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'Does it mean the sky is falling? Maybe not': Experts say OU's debt not a red flag when compared to other Big 12 schools

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Evans Hall

Evans Hall's main entrance on University of Oklahoma's Norman campus.

Current OU President James Gallogly has said OU is in financial crisis mode. Former OU President David Boren has said the finances aren’t the end of the world. They are both right and wrong. 

When compared to other public Big 12 universities, OU does have some of the highest debt levels, as Gallogly has told the OU community since taking office July 1.

But, according to outside experts, debt isn’t always a red flag.

After reaching out to all public Big 12 schools, which OU benchmarks itself against financially, The Daily received financial information from every school except the University of Kansas. This information included total debt for each school and the percentage of each school’s overall budget spent on debt payments per year, among other things.

The review found that OU's debt levels are significantly higher than many other peer institutions' and the university does spend more than its counterparts of its overall budget on debt payments. But this might not be cause for immediate concern, said Susan Menditto, director of accounting policy at the National Association of College and University Business Officers, of which OU is a member.

"Without knowing all of the intricacies, I don't have a negative reaction... but (the debt) should be looked at against the viability of classic revenue streams like tuition and fees and compared against other institutions in the state," Menditto said.

Gallogly said he was displeased with OU’s financial situation, and during his first few weeks on the job, he cut multiple executive positions in early steps toward restructuring and savings. Since, there has been a round of layoffs with more to come, multiple offices have closed and staff members have begun to express serious concerns with the new administration.

David Boren, Gallogly’s predecessor who controlled the budget for the prior 24 years, released a statement in June following Gallogly’s initial comments on OU’s debt, saying the type and amount of debt is normal for a university of its size.

“OU’s required annual debt service payments represent only approximately 6 percent of its total operating revenue,” Boren wrote in the statement. “Neither its total debt outstanding nor its underlying funding sources are unusual.”

Menditto said every institution can handle differing amounts of debt depending on its overall financial health, so it can be difficult to pin down an exact number that universities should strive for.

“It’s hard to make a totally definitive statement, but when (debt) gets in the way of current operations, that may be problematic,” Menditto said.

Comparing OU’s debt 

OU’s debt totals $908 million as of Nov. 30, according to Erin Yarbrough, interim vice president for public affairs. Yarbrough also said OU will spend roughly $66 million on debt payments this year.

Yarbrough previously told The Daily that a final university budget has not been completed for fiscal year 2019, which ends next June, so there is not an official percentage of the amount of the overall budget that will be spent on debt payments. But the Board of Regents approved a $1.02 billion preliminary budget for the Norman campus this fiscal year, leaving OU to spend roughly 6.5 percent of its total budget on debt payments until official budgets have been approved.

"I’ve seen healthy private institutions at that rate or higher," Menditto said, referring to OU’s 6.5 percent.  

When looking at total debt, the percentage of overall budget spent on debt payments and debt per student, OU does spend more per year than most other Big 12 universities.

The University of Texas has $1.6 billion in debt, but it spends about 4 percent of its overall budget on debt payments. Oklahoma State University said it has roughly $863 million in total debt and spends 5 to 6 percent of its total budget on payments.

West Virginia University has $753 million in debt and spends approximately 5.5 percent on debt. Iowa State has about $503 million in debt, with 3 percent of its overall budget going to payments.

Kansas State University said it has $464 million in debt and spends 4.5 percent of its total budget on debt payments. Texas Tech has $445 million in debt, and most of its payments are covered through donations and gifts to the school.

The per student debt at OU's Norman campus is the second-highest in the Big 12 at $31,768, following Oklahoma State at $35,011, according to enrollment numbers from the schools' websites. 

“We build a lot of buildings and have taken on a lot of debt. And that debt is, on a student basis, very high,” Gallogly said. “So we don't need to go build new buildings right now. I'm focusing on human capital.”

At OU, current debt was used for capital improvement projects, such as dorms, student recreational facilities and instructional buildings on campus.

Gallogly said at the June regents’ meeting that the university went on a “building campaign” in the past decade, and that projects like the new Cross Village and the Residential Colleges have proven to be poor investments due to their high start-up costs and low initial occupancy.

But these projects are similar to what other universities use debt for, according to information provided by other universities. Oklahoma State funded improvements to its student union and built new laboratory facilities and residence halls. Kansas State funded new athletic facilities, a recreation center and a research facility, among other things. Texas Tech spent funds on academic buildings and other facilities.

