Wednesday, November 7, 2012

Financials of a University System

University Bonds

Universities are interesting creatures financially speaking. They are relevant because they often float general obligation and revenue bonds to finance themselves. These bonds are typically tax exempt and are part of the greater municipal bond universe. As an asset, they are infrequently traded. As a business, they derive a considerable amount of revenues from their medical center operations, government research contracting, government appropriations, and finally tuition. Consider the University of California system, the largest of its kind 302k students and 136k faculty spread across 10 campuses.

University Revenues

The lion's share of the revenues come from the medical centers and government research grants/contracts. Actual state appropriation funding and tuitions contribute only a quarter of the total revenue.

Over the past 5 years, the tuition/fees category grew by about 61%. Medical center and government contracts revenue grew by 38% and 26% respectively. State appropriations and DOE lab contributions actually declined by 6% and 55% respectively.

University Expenditures

The chief risk in to the business is the defined-benefit pension program (amounting to a $2B/year payout). The number of retirees receiving payments may have only increased by 13% over the past 5 years, but the amount of payments has increased by 25.6% over the same period. Two years (2008 and 2009) of massive depreciation of the assets in the plan certainly did not help. Over the same period, the income part of the plan investments (interest and dividends) declined by 41% at least partially due to the low-interest rate environment of recent years.

The California state government budget crisis led to some deferred payments to the university system in 2010-2012, amounting to around $500MM each year.

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