Wall Street on the Susquehanna: PASSHE Bond Scheme Bleeds Education Budget for Beautiful Buildings

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.

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.

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

First, the new Board Policy requires each university to establish a facilities master plan that will help determine the need for any new building projects. According to the policy,

Only those projects that satisfy a valid space deficiency, a System or Commonwealth educational requirement, or renew an existing facility for a valid mission requirement will be submitted for Board approval.

For the first time, PASSHE universities were going to have to keep a facilities inventory based upon standard criteria set in Harrisburg. And, for the first time, each university would be submitting requests to the Board for approval based upon this inventory – essentially reversing the communications flow. Now each university would initiate building projects and the Board of Governors takes on a more central role in approving those projects.

2. Privatize Funding for New Buildings and Capital Projects Incrementally

As part of its expanded role the Board, in turn, may also

require universities to contribute funding from alternative sources for some projects…Projects receiving significant private support will receive a higher priority recommendation for public funding. Public/private alliances or private sector support for academic facilities that satisfy System educational requirements and/or contribute to global competitiveness and workforce needs are strongly encouraged.

PASSHE Privatize DormsPASSHE’s current web page states the system’s desire for turning new Capital projects – especially student housing – over to the private sector even more directly:

The PASSHE Board of Governors’ policy is that new student housing be satisfied through private development to the extent feasible. Development is generally by a viable, supporting 501(c)3 tax-exempt affiliated organization. Development may be either off campus or on campus (with lease of the site to the tax-exempt affiliated organization).

If you dig a little deeper, you can even see the specifics spelled out. Volume IV of PASSHE’s facility manual, “Capital Appropriations Approval Process,” states:

Alternative Funds

Board Policy 2000-02 requires private sector or public/private alliances support of at least 50% of the project cost to be raised for all new academic facilities space…

…Typical sources of alternative funds include gifts; unrestricted endowment income; corporate sponsorships; camp, conference, and similar net income; federal funds; university operating funds planned for capital improvements, or costs avoided with documented significant improvements in instructional or operational efficiency and effectiveness. With formal University Council of Trustees and Board approval, PASSHE bond funds may be used to meet the case flow requirements of the projects versus receipt of the revenue. Revenue from sources, such as those listed above, should fully cover all bond expenses including fees, debt service, and principal.

PASSHE Facilities Manual ShotThe requirement for individual PASSHE universities to raise 50% of the project cost from private funds shows a significant push to force State universities to privatize more of their operations. Contrast that with a 1992 program initiated under then Democratic Governor, Bob Casey, Sr. called “Jumpstart.” According to Volume IV of PASSHE’s facility manual:

In 1992, the Governor initiated a one-time program entitled Jumpstart. The Jumpstart program included a 75/25 shared-funding approach for projects and delegation of the projects to PASSHE for administration of the construction. The Universities wee tasked with raising their share of the funding.

Just four short years later under Republican Governor Tom Ridge, PASSHE initiated a new program called the Academic Facilities Renovation Program that, according to the same document,

involved a shared-funding approach similar to Jumpstart; however the matching funds were bond-financed for 20 years from the Universities E&G [Education and General] operating funds. The original bond issue was for $75 million with funds and debt service distributed using the allocation formula.

The current policy’s requirement that individual universities match state funds dollar-for-dollar, amounts to a 50% reduction in state monies for new buildings or other significant capital projects.

3. Finance New Building from University Education and General Funds

The incremental shift toward privatizing aspects of PASSHE – or, to enter into “public-private partnerships” to use former Gov. Rendell’s favored term – shows that the gradual defunding of PASSHE (as show in the chart above) not only represented a dramatic shift in costs onto students and their families, it also represented a shift in the core character of Pennsylvania’s 14 state-owned universities. In short, Republicans and Democrats in Harrisburg, allowed and advocated for the marketization of public higher education in the Commonwealth.

Cevallos Job Desc PiecesHowever, the shift in Board of Governor’s policy regarding the financing of capital projects also documents a shift in how debt was issued for these projects and how the debt would be repaid. Beginning with the 1996 policy under Gov. Ridge, individual universities would begin financing new building projects with bonds and those bonds would be paid back through a combination of “alternative funds” and directly from a university’s Educational and General Funds budget. Fundraising has always been a challenge for PASSHE universities who do not have the name recognition as Penn State or Penn and who have until recently been known primarily for graduating the state’s teachers. Given that reality, PASSHE universities began diverting funds from their E&G budgets to pay the interest and principle on bonds for new capital projects.

