Magazine Article

Financing the CSU’s needs

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CSU executives say faculty salaries must compete for dollars with the university’s infrastructure needs. But buildings, modernization and much more can—and should—be funded in ways that do not interfere with support for quality instruction. We are talking bonds. Read on…

By Steven Filling
President, Stanislaus CFA Chapter
Business, CSU Stanislaus
     and
John Griffin
President, Channel Islands CFA Chapter
Business, CSU Channel Islands

Every Spring considerable attention is given to the negotiations in Sacramento over the next California State Budget since a large portion of the funding for the California State University 23-campus system is determined through that process.

Our California Faculty Association Government Relations Team works hard year-round to inform legislators and policy makers of our good work so that the CSU’s needs are given due consideration in the process.

The stakes are high for our students, whose education depends a great deal on that funding, and for us because our CFA Bar-gaining Team so often is told that faculty raises are constrained by the funding that is determined by the Legislature and the Governor.

That line of argument is accompanied by laundry lists of competing needs for funds. Perennial items include deferred maintenance, critical infrastructure needs and information technology programs.

What is missing in the arguments that “the CSU can’t afford compensation increases for faculty” is the reality that there are other sources of funds available to the CSU.

ANOTHER SOURCE OF FUNDS

This article describes one of those sources—debt. Most of us would never be able to purchase a home or car without the use of debt. Today, with interest rates at historic lows, organizations of all kinds are using debt to build and upgrade capital assets like buildings, equipment and infrastructure.

We are not proposing that the CSU’s management issue bonds to fund employ-ee compensation; rather we suggest that CSU management use debt wisely, as other organizations do, to fund acquisition and maintenance of long-term assets.

In the recent 2016 June primary election, 46 California school districts (K-12 and Community College Districts) got voter approval to borrow over $6 billion.

By comparison, the entire 2016/17 CSU Budget is about $6.5 billion. More than double that amount in new school debt is likely to be approved by voters in the 2016 November General Election for schools. One measure alone up for a vote in November, Proposition 51, provides for the issuance of $9 billion in bonds to improve construction of school facilities for K-12 schools and community colleges. (1)

Managing debt is the job of the Chief Financial Officer. Recently, the CSU Trustees approved the r$1 billion in existing CSU debt resulting in savings of more than $300 million in inter-est payments over the next 10 years.

These are real dollars that benefit the CSU’s general fund in the same way that a legislative funding increase does. How many of you have rour home loan to realize savings on your monthly mortgage payments? This is no different.

BONDS CAN BE SOLD

When a business or non-profit organization like the CSU decides to borrow money, it typically sells bonds to the public rather than taking out a loan at a bank.(2)

Because the CSU is a public state agency and uses bond proceeds in pursuit of the public interest, it can borrow money at low-er rates than corporate entities. The reason for those lower rates is that interest paid to investors on those bonds is usually tax free.

Another reason CSU bonds have lower rates is the CSU’s financial position.

Bonds are rated by external agencies that review financial and operational information about bond issuers. CSU bonds are currently rated Aa2 by Moody’s Investors Service, a higher rating [meaning the bond is less risky to an investor] than the State of California itself [its bonds are rated A1, which indicates more risk].

This means that bond rms see CSU bonds as high-quality invest-ment-grade securities with very low credit risk.(3) In other words, the bond ratings firms believe CSU to be in strong financial health.

Investors, like insurance companies and pension funds, buy bonds (lend the organization money) because bonds are less risky than other investments (stocks).

In order to attract those investors, the CSU publishes a document that describes its financial condition in glowing terms. The document, called a prospectus, shows the many CSU sources for revenue including student tuition, student housing fees, park-ing fees, and information monies earned by our campus auxiliaries.4 It also states that even after issuing the $1.3 billion 2016 bonds, the CSU has the authority to issue $1.07 billion in bond funds that have not yet been issued. The CSU’s financial prospectus document stands in stark contrast to the dire state of the CSU presented  on our campuses and at the bargaining table.

As noted above, bonds are huge sources of funding that remain untapped and could be used to meet oft-mentioned CSU funding expenses for “critical infrastructure projects, deferred maintenance and information technology programs.”

As we approach the next round of contract negotiations, your CFA Bargaining Team will continue to remind the administration that faculty have expenses, too. There can be no justification for reducing long-constrained faculty salary increases in order to fund infrastructure and deferred maintenance projects. With interest rates at historic lows now is the time for the CSU to flex its muscle for infrastructure and maintenance projects.

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Learn more about how CSU executives could address their problems from Economics Nobel Laureate Paul Krugman, in his New York Times article “Time to Borrow.” 

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