SAN FRANCISCO — The University of Oregon hopes to get the green light for a novel plan to sell $800 million of bonds to help create an endowment that would pay for the school’s expenses and reduce its reliance on state funding, according to its president.
But like its football team’s national championship aspirations, the university has a long road ahead to win approval for the controversial proposal.
The plan calls for using matching private gifts to create a $1.6 billion endowment to fund the budget. And while most agree something needs to be done to help higher education in Oregon, some experts and lawmakers see the proposal as too risky and unfairly favoring one university.
University of Oregon president Richard Lariviere said he has made the pitch to try to build stable financing and reduce reliance on shrinking annual contributions from the state. If the school’s finances remains unchanged, he expects tuition to continue to rise.
“The reason we made this proposal is that we are working very hard to preserve the public nature and the public mission of this university,” Lariviere said in an interview. “What we are doing is replacing a very volatile funding source with one that is much more predictable.”
The president said the financing plan appears to be the first of its kind in the country.
As it stands now, the proposal would have Oregon sell $800 million in 30-year taxable general obligation bonds at 7% interest, with an expected annual debt service of $64 million.
The state would use fixed appropriations to pay debt service.
The university plans to combine the debt with matching private gifts to build a $1.6 billion endowment, which it estimates would garner an annual investment earnings rate of 9% and a distribution rate of 4%.
The matching funds would be raised over a seven- to 10-year campaign and bonds would be sold as the gifts became available, likely being issued in $200 million tranches, the president said.
Lariviere said Oregon is at the forefront of a national trend of decreasing contributions from states to their public higher education systems.
Twenty years ago, the university received an appropriation of $63.3 million from the state legislature.
Its projected revenues for the 2010-11 budget are $726 million, including $53.4 million coming from the state, $188 million from gifts, grants and contracts, and $287 million from tuition and fees, according to a white paper.
The president said a draft of the proposal has been put to a legislative council to prepare a bill.
If passed next year, he said the measure — which would amend Oregon’s constitution — would be on the ballot in the next election cycle.
If all went well, he said bonds would likely be sold in 2014.
Lariviere said in a recent article that in its first year, based on “reasonable” estimates of a 9% yield and a 4% distribution rate, the public endowment would generate $64 million in operating revenue.
He said the distribution would increase each year eventually to $263.4 million in its 30th year, when the capitalized balance will total $6.9 billion.
Jay Namyet, chief investment officer for the University of Oregon Foundation, which manages the school’s existing endowment — $532 million at the end of June, — defended the financial projections that appear rosy to some, especially considering the recent financial crisis.
Namyet said over the last decade the foundation returned about 6% per year, and 9.6% for the last 15 years.
Those figures take into account three years of negative returns during the economic downturn, including a 17.8% loss in 2008.
“What is most important is not what has happened in the past but what today’s valuations are,” he said. “We take risks very seriously because ultimately what we are here to do is to fund the university budget on a yearly basis.”
The $1.6 billion endowment would be operated separately by the foundation as it would be contributing directly to the operating budget, according to Joe Mosley, a spokesman for the university.
Critics call the financing plan overly risky and optimistic.
Robert Novy-Marx, a professor of finance who specializes in asset pricing at University of Rochester’s Simon Graduate School of Business, said Lariviere is “blowing smoke” with the financial projections.
“He is basically proposing that the [University of Oregon] write put options. If the market does well, then the university keeps the upside and has extra cash; if the market does poorly, then there could be a huge gap, which I presume the university would ask the taxpayers to fill,” Novy-Marx said.
The proposal comes at a time when the state is battling to fill big gaps in its own budget.
Oregon recently adopted a $13 billion biennial budget that plugged a projected $3.8 billion hole.
Earlier this year, voters approved income and corporate-income tax hikes to replace falling tax collections due to the fiscal crisis.
State Treasurer Ted Wheeler recently made headlines when Oregon’s debt commission unanimously backed his proposal to temporarily halt general fund-backed public borrowing until Oregon’s finances recover.
He said in an interview that the state’s historic 5% limit of debt service to total general fund is under pressure.
Wheeler said he agreed with Lariviere on his point that universities are in need better funding, but he said he is unsure of the proposal.
“I am just not convinced that [The president’s] proposal makes economic sense at this point,” he said.
Some lawmakers see the plan as poor policy that could come at the expense of investments in other universities and long-term capital projects because of the constraints on the state’s bonding capacity.
“Using bonds to pay for services is not sound fiscal policy,” Rep. Sara Gelser, D-Corvallis, and chair of the House Education Committee, said in an e-mail statement.
“Most importantly, this proposal benefits a single university rather than our entire higher education system.”
But in the end, the plan may pass the legislature.
Jim Moore, a political science professor at Pacific University in Oregon, said the financing proposal goes along with past talk about making the University of Oregon and Oregon State University more independent.
“The important thing is how [the proposal] is viewed by the legislature and I think the legislature is pretty well on board,” Moore said.