This shift in policy amounted to a huge gamble. The gamble was based upon unsubstantiated hope that each PASSHE university would be able to turn itself into a hub of private fundraising and that nothing significant would change when it came to PASSHE state appropriations. You can see the shift in these priorities in the job descriptions of PASSHE university presidents hired after the new policy went into effect. For example, in 2002 Kutztown University was searching for a new president. The job description for that position made several mention of the need to raise external funding for “development and growth” and complete multiple capital campaigns. It clearly states that the new president would be charged with “completing the $18 million capital campaign and planning the next major campaign.” That Third Century Fund referenced in the job description began in 1999, but Director of University Relations, Matt Santos, said the actual amount of the Third Century Fund was ” $15,250,000, not $18 million” when it was completed in 2003. According to Santos the Kutztown University Foundation “actually raised $13,768,884 toward that goal.” Nearly $3 million of that capital campaign was designated for the new Boehm Science Building. 

If university administrations were unable to meet their fundraising goals, however, there was only one place left to pay down their debts: their Educational and General funds. That is, they would have to pay interest on their debts out of money that would otherwise go to educating students. As I reported previously in “PASSHE’s Austerity Magic: Save Your Despair for Better Days,” most cost increases at Kutztown University can be traced to a line in their E&G budget called “Operations and Maintenance” – the line devoted to new buildings. Kutztown faculty member Ken Ehrensal explained that instructional costs – the costs of actually educating students – have actually declined by about 20% since 1995. The real cost increases have been in non-instructional costs, especially buildings.

The gamble seemed to make sense to policy makers on both sides of the aisle who were riding on the bubble of an inflated housing market and fraudulent Wall Street schemes. That was the same bubble, incidentally, that convinced PA State legislators that they didn’t need to meet their contractual obligations to fund the State pension system, while workers never missed a payment. As long as money was growing magically on Wall Street trees, corporatists and privateers were able to advance their agendas.

In the years following PASSHE Board of Governors new policy for funding new building and capital projects, there was a building boom on many of the 14 State university campuses. At Kutztown University, the building boom began modestly under former Gov. Casey’s Jumpstart program with the renovation of the university’s original building, Old Main, and additions to the library and the DeFrancesco classroom building in 1994. But those were projects that were relatively modest and paid for through funds designed to modernize and update buildings that had not been updated in 50 years in some cases.

However, the 21st century brought a building boom of another sort, facilitated by a growing belief among administrators that their student/consumers were insisting upon beautiful buildings and manicured landscapes and a new Board of Governors capital projects policy. Between 2000 and 2008, Kutztown University, had three major construction projects: a $15+ million renovation/new construction of Boehm Science building  in 2003-2004; a brand new $16 million Academic Forum or large classroom building in 2006; and the $26+ million renovation/new construction of the Sharadin Arts Building completed in 2008.

Kutztown University was not unique among the 14 PASSHE universities to be sure. East Stroudsburg University, for example, topped Kutztown’s most expensive project with their new Science and Technology Center which broke ground in 2006. According to an April 2006 press release posted on ESU’s webpage, the cost to build the new center would “exceed $27 million.” How will the project be funded?

Funding in excess of $14 million in state and federal dollars to the building includes: $13.6 million announced by former Pennsylvania Governor Mark Schweiker in January 2002 and a $500,000 federal grant announced by U.S. Senator Arlen Specter in March 2002. The balance of the cost of construction will be provided by the ESU Foundation through private gifts. Dr. Sam Niedbala and Linda Lee Niedbala, both graduates of ESU, will lead the kickoff for the “public phase” of the Comprehensive Campaign, which has already achieved more than half of its $15 million goal.

The private gifts part of this announcement, especially the “will be provided” part, is especially significant in that ESU was gambling that the university’s foundation would be able to raise over $13 million as part of a new capital campaign to cover nearly 50% of the costs of the project. In other words, ESU did not have $13 million in the bank for the project.

Then, of course, the bottom fell out of the U.S. economy. And that’s the funny thing about Wall Street money trees. When the illusion is exposed, the bills for the rest of us are still due. If PASSHE universities such as Kutztown had a difficult time raising money before the economic collapse, the post-collapse fundraising climate was like bleeding a stone.

