ALLENDALE, MI - Fall of 2013 marked a big moment for Grand Valley State University.

After years of construction, two new building projects – the L. William Seidman Center and Mary Idema Pew Library Learning and Information Commons – officially opened, creating more classrooms and collaborative learning spaces to serve the university’s growing student body.

But the high visibility buildings, in downtown Grand Rapids and in the center of the Allendale campus, were financed in part through substantial borrowing, shining a light on growing debt and long-term liabilities that play out behind the scenes at both GVSU and higher education as whole.

College administrators say the structures and the amenities provided are necessary to help students achieve, but they're also used as tools to attract - and beat out other institutions - for the best and brightest.

"We really are competing against one another, so having good stuff does matter – that's how you get enrollments," said Jim Bachmeier, GVSU's vice president for finance and administration.



Related: See how debt, liabilities have changed over past decade at Michigan's colleges and universities

Grand Valley's two projects, at a total cost of $107 million, included $41.5 million that was borrowed, pushing GVSU’s long-term liabilities to $267 million, more than double the amount a decade ago, according to the university’s most recent financial statements. Bachmeier said part of the money borrowed for Seidman would be “offset by a $16 million receivable."

Grand Valley State University's L. William Seidman Center.

And while the Allendale-based school has one of the highest credit ratings possible – meaning investors consider loaning it money a very safe bet – its growing debt comes at a time when financial experts are predicting challenges for colleges and universities.

Among the difficulties facing higher education institutions are a shrinking pool of high school graduates, rising student debt, climbing tuition prices and possible declines in state funding, according to a report by Moody’s Investor Services, which gave the national sector a negative outlook.

"The US higher education sector has hit a critical juncture in the evolution of its business model," said Eva Bogaty, a Moody's assistant vice president and the analyst who is the lead author on the report. "Even market-leading universities with diversified revenue streams are facing diminished prospects for revenue growth."

Bachmeier said the university’s debt grew as its student body expanded, helping finance projects such as new residence halls.

“If you look at GVSU over a long period, you would see that the university has gotten considerably bigger, in terms of its operations and budget, in terms of its total assets, and in terms of its debt load,” he said. “I think our debt is appropriate relative to the size of the university.”

Growing liabilities

Between 2002 and 2012, long-term liabilities – a category that includes debt and other expenses, such as post-retirement health benefits – grew at all but two of Michigan’s 15 public universities: University of Michigan-Dearborn and Lake Superior State University.

The Spoelhof Center at Calvin College

Michigan Technological University saw the largest percent increase, with long-term liabilities up nearly sixfold. Ferris State University had growth of about 50 percent, bringing its total to $128 million.

And at Calvin College, debt and long-term liabilities nearly tripled. It now has $192 million on the books.

The growth in Calvin’s liabilities was fueled by real estate acquired by the college and the construction of several buildings, including the Covenant Fine Arts Center, van Reken Residence Hall and the Spoelhof Fieldhouse Complex. The sprawling $50 million complex includes a basketball arena, an Olympic-sized swimming pool, indoor tennis courts and a 38-foot tall rock-climbing wall.

The building could fall into what some call the “amenities arms race.” The term was coined to describe colleges and universities that seek to one-up their peer institutions with shiny, new facilities aimed, in part, at luring prospective students.

Sally Vander Ploeg, Calvin’s vice president for administration and finance, said many students expect schools to have top-of-the-line amenities, and institutions must do their best to meet that demand.

“When you look at students coming in, even from high schools, the level of the facilities that they have and that they’ve grown accustomed to is just incredible, and that’s a wonderful blessing,” she said. “But it does put pressure on the higher ed institutions.”

Calvin’s long-term liabilities also grew because of the increasing cost of post-retirement health benefits, Vander Ploeg said. A decade ago, those benefits constituted less than $1 million of Calvin’s long-term liabilities. Now, they total about $31 million.

Growing debt has created obstacles for Calvin.

Administrators were using investment returns to cover annual debt payments. In short, those investments – at least in some instances – generated smaller than expected returns. Because of that, the school is now diverting dollars from its general fund to cover debt payments.

