✔ Good day, fellow Dukies. Fact Checker here. Probative. Provocative.
We have been closely following the simultaneous debates in Washington over borrowing and spending.
Currently, every time the federal government spends $1, it borrows 40 cents.
On August 2nd, this nation will max out on its credit cards -- being $14.294 trillion in debt - and there will be no Congressional authority to borrow another cent. That means the USA won't have enough money to pay all its bills: not enough for the paychecks of federal workers, or for monthly payments to people getting Social Security, not enough to keep Medicaid and two wars going. And from Wall Street's standpoint, most importantly, we could miss payments on existing loans unless the fat cats are favored and paid first.
If we defaulted on fat cat payments, after borrowing so much by pledging the "full faith and credit" of the United States, we are told there would be utter chaos.
Looking ahead, there are projections -- which obviously are only estimates so they can vary -- that if we do not trim what we have already planned to spend, we will add another $13 trillion to the national debt in 10 years.
Whew. Some legacy.
We'll let the politicians in Washington battle over all that, while FC pursues its mission: to watch over Duke University.
✔✔ Fellow Dukies, you may be surprised to learn that our institutional debt has actually proliferated faster than the national debt -- to the point where the interest we must pay is putting a real crimp on other spending.
That's just to pay the interest. For the most part, Duke has no plan whatsoever to repay the debt, and our only option will be, on the due date of each loan, to roll the debt over and borrow some more to pay the original lender.
We are going to leave the Duke Health System out of this essay. It operates as a separate corporation -- and it has a superior revenue stream, getting fees from 61,749 patients who were hospitalized in the most recent year reported, and 85,512 surgical procedures, and 1,811,955 doctor visits in the out-patient clinics, just to begin the list. The FC investigation indicates that Health System debt for four of the most recent years did not budge significantly. While construction of new facilities like the Comprehensive Cancer Care Center has caused a bulge, it is in our analysis responsible and manageable.
So we turn to look at the "education" side of Duke, or as it is called in some reports, "the campus."
As we examine this portion of Duke, we are going to put aside the $500 million emergency loan that Duke took out two and a half years ago to protect its liquidity during the world-wide fiscal meltdown. We'll come back to that in a few moments.
One final caveat: bear in mind that we are using the latest figures supplied by Duke, which are for the fiscal year ending June 30, 2010 (a year ago). And bear in mind that despite our repeated attempts to ask questions and secure an updated briefing on finances, we've been rebuffed. A Bronx cheer to Trask and Schoenfeld.
So, at the end of the 2004-5 academic year, the education side of Duke owed $779,000,000. That in itself is a radically different balance sheet than this university had enjoyed historically: it used to be we constructed buildings and acquired other expensive things only when we had accumulated the cash. That tradition started with Trinity College and continued even after James B. Duke forked over the big loot and the school changed its name to his. Recall, please, how ground-breaking for the new Medical School and Duke Hospital was delayed more than six years because there was no cash.
Back to modern times. By the end of the 2009-2010 academic year, the total debt on the "education" side had increased to $1,387,000,000. As noted above, this excludes the $500,000,000 liquidity loan which we will talk about separately.
✔✔ That's an 80 percent increase in five years. An unsustainable pace. Yet the current administration has shown no signs of letting up.
✔ Witness, for example, the new dorm nearing completion in Keohane Quad. You are looking at borrowed money. And you are looking at a fairy tale on how we are going to pay for it.
At present, existing dorms that we have paid for in full operate at a slight loss. But with fantasies only an administrator can explain -- and won't explain to us -- Keohane 4 (as it is called) is going to derive from room rents enough to pay ongoing expenses, plus enough to pay interest.
No, the loan is not being amortized. It's not like a home mortgage where every year you pay interest and also melt down the principal. At the end of 30 or 40 or 50 years, we will have an out-of-date worn down dorm -- and still owe every cent for constructing it.
There has not been one administrator who has taken the FC challenge: if new dorms could pay for themselves, if this myth of the financing of K4 were true, why put up only one dorm? Let's develop Central and solve the entire housing problem -- whee -- for free!
The interest rates that Duke must pay on all this debt vary considerably. Some bonds (long term debt) are tax free and interest rates are low. Some more recent bonds are taxable and carry interest rates as high as 5.9 percent. In this economy, that's a high rate; we do not know if this reflects an erosion in Duke's credit rating, and had Trask and Schoenfeld not ducked, we would be asking.
The FC calculation is that in the academic year just starting, the education budget of Duke is going to be hit for $60 million in interest charges. If Mr. Trask has a better number, we'll be glad to sit down with him to discuss it.
Just think of what could be done with $60 million -- if we had not gone on this destructive borrowing spree.