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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

The most startling aspect of this data is the fact that even after the worst economic crisis since the Great Depression, PASSHE’s Board of Governors continued to approve new capital projects and allowed individual universities to take on new debt. For example, in 2008, the year of the economic collapse, Kutztown made capital purchases in excess of $42.5 million; East Stroudsburg made over $29 million in capital purchases; and, Edinboro made over $18 million in capital purchases. It’s even more telling when you look at how much these three universities shelled out in debt payments from 2008-2012: Kutztown $76,708,437; East Stroudsburg $39,606,898; and, Edinboro $29,905,829. All three of these universities were sent notifications of possible layoffs this year due to “budget shortfalls.” In fact, if you add up the amount of debt payments made by the eight PASSHE universities that received letters warning of potential layoffs (retrenchment in contract speak) you can see why it gets a little hard to swallow the argument made by PASSHE administrators that faculty and staff salaries are the reason for “rising costs.” Over that five-year period, those eight universities (California, Cheney, Clarion, Edinboro, East Stroudsburg, Kutztown, Mansfield, and Slippery Rock) paid out $292,179,144 just in debt payments. The 14 PASSHE universities together paid $534,069,986 in debt payments.

The fact that PASSHE universities were dramatically increasing their debt during a time of dramatic economic difficulties is disturbing in its own right, but the 2012 firing of California University of Pennylvania (CalU) president, Angelo Armenti, Jr., began to shed light on a lack of careful oversight by PASSHE’s Board of Governors and the quiet debt crisis that had been growing unchecked on each university campus for over a decade. As Taryn Luna reported in the Pittsburgh Post-Gazette following the news of Armenti’s firing:

This year [2012], CalU and the rest of the State System absorbed a nearly 20 percent cut in their state appropriation, and next year’s state budget proposed by Gov. Tom Corbett would slash another 20 percent, though the Senate last week moved to undo that cut.

CalU has said the aid reductions contributed to an operating loss last fiscal year totaling $4.3 million, and a 2 percent dip in spring enrollment has not helped the school’s budget. Neither has rising debt load.

CalU, with a $120 million operating budget, has seen a five-fold increase in yearly debt obligations in 10 years. Its annual debt service during the period grew to $7 million from $1.5 million, the university said.

Its total capital debt of $97.2 million as of March is the second largest among the State System universities behind only Kutztown, and it is up from $12.7 million in 2002, according to State System data.

Debt service on the new $59 million convocation center and $20 million parking improvements by themselves exceed $4 million a year, CalU has said.

An audit conducted as part of the State’s investigation into Armenti and the university’s finances, found that in their rush to build more pretty buildings, university administrators engaged in some questionable financial practices. Writing in the Pittsburgh Post-Gazette, Laura Olson and Janice Crompton reported:

Three items in particular raised a red flag for auditors: the university counted on anticipated donations to help pay for the convocation center; net profits from housing facilities were transferred to the Foundation for California University instead of remaining within the university; and the university and its fundraising foundation may not be as separate as the law requires.

On the convocation center funding, the audit was critical of the contrast between a 2009 bond document stating that the university had cash-on-hand and donations totalling $12.3 million, and later documents indicating that only a small portion of that figure was actually available.

University publications also gave conflicting figures on donation goals.

Michael Stratford reported more of the damning details in a May 17, 2012 article in the Chronicle for Higher Education:

The report [audit report] states that the university, in its first request for bond financing, in 2009, had said that it had cash on hand of $6.8-million and donations of $5.5-million, or a total of $12.3-million, to contribute to the project. In 2011, the report says, the university revised its numbers, telling the state that the $6.8-million in cash had been used for other purposes and that only $2-million in donations was available.

The audit found that in fact the university had received only $4,000 in donations for the convocation center. The remainder of the $2-million the university counted as “donations” actually referred to two state grants it had received, the report says.

It is to the credit of PASSHE’s Board of Governors and the former Chancellor, John Cavanaugh, that they came down hard on Armenti and the financial gymnastics in which CalU’s administration was engaged. However, their actions in 2012 beg the question: what the hell were they doing for the past decade? The fact is that PASSHE’s Board of Governors have approved almost every new bond request that came their way – including all the CalU bonds that led to Armenti’s firing. A simple review of the past five years of PASSHE Board of Governors agendas, the “Finance, Administration, and Facilities Committee Meeting” reports in particular – make it clear that individual universities were getting little push back from Harrisburg when it came taking on new debt for new buildings (more to come on specific projects in future articles on Raging Chicken Press).

To put it another way, while the CalU case may stand out for the extremes Armenti and his administration went to in order to secure more debt for pet building projects, PASSHE university administrators’ love of debt for buildings was – and is – systemic. That is, for the past decade and more, PASSHE universities have been bleeding money from their Education and General fund in favor of making interest payments on bonds used to build their new buildings.

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.

In 2013, Moody’s maintained PASSHE’s Aa3 rating citing, once again:

  • High balance sheet leverage from substantial increase in debt since FY 2004, with total pro-forma debt rising to nearly $2.25 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 potential expectations of PASSHE to step in to fund or assume management or ownership of the housing facility.

