The District of Columbia sold $40 million of special obligation bonds last week on behalf of Gallaudet University, a first-ever borrowing for the school.

Gallaudet is a private, federally chartered institution located in the district that serves students who are deaf and hard of hearing. Federal funds account for a large portion of the school’s operating budget.

Payments the university makes to the district will repay the bonds, which will help finance a new student center and infrastructure upgrades.

The $40 million sale does not carry the district’s general obligation pledge or constitute a debt of the district.

Moody’s Investors Service and Standard & Poor’s rate Gallaudet’s Series 2011 bonds A2 and A-plus, respectively. Both rating agencies assign a stable outlook to the credit.

Wells Fargo priced the debt on Thursday. The bonds mature serially from 2013 to 2026 with yields ranging from 1.85% on a 3% coupon for debt maturing in 2013 to a 5.03% yield with a 4.875% coupon for debt maturing in 2026. Another $11.88 million matures in 2034, yielding 5.6% on a 5.5% coupon and a $15.51 million term bond maturing in 2041 priced with a 5.72% yield on a 5.5% coupon.

Paul Kelly, Gallaudet’s vice president for administration and finance, said strong demand enabled the university to lower yields by seven basis points, on average, compared to earlier expectations.

The deal was oversubscribed six or seven times on the 2034 and 2041 maturities, he added. Investors that placed orders for the bonds included Aetna Life & Casualty, First Securities, Neuberger Berman LLC, Nuveen Investments, OppenheimerFunds Inc., Pacific Investment Management Co., and Putnam Investments, while Wells Fargo also wanted to keep some of the bonds, Kelly said.

“We’re really thrilled to find out that our bonds are being well-received in the market,” he said. “It’s a real validation for Gallaudet.”

This is the first time that the university has tapped the capital markets to raise needed funds for infrastructure projects. In the past, it has used federal funds and capital fund-raising campaigns to support infrastructure needs. Gallaudet has $1 million of capital leases outstanding, according to Standard & Poor’s.

Bond proceeds will help finance a new $18.5 million, 60,000-square-foot student housing facility that will accommodate 175 students, according to the preliminary official statement. Officials expect the new building will open by September 2012.

Another $11.5 million will update the school’s heating, hot water, cooling and lighting systems as part of an energy conservation project that could generate $2.2 million per year in utility cost savings, Moody’s said.

Bond proceeds will also help finance $11 million of various infrastructure projects throughout the campus during the next three years, including renovating residence halls, classrooms, parking facilities, and athletic fields.

“This bond issue marks an important step for Gallaudet, in going to the capital markets for the first time to finance an innovative new housing facility as well as green initiatives for our campus generally,” Gallaudet president T. Alan Hurwitz said in a statement.

Historically, the school spends about $10 million per year from its operating budget for capital needs. To begin construction on the dormitory project and the energy-efficiency upgrades required help from the capital markets.

“We wouldn’t be able to do both the energy conservation project and the housing project on our internal time frame,” Kelly said. “It would have taken us too long to do that.”

President Abraham Lincoln in 1864 signed legislation authorizing the institution and since then, annual federal allocations have accounted for a large portion of Gallaudet’s operating budget.

Reliance on federal aid has decreased over time and officials are looking at ways to diversify revenue streams. Federal allocations accounted for 69% of total operating income in fiscal 2010, down from 81% in fiscal 1985.

“The receipt of such large annual federal appropriations is viewed as a credit strength due to the U.S.’s strong history of support; however, the high reliance on the potentially volatile appropriations, in our opinion, limits budgetary flexibility,” Standard & Poor’s analyst Carolyn McLean wrote in a report.

The school has received $118 million of federal appropriations per year since fiscal 2009 and $5 million to $6 million for capital projects. The fiscal 2011 federal appropriations bill cut Gallaudet’s $118 million allocation by $236,000 and reduced  construction support by $10,000.

Moody’s views the reliance on federal allocations as a credit challenge given “uncertainty about [the] level of federal appropriations in future years given that these revenues comprise two-thirds of operating revenues,” Moody’s analyst Jenny Maloney wrote in a report. “However, we believe the university’s reliance on this source of revenue is mitigated by our expectation that federal appropriations will remain at least level over the next few years and that management will continue to diversify revenues and control expenditures.”

In addition, three members of Congress — one senator and two House members — sit on Gallaudet’s 21-member board of trustees. Sen. Sherrod Brown, D-Ohio, and Rep. Lynn Woolsey, D-California, currently sit on the panel while the third congressional seat is vacant.

University officials are looking to boost student enrollment, bring in more commercial development on unused campus property, and increase the school’s clinical services to help bring in a greater mix of revenue streams, Kelly said.

“The federal government is cutting back a lot on domestic spending so our appropriation has been pretty solid, but it’s probably not going to grow over the next few years,” he said. “So we’re focused on trying to recruit and retain more students and they’ll bring some revenue with them.”

Gallaudet’s current operating budget totals $173 million, including the $118 million federal appropriation and $12.9 million of net tuition and fee revenue after accounting for $7.1 million of scholarship aid, the POS says.

The school expects to collect $20 million of total tuition and fees in fiscal 2011, up from $18.9 million and $17.3 million in fiscal 2010 and fiscal 2009.

Tuition for the 2010-11 academic year is $10,850 for undergraduates and $11,930 for graduate students. After two years of no increases in the tuition rates, the school will implement a 7% tuition hike for the 2011-12 school year.

Those costs may increase again in the following year by 5% to 7%, according to Standard & Poor’s.

Current enrollment is 1,064 undergraduates and 413 graduate students. Officials are looking to increase total enrollment to 3,000 full, part-time and continuing education students, although most of that growth is expected to come from non-degree continuing education and online programming students, Moody’s said.

Gallaudet’s endowment totals about $165 million, Kelly said. About 85% of the endowment is permanently restricted, which limits the university’s ability to tap into the fund, if need be. The fiscal 2010 budget included about $7.3 million of investment income, according to the POS.

Squire, Sanders, & Dempsey served as bond counsel on the Series 2011 bonds. ButcherMark Financial Advisors LLC is Gallaudet’s financial adviser.

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