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.