Previously, annual debt payments amounted to less than one percent of Calvin’s total budget. By 2017, Calvin has said it expects to use about 10 percent of its budget to cover debt payments.

Diverting more dollars to cover debt has forced the school to trim its budget. In May, the college announced that 22 faculty and staff positions had been eliminated, one of several moves administrators took to trim its 2013-14 budget by $4.7 million.

So is Calvin now suffering because of mounting debt?

“Whenever you take out debt, there comes a time when of course you have to repay the debt,” Vander Ploeg said. “We’re definitely in the repayment stage right now.”

Challenges

Experts say debt could become a burden at some schools because the number of high school graduates in Michigan is projected to shrink, possibly leading to declining enrollment and therefore reducing most college’s biggest source of income: tuition revenue.

The number of high school graduates in Michigan peaked at 123,576 during the 2007-08 school year, according to a report by the Western Interstate Commission for Higher Education. Graduates are expected to fall below 99,000 for the 2019-20 school year, with further declines projected beyond that point.

“Families are struggling to pay college costs and enrollments have been falling,” said Kenneth Redd, director of research and policy analysis at the National Association of College and University Business Officers. “So basically there’s fewer customers and that means there’s less money coming in.”

At least one public university in Michigan recently had its outlook revised to negative by a Wall Street rating’s agency.

On Sept. 18, Standard and Poor’s downgraded Western Michigan University’s outlook from “stable” to “negative,” citing a “flat enrollment trend,” “risks associated with starting and operating a new medical school,” and “the issuance of $140 million in total new debt.”

Eastern Michigan University also saw its credit rating downgraded in September.

Jennifer Delaney, a higher education funding expert at the University of Illinois, said declining enrollment could be particularly troublesome for private institutions, which don’t receive state-aid and are entirely tuition dependent.

“There are brand-name privates that are doing really, really well and have huge endowments,” she said. “Other kinds of institutions that aren’t nationally drawing, that are regional or state based places that are smaller in scale, these are places that are frequently struggling lately.”

Calvin’s long-term liabilities stand out when compared with other private, Christian colleges in West Michigan.

Hope College, Aquinas College and Cornerstone University all saw their long-term liabilities decrease between 2002 and 2012, according to financial statements.

Davenport University, which expanded significantly between 2002 and 2012, saw its long-term liabilities grow from $7.2 million to $40.8 million, administrators said.

Assets to liabilities

Although debt increased at many schools, that growth has not weakened the financial standing of some universities, according to one measure.

The ratio of unrestricted net assets to long-term liabilities improved at several Michigan’s 15 public universities between 2002 and 2012, according to financial statements.

Among them: Ferris State University, where unrestricted net assets now account for 93 percent of the school’s long-term liabilities. That’s up from 33 percent in 2002.

Unrestricted net assets are dollars that can be used in a variety of ways. That’s opposed to other funds, which are typically earmarked for certain expenses.

Jerry Scoby, vice president for administration and finance, said the ratio improved at Ferris because administrators have strived to rely on savings to finance construction projects.

He pointed to the university’s new student center as an example. Administrators are paying for about half the $31 million project through savings. The remainder is being covered by taking on additional debt.

“Instead of not planning for the future and knowing that project was coming up and then going out and borrowing $30-$35 million dollars for a project, we said there’s a way we can do this over time,” Scoby said.

At GVSU, the ratio of unrestricted net assets to long-term liabilities worsened slightly, dropping from 69 percent to 64 percent, financial statements show. Other universities whose ratios also dropped included Eastern Michigan and Michigan Tech.

Despite GVSU's drop, Bachmeier said the size of university's debt is appropriate.

In an ideal environment, the state would have contributed financially to academic buildings the university constructed in recent years, eliminating the need to borrow money, he said. But without such support, debt remains a necessary tool.

Taking on debt to improve the university – if done properly – can be beneficial, rather than harmful, Bachmeier said.

"These students, especially ones that go to an institution like Grand Valley, they’re bright, they’re highly motivated, and they can go almost anywhere," Bachmeier said. "We’ve got to give them a reason to come to our place.”

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