including tuition and fees—UC’s ability to borrow on private capital markeys goes up, and its dependency on state capital funding goes down. After 2004, any revenues produced by a bond-funded contract would be added to General Revenue (unless this were limited by that contract); but any such projects could also be subsidized by each other, or by revenues from sources such as tuition, student activities, grant “overhead,” endowment, etc.
“Students get it. Students get that that was the point of my article and that’s what I would like the Meister Controversy to be about,” he said Tuesday.
Meister also addressed transparency issues.
“We don’t know how student fees are being used,” he said. “They are not tracked and we don’t know how debt service is being paid.”
Complicating UC’s assertions that it will not use student fees to service bond debt, he says, is a policy passed at last week’s regents’ meeting. The policy clarifies the student fee policy to say that the regents have total authority to set fees at any level and that student fee policies are not contracts with students.*****
Meister described the policy as part of a “complete circle”: the student fee policies were the reasons the regents weren’t doing things like spending student fees on construction and bond debt and “now that we’ve asked them to show they weren’t violating their own policy, they’ve changed their policy going forward.”
*Faculty Seminar on UC’s Financial Future, an open seminar organized by UC Berkeley Professors Stanley Klein (Optometry), Alan Schoenfeld (Education) and Charles Schwartz (Physics), devoted to research into topics such as construction finance and how the University of California contributes to the state’s economy. The seminar meets Tuesdays from 5-7 p.m. in 489 Minor Hall on theUC Berkeley campus.
**Other commentary and analysis addressing UC finances can be found on my “Commentary and Analysis” page. http://caledinsider.org/faculty/
***Meister said in an e-mail that the projects Jacobsen presented on were completed before 2004, thus exempting them from the Bond Indenture. See the portion of this blog post about Meister’s speech during the seminar.
****I will have to look up what the exact item was.
*****Taylor said this policy was in response to the UC losing a lawsuit by former students who claimed they had read on a UC Web page that fees at their professional schools would not increase while they were in school, but that they experienced fee hikes anyway.
March 2011 UC Regents Meeting
The UC Regents will meet Tuesday, Wednesday and Thursday of this week at the Community Center, UC San Francisco Mission Bay. For directions to the meeting and a link to the meeting’s live Webcast of the meeting, go to the UC Regents Web site (or click here).
The meeting falls during the spring break of UC Berkeley, the UC campus closest to the location of the meeting other than UCSF itself. (Most other UC campuses are in session right now.) As a result, a large number of students and other members of the UC community who would otherwise attend the meeting will be out of the area. At the last meeting of the Faculty Seminar on UC’s Financial Future, Professor Emeritus Charles Schwartz questioned whether this week was the most ideal time to have a meeting. UC Student Association board member Ricardo Gomez raised the same concern in the March 18 Daily Californian article previewing the meeting.
The Daily Cal article states that the meeting will focus on promoting diversity in the UC system in light of recent controversial incidents at UC Davis and UC San Diego:
Last month, the UCSD administration faced backlash following an off-campus “Compton Cookout” party and the discovery of a noose in a campus library. At UC Davis, derogatory graffiti was sprayed on the campus Lesbian, Gay, Bisexual, Transgender Resource Center and cotton was placed in front of the campus’s Black Culture Center.
The meeting agenda also mentions an incident at UC Irvine, in which a speech by the Israeli ambassador to the U.S. was interrupted by students.
The Wednesday and Thursday portions of the UC Regents Meeting both start with a public comment period at 8:30 a.m. On Tuesday and Thursday, all committee meetings are open sessions, meaning the public may attend those sessions. On Wednesday, all the morning sessions are open, then about three hours worth of sessions are closed in the afternoon, and the last session of that day– a meeting of the Committee on Investments– will be open.
The topic of UC investments is very controversial, especially concerning UC pensions and the UC’s bond-selling practices. UC Santa Cruz Professor Bob Meister (political science) wrote a paper claiming that the UC uses student fees as collateral for bonds, meaning that fee increases, which are increases in collateral, improve the bond rating of the UC. The placement of the last open session on Wednesday raises similar concerns about scheduling as having the meetings during Berkeley’s spring break does. The fact that a single open session– especially one that may be very controversial– is placed after hours of closed and Regents-only sessions makes me wonder by what method each day of the UC Regents Meeting is planned. I would think that hours of closed session would cause a lot of people to leave UCSF, at least while the closed sessions are going on. Also, since a session can start as soon as the one before it ends, this last session could start at a wide range of times. I want to emphasize though that I really don’t know how UC Regents meetings are planned and the UC Regents may well have to discuss certain content before the Committee on Investments can meet Wednesday. Still, I think the question about method of scheduling is worth posing.
I plan to go to the Wednesday portion of the meetings and will try to blog live, provided I can get onto the internet. The agenda for the meeting can be found here. Click on each committee meeting to see its action items, which can each be clicked on as well to find out more about each one.
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