THE HOUSE REPUB­LI­CAN TAX PACK­AGE

The Bond Buyer - - Front Page - By An­drew Coen

would put some more pres­sure on the al­ready pres­sured pri­vate higher ed­u­ca­tion sec­tor.

The House Repub­li­can tax pack­age would put some more pres­sure on the al­ready pres­sured pri­vate higher ed­u­ca­tion sec­tor.

Elim­i­nat­ing the tax-ex­emp­tion for pri­vate ac­tiv­ity bonds would force pri­vate schools to is­sue more ex­pen­sive tax­able debt for cap­i­tal projects.

The House bill, which ad­vanced Thurs­day from the House Ways and Means Com­mit­tee, would ter­mi­nate PABs on Jan. 1, 2018.

A large num­ber of the na­tion’s pri­vate higher ed­u­ca­tion in­sti­tu­tions are lo­cated in the North­east re­gion and have his­tor­i­cally bor­rowed for var­i­ous cam­pus im­prove­ment projects with tax-ex­empt bonds sold by con­duit is­suers.

“The loss of the tax ex­emp­tion means the cost of cap­i­tal across the board for pri­vate col­leges is go­ing up,” said Bill Rhodes, who heads Philadel­phia-based Bal­lard Spahr’s higher ed­u­ca­tion prac­tice. “It’s go­ing to draw up their bor­row­ing costs.”

Rhodes said the loss of PABs could force some schools that have started lon­grange mas­ter plans to re­think the scope of their projects.

The loss of ac­cess to the tax-ex­empt mar­ket wouldn’t be felt equally.

Moody’s In­vestors Ser­vice An­a­lyst Su­san Fitzger­ald said a grow­ing amount of larger re­search in­sti­tu­tions have been is­su­ing tax­able bonds in re­cent years due to fa­vor­able mar­ket con­di­tions and more flex­i­bil­ity about how to use the pro­ceeds, so their short-term cap­i­tal projects may not be neg­a­tively im­pacted.

“Tax­able and tax-ex­empt debt are very com­pressed with spreads now,” said Fitzger­ald. “This cur­rent mar­ket en­vi­ron­ment would not be a shock to the sys­tem, but in 20 to 30 years it could be.”

Mu­nic­i­pal Mar­ket An­a­lyt­ics Manag­ing Di­rec­tor Lisa Wash­burn said many smaller pri­vate col­leges are al­ready fac­ing neg­a­tive head­winds and the loss of PABs would just add to their fi­nan­cial bur­den.

It would be dif­fer­ent, she said, for the most se­lec­tive pri­vate schools with the largest en­dow­ments, which have the fi­nan­cial flex­i­bil­ity to with­stand the ris­ing bor­row­ing costs and have al­ready gained ex­pe­ri­ence in the tax­able bond arena.

“The Har­vards, Prince­tons and Dart­mouths are not likely to be mean­ing­fully im­pacted, but smaller more tu­ition-de­pen­dent schools would def­i­nitely face some risk from the bill,” said Wash­burn. “The smaller, less se­lec­tive schools would def­i­nitely be more im­pacted from the loss of pri­vate ac­tiv­ity bonds be­cause their re­sources are gen­er­ally much thin­ner.”

A re­port Thurs­day from S&P Global Rat­ings said higher ed­u­ca­tion would be among the most im­pacted sec­tors from the House tax bill with both pri­vate and pub­lic schools im­pacted by an elim­i­na­tion of ad­vanced re­fund­ings.

Jes­sica Mat­sumori, se­nior di­rec­tor for S&P’s U.S. Pub­lic Fi­nance Higher Ed­u­ca­tion Group, said smaller schools could face se­ri­ous fis­cal chal­lenges with­out the use of tax-ex­empt bonds.

