Indebted Cornell Chases Donors in ‘Pay-as-You-Go’ Expansion

Cornell President David Skorton
Cornell University President David Skorton speaks at the 2013 Cornell Alumni Leadership Conference in Ithaca, New York. Skorton has banned the accumulation of any new debt despite the resumption of campus projects. Photographer: Lindsay France/Cornell University via Bloomberg

David Skorton’s appointment as president of Cornell University seven years ago ushered in a $4 billion fundraising campaign, the school’s largest ever and first in more than a decade.

Skorton has since increased the goal to $4.75 billion and extended it four years to 2015. Now he’s preparing to kick-start a second effort to finance a $2 billion technology campus as the upstate New York Ivy League school expands on Roosevelt Island in Manhattan.

“We are going to grow as fast as we can get revenue to grow,” Skorton, 63, said in an interview in his office in Ithaca, where Cornell was founded in 1865. “I’m in a pay-as-you-go mode.”

A legacy of rapid expansion across academia has left universities overburdened from borrowing. Cornell, even with a $5 billion endowment, is saddled with $1.9 billion in debt. With endowment returns unpredictable, tuition revenue flat and public support retreating, colleges are setting higher bars for fundraising to meet the pressure for growth.

The University of Southern California kicked off a $6 billion campaign two years ago, an unprecedented level in higher education. Harvard University, the world’s richest school with a $30.7 billion endowment, plans to announce a similar-sized effort this year to fund a multibillion-dollar campus expansion in Boston, derailed by the global credit crisis in 2008.

‘Fully Tapped?’

Stanford University near Palo Alto, California, collected more than $1 billion in donations for the year ended June 30, 2012, a record amount for a single year. The money schools are raising is funding construction as well as faculty salaries and growing levels of financial aid for students.

Still, with donations so closely linked to the economy, and growth tepid, many schools are struggling to top past results. Charitable contributions to colleges increased 2.3 percent last year to $31 billion, a rate just ahead of inflation and below the high-water mark of $31.6 billion in 2008, according to the Council for Aid to Education. About half of the 1,000 schools in a survey by the New York-based group reported a decline in giving in 2012 from a year earlier.

“I don’t know whether we’ve fully tapped the capacity of generosity out there,” said John Lippincott, president of the Council for Advancement and Support of Education, a Washington-based advocacy group representing 3,600 institutions. “If those campaigns stop growing and we’re tapped out, it would signal a decline just as the importance of education is growing.”

Building Boom

Skorton is a cardiologist who previously served as president of the University of Iowa. When he arrived at Cornell in 2006, the youngest of the eight elite Ivy League schools was in the midst of a building boom. The trend across higher education was fueled by growth in federal research money that began in the 1990s, rising tuition and investment returns on endowments.

Since 2001, Cornell has spent more than $900 million constructing about 1.8 million square-feet of new dormitories, labs and classrooms across its sprawling, 745-acre campus in Ithaca, 230 miles (370 kilometers) northwest of Manhattan in New York’s Finger Lakes region. The university has invested about $930 million more in its New York City medical school, including a new research building opening next year.

The boom ended in October 2008 amid the global financial crisis. Skorton declared a moratorium on construction as Cornell’s endowment skidded toward an investment loss of 26 percent in fiscal 2009.

Budget Deficit

By 2010, the university faced a $68 million deficit on its annual budget of about $2 billion. In order to balance the budget, it has since sliced more than 400 administrative jobs through buyouts while seeking other savings by centralizing services such as procurement across the campus.

“We were overleveraged,” Skorton said in a separate interview earlier this year. “We’ve built buildings like crazy.”

While the university, which has more than 20,000 students, collects between $300 million and $450 million a year in donations, it piled on a historic level of debt to finance the expansion. After it borrowed $500 million to bolster cash as investment returns crumbled in 2009, Cornell’s total debt reached $1.9 billion in 2010, triple the level a year before Skorton’s arrival.

The university’s interest and principal payments will more than double to $393 million this fiscal year, largely because it must pay back almost $300 million it borrowed during the crisis. Every year it transfers money from its endowment to help cover operating expenses, including debt service.

Forward Swaps

Cornell tried saving money by locking in interest rates years before its bond sales. Using derivatives known as forward swaps, the strategy backfired when central banks began slashing benchmark rates to near zero percent in the aftermath of the crisis, making many of the deals Cornell locked in worthless.

The university amassed more than $1 billion of interest-rate swaps, buying them from banks including JPMorgan Chase & Co. and Morgan Stanley. It paid more than $30 million in termination fees to bankers in 2010 to unwind agreements, according to Moody’s Investors Service. It has also been left paying interest to banks for bonds it never sold because it still had forward-swap contracts on its books.

