Friday, February 15, 2008

It Kinda Looks Like a Sword of Damocles to Me

I've had sometime to look into Penn State's debt situation, which I wrote about in the previous post, and, to this non-accountant's eyes, there appears to be a potential problem. The University's debt load is huge. Fortunately for Penn State, most of its debt is in fixed rate obligations.

The numbers I'm about to quote come from the external audit for the fiscal year ending June 30, 2007. It's here.

Brace yourselves. Penn State held $911,506,000 in longterm debt at the end of the last fiscal year. And you thought your credit card debt was bad. The debt service plus payments on longterm leases, which are included in the longterm debt, run in the in the high $30 million range over the next five years, which is about $3 million a month. To be fair, not all of these debt payments come out of tuition, but much of it does and some of it, the part issued to build dorms, comes out dorm contracts.

Although most of the bonds issued by the University are at fixed rates, from what I could tell, the University's second and third largest bond issues, Series of 2002, worth a total of $100,000,000, and Series A of 2001, worth a total of $75,000,000, are at variable interest rates. When this audit was issued they were paying at 3.71%, but the interest caps at 12%. This may prove to be a problem. If you are an accountant let us know what you think in comments.

I couldn't find any auction rate bonds in the Penn State audit Penn State. These are the type that got Penn into trouble. Paul Krugman explains in his column today why auction rate bonds are bad news.

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