Finances provide base for Commission goals

By Alan Simmer
Assistant News Editor

Money makes the world go round. This was no different with Commission Wartburg. In order for the recommendations of  the Commission to become a reality,  a price tag needed to be placed on the proposals of the eight task force teams.

After the Board of Regents ranked the recommendations produced by Commission Wartburg, President Jack Ohle’s Cabinet assigned dollar amounts to them. The total cost of implementing everything the task forces came up with would have been about $191 million.

The Cabinet eliminated all of the third-tier and lower recommendations and reduced the cost of some others to arrive at the goal for Campaign Wartburg, $88 million. Of this amount, $40.85 million was to go to the endowment, $40.15 million to the construction of new facilities and $7 million to the Annual Fund, according to a Harvard Graduate School of Education study on Campaign Wartburg.

Dave Ostrander, vice president for institutional advancement, noted that funding the college is like a three-legged stool, made up of the endowment, the Annual Fund and major gifts. Without any one component, the college would have a hard time operating.

The development office raises “one million per year for the budget via the Annual Fund,” Ostrander said. Without this funding, tuition would have to be increased to offset the deficit in funds.

Ostrander organized several individuals into a fundraising network to generate donations. The Board of Regents decided that 25 percent of the total goal should be donated by the Board itself. To date, Campaign Wartburg has raised $83.7 million. It has “helped to fund a variety of things,” Rich Seggerman, chief business officer, said.

However, Ostrander noted that almost $43 million of these funds are in the form of deferred gifts. These gifts vary in form. Some donors put Wartburg in their wills, others establish trusts and annuities for the college and some make the institution a beneficiary of an insurance policy.

Wartburg will not receive any of these funds until the donor’s death. “There’s no way of knowing when these gifts will come,” Ostrander said.

More than 90 percent of these gifts are slated to go toward the endowment. One of Commission Wartburg’s goals has been to increase the endowment to $50 million before 2005 and to $100 million by 2010. When all current deferred gifts are received, the endowment will be about $80 million, but it currently sits at more than $36 million, according to Ostrander. Until these deferred gifts are received, Wartburg is only earning interest on the $36 million currently in the fund.

Because of the large amount of deferred gifts, much of the construction around campus has been financed through the sale of bonds. Investors purchase the bonds and receive interest from the college, which is referred to as debt service.

The college has a set of bonds worth $50 million that were sold for the expressed purposes of building the Science Center and Student Center as stated on Wartburg’s Tax Form 990. The bonds were sold using the entire campus as collateral.

Fitch Ratings recently assigned a BBB- bond rating to the $50 million series.  This rating is an indication of how good an investment these bonds are. AAA is the highest rating and anything rated BB or below is considered a junk bond. A BBB rating is a step above BB. The minus sign after the BBB indicates that Wartburg’s bonds lean toward a BB rating rather than an A rating.

Fitch cited Wartburg’s high debt burden as one of its main concerns in assigning this rating. Out of Wartburg’s unrestricted revenues, 8.7 percent of those funds go toward covering debt service. The median amount for an institution with a BBB rating is 4.9 percent.

According to the financial statements in the Fitch analysis, Wartburg’s operating margins and unrestricted net assets were negative three of the last six years. Operating margins represent the difference between revenues and operating expenses as a percent of revenues. Fitch does not include assets released from restriction for capital improvements or unrealized investment gains or losses in this calculation.

Fitch viewed Wartburg’s consistent history of fundraising as a positive in its rating. The college’s continually increasing enrollment was also seen as a plus, since 83.7 percent of revenue comes from student tuition and fees. Wartburg also has a higher liquidity level at 64.3 percent than the median at 40 percent.

Dr. Scott Fullwiler, assistant professor of economics, clarified what these bond ratings mean. “If things don’t go the way [a business] wanted them to, it would be hard to raise more debt,” he said. “The more debt you have, and the lower the rating, the harder it is to get more debt.” For the college, that means being “more likely to be affected by bad business conditions.”

Ohle is not concerned about the bond rating or the financial position of the college. “It’s never been stronger,” he said.

Dr. A. Frank Thompson, professor of finance at UNI, had a more negative view of the bond ratings and the financial situation in general. “The perspective I have, for well-run businesses, anytime you get above 30 percent debt leverage, solvency may be impaired,” he said. Thompson also mentioned that the large increase in debt was a concern and that “outside markets recognized that by rating Wartburg BBB-.”

Negative operating margins also gave Thompson pause. Wartburg is “generating expenses very above what [they] have in the way of revenues, and that’s a big danger,” Thompson said.

Wartburg has also sold another set of bonds worth $35 million to fund the construction of the new wellness center. According to Ohle, these bonds were not rated because Wartburg did not ask for them to be. He also said that it is common for colleges to have unrated bonds.

Thompson said unrated bonds can mean “serious financial difficulties on the horizon." He said the investing community typically sees unrated bonds as a sign that the institution holding them deems them “to be less than investment grade” and doesn’t want to get a low rating.

“There’s a lot of investors who are legally prohibited from investing in [junk bonds],” Fullwiler said.

Ohle said Wartburg won’t need to incur more debt because there won’t be any more construction in the foreseeable future. “We’re done,” he said.

Editor-in-chief Allison Schmidt and Managing Editor Nick Petaros contributed to this story.