Balance Sheets

“Our balance sheets were probably more complicated than they should have been,” said Peter Meinig, chief executive officer of HM International Inc. in Tulsa, Oklahoma, who served as chairman of Cornell’s board of trustees from 2002 through 2011.

Tommy Bruce, a Cornell spokesman, declined to comment further on the derivatives.

Harvard, the world’s richest university, confronted a similar dilemma in 2008 and spent more than $900 million extracting itself from forward swaps linked to the expansion it is now restarting in Boston, across the Charles River from the main campus in Cambridge, Massachusetts.

While the construction moratorium lasted a year, the fallout from the borrowing binge and adventures with derivatives remains. Skorton, quick to declare himself a finance novice, banned accumulating new debt as campus projects resumed. That initially meant scaling back expansion and ratcheting up fundraising even as he cut staffing in the development office.

Computer Center

In Ithaca, the university is finally completing a downsized computer sciences center funded in part with $25 million from the Bill & Melinda Gates Foundation in 2006. Again, counting on philanthropy, it broke ground in May on a $61 million humanities building named for hedge-fund manager and alumnus Seth Klarman, who runs Boston-based Baupost Group LLC, and his wife.

“David Skorton, without exaggerating, I believe he is the best fundraiser I’ve ever met,” said Sandy Weill, the former chairman of Citigroup Inc. who graduated from Cornell in 1955. “I know first-hand how good he is with it because I’ve watched him handle me.”

In 2009, Skorton convinced Weill to expedite a $170 million gift that he planned to leave to the university in his will. The former banker and his wife have given more than $700 million to Cornell, much of it to the medical school in Manhattan, which bears their name. In 2011, Weill and Skorton spent eight months working together to select the school’s new dean.

Universities count on about a tenth of their donors for more than 90 percent of the money they raise, according to CASE President Lippincott. While more than 150,000 people and groups have given to Cornell’s latest campaign, about 500 of them account for two-thirds of the $4.1 billion collected so far, according to the school.

Big Donors

It costs about $61,000 a year to attend Cornell before financial aid and discounts for some in-state students. To boost fundraising, the school is assigning individual development staff members to as many as 40 of its biggest donors, arranging meetings for them with faculty, deans and students, said Charles Phlegar, vice president for alumni affairs and development.

Skorton has also taken starring roles at alumni events across the country. He employs a self-deprecating charm, joking about his teen years working at his family’s shoe store near Ventura Boulevard in Los Angeles. While an accomplished doctor and university administrator, he invariably brings up that his real dream was to be a jazz musician.


In 2011, New York City Mayor Michael Bloomberg invited universities to bid on building a proposed applied sciences and engineering school on city land. Among the competitors was Stanford, which helped inspire a vision for the campus as a hotbed of technology company spinoffs.

The mayor of New York is founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

Before the city named a winner in December 2011, Skorton spent an evening in Manhattan at the home of Charles Feeney, a Cornell alumnus who made a fortune developing the duty free shop business and has been giving almost all of it away through his foundation. After coffee with Feeney and his wife, Skorton walked out with a $350 million commitment to Cornell’s tech campus bid, the single largest gift in the university’s history.

“That didn’t happen overnight,” Phlegar said in a phone interview. “We thought about Chuck Feeney every single day.”

On the same day the record donation was revealed, the deeper-pocketed Stanford withdrew from the competition. Cornell, and bid partner Technion-Israel Institute of Technology, won the right to develop a 2.1 million square-foot graduate school on a 12-acre site on the southern end of Roosevelt Island, in the East River between the Upper East Side and Queens. The first phase will open in 2017 with the groundbreaking next year.

New Risks

While the tech campus will bolster Cornell’s presence in New York City, where it has about 50,000 alumni, it also introduces a new set of risks for the university. One of those was on display last year in the aftermath of Hurricane Sandy, which left the northern end of the two-mile long island under water and without power.

Plans for the new campus take into account possible flooding and the risk of global warming, Skorton said. Still the university is heading into unchartered territory, constructing a new campus from scratch in one of the most expensive cities in the world. While he won’t rule out an eventual return to taking on new debt, the question remains whether Skorton can successfully navigate between parsimony and growth.

“There appears to be an endless number of wealthy individuals willing to fund university facilities,” said Edith Behr, a credit analyst at Moody’s Investors Service in New York. “The issue is that there’s much more pressure on operating revenue and uncertainty about what universities will look like in the future.”

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