Tufts is currently $363 million in debt, but Vice President for Finance and Treasury Thomas McGurty is not losing any sleep over it.
Tufts' debt is in the form of secure and sought-after AA bonds (S&P AA; Moody's Aa3) the second-highest category for reliability and stability in financing.
Borrowed money has also facilitated virtually all construction projects on campus.
McGurty explained that debt in the form of bonds is essential for universities' ongoing need to access capital for expansion, and are issued by practically every institution of higher learning.
Bonds issued by universities are exempt from state and federal income tax. Accordingly, lenders are willing to settle for a lower return on their capital and offer universities a lower interest rate.
As a result, McGurty said, universities may issue bonds to borrow money at approximately a 30 percent discount off the rates generally accessible to for profit businesses.
"You'd be crazy not to take advantage of this," he said.
When Tufts needs capital for a major project - usually construction - it will issue bonds, which are then purchased by a creditor. "Our bonds are marketed to a wide variety of sources - they're held by investment funds and some high-worth individuals," McGurty said.
Tufts then pays the creditor back the principal and interest, bit by bit, over a 30 to 35-year period.
The stronger the university's financial situation, the less risky the investment - and the lower the interest rate a lender is willing to offer for the bond.
Tufts' rating "allows it to access capital markets; our cost of borrowing will be less than it would be for an institution with a single-A or B rating," McGurty said.
According to McGurty, the bond rating reflects the stability of the school as the issuing institution and is comprised of four elements.
The first factor, McGurty said, is the "student demand and the attractiveness of the school." The higher the student demand for the school, the more certainty that tuition will arrive without incident and provide the administration with a reliable source of capital.
"It's not lost on the rating agencies that we get 15,000 applications for 1,300 spots," McGurty said.
Tufts' stability on this front is significant - student tuition and enrollment covers 80 percent of the Arts & Sciences and the Engineering Schools operating budget, McGurty said.
The institution's success at fundraising "to provide support, buildings, and improve its endowment" is also a consideration.
Tufts' previous financial behavior also makes an impression. "They look at the financial position of the institution, the strength of their balance sheets, and the ability to consistently manage operating costs," McGurty said.
Yet McGurty said that sometimes schools elect to take financial risks that have the potential to drop their credit rating.
"It's something that every school wants to avoid, but sometimes they feel it's necessary in the long run for the success of the institution," he said.
For example, Boston University (BU) has recently made substantial investments in space and new facilities that have significantly expanded capacity. As a consequence, the school's credit rating has dropped to BBB.
"They took on a strategy that built tremendous advancements in new facilities and their campus, but it came at a cost," McGurty said.
Tufts construction projects are financed at Tufts through a combination of bonds and gifts.
Approximately four percent of Tufts' $567 million of expenses is devoted to the repayment of bonds.
According to McGurty, Tufts' total debt is approximately half of its expendable resources.
Universities' bond/credit ratings are usually tied to the size of their endowments. Accordingly, many of Tufts' peer institutions share its AA bond rating - including Cornell, Duke, Brown, the University of Chicago, Middlebury, and Bucknell.
A very small number of colleges enjoy the very highest bond rating, AAA. Extremely well-endowed institutions - Harvard, Stanford, the Massachusetts Institute of Technology, and Princeton, to name a few - enjoy the AAA rating.
More important than the endowment itself, McGurty said, is the endowment per student ratio.
Harvard's $25.9 billion endowment may far surpass Princeton's $11.8 billion, but Princeton's low number of students gives it the highest endowment per student in the country.
University debt pales in comparison to the debt being amassed nationwide.
"Universities aren't a big enough part of the overall economy to have much effect on its operation," said Economics Professor Thomas Downes.
Will Tufts ever pay off its debt?
"Probably not," McGurty said. "You can never be debt-free, you're constantly in-debt. An institution [constantly] needs capital to maintain its physical plant."
Without credit options, McGurty said, "you would have to find some other way of expanding your physical plan" and increasing inflows from other sources, like higher tuition.
