A new student center is in the process of being built, Friday March 2, 2012 at Sonoma State University in Rohnert Park. (Kent Porter / Press Democrat) 2012

Sonoma State's debt burden rises

JEREMY HAY
THE PRESS DEMOCRAT

Ruben Armi?na went before state university trustees in the Glenn S. Dumke Auditorium in Long Beach last November and made a request that has become familiar to the CSU board over the past decade.

The Sonoma State University president asked for financing approval for a campus building project, this time for a $60.5 million student center.

His request was granted and SSU shot upward on the list of CSU campuses that are heavily in debt.

Since 2000, as new buildings including the Green Music Center and 21 student apartment buildings in complexes named for wine varietals sprouted on its campus, SSU's debt has soared to $223 million.

SSU, with just over 2 percent of the system's 347,000 undergraduate students, accounts for 6.75 percent of CSU's $3.3billion revenue bond debt. With 7,381 students, it is the 16th-largest of CSU's 23 campuses, but it is sixth in overall debt burden.

Including the student center, which students approved in an election last April and is now being built, SSU's debt has grown 355 percent since 2000, when it owed $49 million.

Students pay for the debt - through fees for housing and other campus services. Starting this year, with $300 in new annual fees for the student center, SSU students pay the fourth-highest package of annual tuition and fees in the CSU system, $6,862.

The debt load has grown through a calculated strategy to turn what was a commuter campus of older students 15 years ago into a residential campus where 3,100 students live. This year, 1,779 of SSU students, or 24 percent, are freshmen, compared to 11 percent in 1996.

"This institution would not be here today if not for the fact that we went into debt to build housing," Armi?na said.

"The local area does not produce enough college students to support the university. We needed to attract students from other parts of the state and these students need housing," he said.

Critics worry about future

But as the debt has risen, faculty critics have become concerned that the university is recklessly mortgaging its future.

"It just seems to me to be building toward something that another president, two, three, four, five years down the road, will not be able to pay," said history professor and social sciences dean emeritus Robert Karlsrud.

"It's very, very alarming," he said.

No one disputes that by any measure, SSU has a lot of debt, according to a Press Democrat review of all 23 campuses' financial statements.

The questions are whether it is too much, how it will be repaid and what it means to the school.

SSU's chief financial officer, Larry Furukawa-Schlereth, called the campus "highly leveraged," in a 2007 President's Budget Advisory Committee meeting.

But the debt, he said in an interview last month, is "completely and utterly appropriate given the condition" of SSU, "its age, and enrollment expectations."

That view has supporters on campus.

"What's going to be the best investment for the future?" said economics professor Robert Eyler, who argues that the debt-financed projects advance SSU's mission and ultimately will benefit the larger community.

"These build capital to generate more space for students and thus more graduates, and it builds human capital."

But others are increasingly worried the debt has grown too high and is costing too much every year.

"I'm concerned, particularly about the debt service, about the impact on resources and on what we see as our core mission, which is educating students," said John Wingard, an anthropology professor and a former faculty chairman.

Experts say SSU's debt is best examined within the context of its membership in the CSU system, which issues the revenue bonds and guarantees their payment. CSU could also draw on other campuses' resources to meet one school's debt obligations, though officials say that has never happened.

CSU "has a process in place to keep both the system and individual institutions from over-leveraging," said Lyn Hutton, a former top finance officer at Dartmouth University and the University of Southern California. She is now managing director at Prager & Co., a San Francisco-based investment bank with a big higher education portfolio.

Projects must pay

CSU approves bond financing only for projects that generate their own revenue to pay off the debt incurred, and campuses cannot use tuition and state funding to pay it down.

"It's a self-contained program" said Robert Eaton, senior director, finance and treasury, at the CSU chancellor's office in Long Beach.

For those reasons, "It's not analogous to individual debt," said Jane Wellman, executive director of the National Association of System Heads, a network of higher education campus administrators.

She called SSU's debt strategy "a pretty solid, conservative way for public institutions to manage capital."

On the other hand, said John Curry, a former chief financial officer for UCLA, "It's an awkward time to be building up additional debt" because state budget cuts are bleeding the CSU system, adding to the pressures to limit enrollment and raise tuition and other fees.

"Insofar as you have this kind of debt on campus, then pressure is going to be on other sources of student revenue, room-and-board and parking," Curry said.

"How much more can be added until that becomes a real burden for students?" said Curry, now a managing director with Chicago-based Huron Consulting.

At SSU - as at all CSU campuses - debt payments are covered by revenues that cannot be used for educational purposes. Those would be from fees students pay for housing and parking, food, recreation and student union services.

The school's continuing education program also contributes to the debt service, making payments on $15.6 million in bonds issued for the Green Music Center. A combination of public and private financing is funding the remainder of the $120 million project.

Running those programs as efficiently as possible - earning enough to pay the debt while also providing affordable, quality services for students that will keep them coming back - is essential, Furukawa-Schlereth said.

"It is absolutely important that those individuals who are responsible for managing these programs, manage them in a prudent way ... an appropriate way and make certain they are financially viable," he said.

Undoubtedly, the burden on revenue programs - particularly housing, which pays the great majority of SSU's debt service each year - will increase.

This year, the university owes about $11.8 million in debt payments, up from $10.4 million last year. Once the student center is finished - which is projected for 2013 - SSU will owe another $4.2 million a year, as outlined in Armi?na's request for financing.

In terms of campus finances, making its debt payments "is, in effect, their priority," Eaton said.

That alarms some faculty leaders who say that in an era of diminishing state financial support, and pressure to limit or cut enrollment, the obligation poses a risk to the school.

"It's put us in a potentially tough spot if the budget gets even a tiny bit worse," said mathematics professor Ben Ford, chairman of the Academic Senate.

"It just adds to the fear," he said. "If we have to cut by 1,000 students because of state allocation cuts, we're in trouble for covering debt payments."

State tax hike key

Armi?na told students last month that CSU would have to admit 22,000 fewer students next year if the state cuts its budget another $200 million, which it says it will if voters turn down proposed tax hikes in November. For SSU, that would translate to about 440 fewer students.

That prospect is no small matter, Furukawa-Schlereth acknowledged.

"If you have enrollment problems you have issues," he said "The primary factor that's going to be measured when you evaluate the financial strength of an institution is its enrollment strength."

Still, he said, "I think it's something that the CSU has to think about, not so much the campus.

"Our debt is really not our debt, the debt does not belong to Sonoma State, it belongs to the California State University."

You can reach Staff Writer Jeremy Hay at 521-5212 or jeremy.hay@pressdemocrat.com.

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