The deficit for Fiscal Year 2021 will be “significantly larger” than previous years and could range from $100 million to $200 million, President Christina Paxson P'19 announced at Wednesday’s faculty meeting.
In order to cover the various costs of the COVID-19 crisis, the University will “spread out the cost over time” by borrowing and issuing bonds from capital markets, she added. Capital markets, including the stock market and the bond market, help match up those who supply capital with those who demand it.
The University has already issued a $300 million taxable bond — a loan between an investor and a borrower — at “favourable rates” that will not downgrade the University’s credit rating. Half of the money will be used to obtain liquidity and the other half will be used to cover current payroll and bills.
The “realized deficit” was discussed at the May Corporation meeting, Paxson said. The exact value has yet to be defined since “it depends on what the coming academic year will bring.” But given the currently estimated range of its value, this deficit exceeds the previously estimated $50-60 million in COVID-19-related financial losses reported by The Herald in early April.
At the faculty meeting, Paxson addressed major concerns about how the University will deal with these costs, outlining a long-term approach which seeks to minimize drastic, immediate sacrifices.
“The financial costs of the pandemic will not be done in two budget cuts in a single year or even two,” Paxson explained, but will rather be spread so that the University does not undertake “massive lay-offs” or “massive budget cuts.”
The University has already implemented a salary freeze for staff and faculty for the coming fiscal year, The Herald previously reported, but has yet to lay off any full-time or regular staff.
Beyond implementing gradual budget cuts and increasing revenue, Paxson stated that there are two ways of dealing with the financial costs of the pandemic: liquidating a portion of the endowment and accessing capital markets.
Paxson stated that currently, it “makes much more sense to take out debt than to liquidate the endowment.”
The average 10-year return on the endowment is 9.7 percent per year. This means that if the University were to liquidate $100 million from the endowment, it would reduce future income by $9.7 million per year that could not be recovered.
On the other hand, by issuing and borrowing from capital markets, the University would need to pay off a debt of 3 percent per year over a 10 to 30-year time frame. This would only cost the University $2 million per year for a limited time, whereas the endowment cost would not only be much higher annually but would reduce returns “forever.”
Paxson also cited a second reason not to draw from the endowment: Since it consists of specific donations that are directed to specific purposes, the endowment is already subject to certain restrictions on what can be liquidated and for what use. The University would face no such limitations on funding usage by borrowing from capital markets to meet the cost of the pandemic.
Borrowing will allow the University to avoid “immediate impacts that would be very damaging to our community,” Paxson said.
Paxson reiterated that the University has “a great liquidity model” and that despite these financial challenges, the current liquidity is in “pretty good shape.”
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