Study: University of Minnesota linked to ‘risky’ financial deals

A Roosevelt Institute study says the University is among a group of colleges that have lost $2.7B in investment rate swaps.

Olivia Johnson

Many higher education institutions — including the University of Minnesota — have turned to risky financial deals and increased tuition and fees to compensate for decreased state funding, a recently released report has found.

According to a Roosevelt Institute study, 19 public institutions, including the University, have lost $2.7 billion in “risky financial deals.” The report, released by the left-leaning think tank last month, said the University lost money through investment rate swaps and made up for those losses by charging more in student fees.

Andrew Winton, University finance department chair and professor, said interest rate swaps began being widely used in the 1980s.

“What they are is just a contract,” he said. “A swap converts a short-term rate to a fixed rate.”

When institutions take out a loan from a bank, it comes with interest payments that fluctuate with the economy. A swap converts these rates to being fixed, so the entity then pays a certain amount even if the economy shifts, Winton said.

“There’s always buyer’s remorse,” he said. “If rates go lower, you no longer benefit.”

Although Winton said he does not know specifics about the situation at the University, he said institutions can be taken advantage of by the banks if they are new to using swaps.

“Forecasting interest rates is very risky,” he said. “You need to be aware. There’s a chance things could turn against you.”

Though the study points out specific instances of risky swaps and pricey termination fees, Michael Volna, the University’s interim chief financial officer said he wouldn’t call swaps like the University’s, ‘risky.’

In 2011, the University refinanced three series of outstanding debt and had to end the swaps associated with them, which cost $17,195,000.

Volna said over the last 20 years, the University has swapped interest rates six times as a way to manage debt.

“The cost to terminate the swaps was factored into the overall economic decision to refinance the debt,” Volna said in an emailed statement.

He said the University uses swaps “when we think that market rates or interest rate risk … would dictate that it would make sense.”

While the study claims certain University fees go towards paying off these swaps, Volna disagreed.

The study also said swaps cost the University $3.5 million a year in payments to JPMorgan Chase.

The study said interest rate swaps cost its sample of 19 universities a total of $2.7 billion.

The authors also took a random sample of the top 500 colleges and universities and analyzed their finances, finding that over half of them used swaps.

“It’s something that’s really, really costly,” said Dominic Russel, a University of Michigan data science senior and co-author of the study. “We also showed that they’re really prevalent and that this really is a crisis in our education. This is happening at schools all across the country.”

He said Roosevelt Institute was uniquely positioned to look into this issue.

“We are trying to look at one aspect of this financialization of higher education,” Russel said. “The aspect we picked out are these risky financial deals called interest rate swaps.”

This risk became a topic of interest during the 2008 recession, Russel said.

“Universities are receiving variable rates. They’re paying huge fixed costs back to the bank,” he said.

The terms of many of these deals require schools to pay large amounts of money in termination fees. For example, Russel said, Harvard University recently bought out of a swap deal by paying over $1 billion.

“They’re really just locked in and stuck in these really, really long term deals that added a ton of risk and [they] now are realizing that risk,” he said.

Russel said his team found the information for the report in public documents, such as the University’s annual financial report, that they collected and analyzed over the last two years.

Since the report is not structured to be easily read by everyone, Russel said, it is often difficult to see the risk in these swaps even though the information is public.

“We just took one really small piece — the tip of the iceberg — with interest rate swaps,” he said. “Ultimately, what we want to do is use this national narrative to change some of the rules around how universities interact with financial institutions and Wall Street.”