New State Board To Give Schools Low-Cost Loans

University officials are looking happily toward the inauguration of the state Educational Facilities Authority--a new board that will give Harvard and other Massachusetts colleges substantial savings in their construction programs.

The authority will have the power to issue tax-exempt bonds to finance college construction projects. Because they are tax free, the interest rate on the bonds will be substantially lower than the going open market interest rate--one of the customary sources of funds for University construction.

Earlier this month, Governor John A. Volpe swore in the seven-man authority established under an act passed in the last session of the legislature. The members of the authority have not yet met nor selected a full-time executive director to supervise their operations, but it is believed that their work could be in full swing by the spring of 1969.

Bond Is Key

The key to the whole operation is the tax-free bond. Since holders of bonds issued by such local and state authorities do not have to pay federal income tax on the proceeds of the bonds, they are willing to accept a lower interest rate than they otherwise would demand. Currently, the interest rate on the tax-exempt bonds is slightly more than four per cent. Borrowing at a bank can cost about seven per cent. Harvard gets an annual return of about 5.8 per cent on its general investment funds.

The authority will sell bonds for a particular project on the open market, and then use the money received to pay for the expenses of the project, including costs of acquiring land and planning the project as well as basic construction costs. Once the project is completed, the authority will rent it to the college and will retain title until the college pays off principal and interest on the bonds.

Harvard could thus save about one or two per cent of its construction costs--a major saving for a University that now has about $100 million of construction under way, in the active planning state, or slated for building within the next six or seven years.

Since much of this construction is already financed, not all of it will fall under the act, but once the authority begins doing business, the University might well decide to finance all future construction through the authority.

"This could be a major source of new funds for Harvard now that the Federal money is starting to dry up," one University official said this week. He added that the law allows the authority to finance a wide range of projects--including for example, parking garages and student housing. Though the law is still not entirely clear, possibly the only Harvard construction that could not be so financed would be Faculty housing, he said.

No one knows how many bond issues will be floated by the authority, but it appears safe to guess that they could run into the hundreds of millions of dollars, if the bond market holds up, since any Massachusetts institution "authorized by law to provide a program of education beyond the high school level," is eligible to participate in the program.

Similar authorities have been operating successfully for several years in New York, Connecticut, and Rhode Island. The Massachusetts authority is modeled after the Connecticut authority.