COVID-19 Updates, News, University News

Brown’s financial deficit for Fiscal Year 2021 could range from $100 million to $200 million

Brown will borrow to pay for higher than expected COVID-19 costs

Senior Staff Writer
Saturday, May 23, 2020

The deficit for Fiscal Year 2021 will be “significantly larger” than previous years and could range from $100 million to $200 million, President Christina Paxson P’19 announced at Wednesday’s faculty meeting. 

In order to cover the various costs of the COVID-19 crisis, the University will “spread out the cost over time” by borrowing and issuing bonds from capital markets, she added. Capital markets, including the stock market and the bond market, help match up those who supply capital with those who demand it.

The University has already issued a $300 million taxable bond a loan between an investor and a borrower   at “favourable rates” that will not downgrade the University’s credit rating. Half of the money will be used to obtain liquidity and the other half will be used to cover current payroll and bills.

The “realized deficit” was discussed at the May Corporation meeting, Paxson said. The exact value has yet to be defined since “it depends on what the coming academic year will bring.” But given the currently estimated range of its value, this deficit exceeds the previously estimated $50-60 million in COVID-19-related financial losses reported by The Herald in early April.

At the faculty meeting, Paxson addressed major concerns about how the University will deal with these costs, outlining a long-term approach which seeks to minimize drastic, immediate sacrifices.

“The financial costs of the pandemic will not be done in two budget cuts in a single year or even two,” Paxson explained, but will rather be spread so that the University does not undertake “massive lay-offs” or “massive budget cuts.”

The University has already implemented a salary freeze for staff and faculty for the coming fiscal year, The Herald previously reported, but has yet to lay off any full-time or regular staff.

Beyond implementing gradual budget cuts and increasing revenue, Paxson stated that there are two ways of dealing with the financial costs of the pandemic: liquidating a portion of the endowment and accessing capital markets.

Paxson stated that currently, it “makes much more sense to take out debt than to liquidate the endowment.”

The average 10-year return on the endowment is 9.7 percent per year. This means that if the University were to liquidate $100 million from the endowment, it would reduce future income by $9.7 million per year that could not be recovered.

On the other hand, by issuing and borrowing from capital markets, the University would need to pay off a debt of 3 percent per year over a 10 to 30-year time frame. This would only cost the University $2 million per year for a limited time, whereas the endowment cost would not only be much higher annually but would reduce returns “forever.”

Paxson also cited a second reason not to draw from the endowment: Since it consists of specific donations that are directed to specific purposes, the endowment is already subject to certain restrictions on what can be liquidated and for what use. The University would face no such limitations on funding usage by borrowing from capital markets to meet the cost of the pandemic. 

Borrowing will allow the University to avoid “immediate impacts that would be very damaging to our community,” Paxson said.

Paxson reiterated that the University has “a great liquidity model” and that despite these financial challenges, the current liquidity is in “pretty good shape.”

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  1. Brown is in a bad spot. $100-$200 million deficit is just the tip of the iceberg. It’s time for Brown to change fundamentally, or it will not survive.
    There is a blueprint for change. A blueprint that will prepare Brown to compete in this century, not the 19th.
    It’s all set forth in 3 opinion pieces that were published in the BDH:

    Note: Just the AP courses recommendation alone will contribute $100 million a year to Brown’s coffers.

    The question is: Is Brown brave enough to implement it?

    John Lonergan, BA ’72, Harvard MBA ’76, Silicon Valley Venture Capitalist.

    • Why does Brown want to make money selling online high school courses? It’s not University of Phoenix. Why don’t you donate a program or institute rather than constantly complain.

      • Rick, read the articles carefully.
        This is about forming a relationship with potential future Brown students from their high school days.
        Brown’s current admissions process is broken. Admissions staff spend 8 minutes per application–a ridiculous proposition. Would you ask someone to marry you, Rick, after knowing them for only 8 minutes?
        The AP program allows hundreds of thousands of high school students to form relationships with Brown professors and student proctors. And it raises $100 million for Brown to boot.
        Maybe $100 million isn’t much to you, Rick, but it represents >10% of Brown’s current operating budget.

    • Forever Brown says:

      John, your thoughts make total sense except for one major thing. Brown does not want to open Pandora’s box and expose that online education can achieve what they claim to achieve in their own curriculum on campus. Paxon makes these absurd claims that Brown is full of rigorous and lively debate, when we all know it’s a giant laboratory of groupthink. So one thing They will avoid like the plague is the notion of transparency and accountability of the administration and the faculty and the curriculum overall. It’s a high priced club with a very expensive brand at this point, so Paxson’s job is to protect exactly that.

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