Moody’s concern about PASSHE’s off-balance sheet projects should not have been a surprise to the Board of Governors. As early as 2008, Fitch – another credit rating agency – expressed concerns about PASSHE’s use of these financial accounting schemes to build more buildings:

While the system’s direct debt is manageable, Fitch views its extensive use of off balance sheet financing for student housing at its various campuses as adding to the system’s overall financial leverage. The separate component units of the system have increased debt significantly since fiscal 2002, from $41.1 million to $610 million in fiscal 2007. Although the component unit debt is non-recourse to the system, it has relied upon this type of financing in order to construct needed student housing. As such, Fitch believes the system may have an interest in the financial viability of the facilities. The system reports that the housing facilities have average occupancy rates of greater than 95% and are financially sound.

In that same report, Fitch saw PASSHE debts reaching a peak in 2010 – this was, of course, before the system added to its existing debt through building and capital projects outlined in APSCUFs table of PASSHE Audited Cash Flow Statements above:

maximum annual debt service (MADS) for system bond debt is approximately $61.3 million, occurring in fiscal 2010. Annual debt service declines each year thereafter. Fitch included annual capital lease payments totaling $4.5 million in its analysis of MADS, increasing the system’s total MADS to $65.8 million or 3.8% of its fiscal 2007 revenues.

PASSHE Fiduciary PicAnd, let’s remember, each new building project and bond had to be approved by a university’s Council of Trustees and the PASSHE Board of Governors. I don’t think it is unreasonable to ask: who was minding the store for the past decade or so? While these issues of bond financing may be obscure to you and I (believe me, I had to learn all this stuff from the ground up over the past month), we should be able to rely upon the people who are supposed to have a fiduciary responsibility for the health of the state system and the resources of citizens of Pennsylvania. That’s not just a statement about what good ethical people should do. It’s a matter of law and policy – and is spelled out in PASSHE Board of Governors’ policies.

At the very least, citizens of Pennsylvania should be able to expect that the people looking out for the financial well-being of the state system would have a familiarity with the threat these “off-balance sheet” projects, especially during a time of deep budget cuts and rapidly increasing system debt. It’s not all that hard to get up to speed on the threat of bond debt, either. Here’s a little primer on the issue from the Financial Times (not exactly your raging progressive paper):

Off Balance Sheet Financing:

Financing that does not appear on a company’s balance sheet because it is not strictly debt (so liabilities and associated assets are excluded from the balance sheet).

In certain circumstances this can have a flattering effect on important accounting ratios such as leverage and return on assets. Accordingly, published financial statements may fail to provide a full and transparent representation of the underlying activity of the reporting entity; in particular, reported results may suggest less exposure to liabilities than really exists.

Common off-balance sheet financing mechanisms include consignment stock, sale and repurchase (or leaseback) arrangements, debt factoring, securitisation, creation of special purpose entities, and leasing …

… Sound commercial reasons may exist to explain the use off-balance sheet financing. These include sharing with other parties the risks and benefits associated with certain assets and liabilities or gaining protection from selected risks. However, off-balance sheet financing arrangements may also be motivated by wanting to reduce perceptions of risk or to camouflage the substance of particular transactions.

Textbook examples of off-balance sheet financing activity include Enron (in the form of special purpose entities) and Southern Cross (in the form of operating leases.

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.


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  1. Kevin Mahoney on the Rick Smith Show: PASSHE’s Beautiful Buildings, Bond Schemes, and Corporatization of Higher Ed | Raging Chicken Press
  2. Edinboro University Brags About “Top Notch Faculty” While Students Protest Faculty Layoffs (Photo) | Raging Chicken Press
  3. Our Building are Empty, but They are New and Shiny | Active Learning in Political Science
  4. Trading Academics for Amenities: Move Over Faculty, Make Way for the Hot Tubs | Raging Chicken Press
  5. ESU Grad Student Takes on President Marcia Welsh’s OpEd, “Recent Changes to Steer ESU in the Right Direction” | Raging Chicken Press
  6. APSCUF Releases Independent Audit of PASSHE’s Books, Confirms Bond Schemes Bleeding Education Dollars | Raging Chicken Press
  7. Slow Train to Destruction of Public Higher Ed in PA?: First Defund, then Divide and Conquer | Raging Chicken Press
  8. PA State Senators Crafting Legislation to Allow Universities to Secede from State System of Higher Ed | Academe Blog
  9. The Return of #SLASSHE – New Chancellor Leads the Charge for New Round of Cuts at PA State Universities | The Omelet Report
  10. PASSHE Budget Ax Falls Again: Mansfield University to Face Loss of 12 Faculty | Raging Chicken Press
  11. PASSHE’s New Tuition Schemes to Increase Costs to Students | Raging Chicken Press


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