“Smaller pri­vate col­leges may face cap­i­tal-rais­ing chal­lenges as the par amounts of their debt are small and their brand may not be as strong as the larger schools tap­ping the tax­able mar­ket,” said Mat­sumori. “While the dif­fer­ence in rates is not very mean­ing­ful at the mo­ment for higher rated bor­row­ers, this will cer­tainly in­crease the in­sti­tu­tions’ cost of cap­i­tal and could have sig­nif­i­cant im­pli­ca­tions over the longer term if the dif­fer­ence be­tween tax­able and tax-ex­empt rates widen or even re­turn to a more his­toric re­la­tion­ship.”

Fitzger­ald said lib­eral arts col­leges with small en­dow­ments would feel brunt of los­ing PABs since many are al­ready feel­ing credit pres­sures from meet­ing tar­geted en­roll­ment num­bers with fewer high school grad­u­ates pur­su­ing higher ed­u­ca­tion than in past decades.

Fitzger­ald said that with in­creased fis­cal chal­lenges in a com­pet­i­tive higher ed­u­ca­tion land­scape, in­creased bor­row­ing costs hit the smaller schools much harder than uni­ver­si­ties with more rev­enue di­ver­sity.

“Many of these small schools al­ready run on thin mar­gins,” said Fitzger­ald. “It would squeeze their bud­gets.”

Fitch Rat­ings an­a­lyst Emily Wad­hwani said if the PAB op­tion goes away for pri­vate col­leges it would likely lead to more al­ter­na­tive cap­i­tal fi­nanc­ing struc­tures with some schools de­lay­ing in­vest­ments for non-crit­i­cal main­te­nance ex­penses. De­spite the ris­ing cost of cap­i­tal that would re­sult, Wad­hwani said the end of PABs would not likely have any di­rect im­pact on credit rat­ings.

“While it’s prob­a­bly too soon to tell whether the PAB ex­emp­tion will re­main in any fi­nal tax over­haul bill, there will be clear im­pli­ca­tions if it does,” said Wad­hwani. “It would in­crease bor­row­ing costs in­cre­men­tally and could pres­sure debt is­suance over­all for the sec­tor.”

While tu­ition-de­pen­dent schools may see the brunt of the dam­age from the tax bill, an­other pro­vi­sion in the leg­is­la­tion that taxes en­dow­ment in­vest­ment earn­ings would neg­a­tively im­pact wealth­ier uni­ver­si­ties.

The pro­posed bill in­cludes 1.4% tax on en­dow­ment in­come of pri­vate not­for-profit col­leges and uni­ver­si­ties with fi­nan­cial as­sets more than $100,000 per stu­dent.

Moody’s noted in a Nov. 7 re­port that about 45% of pri­vate higher ed­u­ca­tion is­suers it rates sur­pass this thresh­old and some schools may also get ad­di­tional pain from an ex­cise tax of 20% on salaries of pri­vate higher ed­u­ca­tion em­ploy­ees earn­ing over $1 mil­lion.

Mat­sumori said the House’s pro­posed 1.4% tax on en­dow­ment earn­ings would hit an es­ti­mated 20% of pri­vate and pub­lic col­leges that S&P rates and may lead to high tu­ition rates at those in­sti­tu­tions.

She noted that while most small schools would not be sub­ject to the en­dow­ment earn­ings tax, other parts of the bill that could lead to elim­i­nat­ing in­di­vid­ual es­tate and char­i­ta­ble con­tri­bu­tion de­duc­tions would add an­other bar­rier to fundrais­ing ef­forts.

Wash­burn said the loss of PABs would mean some schools may need to re­ex­am­ine their cap­i­tal projects and pri­or­i­tize more. She said the sea change could ul­ti­mately lead to fewer con­struc­tion projects on col­lege cam­puses.

“Projects will need to be eval­u­ated in the con­text of cost­ing more to fi­nance and the im­pact of the higher debt ser­vice on the bud­get,” said Wash­burn.

“Ar­guably, all else equal, fewer dol­lars will be avail­able for higher ed­u­ca­tion in­fra­struc­ture,” she said. ◽

“Smaller, less se­lec­tive schools would def­i­nitely be more im­pacted from the loss of pri­vate ac­tiv­ity bonds,” said Mu­nic­i­pal Mar­ket An­a­lyt­ics Manag­ing Di­rec­tor Lisa Wash­burn.

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