Sunday, October 05, 2008

Crunch Time

On the heals of the last recession and the resulting downturn in support from the Commonwealth, Penn State made a decision to steam ahead with an ambitious building campaign by riding  the easy credit bubble. Graham adopted the the recommendation of his  Tuition Task Force that tuition be raised to cover costs plus one percent with the understanding that students and their parents would likely have to take on more debt to meet the rising price of their education. In turn, the University would go into hock to the tune of one billions dollars in order to build, build, build.

This was a stark contrast to the way in which the University responded to the recession of the early nineties when Commonwealth funding was frozen. At that time,  a  University Future Committee was put into place to look into how the University could tighten its belt. Programs were cut and construction waited  until money could be found to finance it. (Search the Collegian on the string "Future Committee" to get a flavor of the mood of the University in those days.)

The first sign that the party was coming to an end this time out came this past spring as the bursting of the housing bubble lead to the failure of Bear Stearns.  Several universities that had been borrowing heavily found that rates on their variable rate bonds were skyrocketing as a result of the ratings of the bond insurers nosediving. Penn State wasn't  effected because it guaranteed its own variable rate bonds backed up with a letter of credit from a commercial bank. Graham didn't even blink as a result. He plowed ahead with his plans to build, build, build by imposing a facilities fee.

Then at the September 19  Board of Trustees meeting he unveiled his  State of the University promotional video, a paean to his building spree which culminated in the announcement of yet another new building. The biggest yet. A $213 million Millennium Science Complex. It was as if he didn't think there was a problem. The BOT said sure thing. Build it.

But September 19 was the day that the cracks which were visable in the economy for quite sometime finally spit open. It was a day in which America was told that they would have to rescue Wall Street to the tune of $700 billion. And finally this week, the collapsing bubble began to impact Penn State. The failure of Wachovia Bank caused a liquidity problem for Penn State, as well as many other universities. Money the University had invested in the Commonfund Short Term account, which Wachovia held in trust,  had been frozen by Wachovia to prevent a run. Graham had to finally admit that all was not well.

Not only was there a short term liquidity problem. Graham had to admit that those variable rate bonds could now be a problem for the University,as they have been for many municipalities accross the country. Construction could be affected and that privately held student loans might dry up. He didn't mention what might happen to parental loans, but he did warn that Commonwealth funding may be a problem.

This time out the option for the University won't be to pass the cost on to students and their parents. They are tapped out. Credit is drying up.

This time around  Graham may have to tighten the belt, but that may not be enough to keep University from collapsing under its billion dollar debt load as the need to meet bond payments comes up against the limits of its liquid assets.  And Graham's reputation which he has assiduously burnished by building, building, building, may be crushed by that collapse.

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