Wall Street on the Susquehanna: PASSHE Bond Scheme Bleeds Budget for Beautiful Buildings (Abbreviated)

This originally appeared in Raging Chicken Press on October 21, 2013. It is a fairly long article detailing changes in Pennsylvania State System of Higher Education (PASSHE) policies regarding new buildings and capital projects. The more I looked in the financial schemes at the system within which I work, the more it became clear that this story is not limited to PASSHE. So, while some of the specifics of this post may seem a bit parochial to some readers of this blog, I am hoping that some of it may be helpful for others in similar fights.  I am including Part 1 of the article here with brief excerpts from other parts. To read the complete article, click “READ THE FULL ARTICLE” at the bottom of the post or go to the original right now by CLICKING HERE

SLASSHE Sinking Ship

This past July, eight of the fourteen PA State System of Higher Education (PASSHE) universities sent letters to their faculty and staff warning of the possibility of deep cuts, layoffs, and program elimination (what they like to call “retrenchment”). University presidents at California, Cheney, Clarion, Edinboro, East Stroudsburg, Kutztown, Mansfield, and Slippery Rock all shouted “crisis” and warned that unless they resorted to strict austerity measures, the end, would indeed, be near.

Clarion University led the PASSHE austerity train, announcing on August 15th that it would slash over 40 jobs – including 22 faculty jobs – and eliminate a number of academic programs. On September 10th, Edinboro University joined the party announcing it would cut 40 faculty, 9 staff members, six managers and a host of academic programs. Two weeks later, on September 25th, Mansfield University announced it intended to eliminate nearly 20% of their 170 faculty members. That same day, East Stroudburg University indicated that it was slowly marching toward retrenchment. Two PASSHE universities, California and Kutztown, were spared a similar fate this academic year. California University miraculously found that it did not, after all, have an $11.8 million dollar budget deficit as it had reported in the spring. Instead, Cal U is looking at a $5.8 million surplus. Ooops! Kutztown University’s president, Javier Cevallos, announced that Kutztown would be putting off the most painful cuts until next year: “Current estimates project a $10.3 million deficit for 2014-15, which will be addressed through a combination of base budget cuts and one-time funds,” he wrote in an October 2nd “Presidential Update.” And, as I reported last week, Slippery Rock’s provost is seeking a “third way” austerity plan – and if faculty do not agree to departmental transfers by Thursday, October 24, the ax may fall there too. The fate of the remaining PASSHE universities is still unclear. However, university presidents are rapidly approaching an October 30 deadline for reporting their intentions to eliminate any tenured faculty members.

To say it’s been an “interesting” start of the academic year for the 100,000+ students and 6,000+ faculty and coaches at PASSHE universities is an understatement. Left hanging in the balance are people’s current and future livelihoods. As I recently wrote on Raging Chicken, PASSHE’s mantra is that faculty and staff salaries and, more recently, a decline in enrollment are the reasons for the deep budget shortfalls. However, despite their continued proclamations, the numbers have never added up. My most recent post on PASSHE’s budget deceptions, “PASSHE’s Austerity Magic: Save Your Despair for Better Days,” highlighted the significant increases in spending on capital projects – buildings – at Kutztown University. As I suggested in that article, the pattern at Kutztown is not limited to that PASSHE university. In fact, it points to a much more widespread practice that has gone virtually unnoticed until the recent ouster of California University of Pennsylvania president, Angelo Armenti, Jr. (more on that in a little bit).

The budget “crisis” at PASSHE universities has its roots in a long-term defunding of public higher education in PA, Wall-Street-esque risky investment schemes, and a virtual lack of oversight.

