There is too much state borrowing to benefit private colleges and schools
According to U.S. News and World Report, Yale University is tied for the fourth largest university endowment in the United States at $30.3 billion. The state of Connecticut has borrowed $4.8 billion and sent it to Yale (excluding hospital funding). If one includes past loans the state has taken out at the behest of Yale, many billions more have been borrowed and refinanced. This is an incredibly unfair and inequitable practice during a time when state leadership has adopted austerity towards public education.
Yale is not alone. Connecticut has outstanding borrowing totaling $7.8 billion on behalf of eight private higher education institutions including Yale, Wesleyan, Fairfield University, Connecticut College and others. There is another $1.8 billion in state borrowing on behalf of private secondary schools with famous names such as Choate Rosemary Hall, Loomis Chaffee, Miss Porter’s, Ethel Walker, Avon Old Farms, Hotchkiss, Kingswood Oxford and the Greenwich Academy. This is almost $10 billion in public borrowing on behalf of “private” education.
The borrowing takes place through CHEFA (the Connecticut Health and Educational Facilities Authority). You can think of CHEFA as a government bank that borrows and then uses that money to give loans to educational institutions. The schools agree to pay CHEFA back. If this situation seems puzzling, it should. In most circumstances, private enterprises borrow without involving the government. CHEFA’s cumbersome financial arrangements have a very specific purpose, though. Involving the state saves schools millions of dollars.
An example: suppose Jim plans to lend $10,000 to somebody. For repayment, Jim wants to take home $1,000 per year for 12 years. Jim would owe taxes on the repayment of the loan. If a Connecticut private school like Avon Old Farms borrows directly from Jim, he would pass along the tax bill, say $35, to the school resulting in an annual repayment by the school of $1,035.
What happens when the state of Connecticut serves as an intermediary between Jim and the school? Through CHEFA, Connecticut would borrow $10,000 from Jim and agree to repay him $1,000 per year for 12 years. Due to federal tax law, there is no $35 tax on Jim’s income from CHEFA. CHEFA passes the $10,000 along to Avon Old Farms who commits to repaying CHEFA, say, $1,005 per year. Each year CHEFA receives $1,005 from Avon Old Farms, sends $1,000 of that money to Jim and uses the $5 left over to cover its expenses and other commitments.
As this example illustrates, the school would much rather use Connecticut as a lender rather than borrowing directly from Jim, saving the school $30 in the process. The general point is that state debt is exempt from federal taxation. Since lenders don’t have to cover taxes on their payments from CHEFA, the interest rate charged to private schools is lower.
It is tricky to calculate the exact size of the subsidy the state has created for private education in Connecticut through its CHEFA pass-through. Higher education’s lobbying arm, NACUBO, estimates that, over 30 years, this type of program saves a school $415,000 per $1 million borrowed. With this rate of savings we can estimate that the state of Connecticut will create a private education subsidy worth over $3.9 billion in the next 30 years, or more than $130 million per year.
State coffers do not benefit from this arrangement in any meaningful manner. In 2019, CHEFA paid the state $900,000. It is true that the childcare industry receives a comparatively moderate annual benefit of $3 million from this arrangement. But our state is not even close to a friendly “halfsies” arrangement with private schools in which the $130 million benefit is split equally.
I am an unapologetic believer in education. I am a university educator in Connecticut. I am a product of Connecticut’s public education system. Across three generations, I count five educators among my close family. Education is a transformative enterprise with the potential to open the doors of opportunity and diminish inequality. Other things equal, I am entirely in favor of robust, meaningful, and stable financial support for education of all sorts.
Unfortunately, the Board of Regents of the Connecticut State Colleges and Universities system falls short when it comes to supporting public higher education. This year, the board slashed $8 million, including funds for payroll for student workers and part-time faculty on public college campuses. They point to a projected $68 million deficit and plan still more cuts.
The reality of higher education policy in our state is that, currently, affluent private education enjoys a stable multimillion dollar subsidy extending many decades in the future while public education faces uncertainty and dwindling resources. Is this fair?
Private educational institutions in Connecticut tout how little they offer to Connecticut students. Browsing their web pages you read observations such as “92% of undergraduates are from out-of-state” and “83% of admits live outside of New England.” One begins to wonder why our elected state officials are so highly committed to families who don’t even live in our state.
It seems Connecticut students have been relegated to second-class citizenship. The student population on CSCU campuses is over 95% in-state. In recent years, roughly 75% of graduates stay in Connecticut, working jobs and paying taxes here. This is a remarkable outcome given the collapsing financial support our governor and General Assembly offer during their college years.
It is hard to understand why our elected officials favor private education to this degree. It is plausible that they don’t know what is happening. However, in light of the fact that CHEFA submits an annual report to our governor, that is unlikely. Gov. Ned Lamont is a graduate of Yale, though, and I could imagine reunions might be a little awkward if he disrupted the school’s subsidy.
It is clear, though, that in an environment of diminishing resources it is drastically unfair that institutions with the least means are asked to disproportionately sacrifice. Such policies accentuate inequality and contribute to social fractionalization, trends which were already on the upswing in recent years. Education is one of the most effective means to reverse this trend, but only if the most accessible sources of learning are fairly and adequately supported.
Brendan Cunningham, PhD, is a Professor in the Department of Economics and Finance at Eastern Connecticut State University.
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