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Campus News

Discussion Opens on FY10 and FY11 Budget

By Penny Pagano

Speaking to a town hall meeting on Dec. 4, Provost Scott Bass and vice president of finance and treasurer Don Myers outlined guidelines for developing the university’s two-year budget for FY10 and FY11.

The guidelines include more than a dozen items to be considered, including enrollments and academic programs, tuition, faculty and staff salary increases, financial aid, development, the new SIS building, endowment, student services, and new revenue. An important component of the new budget will be aligning new action items being developed with the goals of the new strategic plan that was approved by the Board of Trustees at its November meeting.

The budget outline also noted that that “a high degree of uncertainty and recent developments in financial markets will undoubtedly affect university operations over the next two years.”

Myers and Bass said that 95 percent of the university’s budget is tuition dependent and that enrollment is AU’s top priority.

“We have safeguards in place and hopefully they will serve us well as we go into this period of uncertainty,” Myers told the full room of faculty, staff, and student leaders at the town hall meeting. He added that it is still important to do some modeling for possible options that the university might need to consider, depending on economic developments.

Addressing market turmoil

Colleges and universities across the nation are struggling with decreasing endowments and unexpectedly higher debt costs as a result of the ongoing financial market turmoil. AU’s financial operations, which do not depend on its endowment, have proceeded without disruption to date, due in part to a full restructuring of its more than $200 million tax-exempt bond portfolio.

Sensing deteriorating conditions in the credit markets at the end of last year, Myers and his team launched an overhaul of outstanding debt in an effort to reduce market exposure.

“We’ve been working diligently to stay ahead of credit-market deterioration by acting quickly to restructure our debt since December of last year,” said Myers. “We’ve now restructured $200 million, or 90 percent of our tax-exempt bond portfolio. We believe we’ve taken the right steps as market conditions have forced us to deal with challenges never before experienced in my 28 years as CFO.”

To reduce the university’s exposure in the volatile municipal bond markets, Myers’s team made the following adjustments:

  • Converted $137 million of AU auction-rate bonds (a market that had frozen-up on fears of lack of liquidity) into variable-rate demand bonds to avoid continued higher interest rate costs and the risk of failed auctions. During the conversion process, the university participated in the twice-weekly auctions for its own bonds, significantly reducing bond interest rates and saving approximately $1.2 million in additional interest costs.
  • Refunded the Series 1985 bonds issued with AMBAC Assurance Corp insurance, which experienced a deteriorating credit rating. This also required several months of negotiations with both AMBAC and Bank of America to redo the related interest rate swaps.
  • Replaced Lehman Brothers as a remarketing agent for the 1985 bonds shortly before Lehman filed for bankruptcy.
  • Secured $200 million in a AAA rated Bank of America letter of credit backing to replace bond insurers, whose credit ratings were significantly downgraded.

In a memorandum to the campus community last month, President Neil Kerwin said he was confident that if further financial challenges arise, the university “will be able to respond without compromising our education mission.”

Changing landscape

According to a recent Bloomberg News report, the Massachusetts Institute of Technology said it will trim spending as much as 15 percent over the next three years as it plans for “a protracted period of financial constraint.” The article also noted that Dartmouth College said in November it would cut up to 10 percent, or $40 million, from its budget, and that Stanford University said it would shed 12 percent, or $96 million. The Boston Globe cited Boston College president, Rev. William Leahy, as calling for a university-wide 2 percent budget cut in anticipation of increased requests for tuition assistance.

For a tuition-dependent university like AU and thousands of other midsize, private institutions of higher learning, enrollment numbers will be closely followed, as families are coming to terms with the impact of lower home equity values, lower values of 529 college savings plans, and scarcer college loan options.

AU, which has seen its endowment decline 26 percent this fiscal year to $303 million due to the unprecedented worldwide market conditions, is closely monitoring all fronts on the financial landscape, Myers said.