No ‘quick fix’ for Queen’s debt

University may enter bond market

Queen’s may soon sell bonds to help finance its debt from capital projects, University spokesperson for Vice-Principal (Finance and Administration) Caroline Davis told the Globe and Mail on Jan. 11.

Other Canadian universities, including the University of British Columbia and the University of Toronto, are also looking into the bond market as they face upcoming budget crunches.

Universities lost an average of 18.5 per cent in endowment funds in 2008, the Globe and Mail reported.

“Universities are desperate because of their expenses,” economics professor Frank Milne told the Journal.

He said he thinks the provincial government’s emphasis on funding infrastructure in recent years has led some universities to spend large amounts of money on capital projects they’re now struggling to pay for.

“They’re all in this situation,” he said. “There’s no quick fix.”

Queen’s is building a new performing arts centre, a medical building and the School of Kinesiology. The Queen’s Centre was finished last term and opened on Dec. 1.

The University has raised $44 million for the Queen’s Centre, which cost $169 million.

Milne said the University can either take out a bank loan or sell bonds to make up the $125 million shortfall.

“They’ll do calculations and find the cheapest way to do it,” he said.

A bond is a financial instrument issued for a period of time to raise money through borrowing, he said. The issuer owes the creditor the principal amount as well as interest, usually paid in set intervals. The creditor doesn’t gain ownership rights.

“They’re usually bought by mutual funds and insurance companies,” Milne said, adding that public institutions like universities are generally trusted because it’s assumed they won’t go bankrupt.

Neither option would have a direct impact on students because borrowed funds would finance debt instead of academics, he said. However, one potential effect could be that students wouldn’t have large fee increases to cover the University’s debts, he added.

Milne said he thinks selling bonds is a symptom of a large debt problem for Queen’s.

The University is projected to run an $8.3 million deficit in 2009-10.

“We call it ‘kicking the can down the road,’” he said. “Essentially, all you’re doing is borrowing and you’re paying interest on it.”

Milne said the University should focus on the revenue side of cash flow instead of on expenses.

“The problem is on the revenue side,” he said. “We assume it’s going to go up and then we borrow in the contingency period so deficit is covered by borrowing. But what if [revenue] doesn’t come in over time?”

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