caledinsider.org: The Budget Literacy Project

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.”