$60 million. Recall please that the Arts and Sciences once had a $500,000 a year budget for research, for travel to conferences for example. That has been shaved and shaved, until last year it was only $100,000. When the A and S Council specifically asked the administration to rebuild this appropriation, the answer was No.
In other words, we are paying our bondholders first, and we are paying for Kunshan first. And A and S is in last place.
✔ What is of particular concern is that we do not know where all this is going in the years ahead. Will we borrow more? Should we?
Duke's strategic plan is horrifically out of date, focused on constructing a new Central Campus in one swoop, paid for by money that evaporated in the meltdown.
The plan is not updated. It says very little about our international ambitions, and nothing at all about a full campus in another nation, Kunshan being merely the first. We fly by the seat of Mr. Brodhead's pants.
✔✔ Now back to that $500,000,000 borrowed during the great meltdown. We informed Trask and Schoenfeld that we wanted to revisit this issue, which we discussed last winter, and they refused to answer questions. Fellow Dukies, we're not talking about OUR questions, they are YOUR questions. For while these two administrators refused to meet with FC and Deputies, it's really Loyal Readers and fellow Dukies who got the snub.
We believe the reason the administration felt it needed this massive infusion of cash was very well hidden, and it had nothing to do with paying routine bills like salaries and electricity. Hidden this way: in addition to existing investments in exotic investments like hedge funds and private equity deals at levels that we knew about, the university was obliged to add new money under its contracts with money managers. Perhaps as much as $2 billion.
Yes that's right. To throw $2 billion (our informed estimate) in new money at the same exotic, hard to understand investments that were swirling down the toilet.
In normal times, these obligations would be paid from the normal flow of cash, most of it from the sale of investments that had appreciated. But there weren't many winners in Duke's portfolio, so any sale would have resulted in a bloodbath. Duke was also counting on new contributions, and they were drying up fast.
As if this pinch were not enough, there's an even bigger reason: Duke evaluates all of its hedge fund and private equity deals by guessing. Trask acknowledges this every year in his annual report.
There are no benchmarks, very little guidance in estimating the value of these investments.
And ah hah... in the meltdown... had we anything at a firesale price, there would then be a price point, and we'd have to use that to recalculate the stated value of our entire portfolio. Yes Duke would have been required to re-evaluate hundreds of millions of dollars in hedge funds and private equity deals to conform with the firesale price. And boy, that would have made things look even worse.
When it borrowed the $500 million two years ago, Duke promptly spent $90 million. Given the suddenness, we believe this was not for current expenses, but rather money we were under contract to add to hedge funds and private equity.
$90 million spent. The balance, $410 million, was salted into a special account where it earned interest. Indeed, over two years, Duke was able to earn more on the $410 million than it cost to take out the full $500 million loan. OK OK Trask take a bow. The actual profit was $6.9 million.
And we believe the profit may have been substantially more. Because we had the $410 million in a very liquid investment -- where we could get our hands on cash immediately -- Duke did not have to keep approximately $350 million in endowment funds that it normally puts in the very liquid -- but low paying -- investments.
Instead, this $350 million could be put to work in the general pool of investment assets which was fortunate enough to earn far, far more. By FC estimate, the $350 million could have yielded an extra $60 million over two years.
✔✔✔ This sounds like a win-win situation to FC. So why last May 5th, did Duke repay the entire $500 million loan?
We had to pay a penalty of $56.2 million to get out of the deal, to pay back the money we borrowed early.
Duke did not have to pay back the money at all. $250 million was due in 2014 and $250 million was due in 2019.
The people who were due money in 2014 really cleaned up. They got almost all of the $56.2 million penalty. Had Duke not paid them early -- but on time -- they would have gotten only $37 million in interest spread over three years. Here, the larger kitty arrived immediately, and for the next three years, they had their principal to invest elsewhere.
In exploring this, FC was told well, maybe, maybe, Duke wanted to get rid of the $500 million debt in case interest rates went up on the loans -- and went down on our re-investment of the cash.
Our response is that yes there was a risk, but no where near exposure for $56.2 million.
Moreover, if interest rates ever did start to move unfavorably -- and they show no sign they will -- they will not go in one bump and Duke would have had substantial time to respond.
In fact, Duke's risk was declining every month, as the length of time that any interest rate squeeze affected the university was being constantly reduced.
Mr. Trask, anytime you're ready, we'd like to understand how you did not waste $56.2 million. And we'd like to know who you made the checks out to when you repaid the loans, and whether any financial institution tied to our trustees made a profit.
Thank you for reading FC. Yes, sometimes it is tedium. No one assured you this was going to be easy.