The following was sent to the editors of Innermost Parts by a recent alumnus of Brandeis, who has been following the news and decided to do some of his own research on Brandeis’ finances. Most of his conclusions come after examining data from this document, the University’s publicly available FY 2007 990 tax form required of all non-profits. We thought his questions were compelling, and hope this post fosters further investigation and research. These are questions that need to be answered.
~ Loki & Sahar
During public conversations about the current state of Brandeis’ financial crisis, much has been discussed about the state of the University’s endowment and its current financial situation. However, none of the articles I have read in the Brandeis press or national press discuss the University’s substantial debt.
Numbers can tell a story. Hard data is necessary to look more deeply into the fiscal health of an organization. Numbers can also raise questions.
Every year all non-profits – including universities – must file 990 forms detailing their financial activities with the IRS. Brandeis last filed its 990 following FY 2007. At that time we were led to believe, from pronouncements in fundraising appeals and in the twice yearly Presidential letters, that the university was the paragon of financial health. Brandeis was in the midst of a successful capital campaign, which was bringing hundreds of millions of dollars into the University. The financial crisis was not even on the horizon.
Yet that very year, Brandeis was saddled with debt. The University increased its liabilities (by issuing Tax Exempt Bonds and taking on Mortgage Debt) by $67 million, to more than $200 million — a 51% increase in debt in one year.
Now, with the credit markets in crisis and donors’ wallets dried up, many other institutions and Americans found they have seriously overleveraged themselves. It is my belief that there is a significant chance Brandeis is in the same situation. (We will not have a complete picture, which might prove this whole hypothesis wrong, until the University files its 990 form for FY 2009.)
Here is a simple explanation of the situation as of the University’s last 990 filing:
According to COO Peter French’s recent presentation, Brandeis’ endowment grew from $520,000,000 to $580,000,000 from FY 2006 – FY 2007. But according to the University’s 990 Form, the University’s debt ballooned in FY 2007.
- Brandeis’ bond liabilities rose from $130,410,446 to $190,641,000. [2007 Form 990 Line 64a]
- In addition the university’s mortgage liability rose from $3,823,214 to $10,860,393. [2007 Form 990 Line 64b]
This means interest bearing University debt increased by $67,277,733 — a 51% increase in SINGLE year.
- Last year, Brandeis listed interest payments totaling $7,495,890. [2007 Form 990 Line 41]
- In addition, Brandeis’ FY 2006 Other Liabilities Schedule showed Brandeis having an Accrued Interest Liability of $13,177,086. I presume these are payments on these University debts.
Brandeis professors trained my mind to be inquisitive. They trained me not to fear to ask the important questions, and to always follow the wisdom of Justice Louis Brandeis. In 1914, he wrote,
Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.
While the picture looks bleak, I am willing to believe Brandeis’ 2007 debt balloon was not the cause of the current crisis. However, in making the case that it wasn’t a contributing factor, the University should answer the following questions:
1. Bearing in mind that the liabilities cited above were acquired prior to the downturn in the markets and the credit crisis, why in the midst of the incredible fundraising success did the University take on more than $65 million in new debt in a single year, 2007? (while at the same time claiming an increase in its endowment of $60 million.)
2. When reporting its endowment to the faculty, staff, and student bodies, did the University subtract its debt from its endowment assets?
- If not, does it present an inaccurate financial picture to claim that the University’s Endowment rose $60 million in a single year, without accounting for $67 million in new mortgage and bond liabilities?
3. How much does the University plan to spend each year for the next five years to service its debt?
- How much of this debt service will be due to the 51% increase in debt accounted for on the FY 2007 990 Form?
- What percentage of Brandeis’ projected budget gap can be attributed to the costs of servicing this debt?
4. According to the President’s fall letter, emailed to alumni on November 25th, well after a majority of Brandeis’ equity market losses were realized, President Reinharz wrote:
In 2007-08, Brandeis reached a fundraising record for the third consecutive year. Thanks to the generosity of alumni, friends, parents, corporations, foundations, trustees, and members of the Brandeis National Committee, the university set records for both cash ($90.4 million) and new pledges ($72.8 million). And in May, when the Board of Trustees voted to increase the goal for The Campaign for Brandeis to $1.22 billion, Brandeis became the country’s youngest private university or college to launch a billion dollar fundraising campaign. We reached the original campaign target of $470 million a year early in fall 2005, and then met the extended campaign goal of $770 million more than fourteen months ahead of schedule, in spring 2008.
With this in mind, were considerations given to paying down the University’s substantial debt or increasing its cash reserves during the capital campaign?
5. Did the University engage in any leverage investing of its endowment, which could account for the large quantity of debt?
6. Would the University be willing to release its FY 2008 990 form early, so that the entire Brandeis community can get a completely transparent picture of University finances as soon as possible?
- Barring that step, would the University be willing to present a clear picture of its current debt levels?
There also some questions relating to a side issue that arose while examining the 990, relating to assets represented by the Rose Art Museum:
7. Where on Brandeis’ 2007 990 does the University account for the value of art owned by the Rose?
- For example, line 57 of Form 990 shows $428,878,042 in “Land Building and Equipment Debt minus $205,171,511 in accumulated deprecation for a total value of $223,706,531.”
