The dangers of bondage

Melissa Fabros writes in the RGE Monitor about the pros and cons of universities' (public and private) borrowing binge. A consequence of the extensive reliance of bonds (traded on the municipal bond market) is that borrowers have been bending over backwards to follow Moody's "roadmap" for universities that want to achieve or maintain AAA/AA1 rating:

Moody’s recommendations highlight tuition hikes, cost cutbacks, online education delivery and direct borrowing as means for universities to survive the Great Recession with their credit ratings intact.

Sounds familiar? This is very clearly the strategy that UC has been following over the last 5 or 6 years, and also the one that is being markedly accelerated in these difficult economic times. Interestingly, the University of California, with about $1.3B in bonds, ranks second only to Harvard (with $2.5B) among institutions that have embraced the bond market. One of the conclusions of the article is that

While seeming a sure win for investors, higher education, given cuts in faculty and services on top of tuition increases, appears to be an increasingly risky bet for students, faculty and staff. 

The problems inherent in the strategy is that in order to borrow universities have to maintain a high rating, which in turn requires raising tuition (which, as we know is being pledged as collateral), cutting staff and faculty, and increasing class sizes. So the question being asked is

how will increased revenue, which will be needed to service the loan, be generated by an institution with reduced capacity?

While reliance on the  bond-market might be (and it has been) successful in the short run, it is fraught with perils as a long-term strategy — not to mention the fact that, especially in the case of a land-grant public institution like UC, it seems to embody exactly the wrong kind of priorities.