The Roanoke Times

File 2006 Two new buildings at the Virginia Tech Corporate Research Center are part of $150 million in debt that the school was planning to issue in mid-November. Tech may have to hold off on those plans.

BLACKSBURG -- From the rising costs of issuing debt and plummeting endowment values to this week's announcement of billions of dollars in operating funds being frozen, universities across the country are feeling the effects of the economic crisis.

Virginia's colleges are no exception as the problems have officials rethinking construction schedules and wondering what the final impact will be.

"I have never experienced the breadth of turmoil in the broad financial markets that's going on right now, particularly on the debt side," said Ray Smoot, Virginia Tech's treasurer and chief operating officer of the Virginia Tech Foundation.

The value of Virginia Tech's endowment -- the pool of private funds the foundation invests to support university initiatives in perpetuity -- has dropped from $527 million June 30 to about $480 million this week. The annual endowment payout, which uses endowment earnings to fund things such as scholarships and professorships, is set at the beginning of the fiscal year. It's based on average endowment value over three years, so the losses since July won't have an impact on its $32.4 million payout this year, Smoot said.

While one terrible quarter won't affect much in the grand scheme of things, if the trend continues it could reduce endowment payouts over the long term. But for the short term, Smoot is more concerned about the debt market.

Tech had plans to issue about $150 million in debt in mid-November. But with skyrocketing costs for banks to guarantee that debt and high interest rates, the university may have to hold off on those plans and the construction that debt would fund, he said.

Among the projects tied to the $150 million is Tech's new $90 million research facility in Northern Virginia and two new buildings at the Corporate Research Center in Blacksburg. John Cusimano, director of investments and debt management for Tech's foundation, said the feeling in the industry is that interest rates will start to come back to normal in the spring, so that may be a wiser time to issue the debt.

"It all depends on when President [Charles] Steger wants to move forward and if they can find a market for the debt," Smoot said.

One pitfall Tech was able to avoid was investment in the Common Fund for Short Term Investments. On Monday, Wachovia Corp. announced it was terminating the fund, which holds more than $9 billion in investments for about 1,000 colleges and schools.

Wachovia also announced a phased withdrawal plan of the fund's assets, leaving some money that schools had planned on taking out to pay operating costs frozen. Schools can withdraw 37 percent of their holdings now and will have access to at least 57 percent by the end of the year.

Tech had $30 million in the fund in May but moved that money to more conservative government money market funds.

"They had a lot of very questionable loans," Dan Ward, the foundation's senior investment analyst, said of the fund.

Steve McAllister, Washington and Lee University's vice president for finance, said the $1.5 million the school had in the Common Fund -- less than 7 percent of operating fund investments -- won't create any problems.

"I think it's been more of a psychological issue," he said. "At this point it certainly creates a level of concern and anxiety, but although our performance has been down a little bit, it's not a dramatic decline."

While private colleges rely more heavily on endowment earnings, the financial turmoil is taking place while Virginia's public universities await news on state budget cuts this month that could slash between 5 percent and 15 percent of general fund support. Midyear budget cuts to the state's public universities in the past have resulted in the elimination of programs, hiring freezes and tuition increases.

Mark Noftsinger, Roanoke College's treasurer and vice president of business affairs, said his school's endowment is having its worst year ever, and the debt market will probably delay the construction of a new residence hall at the private college. But he's more concerned about what the borrowing difficulties could mean to students trying to pay tuition.

"We want to make college as affordable as possible, and this is just making it that much more difficult," he said.

While Tech was able to avoid any major disasters in its investments so far, Smoot said that doesn't mean Tech's financial advisers are smarter than those at other schools who have had problems or that they couldn't run into some of their own.

"We've gotten two waves now of this thing, and it's not over," Cusimano said. "We may see, in the third wave, some very high-quality things go under."

Universities can hold off on issuing debt until the crisis abates, but Cusimano said it's difficult to move investments around when funds are locked down.

"To a certain extent, any time you go into a financial crisis, you kind of hope your bed was made properly to begin with," he said.

With more sophisticated programs and diverse portfolios, universities with large endowments are better able to handle market swings. But even the University of Virginia's $4.6 billion endowment has suffered a loss of about 1.9 percent since the end of June, said Yoke San Reynolds, UVa's vice president and chief financial officer. And while the university's high bond rating protected it from the credit crunch earlier in the year, it's become more expensive to borrow since the beginning of September, she said.

"We've been affected like everyone else in terms of our long-term investments and looking at a final impact," she said. "We're waiting to see where the dust settles."

And that's something none of the university financial leaders had a good answer for. Cusimano said most universities are flush with cash from tuition payments this time of year, but by the end of June, when cash is scarce, the answer to who was hit hardest might be revealed.

"There's an old saying that goes, 'When the tide recedes, we'll see who was swimming naked,' " he said.