Education

NCSU and UNC look at 100-year debt option

UNC-Chapel Hill, along with N.C. State University, want the authority to borrow up to $500 million each for a period of 100 years.
UNC-Chapel Hill, along with N.C. State University, want the authority to borrow up to $500 million each for a period of 100 years. rwillett@newsobserver.com

N.C. State University and UNC-Chapel Hill want new authority to borrow up to $500 million each for a period of 100 years – significantly longer than the state’s current 30-year limit for debt.

The unusual financing mechanism, known as a century bond, has come into vogue in recent years for large universities to pay for construction to address decades of deferred maintenance. The method has been popular with elite private universities such as Yale and Massachusetts Institute of Technology, and three publics – the University of California and Ohio State and Ohio universities – also have issued century bonds in recent years.

Such long-term debt would require new authority from the legislature. On Friday, the UNC Board of Governors is expected to add the item to its legislative priority list for the General Assembly session that starts later this month.

Two board committees reviewed the century bond proposal Thursday and approved a plan to ask the legislature for the authority. But the idea ran into skepticism. Some members were concerned that the financing tool would only be available to a few large campuses with the highest credit ratings. Particular concern focused on the possibility that future debt could mean higher tuition for students.

We are being asked to buy a pig in a poke with this.

Champ Mitchell, UNC Board of Governors member

Champ Mitchell, a board member from New Bern, said he was uncomfortable with the century bond proposal presented by the UNC-Chapel Hill administration.

“We are being asked to buy a pig in a poke with this,” Mitchell said, adding that no limits had been mentioned on how the borrowed money might be used.

“I certainly think this is a good financing vehicle if you know what you’re financing and you’ve got control of it,” Mitchell said. “But at this point, this is, ‘Give me $500 million and let me figure out how to use it.’”

Hannah Gage, a board member from Wilmington, said the century bond idea is intriguing and would give the campuses great flexibility. But she pointed out that the proposal currently provides the 100-year debt could be repaid from a variety of funds, including tuition revenue.

“That jumped out at me. We never use tuition revenues for bricks and mortar,” Gage said. “I’m sure it will be a small amount. But over a hundred years, I think that when we’re trying to get tuition down, if there’s a way this can be structured so that it doesn’t require tuition money, it may have a lot more appeal.”

Others said the idea has a lot of merit. It would allow universities to take advantage of historically low interest rates, and would provide new ways to manage the debt. The debt would be issued at a fixed rate.

Some universities have used the option to form an internal “central bank” that would allow the management and investment of money, almost like a revolving fund that could be used for projects across different departments over time.

“It’s very innovative, very unusual,” said board member David Powers. “It’s very bold.”

Most universities that have done century bonds set aside an amount upfront to be invested for decades, which would yield enough to pay off the principal at the 100-year mark.

Most universities that have issued century bonds set aside a portion upfront to be invested for decades, which would return enough to help repay the loan at the 100-year mark.

Matt Fajack, UNC’s vice chancellor for finance and administration, said the Chapel Hill campus would set aside $7 million or $8 million on the front end to take care of the future payment. Then the university could quickly get to work on construction projects.

“We’re looking to take control, not count on the state as much anymore,” Fajack said, “take some control of our destiny and fix some of these problems.”

Campus officials say they are in a bind when it comes to taking care of aging buildings without significant state money for repairs. Voters last month approved a $2 billion bond issue for state projects, including $1 billion for university campuses. But that money will only pay for one building on each campus, or two in the case of NCSU.

NCSU Chancellor Randy Woodson said his campus needs nearly $540 million in updates. UNC-CH officials estimate that they have a backlog of $650 million in building repairs and renovations, with 60 percent of buildings 25 years or older.

But the money would likely be used for other things, too. UNC-CH officials, in the midst of a multiyear fundraising campaign, could use the money as matches for donor pledges, for example.

Woodson said many policies would have to be put in place around such a borrowing plan.

“It’s a tool that has a time window when it makes sense,” Woodson said. “We happen to be in one of those time windows now. Interest rates are low.”

In the end, the committees agreed to seek the legislative authority to extend the amount of time that debt could be issued. But the campuses would have to get approval from the board for the specifics of how the money can be used and what sources of funding can be used to repay the bonds.

Jane Stancill: 919-829-4559, @janestancill

  Comments