- Considering the value of the Rose’s collection has been valued at over $300 million, where on Brandeis’ 990 was this accounted for? (I am assuming the collection of the value of the Rose was not included in Line 57 which would thereby have it account 70% of the University’s land building and equipment value pre deprecation.)
I raise these questions because I believe the University has the responsibility to present all of its stakeholders with a full accounting of its financial picture at this time. My theories about Brandeis’ debt level might be proven wrong with some transparency from the University.
I look forward to hearing answers from the administration and working together to help our school.
What do you all think? Something else I found interesting after perusing Brandeis’ tax returns: Last year, both Pres. Jehuda Reinharz and COO Peter French were paid about $592,000, including bonuses. Though Peter French told me that no raises have been implemented this year, neither he nor Pres. Reinharz have taken a pay cut, as have top administrators at several other peer institutions. Though Reinharz is by no means the highest paid of University presidents – within our class, it seems he is around the average – such a measure would show solidarity with the many faculty and staff whom we have decided to entirely lay off. Just something to consider.
Also, a piece which proves valuable companion reading is the recent post by Felix Salmon, of the blog Market Movers. He is skeptical of French’s claim that Brandeis needs to sell the Rose, and offers a financial dissenting viewpoint on the decision.
He also found at least one answer to our anonymous alumnus’ question. In a follow-up post, he states that he was told by David Nathan, the director of communications in Brandeis’ Office of Alumni Relations,
Apparently all of the Rose Art Museum’s artworks are considered to be assets of the university endowment, valued at $1 each. All the proceeds from the sale of any artwork, then, is automatically a desperately-needed capital gain for the endowment.
7 responses to “Did Too Much Debt Cause Brandeis’ Financial Woes?”
[…] will change that, but for now – opacity. We’ve seen how that turned out. So, was it debt that created Brandeis financial woes? Or was it an over-reliance on liquid assets that couldn’t be cashed in when it mattered the […]
Excellent points. I cannot understand why the University overextended itself so enormously. I cannot help but draw comparisons to the nation’s financial sector – after everything crashed, the Rose has become our bailout fund.
Publius is spot-on.
But he also highlights an important point, one that has mostly been lost in this discussion. Your anonymous financial analyst gets it backwards when he suggests that Brandeis was somehow duplicitous to report endowment gains at the same time it assumed larger debts. Those are two separate categories.
But the real question is whether Brandeis engaged in reckless expansion. I have to say that it strikes me as more than a little hubristic for a university with a structural operating deficit to have launched an aggressive building campaign financed in large part with long-term debt. Brandeis quite simply lacked sufficient financial support from its donor base to pay for the buildings it felt necessary to compete. It built the New Ridgewood dormitories for $35 million, without so much as a name donor – where are the student protests about that? It opted to build an enormous new, state-of-the-art science facility, with a reported price tag of $154 million. The Shapiros ponied up $25 million, to bail out the struggling project; counting that pledge, the university had only $39 million in hand when construction began. The largest capital project in the university’s history, built on hope. Where were the protesters then? Once committed to these projects, Brandeis found itself obliged to complete them, even after it became clear that it couldn’t afford them and was facing a fiscal crisis.
I understand that operating and capital budgets are nominally separate. But the emphasis on new facilities absorbed much of the flow of funds generated by the capital campaign, and saddled the university with expensive debt service that it can now ill-afford. Not to mention ongoing maintenance costs, and the inevitable cost overruns.
The predictable result is that the university is going to have to aggressively pare back faculty and graduate students. Specifically, it’s targeting the arts, humanities, and social sciences – the non-grant-funded disciplines, in which the university itself bears the prime costs of education. After all, cutting staff or students who are funded with grants doesn’t save the university much money. But I can’t help but wonder whether, in some ultimate sense, the university’s decision to invest $154 million in shiny new facilities for the sciences – $115 million more than it had on hand – is now costing the institution its strengths in other areas.
No, it didn’t directly precipitate the crisis. But had Brandeis focused on shoring up its structural problems before it moved to construct facilities for which it couldn’t actually pay, it might have preserved the flexibility to ride out the downturn.
Also, one more thing. Most of these Tax Exempt bonds were taken through MassDev. They were taken to help complete buildings like the science center as well as do necessary improvements to the physical plant to bring the buildings up to fire code. The bonds that were taken over the last couple of years are 25-30 year bonds, so the payments on the bond is not what is causing a $25 million deficit in a couple of years. The major thing that appears to be causing the problem is the inability to take the 6% or so from the endowment to pay for operating expenses as they have the past few years (that is like $50 million).
Just wanted to point out that the Form 990 breaks it out into base pay and deferred comp/benefits. President Reinharz and Peter French’s base pay is a much lower (for President Reinharz it is $367,000) in the year ended June 30, 2007. The deferred comp part may have been payments from earlier years that were paid 2006-2007 + the benefits package. Keep that in mind because is base pay is actually below that of comparable institutions.
In case you have not seen this 1991 story about Brandeis selling art, you may find it interesting. This is not to argue in favor or against the move, but only to point out that the university has gone down this path
before. Arguably it should have anticipated the fallout that ensued and adjusted its public relations approach accordingly.
I can’t believe President Reinharz isn’t taking a pay cut. What does he do with all that money??? (And as a secondary question, did he invest with Maddoff?)