Financial Plan - Cornell University Division of Budget & Planning

Tuition, Financial Aid & Endowmentthe endowment’s extremely long time horizoninfluences investment and payout choices that arenot congruent with the model used by a typicalannuity, which assumes an eventual terminationof the annuity payments.Managing DebtFor the first 100 years of Cornell’s existence, its trusteeswere parsimonious in the use of debt, believing,as noted in a 1975 trustee report, that “while investmentsprovide resources for the future, debt createsa mortgage against future income.” 31 Cornell hadnearly gone bankrupt in the 1870’s and 1880’s andwas strained severely during World War I and theGreat Depression, incurring $1.5 million in operatinglosses and unfunded capital expenses between 1925and 1937 that were offset by the decapitalization of aportion of the Cornell endowment. 32 Generations ofCornell trustees, including those of the mid-twentiethcentury, were suspect of incurring obligations thatwould be difficult to meet. Two factors combined toalter this point of view and helped set in motion theuniversity’s current approach to debt:• The creation of the Dormitory Authority of the Stateof New York (DASYN) in 1944, first to constructdormitories for the State Teachers’ Colleges andsubsequently (in 1960) to bond construction projectsfor private colleges and universities• The need to expand Cornell’s facilities to accommodateboth enrollment growth and an expansion inresearch activitiesAs described in that 1975 trustee report:Prior to 1965 the University had little debt. At that time,the pressures to expand University facilities and the readyavailability of government-backed credit from both stateand federal sources led Cornell’s trustees to re-evaluateand liberalize earlier policies to permit assuming limitedamounts of debt for essential facilities—particularly thoseexpected to generate substantial revenues—or whoseconstruction could be partially supported from gifts.Cornell’s annual debt service payments to DASNYquickly rose from zero in 1962 to $3.8 million in31 “Report of the Trustee Ad Hoc Committee on CapitalFinancing.” Ithaca: Cornell University, 1975.32 Board of Trustees. “Minutes (Apr. 29, 1939).” Ithaca:Cornell University.Outstanding External Debt by Category(dollars in millions)4/30/71 % of 2/29/08 % ofCategory Principal Total Principal TotalResidence/Dining $33.4 67% $290.7 38%Physical Plant 3.5 7% 137.2 18%Academic 7.0 14% 305.7 39%Other/Miscellaneous 6.2 12% 39.7 5%Total 50.1 100% 773.3 100%1972-73. 33 For most of the 1960’s and 1970’s, debt wasused to finance dormitories and utility projects, wherethe debt service could be built into revenue streamswith defined rate structures. Few facilities projectsthat were academic, administrative, or general supportin nature were debt financed. The trustees’ approachunderwent a second evolutionary change in the lastdecades of the twentieth century, as the judicious useof debt—within an overall financial framework thatviewed endowment and debt as two sides of the samecoin—was embraced. The advantageous use of debthas become a form of investment that recognizes thatprogrammatic returns may have the same relevanceand currency as financial returns. The university nowexamines the total amount of debt that it can reasonablyincur while maintaining its current debt ratings,and allocates access to that debt as a resource.As a result of these changes, Cornell expanded its useof tax-exempt debt and began to issue taxable debt(beginning in 1987) and variable-rate debt where ratesand terms were advantageous. Cornell has also enteredinto forward-swap agreements to lock in rates onanticipated borrowings and has issued both tax-exemptand taxable commercial paper when conditionswarrant, creating a matrix of debt instruments thatapproaches the complexity of the university’s investmentportfolio. As with investments, debt is managedin a pooled fashion (where permitted), and theinternal payment of debt service for various projects isseparated from the external repayment of debt by theuniversity. The trustees’ change in approach of usingdebt to finance academic construction projects canbe seen in the table above, which shows that almost33 “Report of the Advisory committee on Financial Planningto the President” (Cranch Report). Ithaca: CornellUniversity, 1972.27