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Debt and the Modern Man

What is it about modern people — including the Board of Trustees — and debt? In January the College floated bonds in the amount of $70 million, and last Wednesday another $150 million offering was issued, bringing the College’s total debt to over $1.13 billion (up from $286 million in 2000). The bonds will purportedly pay for buildings that are still far from the start of construction.

Moody Bonds $150 Million.jpg

Repaying these two issues over the next 30 years is not going to be cheap. If the recent $150 million issue has the same 4% interest rate as January’s $70 million offering, then the College is looking at an annual payment of $12.7 million in interest and principle through 2042. We could do a lot with that money.

Like too many other institutions, and just about all of the world’s governments, the Trustees seem to like the easy gratification of debt. Why do the hard work of fundraising when borrowed money is just a few phone calls away. And besides, paying back this money will be someone else’s problem further down the road.

This attitude seems to afflict a great many people in America. Let me tell you a story. At one of my businesses, a health club in Lebanon, NH, we have charged a $195 sign-up fee for many years. Such fees are standard in the industry. However, our sales reps have complained about the fee for as long as I can remember. It seems that there are plenty of local people who wish to sign up for a membership that costs close to $1,250/year, but they are put off by an upfront charge of $195 that is in addition to their first month’s dues. The first check is too big for them.

So, as an experiment, we cut the sign-up fee to $95. No dice. A few months later, the guys in sales reported the same problem. People were resistant to writing a check for several hundred dollars to join the health club.

So I proposed a new solution: we went back to the $195 sign-up fee, but we allowed people to pay it over the entire 12-month period of their membership. That works out to $16.25/month.

Issue resolved. Nobody has ever complained again about the sign-up fee. It seems that our new members would much rather pay $195 over the course of a year than $95 up front.

The Trustees are following the same route. They’d rather pay out $382 million dollars over the next 30 years (that’s the total of the two bond offerings’ annual payments of $12.7 million between now and 2042), rather than run the College sufficiently well so that fundraising allows them to cover the cost of new buildings.

One more point: another way to look at $12.7 million/year is that this amount alone adds 1.7% to the current $738 million annual cost of running Dartmouth.

The College’s decline continues.

Addendum: Of course, nobody can say that the Trustees aren’t clever: During the period of time when the various buildings paid for with above borrowed money are being built, the interest and principle paid out on these bonds will be capitalized — that is, the payouts will be considered as part of the capital cost of the buildings themselves, and therefore the sums of money in question won’t appear on the College’s operating accounts. A neat trick, if that is the way that you look at the world. But if you think that a dollar spent in one place is one that could have been spent elsewhere, then you are not fooled.

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