Should universities borrow money to fund new projects?(Read article summary)
The Ohio State University has borrowed $500 million dollars by issuing 100 year bonds. Should other universities do the same?
Last Sunday's Business Section of the NY Times had some wild stuff. There was a large advertisement from the Stanford University Medical School announcing its new search for a Dean of the Medical School. Now, the interesting part was to announce this in the Business Section! Maybe medicine and capitalism are connected? There was also an article about Tom Sargent as he explained that he is both liberal and conservative but he doesn't like simple labels and slogans.
Finally, on the back cover of the Business Section was another Ad. The Ohio State University was announcing that it has borrowed a 1/2 $ billion dollars by issuing 100 year bonds to help it remain a great university. As I read this, I asked myself; "Why isn't UCLA doing this?". There are many great projects that we could invest in now (no, the New Hotel is not one of them) if we had the $. If we could borrow and pay interest for 100 years and then pay back the balance, we could do great things with such $. Ohio State will pay 4.8% on its bonds. I believe that serious investments in UCLA will generate a greater than 4.8% percent annual return.
Now, I'm not a lawyer but I believe that the University of California can already issue bonds. I propose that UCLA should be allowed to set its own tuition and that it be allowed to issue debt if it wants to.
Who would buy this debt? UCLA has over 300,000 graduates. Many of them have never given a penny to the University and many paid very low tuition to attend. Many of these graduates are successful and are looking for risk adjusted investments that pay a high rate of return. The UCLA bonds would offer a safe investment that would offer a loyalty payout. By buying our bonds, our graduates would be showing their support for UCLA moving forward. Casey Mulligan has documented a similar loyalty effect during World War II when people were willing to hold U.S bonds at a low interest rate. Such UCLA patriotism would mean that we could borrow at an even lower interest rate.
Research by David Cutler and Grant Miller found that when U.S cities were able to issue debt to finance new infrastructure investments in the early 20th century that death from waterborne diseases fell sharply. I predict that UCLA will achieve similar greatness if it can invest now using your savings!