Rutgers: Making changes and moving forward

Presentation to Rutgers University Board of Governors
Rutgers’ Steps in Dealing with the Global Economic Crisis
President Richard L. McCormick
Executive Vice President Philip Furmanski
Senior Vice President Bruce C. Fehn
Monday, October 13, 2008


 

President McCormick:

Members of the board, the events of the past few weeks in credit markets, banking, and financial markets here and abroad are astonishing and certainly without precedent in our careers if not our lifetimes. The full impact that they will have is impossible to know, but the variables they have introduced are significant and will affect every sector of the economy, including higher education. As I will explain, Rutgers is taking a number of important steps to deal with the global economic crisis. I have also asked Executive Vice President Phil Furmanski and Senior Vice President Bruce Fehn to brief you on our efforts to preserve our core programs and protect the bottom line. 

Let me state at the outset that Rutgers today is in sound fiscal shape. Working closely with our financial consultants, we are monitoring events in the financial world carefully and have made prudent and conservative decisions to weather the current crisis. We manage our debt carefully, and we have the cash we need to pay our bills and to meet our current obligations. We are able, and indeed we are solemnly obliged, to honor the university’s financial aid commitments to students, including Rutgers scholarship awards.

Keep in mind as we deal with these impacts that our university is also a force for economic growth with a vital role to play for our state and the nation. Now more than ever, our leadership is needed to develop the human capital that is represented by our remarkable and diverse student body and to prepare them for the challenges of an ever-changing global economy. Our expertise is needed to develop solutions to difficult problems that have significant economic impact, including alternative energy, transportation, and health care. Even in difficult economic times, we must and will be guided by our fundamental educational mission. Education is, indeed, one asset that gains in value in these difficult and uncertain times.

However, the financial crisis will cause serious problems for Rutgers on several fronts. State income tax and sales tax revenues will take a substantial hit, and there is talk in Trenton of midyear budget cuts. Borrowing for capital projects is far more difficult and much more expensive than even just a month ago, and at the same time interest income on our own investments is down. Student retention could become an issue, especially in families that suffer a dramatic shift in household income and investments. Fundraising also becomes much harder, and we hope that our friends will recognize an even larger imperative to support Rutgers.

For all these reasons, we must manage our resources with extreme care and prepare for these impacts as much as we can. As he will explain in a moment, last week Phil Furmanski sent notices to all deans and vice presidents, asking them to make contingency plans for the possibility of a midyear reduction in our operating budget. Bruce Fehn has already been in contact with the members of the board regarding our commercial paper program and will offer more details this morning on our financial picture moving forward.

Our first priority is our students, so many of whom depend on financial aid. Through our participation in the federal direct loan program and the NJCLASS program, our students have had access to dependable and affordable sources of funds for student loans, altogether approximately $400 million. Liquidity is not an issue for either of these programs, so money continues to be available to our students. If there is any concern, it will be the availability of private loans from banks in the spring semester. In Rutgers’ case, these loans account for a much smaller proportion of our student borrowing—about $11 million each semester. We will continue to monitor this situation carefully, and our financial aid and student services offices will help students and their families as much as possible. Financial aid is and will continue to be a central priority of our fundraising efforts.

Last month in my annual address I declared that we will not allow cuts in state funding to define us or deter us, and the same holds true as we encounter this present crisis. Rutgers will continue to advance initiatives that speak to our core missions, such as our Rutgers Future Scholars Program and our research initiatives in nutrition and climate change. At the same time, we must examine all our spending plans and initiatives and ask if we can achieve the same goals at a lower cost.

Certainly this same approach applies to our capital program, which is especially affected by the factors I have mentioned, including the growing cost of borrowing money. We will be taking a hard look at all of our facilities projects, from those on the drawing board to those under construction, to be certain that we proceed prudently. We must always balance short-term concerns with long-term interests and needs.

Because the football stadium has been the subject of so much public attention, let me say a few words about that project in particular. As with every construction project, there are several factors to consider, including fundraising, financing, and the scale and scope of the project itself.

Fundraising for the stadium has gone more slowly than we had hoped. Governor Corzine and Senator Lesniak remain committed to help us raise the private funding needed for the project. But given the current economic downturn, it will take longer to raise the funds.

Second, the cost of borrowing has been greatly affected by the credit crunch, and this increase must be factored into our financing plan for the stadium.

Given these facts, I have asked University Facilities and the Division of Intercollegiate Athletics to develop options for the stadium that would continue to place priority on constructing additional seats while reducing the overall cost. When we have more information, we will be able to decide how to complete the project in an economic fashion. This is only prudent, given the new realities we face. But make no mistake about it: Rutgers remains committed to having an outstandingly successful football program.

With that, let me ask Phil Furmanski to speak about the steps he has set in motion, and then Bruce Fehn will follow Dr. Furmanski.

Executive Vice President Furmanski:

Last week, as the president mentioned, I issued separate letters to the heads of all academic and administrative units. I directed them to provide, by November 7, a contingency plan for a possible midyear operating budget rescission—and a plan for making such a cut permanent in the next fiscal year, should that become necessary. In the case of academic units, this will take place through a process of engagement with their faculty. For all units, we are asking them to indicate the actions they will take in priority order, so it will be possible to essentially draw a line as to the cuts that might be necessary as we consider our entire financial picture.

I have also asked all deans and department heads to delay or defer all nonessential spending, even if that goes beyond the cuts we have asked them to model. In this way, even if we don’t need to make these cuts, the savings will allow them to build reserves as a cushion against further difficulties.

President McCormick devoted part of his annual address last month to the need for Rutgers to expand its revenue-generating programs. That’s important for the long term but also the short term, and I have challenged these units to propose cogent plans for immediately generating additional revenues.