Part I: How (Not) to Fund the College Experience

PASSHE Appropriations v ENGPennsylvania vies for the top spot when it comes to the size and cost of its state legislature. PA also has the lowest percentage of public workers in the United States. In the best of times, that scenario might lead to excellent representation and efficient government. More recently, however, it has meant a right-wing Republican Party intent on destroying the public sector and a shrinking number of public employees to handle the work of cleaning up their messes. Anyone paying attention to what’s happened in PA since the 2010 mid-term elections, knows the story all too well. Newly elected governor, Tom Corbett, put public education – K-12 and higher ed – on the chopping block from day one. In his first year as Governor, K-12 schools were cut by $1 billion; PASSHE universities were cut by 20%. The trend has continued. There is no doubt that Corbett’s shock doctrine policies for public education have hit PASSHE universities hard. However, Corbett’s cuts were really a more extreme version of what had been happening for decades. In 1983-84 State appropriations accounted for almost 65% of PASSHE’s budget, while tuition and fees amounted to just over 35%. In 2011-12, State appropriations amounted to just over 25% of PASSHE’s budget, with tuition and fees reaching nearly 75%.

For more than three decades, the “free market” mantra of right-wing think tanks and policy makers, have eroded investment in all things public. However, as Dina Ransor made clear in a 2011 article for Truthout, their claims don’t match their outcomes:

This belief that the “free market” will always do better than the government at any task has increased over the years until each president since Reagan has taken it as a given.

Even Bill Clinton pushed to shrink the federal employee workforce by “outsourcing” the work to supposedly cheaper contract workers to save money during his “reinventing government” effort. This craze to outsource as much of the federal government as possible hit its height during the second Bush administration. Saving money was always the reason given, but there was very little actual proof that this was true.

The situation in Pennsylvania was no different. Over the past three decades, Pennsylvania state legislators of both political parties slowly abandoned investments in public higher education as a public good. Instead, higher education became a “service” or a “commodity” that students – now “customers” – bought. Politicians and policy makers from both political parties gradually, but decidedly, drank the free market Kool-Aid instead of reenergizing efforts to invest in Pennsylvania’s State System of Higher Education.

While the steady decline in State appropriations significantly contributed to the current “budget crises” at several PASSHE universities, several under-the-radar policy changes at the top-levels of PASSHE’s administration during the last decade have continued to drain the universities’ already diminished “Education and General Fund,” or “E&G” budgets. One of the most devastating came during the tenure of former PA Governor, Ed Rendell. Yes, the Democrat.

Part II: Of Bonds and Balance Sheets (Down the Rabbit Hole)

Until 2000, PASSHE had a fairly centralized process for initiating new building projects on any of its 14 universities and the official guidelines were pretty murky. The one Board of Governor’s policy that addresses planning for new buildings (Policy 1995-01-A), “Facilities Projects Contract Compliance Program” had more to do with ensuring compliance with Act 188’s Nondiscrimination Policy (Section 20-2014-A) with respect to the awarding of state contracts, than it did with laying out a process for making decisions about where to build and why. Under Section E, “Program Administration Responsibilities,” Policy 1995-01-A stated:

The Chancellor of his/her designee shall serve at the program authority to administer a System-wide uniform Contract Compliance Program. Each university president shall be responsible to the Chancellor for implementation of the Nondiscrimination and Equal Employment Opportunity Program at his/her institution. The president may designate and delegate responsibility to a qualified contract compliance officer and other staff as necessary to implement the program.

There is not a single mention of how the Chancellor, Board of Governors, or anyone else for that matter, decides when new buildings need to be built. The one thing this old policy does establish is a centralized process of communication and compliance. That is, it is clear that the Chancellor’s office is where the authority initiates. Administrators at each PASSHE university comply with “orders” issued by the Chancellor’s office.

Policy 1995-01-A was “repealed by the action of Board of Governors on July 13, 2000 and replaced with Board Policy 2000-02, “Capital Facilities, Planning, Programming, and Funding,” on that same date. Board Policy 2000-02 is much more extensive; it lays out the process for making decisions about new buildings. Three parts of the new policy are significant for my purposes here.

