(Bloomberg) -- Investors prizing Princeton University bonds have fueled gains relative to top-graded municipal debt. Some residents of the Ivy League school’s New Jersey hometown are less impressed: They’re suing to strip the institution of its property-tax exemption.
The lawsuit hangs over a $200 million sale of tax-exempt debt that the New Jersey Educational Facilities Authority plans to issue today for the school, one of 15 colleges nationwide with top grades from Moody’s Investors Service and Standard & Poor’s. It boasts one of the biggest endowments among U.S. universities and its alumni include First Lady Michelle Obama, Amazon.com Inc. founder Jeffrey Bezos and Google Inc. Chairman Eric Schmidt.
The school’s debt has defied a lawsuit brought by residents of Princeton claiming the institution should lose its exemption from property levies because it shares royalties with faculty. A judge on June 27 refused to dismiss the case, which is pending in New Jersey tax court and could affect colleges across the U.S. that are increasingly relying on royalties to help fund research.
Universities “don’t have to pay property taxes, and they benefit generally from lower borrowing costs from issuing tax- exempt bonds -- it’s definitely advantageous,” said Paul Brennan, who helps oversee $90 billion of local debt, including Princeton bonds, at Nuveen Asset Management in Chicago. “The counterargument is the schools are providing a lot of economic activity.”
TOWN-GOWN STRAIN
The tension with taxpayers precedes the current legal case. At a standing-room-only event in April 2009 billed “Why Princeton University Should Pay Its Fair Share of Property Taxes,” a dozen people booed the school’s director of community and regional affairs.
The community of about 12,300 residents is located halfway between New York and Philadelphia. The borough’s median household income of $106,686 compares with the state average of about $72,000, Census data show.
Across the U.S., municipalities closing budget gaps after the longest recession since the 1930s have sought more funds from local universities, whose land holdings are mostly tax- exempt.
Martin Mbugua, a university spokesman, said the school finds the residents’ argument “without merit,” and is preparing for trial, a date for which hasn’t been set.
The case won’t affect the school’s federal tax-exempt status, he said.
STUDENT COSTS
Though institutions nationwide are grappling with limits on their ability to increase tuition, Princeton benefits from the fifth-richest endowment in the U.S., according to the National Association of College and University Business Officers and Commonfund Institute.
It also has room to raise student costs. At $40,170, the school has the lowest combined annual tuition and fees among the 15 highest-ranked national universities, according to U.S. News & World Report.
In the Ivy League, a group of eight selective colleges in the northeastern U.S., Harvard University, Yale University and Columbia University join Princeton in earning top credit grades.
Though much of the school’s property is exempt, it still paid $9.5 million in local taxes to Princeton, where it is the largest taxpayer, according to the university’s website.
CONTRIBUTION TALLY
The institution in 2013 also made a voluntary contribution of $2.48 million to Princeton, which is “far and away the highest contribution by any college or university” as a percentage of the municipality’s budget, which is about $60 million, Mbugua said.
The school’s policy is to remove a non-residential building from tax rolls only when its sole use is educational, according to the website.
Princeton isn’t alone in facing pressure to pay its host community more. Brown University, the Ivy League school in the Rhode Island capital of Providence, agreed in 2012 to boost payments to the city by $31.5 million over 11 years. Providence has the third-lowest investment grade from Moody’s.
Disputes stem from “municipalities looking for additional revenue sources,” said Brennan at Nuveen.
Moody’s cited Princeton’s “exceptional student market position” and “robust financial resources” in affirming its Aaa rank.
AAA EDGE
About $150 million from today’s deal will refinance debt, with the rest to be used for constructing and renovating buildings such as Firestone Library, the Lewis Center for the Arts and dormitories, according to Mbugua and offering documents.
It’s the school’s first tax-free bond sale since 2011, according to Bloomberg data.
The university’s top bond grades may buffer it from record withdrawals in the $3.7 trillion municipal market. Individuals have pulled money from muni mutual funds for 32 straight weeks, the most since at least 1992, Lipper US Fund Flows data show.
AAA bonds have weathered the wave better than the rest of the market. Over the past 12 months, such debt has lost 1.3%, compared with the entire market’s 2.7% decline, Bank of America Merrill Lynch data show.
BONDS OUTPERFORM
Some Princeton debt has outperformed benchmark munis.
Tax-exempt debt issued by the New Jersey educational agency for the university and maturing in July 2020 traded with an average yield about 0.08%age point above top-grade munis during the past five months, data compiled by Bloomberg show. That compares with an average spread of about 0.28%age point in the prior five months.
“If there’s a better credit out there than Princeton University, I’m not sure who they are,” said Hugh McGuirk, Baltimore-based head of municipal investments at T. Rowe Price Group Inc., which oversees about $20 billion of local debt. The company owns some of the school’s debt in its New Jersey fund, he said.
McGuirk cited the university’s endowment, which reported an 11.7% return on investments in the 12 months ended in June, up from a 3.1% gain a year earlier. The pool’s value grew by $1.2 billion to $18.2 billion.
By comparison, the school has about $3.2 billion of debt, according to Moody’s.
“Generous support from this endowment allows the university to fulfill its educational mission and to charge lower tuition than its peers,” Moody’s said.
Chartered in 1746 as the College of New Jersey, Princeton has about 7,900 students, according to its website.
The case is Estate of Eleanor J. Lewis v. Trustees of Princeton University, 010656-2011, Tax Court of New Jersey (Morristown).
COLLEGE WEEK
Princeton joins issuers including Northeastern University in Massachusetts and the University of Texas System in offering $2.3 billion in long-term debt this week.
The interest rate on AAA 10-year munis is 2.97%, compared with 2.94% on similar-maturity Treasuries.
The ratio of the two, a measure of relative value, is about 101%, compared with a five-year average of about 99%. The higher the number, the cheaper munis are compared with federal securities.
