(This story is by Matt Hongoltz-Hetling, of the Valley News, in which it first appeared July 22, 2016.)
[S]OUTH ROYALTON — Vermont Law School is hoping to borrow $15 million from the federal government to help restructure its debts and take advantage of lower interest rates.
VLS officials said the school has put the worst of its financial woes behind it, and the proposal would fund a land-lease transaction involving its 15-acre South Royalton campus.
“It means significant operating savings for VLS,” said Lorraine Atwood, vice president of finance at the school, which she said currently spends about $1.2 million annually to service about $13.5 million in debt.
The school, which has an annual budget of $28 million, is hosting a public information meeting at 5 p.m. Thursday at Oakes Hall about the plan, which would create a land-lease agreement with a separate entity, VLS Campus Holdings LLC.
The law school would continue to own its land and 22 buildings, which have a combined net book value of $22 million, according to Atwood.
The school is seeking the loan from the USDA’s Rural Development Community Facilities Direct Loan Program, which develops “essential community facilities” in rural areas.
Bob Giroux is executive director of the Vermont Educational and Health Buildings Finance Agency, which exists to help nonprofit institutions like VLS access capital financing on favorable terms.
Giroux said VLS is joining a recent trend that has, over the last two or three years, seen a handful of hospitals and educational institutions try to restructure their debt through the USDA program.
“It’s becoming more and more common,” Giroux said.
In order to qualify for a loan, the school must demonstrate that it “provides an essential service to the local community for the orderly development of the community in a primarily rural area, and does not include private, commercial or business undertakings,” according to guidelines on the program website.
In all, USDA Rural Development administers roughly $38 billion in loans and grants nationwide each year.
“We’re working very closely with the USDA,” Atwood said. “They are very helpful and they respond very well. They want our programs to be successful.”
VLS officials declined to provide a copy of its application.
An official with the USDA said it could take up to 20 days for the federal agency to respond to a Freedom of Information Act request from the Valley News for a copy of the application.
Atwood said the federal loan program has funds, but she was unsure as to whether the effort would bear fruit.
“We don’t know if we’ll be successful, but we’re doing everything we can to qualify for it,” she said.
Atwood said the law school’s prominent role within the Royalton community makes it a good fit for the program.
The school operates the South Royalton Legal Clinic for low-income residents, a state library, a community day care center, and a fitness center, all of which are open to the community. It also has joint agreements with the town that support joint infrastructure and employs 135 faculty, not counting adjunct professors.
Ted Brady, state director of Vermont and New Hampshire for USDA Rural Development, agreed that VLS is a good candidate.
“Institutions of higher education are especially vital to rural communities,” Brady said. “Vermont Law School is a great example of an essential community facility that not only provides a vital service to Vermonters, but also anchors the community’s economy and culture.”
The Royalton Selectboard met July 12 and unanimously approved sending a “certification of support” to the USDA regarding the VLS loan.
“It’s such an important part of the community,” said Joan Goldstein, a Royalton Selectboard member. “Hundreds of people attending school, teaching, working at the school, all frequent the business block in town.”
Selectboard Chairman Larry Trottier said that, before board members signed the letter of support, staff checked to make sure that the transaction would not change the tax status of the VLS-owned properties. “We thought we needed to be supportive,” he said. “It’s just a good asset to the town.”
Over the past several years, a national downturn in law school enrollment took a toll on VLS, which is not affiliated with a larger university and is therefore heavily dependent on tuition of about $46,800 per student.
In 2013, the school began cutting staff as part of a larger cost-cutting measure that has ultimately trimmed $4.8 million, or 21 percent, from its budget; in 2014, Moody’s Investors Service downgraded $10.3 million in 2011 revenue bonds from Baa2 to Ba1, a worsened rating that led VLS to technically default on a loan agreement from TD Bank.
Goldstein said town leaders in Royalton kept a close watch as the drama unfolded and wondered what would happen if the school was radically downsized, or shut its doors completely.
“We didn’t do a formal study of any sort, but we obviously thought it would be a grave concern,” she said.
But since then, Atwood said, the school’s aggressive cost reductions and a stabilization of enrollment rates have combined to shore up its finances.
The 2015 enrollment was 145 students, which is down significantly from a recent high of 171 in 2012, but in line with VLS numbers in 2013 and 2014, which Atwood said is a sign the bleeding has stopped.
“Our enrollment has stabilized,” she said. “This transaction will help us keep tuition down. We’re trying to keep it flat.”
Atwood said the school has budgeted for an expected enrollment of 155 students in 2016.
She declined to say how much, exactly, the deal would save the school, because there has been no firm agreement with the USDA on terms.
She said it has yet to be determined whether VLS would lose ownership of its campus in the event of a default, or what the length of the loan period would be.
The USDA Rural Development guidelines say that the life of a loan can “not be longer than the useful life of the facility, state statutes, the applicants authority, or a maximum of 40 years, whichever is less.”
Atwood said VLS would make payments to the LLC, which was created specifically to apply for the loan and which is under VLS control. She said the LLC would then make payments to the USDA.
Of the $1.2 million the school pays in debt service, about half, or $600,000, goes to pay interest, which is assessed at a rate of about 6 percent.
Atwood said the USDA loan, if approved in the near future, would have “a very favorable” interest rate of 2.8 percent.
“We’re hoping to lock into the current interest rates at this point,” she said. “There’s a chance they could go down further, but there’s also a chance they could go up.”
Giroux said low federal interest rates have created a strong incentive for institutions to refinance their debt.
“We are near what some might call hysterical lows, not just historical lows,” he said.
Atwood said VLS hopes to hear a response on its application by Sept. 30, the end of the quarter.
Brady said USDA staff members “are currently evaluating the application materials,” but could not provide a timeline until it has been fully processed.