1. Decentralize New Building Planning …

2. Privatize Funding for New Buildings and Capital Projects Incrementally …

3. Finance New Building from University Education and General Funds …

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Part III: Talking to the Taxman about Poetry above the Sounds of Ideologies Clashing so We Can Help Save the Youth of America

Keep in mind that under the current PASSHE Board of Governor’s policy 50% of the funds for new building projects have to come from “alternative funds,” primarily funds raised from external sources. In the post-collapse environment, those “alternative funds” were hard to come by, but the bills were still coming in and universities had to find ways to pay “bond expenses including fees, debt service, and principal” that they had agreed to pay at the beginning of the process. So, universities are forced to dip into their financial reserves and E&G funds to make their bond payments – funds that should have been used for educational purposes.

So, naturally, PASSHE’s Board of Governors stopped approving new building projects in the post-collapse environment, right? I mean it would be irresponsible to issue additional debt for universities who were now struggling to make their existing bond payments, right? Wrong.

Check out this table compiled by the faculty union, APSCUF, based on PASSHE’s 2008-2012 audited financial statements. The top part of the table shows new capital purchases – that is, new buildings and the like – for each of the 14 PASSHE universities over those years. The bottom part of the table shows the interest and/or principle payments toward each of the universities’ debt for those same years.

Capital Debt and Payment

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Part IV: Smoke and Mirrors Budgeting: There’s More than One Way to Sink a Ship

Do you remember Enron? Here’s a little refresher from Wikipedia:

Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world’s major electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion during 2000.[1]Fortune named Enron “America’s Most Innovative Company” for six consecutive years.

At the end of 2001, it was revealed that its reported financial condition was sustained substantially by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. Enron has since become a well-known example of willful corporate fraud and corruption. The scandal also brought into question the accounting practices and activities of many corporations in the United States and was a factor in the creation of the Sarbanes–Oxley Act of 2002. The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting company.[2]

Enron Stock TankEnron’s finance people used a whole slew of “off-balance sheet” accounting practices that allowed the corporation to omit significant liabilities – debts – from their official books and filings. Enron, for sure, went far beyond these legal, if not quite ethical, accounting practices and committed numerous acts of fraud. And, the fact is that “off-balance sheet” financing schemes were all the rage when Enron went down in flames.

“Off-balance sheet” financing schemes were especially popular U.S. colleges and universities as a way to finance new building projects in the absence of significant endowments. It was part of the “public-private partnership” (PPPs) craze of the early 2000s that I discussed above. In a 2010 National Association of College and University Business Officers article assessing the impact of the financial crisis on “off-balance sheet” building projects at colleges and universities, Roger Bruszewski, Sam Jung and Jeffrey Turner note that many colleges and universities entered into PPPs “through the university’s existing foundation, a newly developed university-affiliated foundation, or a collaboration with an unaffiliated national foundation that partners with institutions.”  One of “benefits” of this model was that these projects were treated as “off-credit, off-balance sheet transaction[s] that preserved institutional borrowing capacity and balance sheet integrity.” That is, bond rating companies did not consider debt from “off-balance sheet” projects as part of a school’s liabilities. As the authors note, “many of the Pennsylvania State System of Higher Education (PASSHE) schools have continued to utilize this approach.” However good these schemes looked initially, the authors warn:

Over the past several years, however, the off-credit, off-balance sheet transactions have come under considerable scrutiny from lenders, rating agencies, and accounting standards boards because of the direct or indirect ties between the project and institution. Over time developers and universities learned that a project can meet the qualifications to be off-balance sheet and still be included in an institution’s debt profile. These initial on-campus project financings were completed without any developer equity and as 100 percent “project-based” debt. Typically, a not-for-profit entity owned the improvements (subject to a ground lease) and the developer was paid a fee to complete the project. The capital markets determined that because of the absence of equity, the high loan-to-value ratio, the project-based nature of the debt, and the lack of any meaningful developer commitment to the project, an institution was the only logical backstop in the event of trouble. “This ‘moral obligation’ resulted in potentially negative implications for an institution’s debt capacity,” states Bill Bayless, president and chief executive officer at American Campus Communities.

