In March, the administration issued its first ever 100-year bond and it’s looking to be a gift that keeps on giving.
The University sold $300 million worth of bonds that will mature in 100 years, otherwise known as century bonds, at an historic low interest rate of 4.674 percent.
The decision to issue these bonds came out of a debt capacity estimating how much debt the University could manage to absorb following the recession in 2008.
When Penn faced financial trouble in the 1990s, it revamped its financial structure and minimized its debt. As a result, it emerged from the 2008 recession relatively unscathed and had the lowest debt growth rate among its peers.
The historically low rates overall and decisions of several other universities to take out taxable “century bonds” led the University to consider these bonds, as opposed to the traditional 30-year municipal, or tax-free, bonds.
After the sale of these bonds, the University decided to devote a portion of the proceeds to deferred maintenance projects, such as updating lighting fixtures in existing buildings. “That’s not the traditional type of thing you borrow money for and it’s the type of thing that donors tend not to give you money for,” said University Treasurer Stephen Golding. “They want to see their name on a new building, they don’t necessarily want you to put their money into fixing heating or electrical systems.”
Vice President for Facilities and Real Estate Services Anne Papageorge agreed. When Papageorge arrived at Penn in 2006, she faced a $700 million backlog of deferred maintenance projects.
Though FRES receives about $30 million annually for these initiatives, Papageorge said it is a slow process. “When the need is $700 million and you’re getting $30 million, you’re not going to get very far very fast,” she said. “As time evolves, buildings age.” To compensate for this deficit, FRES had been seeking alternative funding methods through funds like the Energy Reduction Fund.
The FRES office is in the process of studying 32 lighting and 17 heating-ventilation-air-conditioning projects to be funded by the century bond. Papageorge estimated that the initial investment for the light projects would be paid back in the form of cost reduction in eight years and the HVAC projects, in 18 years.
Papageorge said these two types of projects were prioritized for different reasons.
The lighting projects would be minimally invasive and would replace certain types of light bulbs that are currently being used in buildings but are no longer being produced.
On the other hand, HVAC projects are larger in scale and thus would be difficult to execute without the capacity of century bond proceeds. Now, with the century bond, FRES Executive Director of Maintenance and Operations Ken Ogawa expressed, the timing is right for HVAC initiatives.
“Practically, it’s very difficult to make a system efficient for the building when you’re only working on a piece of it,” he said. The big advantage of the century bonds is that it allows us to change that thinking.” Ogawa added that some of these projects will cost almost double the normal annual maintenance budget for the whole campus and wouldn’t have been possible without the century bond proceeds.
The cost-reduction aspect of maintenance projects enabled the budget office to draw up a combined plan to pay back interest. The interest on the bonds will be paid through a combination of returns from the portion of bonds that will be invested, energy savings and interest from the internal loans that the University will issue to “strategic priorities,” such as renovating parts of College Hall.
In addition, individual schools will have the ability to apply for interest-free loans. These funds will be recycled as capital and paid back to the central pool.
“It’s a unique opportunity that we haven’t had before. The fact that schools are embracing that this is a great opportunity and are anxious to work with us is just going to lead to a higher chance of success … of effective, cost-effective, minimally disruptive implementation,” Papageorge said.