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Bank Limits Fund Access by Colleges, Inciting Fears
By SAM DILLON and KATIE ZEZIMA
Published: October 1, 2008
In a move suggesting how the credit crisis could disrupt American higher education, Wachovia Bank has limited the access of nearly 1,000 colleges to $9.3 billion the bank has held for them in a short-term investment fund, raising worries on some campuses about meeting payrolls and other obligations.
Wachovia, the North Carolina bank that agreed this week to sell its banking operations to Citigroup, has held the money in its role as trustee for a fund used by colleges and universities and managed by a Connecticut nonprofit, Commonfund.
On Monday, Wachovia announced that it would resign its role as trustee of the fund, and would limit access to the fund to 10 percent of each college’s account value. On Tuesday, Commonfund said that by selling some government bonds and other assets held in the fund, it had succeeded in raising its liquidity to 26 percent.
Still, Wachovia’s announcement sent shock waves through higher education, sending hundreds of college presidents rushing to check their financial vulnerability on every front.
Some smaller colleges that had not previously arranged lines of credit were feverishly seeking to negotiate those on Wednesday. And some large institutions said they were facing, at the least, a major financial inconvenience as a result of Wachovia’s action.
The University of Vermont, for instance, said that about half of its liquid operating assets — $79 million — were invested in the fund.
“It appears that the asset is secure,” said Richard H. Cate, vice president for finance and administration at the University of Vermont, because, he said, much of the $9.3 billion is held in securities that will become available when they mature. “But we’re not real thrilled with the fact that we can’t access all of our money when we want it.”
Wachovia’s action was perhaps the most tangible signal yet that the credit crisis could have a powerful impact on higher education. Another sign came on Tuesday as Boston University, saying it needed to respond to the financial crisis with cautionary steps, announced an immediate hiring freeze and a moratorium on new construction projects. That decision was unrelated to the action by Wachovia, where Boston University was not an investor.
On Tuesday, officers of Commonfund held a lengthy conference call to provide details of Wachovia’s action to representatives of more than 900 colleges and universities, many of whom were upset, said W. Judson Koss, a spokesman for Commonfund.
“The whole issue is liquidity,” Mr. Koss said. “This is a fund that has been in operation for over 35 years, and is invested in nothing but Triple-A government and corporate paper, all top-notch equities.
“We’ve been going along just fine, but Wachovia had a liquidity concern. They asked, ‘What if there’s a run on the bank and we can’t redeem these securities?’ So they were the ones who pulled the pin on the grenade.”
Colleges have used the fund, formally called the Commonfund Short Term Fund, almost like a checking account, depositing revenues including tuition payments and withdrawing funds daily to finance payrolls, maintenance expenses, small construction projects and other short-term needs, college officials said.
Nearly 60 percent of the securities in the fund are scheduled to mature by Dec. 31, and thereafter would be available to investors, Commonfund said in a statement. When the remaining funds would become available was unclear. The fund said it was seeking a trustee to succeed Wachovia.
To date, none of the securities have defaulted, and all were continuing to pay timely principal and interest, the statement said.
But for the time being, some institutions that have relied on the fund were scrambling to secure money for operating expenses.
Augsburg College in Minneapolis is one of more than a dozen Minnesota colleges with investments in the fund. Augsburg was fortunate, its president, Paul C. Pribbenow, said, because its holdings were just $13,392.
“But this certainly raises the specter that we can no longer take anything for granted,” Dr. Pribbenow said. “It shows just how vigilant we need to become about every financial relation we have.”
The University of Akron had $800,000 invested in the fund, a small part of the university’s total portfolio of operating funds, which typically range from $100 million to $150 million in a semester, said John Case, the university’s chief financial officer. Shortly before Wachovia’s announcement, the university withdrew $80,000, but has since been unable to withdraw any of its remaining money, Mr. Case said.
Matthew Hamill, senior vice president of the National Association of College and University Business Officers, said, “This is a pretty significant event, in the short run, because it’s going to cause dislocation and uncertainty.” Mr. Hamill added: “My estimate is that in the long run, investors will wind up with their money back. But they don’t have access to cash in the short run, so it’s going to cause significant financial and operational changes.”
Molly Broad, president of the American Council on Education, which represents 1,600 colleges and universities, said: “A widespread credit crisis will affect a large number of our institutions very quickly. Those folks who’ve been saying that the economy could be seized by a liquidity crisis, well, it’s unfolding before our eyes, and it’s having an impact on colleges and nonprofits.”
At Boston University, President Robert A. Brown sent an e-mail message to faculty and staff members on Tuesday saying that the university would temporarily freeze hiring, with the exception of public safety employees and professors whose hiring process was under way, and that it would postpone all capital projects that had not begun.
Joseph Mercurio, the university’s executive vice president who oversees its budget, called the steps pre-emptive.
“We have a lot of economic uncertainties that have to do with the national economy,” Mr. Mercurio said, “and in light of those conditions we’re going to take some prudent steps right now.”
