California doubles bet on century bonds in $2 billion move

Hundred-year loans offer US universities big benefits, some risk, and queasiness

October 16, 2019
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The University of California system is planning a record expansion of a historically opportune but risky multi-generational investment tool, seeking to raise another $2 billion (£1.59 billion) through so-called century bonds.

The financial manoeuvre uses abnormally low interest rates to provide critical infusions of capital at minimal cost to institutions willing to commit generations of their successors to a 100-year payback schedule.

The 10-campus California system is the biggest among a relatively small but elite group to try century bonds in recent years, including a few other public institutions struggling to cope with cuts in state funding.

Peggy Arrivas, an associate vice-president and controller for the California system, said she was confident that by more than doubling its existing bet on century bonds, her office was making the best decision for untold numbers of current and future California students.

“We’ve been around for 150 years, we’re an incredibly strong organisation and I don’t think there’s any doubt that we will be around 100 years from now,” Ms Arrivas said.

The opportunity is a result of the current global environment of low interest rates. Yet even with the apparently low risk of something going wrong, just the notion of accepting a 100-year bond commitment can be anxiety inducing for university officials facing the stakes and divergent voices of academia.

Michael Gower, the treasurer of Rutgers, the State University of New Jersey, which last month completed a $330 million century-bond sale, described at a Times Higher Education-HSBC conference his uneasy feelings about “doing something that has consequences after I’m long dead”.

“My worry is what kind of markets are we going to see in the future and what kinds of economies are we going to see,” Mr Gower said.

While the non-political investment decisions of university treasurers do not typically attract wide attention, the California system itself has some experience with it.

In 2014, Peter Taylor, the system’s chief financial officer at the time, faced protests over a bad bet on interest rate swaps that would pay benefits if interest rates started to rise. Instead, his move was estimated to cost the system as much as $136 million over several decades, worsening the pain of state disinvestment.

Now, with its century bonds, California has a chance to make that up, and more. It already raised $1.36 billion in century bonds issued in 2012 and 2015, largely used to help build classrooms and research facilities that the state would have funded in past years, Ms Arrivas said. The planned new round worth $2 billion is intended to help its medical facilities with tasks that include meeting a state law requiring earthquake-proof construction, she said.

Other US institutions issuing such bonds in recent years include the Massachusetts Institute of Technology, Ohio State University, the University of Pennsylvania, Yale University and the University of Virginia.

Mr Gower said he didn’t expect students and faculty to reach the point of joining him in discussions of weighty decisions such as century bonds. But the experience has reinforced his belief that the academic community somehow needs a better understanding of institutional financial realities.

“The more they know, the better the discussions can be,” he said. “There’s a perception that money comes from Trenton [New Jersey’s state capital] for these things, or we’ve got unlimited amounts of money in a piggy bank somewhere in the basement of the administration building, and that’s just not the case.”

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