In recent years, news organizations like Time, The Atlantic and Forbes have examined the trend of universities using debt to finance campus improvements to increase out-of-state enrollment and tuition dollars, and studies have researched the same topic. According to a report published by the Roosevelt Institute, “public and private schools both are competing with each other for student dollars, increasingly courting wealthier students with fancy amenities built with borrowed money.”

Menditto said debt can be used as a long-term finance strategy, but for those who are more fiscally conservative, short-term strategies may be more appealing.

“In the recent past, the university has taken on more expenses and debt without having a significant enough decrease in expenses or increase in revenue to cover the cost of making payments on that debt,” Yarbrough told The Daily in an email. “The president is working with areas across the university to balance the budget via expense reductions first... Being better fiscal stewards allows us to hold the line on tuition and assure taxpayers and donors that their funds are well spent.” 

Credit ratings

OU’s credit rating is A+, according to the rating firm Standard & Poor’s, which rates thousands of corporations, organizations and universities every year.

The range of credit scores goes up to AAA+, but an A+ score is the most common rating among universities, with roughly 25 percent of universities rated by S&P in 2017 having this score.

In S&P’s most recent report on OU in October 2017, it said the score was based on, “OU’s role as a co-flagship institution and its favorable enrollment trend.” The report also points to the belief that, “OU will continue to be well managed and governed and the enrollment trend will remain firm.”

The firm went through the entirety of OU’s financial portfolio, including enrollment data, financial management policies and total resources and debt, and then presented its findings to a committee that voted to give OU its score of A+, said Mary Ellen Wriedt, the lead analyst who authored S&P’s OU report.

The score indicates overall financial health, Wriedt said, and is used to determine how much interest an entity will pay on a loan.

Wriedt did not say whether OU’s score was good or bad for a university of its size, but said OU currently has an investment grade rating. OU is due for a review in the next few months.

“We don’t have qualifying adjectives of whether it’s good or not,” Wriedt said. “There are still many ratings below what OU has.”

But if the university sees continued state appropriation cuts, it’s likely the score could go down. It’s also possible for an administrative change to impact a credit score, Wriedt said.

Oklahoma State is rated one level higher than OU, with an AA- rating. Kansas State has the same A+ rating, and Texas Tech has one of the highest ratings available, at AA+.

Layers of bureaucracy

Debt cannot be approved at OU without university leaders navigating many layers of oversight.

OU’s president and the Board of Regents must be given a detailed financial plan from chief financial officers and vice presidents, including information on OU’s current debt, how new debt will be used and how it will be paid off, according to the regents' policy on debt.

His first day on the job, Gallogly ousted the longtime financial administrators who would have been in charge of these plans and recently filled those positions. 

The policy’s goal is to make sure projects are affordable, the regents are informed of debt decisions and the highest achievable credit rating is maintained.

The policy also has language encouraging the use of debt to finance projects, saying, “Debt, especially tax-exempt debt, provides a low-cost source of capital for the University to help fund needs required to achieve its mission and strategic objectives.”

Once approved by the regents, proper documentation of OU’s financials are sent to the state treasurer’s office and the proposal is either approved or denied based on the purpose, structure and methods on which the debt is based, said Andrew Messer, a state bond adviser.

Even with these layers of oversight, Gallogly has said he does not believe the debt has been well-managed. He told The Daily in July that he thought the regents only passed recent debt proposals because they were given faulty information.

The Board of Regents includes some of the state’s leading business people, with chair Clay Bennett serving as the president of an investment firm and chairman of the OKC Thunder and regent Renzi Stone serving as the president of a large public relations firm.

“The financials that were presented indicated these were good deals... I have the benefit of seeing some of the numbers, but I think the premises were flawed,” Gallogly said. “For instance, the occupancy of the Residential Colleges. There are assumptions made  would they be full or not full? How much rent can be charged? Some of the assumptions turned out to be inaccurate.”

Menditto, the accounting policy director of the National Association of College and University Business Officers, said these assumptions can be vulnerable to change, but they are based on hard data.

"In general, I don't believe financial professionals put proposals together willy-nilly," Menditto said. "Analysts, bond buyers, bond issuers, they all carefully analyze proposals and ask questions and ask for more information if something looks askew... And if (OU has) an A+ rating in general, I'm not so sure there have been faulty assumptions in the past.

“The president has objectives and, to him, this is maybe a yellow light warning sign,” Menditto said. “Does it mean the sky is falling? Maybe not, but they are trying to deal with it.”

Kayla Branch is a journalism senior and The Daily's enterprise editor. Previously, she has been the editor-in-chief, a news editor and covered the student government as a reporter.

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