As we always do in preparing for cuts, we will preserve core missions and our most important strategic initiatives to the greatest extent possible.

Senior Vice President Fehn:

First let me offer my gratitude to board member Les Goodman. Les has been intimately involved in our discussions with our financial advisers, our bond counsel, and our commercial paper dealer, and he has helped us navigate truly uncharted waters. His financial expertise and wisdom have been invaluable to us.

I want to echo something President McCormick said at the start of his remarks: We have the cash we need to pay our bills. In light of the current freeze on commercial paper, which has crippled some businesses, it’s very important to make clear that Rutgers does not use commercial paper as working capital to cover our payroll or any other daily operating expenses. We never have. We do use commercial paper to provide low-cost interim financing for approved capital construction projects. We have also used our commercial paper program to temporarily refund outstanding obligations that are ripe for refinancing, for example, our $14.3 million in the NJEDA auction rate certificate program that we redeemed in the spring. The commercial paper that we have issued to date for capital projects should take us through January 2009, when we plan to replace that short-term debt with long-term bonds. Only then would we issue any new commercial paper.

As my email to the board last week explained, credit markets all but closed at the beginning of October for us, and Rutgers had about $41 million in commercial paper that matured and could not be remarketed. Fortunately, and as planned for under such circumstances, Wachovia Bank, under a standby bond purchase agreement, stepped in to purchase the notes on October 1. The failure to remarket was not a reflection of Rutgers’ creditworthiness, which is highly rated at Aa3/P-1 and AA/A-1+ from Moody’s and Standard & Poor’s, respectively, but due to the general credit crisis and investors’ concern over the viability of Wachovia Bank and its ability to provide liquidity for our commercial paper. I should note that the P-1 and A-1+ rating are the highest ratings available for commercial paper programs.

Last week the credit market improved slightly and we were able to remarket approximately $48 million at 8 percent for up to a two-week period. Our hope is that the credit markets will continue to improve as the extraordinary measures taken by banking authorities around the world begin to take effect. We are also hopeful that the Wells Fargo purchase of Wachovia—approved today—will help restore investor confidence in Wachovia’s ability to backstop our commercial paper and thereby reduce the interest rate investors are demanding for the purchase of our commercial paper.  

I should also note that we have in place interest rate swap agreements covering our outstanding variable rate bonds and commercial paper, and we expect that these swap agreements will help offset some of the spikes in interest rates that we are experiencing on our variable rate obligations. Our counterparties in these agreements carry acceptable credit ratings and are generally considered stable firms at this point in time.

Nevertheless, the higher interest rates are creating an additional cost burden that we need to address. Accordingly, we are looking at a number of short-term options to reduce the cost of our outstanding commercial paper, including the repurchase of some portion of the outstanding commercial paper ($133 million) until permanent refinancing can be put in place in early 2009. This option now seems possible given a temporary Treasury Department ruling that allows tax-exempt issuers to repurchase their own tax-exempt obligations without precluding a subsequent reissuance on a tax-exempt basis. This option may make sense if we find that we are paying more on our commercial paper (net of swaps) than we can earn on our temporary investments.

The current outlook for interest rates on long-term tax-exempt debt is also trending upward. The 30-year MMD (Municipal Market Data Index for AAA GO credits) has increased over 100 basis points over the course of the last six months to 5.69 percent.

That’s the debt side. The news is also challenging on the investment side. For the moment, we can expect that our endowment funds will experience a serious decline in market value. Our asset allocation, based on the June 30, 2008, combined market value of $514.7 million for the Board of Governors and Board of Trustees investment pools, was 38 percent (or $195M) in domestic, international, and emerging market equities; 38 percent in risk reduction assets including fixed income and hedge funds; 18 percent in inflation protection assets (TIPS and Real Assets); and 6 percent in private equity. As of last Friday, the market value of the endowment allocated to equities appears to have declined approximately 30 percent from June 30, 2008, based on preliminary valuations. This decline will undoubtedly reduce the amount of income available to support operations under the university’s endowment spending policy.

With regard to projected investment income earned on working capital, we will certainly experience a decline due to extraordinarily low yields on treasury bills and the unavailability of other safe investment alternatives. We will continue to monitor our investments and do all we can to protect them for the long term.

President McCormick:

Thank you, Vice President Fehn and Vice President Furmanski. I mentioned briefly before, and I want to reiterate now, that Rutgers’ fundraising efforts will continue. They must, because the last thing you should do in time of crisis is to abandon the hopes and ambitions you hold for the future. Our foundation and our faculty and staff have worked hard to identify those ambitions with the greatest potential to transform Rutgers, including vital support for scholarships and endowed professorships. Now it is more urgent than ever for us to redouble our fundraising efforts and strengthen our ties with our alumni and friends here in New Jersey and around the world. For some of our potential benefactors, this actually may be the moment that they can make the greatest difference for Rutgers.

I am confident that Rutgers will ultimately triumph over the challenges now before us—confident because we have leaders of vision on this board, in this administration, and on our faculty and staff. Rutgers will also play an important role in helping our fellow citizens make their way. Local, state, and national decision-makers will turn to our faculty wisdom and insight as they seek solutions that help get people and businesses back on track.

We have the great fortune to be here at Rutgers, an institution that has meant so much to generations of students and that does so much good for our state and the world. Yes, we face tough times. But we will continue to shepherd our resources so we can invest in our highest priority academic and student support functions. And we will sustain the programs that bring excellence and recognition to the university. That is our future and it is also our pathway out of the current difficulties. Rutgers has been here for 242 years, and we intend to be here and to be increasingly outstanding for at least another 242.