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GW shakes up plan to cover massive SEH debt after fundraising flop

Katie Causey | Hatchet Staff Photographer
Katie Causey | Hatchet Staff Photographer

Faculty who have doubted how the University will pay for the $275 million Science and Engineering Hall were right: The original financing plan isn’t going to work.

GW announced what many have feared for years at Friday’s Faculty Senate meeting. Two of the three funding streams that administrators had counted on to pay for the University’s largest academic investment in its history – fundraising and government subsidies for research – won’t be able to bring in enough to cover the costs.

Instead, GW will rely on rent from its high-end commercial properties at The Avenue complex to cover about $250 million. That includes almost all of the building costs and annual interest payments the University will make until it can pay off the debt it added to fund the construction.

“We can pay for the building, but not as we thought we would,” Provost Steven Lerman said at the Faculty Senate meeting.

But using The Avenue as a cash cow will come at the expense of programs across GW. Originally, that money was supposed to help fund other programs and areas, like the School of Medicine and Health Sciences, and could have helped update aging buildings.

The shift marks the second time the University has changed its plans for financing the building.

GW hopes to pay off the debt within the next 30 years, Lerman said. The Avenue brings in about $9 million a year for the University – just a slice of the $151 million GW saw in commercial rent revenue last year, according to its 2014 financial report.

Donald Parsons, an economics professor and member of the Faculty Senate’s finance committee, said the shift in funding plans shows the “whimsy” of the Board of Trustees that put the plan in place to start.

“[The funding plan] never made sense in the first place. It was primarily to sell it,” Parsons said.

The change in funding streams for the building comes as GW has barely been able to raise any money for the construction over the past year. It currently has just $7 million to cover construction costs, about the same amount it had last November. That’s just 9 percent of the $75 million it had planned to secure from outside sources.

The University had also planned to put about $9 million a year toward the building using bonus funding it gets from federally subsidized research. Lerman said the money, known as an indirect cost recovery, is now projected to add just $1 million to the building’s programs every year over the next 25 years.

Coming at a cost
Michael Castleberry, who was the chair of the Faculty Senate’s executive committee during initial conversations about the building, said at the meeting that changes to the funding were “disconcerting” because professors had hoped revenue from The Avenue would go to other areas of the University.

“It’s like politics. You know people are telling you what you want to hear but you don’t have any data to say that’s impossible,” Castleberry said. “In the selling and desire to get approval, I think it was a best-case scenario.”

Media Credit: Hatchet File Photo
Provost Steven Lerman said he was disappointed with fundraising totals for the Science and Engineering Hall.

Castleberry said that money was initially supposed to cover “the build out of this campus” – not just the Science and Engineering Hall. He said buildings like Monroe and the Hall of Government need technology upgrades, which could have been covered with revenue from The Avenue.

Funneling money into the Science and Engineering Hall for the next several decades could also delay the construction of a new building for the Graduate School of Education and Human Development. In 2006, the Faculty Senate had put that school next in line for new facilities after the engineering and public health schools.

That’s part of the “opportunity cost” of the Science and Engineering Hall, said Anthony Yezer, the former chair of the Faculty Senate’s finance committee. Yezer said funds from The Avenue could have been used to boost staff pay, limit tuition increases or hire more full-time faculty.

“The question is always what alternative use could be made of the funds,” said Yezer, who is also an economics professor.

David McAleavey, an English professor and member of the Faculty Senate’s finance committee, said though the building is an important step for a University that wants to grow its research potential, it has stretched GW’s resources “pretty thin.”

“Other very important needs are hard to address right now,” he said.

Nelson Carbonell, the chair of the Board of Trustees, declined to comment on the specifics of Lerman’s announcement, but said the Science and Engineering Hall is still an investment that the Board fully supports to put GW “on the map.”

Still-hazy funding abilities
But counting on indirect cost recoveries to go toward the Science and Engineering Hall creates uncertainty, as they depend on faculty’s ability to secure the necessary grant funding.

“Total research over time is very hard to forecast,” Lerman said. “I do believe we can raise $25 million, but am I going to raise my right hand and say, ‘Well, that’s the number?’ I couldn’t possibly do it.”

Lerman said so far “almost none” of projected cost recoveries have been collected for the building’s programs.

He said that the University as a whole has received a total of about $22 million in cost recoveries from eligible research. That amount is what officials negotiate with the federal government depending on the size of research projects.

Charles Garris, an engineering professor and the chair of the Faculty Senate’s executive committee, said though it’s encouraging that GW has figured out another way to pay for the building, the plan to rely on cost recoveries “is very difficult.”

“The good news is they are going to find means,” Garris said. “Obviously we’re on a shaky foundation here, we don’t know exactly how the future will pan out.”

GW’s fundraising challenge
The funding woes would disappear if the University could land a deep-pocketed donor to give money to help pay for a significant portion of the construction costs. But donations to buildings are down nationwide, and raising construction money becomes even less likely once the ribbon is cut.

With the building scheduled to open in January, time is running out.

Parsons said when officials pitched the building plan, they talked about potential big donors or trustees who were set to make donations. He said fundraising for the building has been a “total disaster.”

“We never imagined they wouldn’t get $10 million,” Parsons said. “I think fundraising is dead.”

The announcement at Friday’s meeting was the first public update in nearly a year. Since GW launched a $1 billion fundraising campaign over the summer, officials have said they won’t give specific updates on paying for the building, instead lumping the specific amounts of money raised into larger campaign goals.

Donors have contributed nearly $36 million for programs in the building, as well as about $7 million in equipment donations, Lerman said.

To spread out some of the large costs, the Milken Institute School of Public Health and the School of Medicine and Health Sciences will also put in about $17 million combined for their share of the building’s seventh and eighth floors from their individual budgets and fundraising.

The next 30 years
Building the Science and Engineering Hall is just the latest piece in the University’s decades-long construction transformation. Crews are also working on the $130 million residence hall District House and are in the process of moving Student Health Service and the University Counseling Center to campus.

Media Credit: Hatchet File Photo by Greta Simons | Hatchet Photographer
The Science and Engineering Hall is not the only construction site on campus – crews are also working to move the University Counseling Center and Student Health Service to the Marvin Center.

Those projects make GW one of many players in a higher education arms race, which experts say has heated up over the last several years. Schools increasingly try to lure students with top-notch facilities, pulling in the tuition dollars that they count on for revenue.

GW relies on tuition for more than half of its revenue, so by building a glitzy engineering building, officials may be able to pull in more tuition and research dollars.

But to do that, there’s a cost: Castleberry said the lack of fundraising for the building would keep GW’s hands tied “for a long time.”

“We’re going to be well off 30 years from now. But it will be a leaner, meaner time probably to handle these next couple of decades,” Castleberry said.

To help pay for major campus construction projects, the University has relied on taking out debt. That has worked because GW has been able to take advantage of historically low interest rates.

This summer, officials took out $300 million in new debt, bringing GW’s debt total to about $1.7 billion – an amount surpassing the University’s endowment. After adding that new debt, credit rating agencies, which grade the University’s financial health, warned that its spending was already too high for its cash flow, and bringing on more debt would be an added strain.

Joseph Cordes, the chair of the Faculty Senate’s finance committee, said the building is critical to the success of the University’s research ambitions – though it’s larger than some faculty members had initially wanted.

“Some investment needed to be made in sciences and engineering to upgrade facilities,” he said. “Their facilities prior to the Science and Engineering Hall were not adequate for what the University wants to do.”

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