With its adoption of Resolution 2017-02 last week, Swarthmore Borough Council gave its final approval to the development plans for Swarthmore College’s Biology, Engineering, and Psychology (BEP) building project, which is scheduled to begin this summer along Whittier Place at the north end of campus. It’s another significant step forward in the borough’s integral involvement with the college, a symbiotic relationship which goes back more than 30 years to the establishment of the Swarthmore Borough Authority.
The Authority was established in 1985 to help the college finance capital projects, and has been successfully used for that purpose to the tune of $747 million in bonds issued over three decades (about half of this total was for the purposes of refinancing prior issues). A $25 million bond sale last year provided funds for part of the 170,000 square foot BEP project, as well as capital for construction of dormitories at Harvard Avenue and Chester Road, the new 19,000 sf. Whittier Place academic office building, and the Cunningham Field student parking lot. In addition, the Authority issued bonds in 2016 to refinance $74 million of College debt at lower rates, which will save the College $24 million over the life of the bonds.
Greg Brown, Swarthmore College Vice President for Finance and Administration, said recently that “Generally, we prefer to raise money for projects [like BEP] before we actually build them. If we anticipate gifts coming in over a period of time, we may borrow against those pledges … and in recent years, when there has been an urgent need to do special projects — e.g. the Whitter Place building and the new residence hall — we have gone ahead and borrowed money. The bond proceeds are invested in the College’s endowment, which in most interest rate environments yields more than the cost of borrowing.”
The Swarthmorean recently spoke with Steven Goldfield, an attorney specializing in public finance who is the solicitor for the Authority and a former member of Swarthmore Borough Council. He contributed the article below to “provide a glimpse into how the College and the Borough work together to finance and refinance projects on the College campus in a manner that is mutually beneficial.” Unless otherwise noted, the words below are Mr. Goldfield’s.
Why does the College borrow through a municipal authority?
As a tax-exempt institution, the College has many options available to it for financing its capital projects, including the capability to borrow directly from a financial institution, or to issue taxable or tax exempt debt. Under Federal and state tax law, interest paid on a bond issued by a state agency or instrumentality (such as the Swarthmore Borough Authority), the proceeds of which are being used by a 501(c)(3) organization (such as the College) is tax free to the holder. Because investors are receiving a tax benefit equal to income tax savings, investors in the tax- exempt market are willing to buy bonds bearing interest at a lower rate. This can be illustrated with a mathematical calculation of what the taxable equivalent yield is compared with a tax-exempt yield for a Pennsylvania investor in a specific marginal tax bracket.
The lower interest rate the tax-exempt investor is willing to receive translates directly into a lower borrowing cost with savings for the benefit of the College. The College bears the full responsibility for issuance costs and the repayment of its outstanding debt. The Borough assumes no liability in these transactions.
Why does the College issue through the Swarthmore Borough Authority?
In 1985, longtime Borough Solicitor Guy Smith applied for the necessary approvals to create the Swarthmore Borough Authority. Interest rates were high at this time; Guy and another former Mayor, Eck Gerner, conferring with then-College President David Fraser, realized that a board of volunteers coupled with a more reasonable fee structure using local professionals would serve the College and the Borough well. The College had rarely borrowed for its capital improvements up until this time; instead, it had been paying for capital improvements from other amounts it had saved. According to Guy, his notion was to help “improve town/gown relations, improve communication between the two entities, give a financial benefit to both entities and tie them together for a long time to come.”
That vision has been fulfilled. For more than 30 years now, the College has been using the Swarthmore Borough Authority to access low-cost capital, despite the availability of several other options including the Delaware County Authority, and the Delaware County Industrial Development Authority, and the Pennsylvania Higher Education Facilities Authority, which are used by Widener and Temple, among other colleges and universities.
What do the parties get out of the relationship?
The College avails itself of a user-friendly local authority to issue long-term debt at a competitive cost. Because tax law requires a governmental hearing and approval, the College uses this as another opportunity to keep Borough Council, the public and the Mayor informed about various projects. This benefits both parties, at no cost to the Borough — in fact, there are substantial benefits to the town.
The College pays all costs of the Borough Authority in connection with the financings (i.e. legal fees, legal advertisements in the Swarthmorean and accounting). The College also pays an issuance fee to the Borough Authority for each bond issue and an annual fee based upon the aggregate principal amount of bonds outstanding (the Borough Authority passes these fees through to the Borough to support the Borough’s operating budget).
In 2016, the College paid $15,000 in issuance fees for the bond issue and $127,817 based upon a formula for all bonds issued by the Borough Authority that are outstanding. Since 2004, the total of these remittances from the College is well over $1 million. The net income goes to the borough’s general and capital funds. Use of the funds is not restricted, and has been used in the past to support operations of the Swarthmore Fire and Protective Association and other public safety initiatives. These amounts are separate from the College’s other voluntary contributions to the Borough and its property tax payments, which include:
• Payment of half the salary of one Swarthmore police officer;
• Taxes paid on approximately 80 taxable properties subject to real estate taxes: borough taxes at the rate of 5.673 mills, and the Wallingford Swarthmore School District at the rate of 43.403 mills. The total of these payments in 2016 was more than $1,000,000;
• Trash fees and sewer fees paid to Borough; and
• Contributions to Centennial and Central Parks.
Swarthmore’s Borough Council and Authority include talented people with relevant expertise, an inclination toward cooperation, and curiosity about the College. The Swarthmore Borough Authority is currently served by these volunteer board members: Chair Maria M. Zissimos, Vice Chair David Wolfsohn, Secretary Steve Carp, Treasurer Elric C. Gerner, and Assistant Treasurer/Assistant Secretary Tom Mandel. Their counterparts at the College are Greg Brown, VP of Finance and Administration and Alice Turbiville, Assistant VP of Finance and Controller. I’ve seen instances in other municipalities where for political reasons, boards and solicitors have created rancor by holding up approvals, forcing choice of a certain counsel or auditor, and making the process so difficult as to discourage an institution from seeking to raise capital through bonds. Our community is fortunate to be represented in its relationship to the College by people of such substance, integrity and goodwill.