U. shoulders $450m in debt

Tuesday, October 23, 2007

Brown will continue to rely on reserve funds well beyond 2010 to make up budget shortfalls as the University continues its aggressive expansion, Executive Vice President for Finance and Administration Elizabeth Huidekoper told The Herald. In addition, the University has taken on a substantial amount of new debt in recent years, although its debt level remains “manageable” and the University’s overall financial health is strong, according to a recent report by debt rating firm Standard & Poor’s.

The budget deficits reflect a calculated attempt by University officials to move forward quickly with the Plan for Academic Enrichment, President Ruth Simmons’ ambitious and wide-ranging blueprint for enhancing Brown’s academic profile. First approved in 2002, its initiatives include an aggressive expansion of the faculty, introduction of need-blind admission and a spate of new building projects on campus.

In support of the plan, the University in 2005 publicly kicked off the Campaign for Academic Enrichment, an aggressive fundraising effort aimed at raising $1.4 billion by 2010. To date, the campaign has raised over $1 billion.

Additionally in 2004, the Corporation, Brown’s highest governing body, approved the use of $60 million in reserves to finance the plan and make up the budget deficits. Approximately $19 million of those reserves have since been used, with projections indicating the University may spend as much as $28 million by the end of the current fiscal year, next June – just under half of the total reserves allotted.

The University expects revenues to grow faster than expenditures in coming years, Huidekoper said, but it is unclear when the gap between the two will close and end the need to spend reserves.

Huidekoper emphasized that the deficit spending could not continue indefinitely. When asked if the University budget would return to breaking even within five years of the campaign’s 2010 conclusion, Huidekoper said, “I think it’s got to be.”

The University Resources Committee, which recommends the University’s annual budget to the president and Corporation, wrote in its February 2007 report that “it is clear that the University’s aspirations will continue to require the investment of reserves and balances for the next five to seven years.”

“We went forward with a very ambitious project … on the expectation that the revenues would come forward,” Huidekoper said.

But strong returns from the campaign are just one of the gains the University will need to close its budget deficits in the future. In addition to increased annual giving and “cash flow into the endowment,” the University is relying on improved returns from the endowment, increased government funding and continued growth of tuition and fees to make up the difference, Huidekoper said.

Tight budgets ahead

University officials have little margin for error in future budgets, as unforeseen expenditures – most notably the recent decision to construct a new $35-million aquatics facility to replace the moribund Smith Swim Center, which was shuttered last spring after structural deficiencies were discovered in its roof – have tested the resiliency of officials’ plans in recent years.

According to Huidekoper, such unexpected expenses and cost increases – everything from complying with fire codes to rising energy prices and a burst pipe on the Main Green in February 2006 – have forced University officials to keep a vigilant eye on the budget.

The University has “slowed some things” in light of unforeseen expenses, Huidekoper said.

“We’ve been very tight on salary increases for staff and others,” she added.

In March, before University officials had announced the swim center’s permanent closure, Simmons told the faculty that the University’s financial situation was “pushing the envelope.”

In addition to strong returns from the campaign and improved endowment payouts, the University’s future plans “also depend on our ability to achieve more than $5 million in budget reallocations and revenue increases over the next four years,” according to February’s URC report.

Further unexpected costs would necessitate reallocation of existing funds, Huidekoper said, as little room remains in the plan to absorb contingencies.

Continuing growth from a variety of revenue sources will be important, Huidekoper said. Strong Annual Fund returns in fiscal year 2007, for example, led the University to use several million dollars less in reserves than projected.

Strong returns from other parts of the campaign will also be important, she said, and the University is taking steps to better leverage its endowment and manage the funds it has on hand at any given time more effectively and more aggressively to get a “higher return on those funds than we have in the past.”

Another crucial revenue source is government grants, Huidekoper said. The University will start renegotiations this winter on a crucial rate governing reimbursements it receives from the federal government for research.

“That has to go up, because it’s an important revenue source,” Huidekoper said.

Managing risk, making exceptions

Officials also took steps to keep the University from “getting out ahead” of itself at the outset of the spate of current initiatives, Huidekoper said.

One such measure was outlined by Simmons at a faculty meeting earlier this month, when she explained that she had promised the Corporation, when it approved the Plan for Academic Enrichment, that the University would pause to reassess plans “midstream.” Eschewing specifics, she told the faculty that “no budget can bear a limitless succession of good ideas” and mentioned that growth in the University’s administrative structures should be examined closely.

Simmons said she plans to report to the Corporation in February with the results of that reassessment.

The Corporation also bolstered its own guidelines governing construction projects early on in the effort, Huidekoper said, requiring that 50 percent of a project’s total funds be secured before an architect can be hired. The required amount was previously 20 percent.

But, underscoring recent pressures, the Corporation recently made two exceptions to that guideline, selecting architects to proceed with planning for the new swim center and the long-planned and recently renamed Mind, Brain and Behavior Building without that level of funding in place, Huidekoper said.

The decision to proceed with both projects was made in recognition of “extenuating circumstances,” she said.

The unexpected aquatics center project needed to proceed quickly, she said, and the Corporation determined that the Mind, Brain and Behavior building, which will house offices and labs for the cognitive and linguistic sciences, represented a pressing enough academic priority to move ahead.

Few donations have been secured for that project since funds originally donated for that building by liquor magnate Sidney Frank ’42 were redirected to the recently completed Sidney Frank Hall for Life Sciences.

The University is taking a “little bit of risk” moving ahead with planning for the cognitive science building, but the decision would not have been made without a “certain amount of confidence” that the funds would come forward, Huidekoper said.

“We’ve got to do some serious fundraising for these two projects,” she added.

Corporation guidelines also stipulate that 100 percent of construction and operation costs should be in place before construction begins on a project, Huidekoper said.

A modest debt burden

Despite the planned annual deficits and recent uptick in the University’s outstanding debt – necessitated by the ongoing capital projects – the University’s financial situation remains stable. S&P assessed Brown as a low-risk borrower in a June 2007 analysis that touted the University’s fiscal health, citing Brown’s “stable outlook” and “modest debt burden,” even after the recent rise.

The University currently has about $450 million in outstanding debt, meaning the University’s annual debt service stands to be about 3 percent of its total budget for the foreseeable future, according to the S&P report. Much of that total debt has been assumed in the past several years, and that figure could still grow as Brown expects to take on “a couple hundred million dollars over the next few years” in further debt, Huidekoper said.

That debt would likely be used to help finance the next round of construction projects, such as the $50-million Nelson Fitness Center, a new Creative Arts Center and the new cognitive and linguistic sciences building.

The $60 million in reserve funding approved by the Corporation – $50 million for the general budget and an additional $10 million for the Division of Biology and Medicine – represents roughly half of the University’s overall reserves, though the funds take a variety of forms, some of which are easier to tap than others, Huidekoper said.

Reserve funds can range from previous years’ budget surpluses and other past savings, which are relatively easy to use, to “rainy day” funds and so-called “quasi-endowment” – endowment principle that the University technically is allowed to spend. The University would tap into such reserves only under situations of extreme necessity, Huidekoper said.

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