University Set to Lend $200 Million to State

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Following its decision to increase student fees and furlough its employees, the University of California agreed last week to borrow money so it can lend the state $200 million.

The state will use the money to continue its state-funded construction projects on eight UC campuses-excluding UC Berkeley-and will repay the loan within three years with 3.2 percent interest.

The UC system decided to lend the money because of the state's battered credit rating that has hindered its ability to borrow cash, said Tom Dresslar, spokesperson for State Treasurer Bill Lockyer.

"Given our budget difficulties and the problematic access to the bond market, creative thinking was required and these kinds of deals are the result," Dresslar said.

Without the agreement, the state-funded projects on the UC campuses were in danger of having their permits and contracts expire, which could cost the university more money for renewal and renegotiation, said UC spokesperson Steve Montiel.

"In a lot of cases, the buildings were done," Montiel said. "But more money was needed to equip the building so they would be usable."

UC Berkeley will not receive any of the funding because the campus does not have any construction projects with an expiring permit, Montiel said.

He added that borrowing $200 million would hurt the university's credit rating, given the proportion of its $19 billion yearly operational fund.

Darrell Duffie, finance professor at Stanford University, wrote in an e-mail that colleges across the nation are borrowing more to make ends meet.

"Recently, because of cash flow problems caused by the financial crisis, Harvard, Stanford and many other prominent universities have borrowed in the capital markets without hurting their ratings," Duffie wrote.

The UC system currently has an Aa1 credit rating, the second-highest rating a corporation could have, based on Moody's Investors Service, a credit rating and research company.

In contrast, the state of California is only three ratings above the status of being considered "junk," a ranking that means a corporation is at too high risk of a risk for defaulting on loans.

Union officials are upset that the decision to take out a loan came after the university's decision to furlough employees, cut services and raise fees, said Tanya Smith, local president of the University Professional and Technical Employees union at UC Berkeley.

"Apparently the university has abundant money, abundant resources," Smith said. "So why the university is raising fees for students, laying-off employees, giving fewer services? We don't know, it makes no sense."

But borrowing money to prevent fee hikes and furloughs would not be prudent for the UC system, Montiel said.

"There would be no way for us to get that money back," he said. "It's like using credit card to pay for expenses when you lose your job and don't have any income."


Contact Paul Edison at [email protected]

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