And, it turned out, these warnings bore fruit. In 2012, the bond rating agency Moody’s downgraded PASSHE’s credit rating from Aa2 to Aa3 (click here for explanation of Moody’s ratings) in part because of increasing debt and off-balance sheet projects. Under “Challenges” for PASSHE, Moody’s listed:

  • High balance sheet leverage from substantial increase in debt since FY 2004, with total pro-forma debt rising to nearly $2.36 billion, driven largely by privatized student housing debt issued for replacement student residences on State System’s university campuses.
  • Debt structure of member university foundations to fund replacement student housing includes variable rate debt requiring bank support or direct bank placement adding risk of liquidity demands of the foundations’ own modest resources and expectations of PASSHE to step in to fund or assume management or ownership of the housing facility

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Remember the backdrop we’re all working with here. PASSHE university presidents across the state are screaming about budget shortfalls and the need to make deep cuts to faculty, staff and academic programs – and not just at the universities that are most immediately under the budget ax. The new PASSHE Chancellor, Frank Brogan, had made it clear that the cuts will continue, remarking In October 10 during a media briefing, “Make no doubt about it, retrenchment is here.” And the story from PASSHE’s administration continues to be that the “problem” comes from “rising costs” from faculty and staff salaries – no matter how clear the data is disproving that claim.

In reality, the costs of more than a decade of irresponsible building projects and sketchy oversight will be borne by faculty, staff and students. And, like the Wall Street fraud that led to the Great Recession of 2009, the people who gambled with our money – with the money that we expected to be responsibly invested in our future and the future of our children – will walk away, pointing their fingers at all of us.

READ THE FULL ARTICLE on Raging Chicken Press

One thought on “Wall Street on the Susquehanna: PASSHE Bond Scheme Bleeds Budget for Beautiful Buildings (Abbreviated)

  1. New York State long ago under Governor Rockefeller simply institutionalized separate entities, the State University Construction Fund and Dormitory Authority, to keep the budgeting and accountability (such as it is) fully separate from operations and personnel budgets in the universities. NYS also has SUNY budgets set up so that there can be no transfers between categories of expenditures, thus construction can continue and operations alone or personnel alone can be cut with no monies ever transferrable, even between operations and personnel. This enables the “game” of saying, for example, that SUNY has no more money for personnel, while construction continues apace with no slacking at all during these economic crises.

    Of course, the place to look for the origin of these abuses of the public trust is in the legislatures where often legislators have personal conflicts of interest in the building industry. In fact, under Governor Pataki a huge scandal hit concerning exactly such influence-wielding by a neighbor and friend of his, a major construction mogul.

    But even this set up was not enough in New York State for the legislators’ and Governor’s self-interest. Governor Cuomo’s future presidential campaign fund contributors, major businesses in the state, want to build their own buildings on SUNY lands, so with Tax-Free New York (euphemistically re-named Start-Up New York), the Governor has established just that: businesses that start up operations on vacant SUNY lands or in partnership with SUNY on and around the upstate SUNY campuses will enjoy ten years of tax-free operations, right down to the personal income taxes for their employees (and not for existing SUNY employees, BTW). Even Donald Trump didn’t get that good of a deal when he started his tax-free developments in New York City. And eroding the tax base for this accelerated construction means, of course, that there is less money to fund SUNY overall, as well as such “minor” programs as Medicaid, etc. (Ain’t irony grand? Grand larceny, that is….)

    SUNY is “blessed” with one of the weakest unions imaginable for faculty and professionals: United University Professions, which is now a shadow of its original self from the seventies. While CSEA, the state’s blue collar union, was decrying the Tax-Free New York legislation during the proposal stages, taking to the press loud and clear with opposition, the UUP leaders were silent — carrying the governor’s water and focusing solely on getting the four-year NYS/UUP Agreement he wanted ratified, even with major portions of the contract still unwritten as it was submitted to the membership. Only after the ratification (with about one-third of members voting) did UUP issue a few press releases of concern — just as the tax-free legislation was being passed — and thus no real harm came to it from UUP opposition.

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