Tax Law Bill Change Will Save Harvard Millions

A small provision in the Taxpayer Relief Act of 1997 promises to save Harvard University-and many other private colleges and charities-millions of dollars in the coming years.

The act repeals a 1986 law which capped at $150 million the amount of tax-exempt bonds non-profit, private institutions could issue. If institutions needed to issue more than that limit, they had to issue taxable bonds-which meant they paid on average an extra 2 percentage points in interest. (Purchasers of taxable bonds must pay income tax on their earnings, hence universities issuing bonds must pay a premium.)

"Two percentage points quickly add up," says Matthew W. Hamill, vice president for administration at the National Association of Independent Colleges and Universities.

Universities issue bonds to raise money for large capital projects-including building laboratory space-or renovations. For instance, Harvard issued several million in bonds to pay for renovations of first-year dorms.

The 1986 law increased the cost of this project and similar ones across the nation and, in some cases, discouraged universities from undertaking them.


Harvard's current debt structure illustrates the bill's potential impact. As of June 1996, Harvard had $1.25 billion in outstanding bonds, $537 million of which was in taxable bonds. If this debt had been issued under the new law, the University would have saved-in just one year-about $10.7 million, and most of these bonds are for 30 years.

Unfortunately for the University, the law does not allow refinancing of existing debt.

Still, the University issues between $50 and $75 million more in debt each year. The new law could save Harvard more than $1 million in interest each year.

Consider that over the course of 30 years this change could save the University over $30 million on just one year of new bonds, and it's clear why Harvard officials lobbied so strenuously for the repeal.

"If they really want us to deliver first class education, they ought to do what they can to minimize the cost," says President Neil L. Rudenstine. "It's one of the smaller [national] investments that can have a big impact."

Officials warn, however, that currently the difference in borrowing rates between tax and tax-exempt bonds is closer to 1.5 percent-which would lower the University's savings-over the past 10 years the average difference has been 2 percent.

Because the cap affected all private, non-profit institutions, an assortment of organizations joined with Harvard to push for the law including the American Red Cross, the Volunteers of America and the American Museum of Natural History.

Nan F. Nixon, director of federal relations and the University's main lobbyist, said institutions capitalized on the Clinton Administration's spotlight on education to pass the bill. Long-time ally of the University, Sen. Daniel P. Moynihan (D-N.Y.) spearheaded efforts to push through the provision.

Lobbyists argued that the cap unfairly disadvantaged private institutions, because the 1986 law did not cap public institutions' borrowing. Moreover, a 1996 National Science Foundation study found that scientific research across the nation suffered because of inadequate space and ill-maintained buildings due in part to the bond law.

"It put institutions in a position where they could do less with their resources, and the backlog of capital projects was getting longer not shorter," Hamill says.

Just after the bill passed, some credit services warned that repealing the cap could in the long run hurt some colleges that could now borrow more money than they could reasonably repay. But officials say that Harvard-which is already well over the $150 million limit and has a pristine credit rating and massive endowment-won't suffer this fate.

Though Harvard has not yet capitalized on the change, a construction project at Emory University demonstrates how much the new law will save universities.

Emory planned to issue $13.2 million in bonds this summer to build a Vaccine Research Center. When officials learned that Congress was debating repealing the bond cap, Emory postponed its issue.

On August 5, Clinton signed the bill into law and Emory issued tax-free bonds immediately thereafter, producing an estimated $1.8 million in savings for the university.

"This one example won't have a dramatic effect on the school, but repeat this many times over the next 25 years and it will be very, very significant," says Frank H. Huff, vice president for finance at