August 25, 1997
Volume 50, No. 1
Before passage of the recent federal tax bill, many in higher education worried about a possible extra tax burden for parents, graduate students and members of TIAA-CREF. However, a little-publicized repeal of a federally imposed debt limit for nonprofit organizations in that same legislative package has benefited Emory greatly as the University moved to issue bonds this summer for capital projects.
"The tax bill removed an artificial cap of $150 million that had been imposed on private colleges-not public-in the amount of debt that could be issued as tax exempt," said Frank Huff, vice president and treasurer. "And we were, in fact, the first private university in the country to take advantage of the change in the tax law because we were going to market the week in which the reconciliation was reached between Congress and the President, and the President signed the tax bill."
Emory originally planned to issue $20.6 million in 30-year, taxable bonds in July. Instead, the University was able to divert some $13.3 million of that amount to tax-exempt bonds that it plans to issue sometime next month. The remaining $7.3 million had to stay in taxable bonds because the projects it funded, including the renovation of the Performing Arts Center and the installation of air conditioning in every dorm, had already been completed, said Huff. "It was just a matter of timing," he explained. "We'd already spent the money, and you can only use the tax-exempt [bonds] going forward-only money that you have not spent."
The new tax-exempt bonds, series 1997C, will be used to partially fund the new Vaccine Research Center and some new clinic equipment.
Emory can lower its borrowing costs significantly by issuing tax-exempt bonds. The difference between taxable and tax-exempt bonds is generally about 200 basis points, or 2 percent, said Huff. "If you think about it in the context of having a home mortgage," he explained, "you might have to pay 7.5 percent [interest] if you went out into the market today. But if you were paying a tax-exempt rate, you'd probably pay about 5.5 percent."
While some industry analysts are worried that removing the debt limit could hurt the credit rating and financial outlook for some universities, Emory is in good standing. The University's strong fiscal management has earned it a double-'A'/'A-1'-plus rating from Standard & Poor's and a similar rating from Moody's Investors Services.
What's more, the outlook on Emory's debt recently was upgraded from stable to positive. "That didn't change the rating," Huff said, "but it suggests that in the future, if everything continues well, they might raise our rating one more time, which would put us in the very top." The reasons Emory is not in that upper tier has nothing to do with its financial health, Huff explained. "It has to do with our selectivity. In other words, we don't turn down eight out of ten students who apply, as Harvard and Yale do."
Still, Emory's current credit rating puts the University in good stead when it comes to issuing bonds. "Bondholders are willing to accept a lower interest rate for something that's higher in quality," said Huff.
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