University sells bonds to fund Scott Hall construction

The university will be issuing tax-exempt bonds to finance the construction of the Sherman and Joyce Bowie Scott Hall, Carnegie Mellon Treasurer Jay Calhoun recently announced.

Scott Hall will be the new home for nanofabrication, the biomedical engineering program, and the Wilton E. Scott Institute for Energy Innovation; it will be located between Wean and Roberts Hall and will link Hamerschlag, Porter, Roberts, and Wean Hall in an attempt to provide greater campus connectivity.

The project is estimated to cost $95 million, consisting of $35 million in gifts and $60 million in bond financing. Issuing bonds is selling debt: The issuer owes the holder money and is required to repay them with interest. Initial investors who buy the bonds tend to be larger institutions.

Carnegie Mellon decided to borrow $60 million, because this amount allows the university to retain its Standard and Poor’s AA– credit rating. This credit rating, along with its stable outlook, is a “strong rating,” according to Calhoun.

Additionally, the interest rates are currently at a historical low, and according to Calhoun, it is a “good time to borrow.”

Carnegie Mellon is issuing bonds in a tax-exempt environment, allowing for lower borrowing costs. Although this type of environment could lead to use restrictions on the building, the situation with Scott Hall is consistent with the rules of the tax-exempt market.

“One of the things that is really attractive about this building is that we expect a lot of the work that will be done in the building [by researchers] will be sponsored more often than not by various federal government entities,” Calhoun said. “In that case, take a particular contract from, let’s say, the Department of Energy: They allow us to recover indirect costs, including the costs of space.... There should be a good stream of income coming back to us from research sponsors.”

There is, however, risk involved with increasing debt. Although the debt is at a fixed interest rate, meaning the cost of the debt will not increase, it has pushed Carnegie Mellon closer to a lower, A+ credit rating. “If we had unfortunate economic events — let’s say we had another crisis-like year in the investment market and we lost 20 to 30 percent of the value of our endowment, — those kinds of things could have a greater impact because we are that much closer to that boundary,” Calhoun said. “There are lots of things that can happen to your financial condition, some of which you control, some of which you don’t.”

Furthermore, there is concern about what government research funding will look like in the future, and about how demographics indicate that college enrollments are dropping.

Sophomore business major Ari Halevy thinks that the risk was worth taking. “The government has had a strong history of funding university research since the 1940s, even when the private sector couldn’t afford to,” he said. “Regardless of the future state of our economy, the federal stream of funds will remain relatively stable in comparison to other government programs.”

Dahiana Jimenez, a sophomore statistics major, said, “Predictions are not reassuring. Believing that there will be a lot of research sponsors is not the same as having them already lined up. I believe that selling the bonds will be worth the risk if there is a concrete list of enough research sponsors committed to the programs, and if there is a guarantee that tuition rates will not increase because of it.”

Carnegie Mellon currently has $509 million in long-term debt, including the new $60 million issued in bonds.