Cornell’s Board of Trustees unanimously agreed Friday to allow the University incur up to $500 million dollars in debt and significantly scale back its spending from the endowment.
The move comes as the University faces a more than $200 million budget shortfall for its Ithaca campus and a $13 million deficit for the Weill Cornell Medical College in New York City. Cornell’s endowment has also shrunk by 27 percent over the past several months.
An ‘Unusual Maneuver’
The Trustees authorized the University to sell up to $500 million in taxable bonds to provide working capital and institutional liquidity.
While the University has other lines of credit and regularly sells tax-exempt debt to finance construction, the sale of these taxable bonds will be an “unusual maneuver” for Cornell, President David Skorton said at a press conference Friday.
“We’re trying to be prudent in how much additional debt we take on by selling these bonds,” he said. “We want to find a sweet spot: on the one hand, having the additional funds that [we need] … but on the other hand not selling more than we need.”
Peter Meinig ’61, chair of the Board of Trustees, said that over the next few weeks, the University will be working with bond advisors and the bonds will be sold publicly “within the next few months.”
Meinig said the sale of bonds is “very intelligent” and “attractive” given the strength of Cornell’s credit rating and the fact that interest rates are low.
Skorton added that he thinks potential buyers will see Cornell’s bond offering as “a relatively secure investment.” Cornell has an “Aa1” rating on the Moody’s Credit Rating.
Cornell’s decision to sell bonds follows the trend among other Ivies to increasingly use bond proceeds to fund operations in light of shrinking endowments. Earlier this year, Harvard sold about $1.5 million of debt and Princeton sold $1 million of debt, according to Bloomberg.
Cutting Endowment Spending
The University is also set to reduce spending from the endowment by 15 percent starting July 1, with further cuts planned for subsequent years.
“[The University] can’t keep taking the money out as if it were a larger endowment,” Skorton said.
Skorton said that these actions would place a “triple pressure” on units and colleges within the University.
“This is going to put substantial strain on the campus because we are taking away budgetary dollars from them by budget cuts,” he said. “We are reducing the endowment payouts—that’s a reduction in the income to the units. And then we are taking away some of the funds they have in uncommitted reserves.”
Skorton said that he anticipates that the financial situation will translate into fewer recruitments of faculty, although emphasized that the University continues to hire faculty and that there is no faculty hiring freeze.
Provost Kent Fuchs said Friday that the 15-percent reduction in endowment spending means that there will be $35 million less funding available for units and departments of the University.
Skorton said that he had received the plans from all the colleges to cut their budgets by 5 percent. He said that over this week, he and Fuchs would be reviewing the proposals to approve the way in which the colleges will be cutting their budgets.
Other University Initiatives
These decisions are the two latest pieces of the University’s plan to deal with its budget shortfalls and smaller endowment.
The University has already cut the Fiscal Year 2010 Budget by $50 million and reallocated $75 million of unrestricted funds. Other initiatives to streamline the budget include a voluntary retirement program for certain staff members, which Vice President for Human Resources Mary Opperman introduced last week.
The University has also extended an external hiring pause as well as a construction freeze on projects that are not yet underway.
Skorton emphasized that while the University does face financial troubles, the Board of Trustees has remained steadfastly committed to its newly announced financial aid initiatives.
The University will continue with its plan to draw about $35 million from the endowment to fund the financial aid initiatives, he said.
Investment Strategies Going Forward
At the press conference Friday, both Meinig and Skorton declined to comment on the specifics of how the University would be changing its investment portfolio in the future.
“These things are going to change extremely rapidly depending on market conditions,” Skorton said. “And we want to be as transparent as humanly possible. Some of those [investment strategies] are private decisions that don’t serve anybody well by being public.”
Meinig added that by having cash on hand, the University is in a good position to take advantage of attractive investment opportunities.
“We’re not ashamed of our performance,” he said. “We’re not happy about having negative performance, but I think our portfolio is well positioned.”