COLORBEARER OF ATHENS, GEORGIA LOCALLY OWNED SINCE 1987
August 13, 2012

In the Red

A drop in enrollment at Georgia colleges and universities is threatening the state's ability to pay down the system's $3.6 billion debt.

The unexpected drop in student enrollment at Georgia’s public colleges threatens to put a financial squeeze on the University System because of $3.6 billion in debt it has quietly accumulated over the years.

One member of the Board of Regents is concerned enough that he used the word “disaster” to describe the potential situation facing the state’s network of public colleges and universities.

The problem centers around a financial arrangement known as a “public-private venture.”

The University System for years has set up these public-private ventures, which don’t actually involve private companies, as a way to raise funds for campus construction projects and avoid the state’s constitutional restrictions on debt.

In a typical public-private venture, the University System designates one of its current foundations or a newly created foundation to lease a site at one of the campuses and build a dormitory, dining hall, parking deck or recreation facility on that property.

The construction is financed through the sale of tax-free revenue bonds by the foundations, but these are not general obligation bonds backed by the state’s taxpayers. The bondholders are paid from the fees assessed on students who use the dorms, dining halls and other facilities.

Over the years, the University System has authorized more than 170 of these projects at 33 of the system’s schools, with the total debt load now estimated at $3.6 billion.

As long as student enrollment continued to increase, as it has done in almost every year for the past four decades, the revenue stream grew as well and the bond payments could be comfortably met.

With an enrollment that is declining, however, the revenue stream shrinks and there may not be enough money to pay off the bondholders – which would create an additional financial strain on a University System that has already had to deal with years of budget cuts by the General Assembly.

John Brown, the vice chancellor for finance, sounded the warning this week as he summarized the budget situation for the Board of Regents at their monthly meeting.

“The downturn in enrollment is going to present problems on that front,” he said.

“We need to look at where we’re going on these PPVs and how to fund them,” said Ken Bernard, a Douglas County attorney. “We’re headed for a big disaster if we’re not careful.”

“You’re correct,” Brown said. “We need to revise the PPV policy to account for these fluctuations in enrollment.”

Brown recommended that the University System keep enough money in reserve to handle a year’s worth of bond payments.

“I think at some point you have to evaluate the cost of education and our ability to pay for it,” Bernard said in an interview after the meeting.

“I don’t think you can issue indebtedness for public-private projects and expect the enrollment numbers to continue to grow,” Bernard said. “I know the chancellor has a lot of concern about it.”

Bernard said the financial situation also puts a strain on students who live in on-campus housing. If the University System is forced to increase student fees to pay off bondholders, many students will be compelled to move into less-expensive private housing – which would exacerbate the situation further.

“The problem is, the economy shrinks, the pressure it puts on the student to decide, ‘do I go into student housing or private housing?’” Bernard said. “If we become pricier than the private sector, they will flock to the private sector.”

Ironically, the General Assembly this year passed legislation sponsored by Sen. Cecil Staton (R-Macon), SB 302, that raises the authorized bonding level of the Georgia Higher Education Facilities Authority (GHEFA) from $300 million to $500 million.

That bill was subsequently signed into law by Gov. Nathan Deal.

Tom Crawford is editor of The Georgia Report, an Internet news service at gareport.com that reports on government and politics in Georgia. He can be reached at tcrawford@gareport.com.

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