Strategic Use of Leverage to Achieve Institutional Objectives Three Unique Views Mary Peloquin-Dodd North Carolina State University Jeff Amburgey Berea College Carl Balsam North Park University Moderated by: Lorrie A. DuPont RBC Capital Markets
Program Overview THE KEY TO USING DEBT (OR ANY KIND OF LEVERAGE) TO HELP ACHIEVE INSTITUTIONAL OBJECTIVES IS A WELL-DEFINED FINANCIAL STRATEGY In today s challenging economic environment optimizing the use of an institution s resources is a priority. With competing demands to preserve capital, yet accomplish the stated mission, higher education institutions must develop a well-defined framework to manage the use of those resources - for both current and future generations. It is also true that no one financial management approach fits all institutions given the wide range of size, structure and resources of colleges and universities across the country. Three very different organizations from a large public research university to a small private undergraduate college will discuss how - and why - they incorporate the elements of debt into their overall financial strategy. 1
Student Profile 28,326 Total FTE Students (22,125 undergraduate / 6,201 graduate and professional) $828.4 million Cash and Investments (from 2013 audit does not include all endowment) $573.8 million restricted $254.6 million not otherwise restricted ($230.8 million unrestricted net assets) $29,200 Cash and Investments per FTE student $1.34 billion Fiscal 2013 Operating Revenues State appropriations $484.0 million (these four sources comprise almost 90% of total) Tuition and fees $242.8 million Contracts/grants $244.0 million Sales/services $209.4 million $47,100 Operating Revenues per student Credit rating(s): AA (S&P) stable / Aa1 (Moody s) stable $671.6 million Total Long Term Liabilities (including $528.7 million revenue bonds) $23,700 Debt per student 2
Student Profile 2,419 Total FTE Students (2,047 undergraduate / 377 graduate) $150.9 million Cash and Investments $61.5 million restricted $89.4 million not otherwise restricted $62,400 Cash and Investments per FTE student $53.9 million Fiscal 2013 Operating Revenues: Tuition, Fees and Auxiliaries $49.3 million Endowment Draw and Gifts/Grants $4.6 million $21,700 Operating Revenues per student Credit rating(s): Non- Rated $62.9 million Total Long Term Liabilities $25,900 Debt per student 3
Student Profile 1,602 Total FTE Students (1,602 undergraduate / 0 graduate and professional) $1.122 billion Cash and Investments $1.012 billion endowment $43.02 million unrestricted $66.79 million other $700,500 Cash and Investments per FTE student $73.75 million Fiscal 2013 Operating Revenues (less federal outreach grants) $40.3 million Endowment Spendable Return $5.9 million Gifts $8.6 million Auxiliaries $9.3 million Net Assets released $9.6 million other $46,039 Operating Revenues per student Credit rating(s): Aaa (Moody s) stable $58.72 million Total Long Term Debt ($36.8 million / 63% Public, $21.9 million / 37% Private) $36,654 Debt per student 4
Relationship of Leverage to the Institutional Strategic Plan
Identifying Capital Sources Traditional Sources of Capital Funds: Endowments Donor restricted, Board Designated Capital campaigns/fund raising Reserves fund balances derived from operations Governmental grants and/or capital appropriations DEBT 5
Why Leverage Capital Sources or Issue Debt? Typical Reasons for Using Leverage: Limits on use of reserves or endowments Adequate capital not available through operations Preserve buying power of investments Opportunity cost of institutional resources is greater Pay for capital facilities over useful life Expected return on capital investment exceeds cost Use future gifts for current capital needs 6
Important Elements of a Capital Management Strategy The following are necessary to develop a sound capital management strategy: Institutional Strategic Plan, Institutional Capital Plan, Debt Policy, Debt Capacity Analysis, Project Feasibility, Project Financing Objectives, and Project Financing Action Plan. 7
Debt Issuance is a Two-Way Decision Process Top Down Strategy Approach Institutional Strategic Plan Capital Budgeting Process - Identifies Capital Needs - Prioritizes Needs - Analyzes Financial Results Debt/Leverage Policies and Guidelines Bottom Up Project Approach Financial Projections Specific Funding Plan - Project Expense Budget - Revenue Generation Plans - Sources of Funding and Financing - Repayment Schedules Financial Objectives Financing Action plan 8
Institutional Strategic Plan Identifies institutional goals and objectives and important elements including : Mission Values Objectives Priorities Risk Tolerance 9
Institutional Capital Plan Identifies and prioritizes capital investments in land, facilities and equipment in order to achieve institutional mission. Identifies funding sources and timeframe: cash, state appropriations, debt, and/or gifts and grants. Identifies circumstances under which the Institution uses leverage rather than just current resources. 10
Why Have Written Guidebook on Leverage? As capital is a limited resource, debt policies provide an overall framework to : Use debt/leverage to achieve institutional objectives; Use debt/ leverage fairly among all constituents; Use debt/leverage consistently and efficiently; Take advantage of market opportunities; Indicate thoughtful use to rating agencies, board members, investors and other constituents. 11
Important Elements of Debt/Leverage Policies Some Important Elements include: Institutional Values Financial Goals and Objectives Implementation Procedures Periodic Monitoring Reporting Obligations and Responsibilities 12
Managing the Debt Portfolio Responsibilities Include: Make timely debt service payments Meet obligations timely under the debt documents: Financial and Other Covenants, Annual Audits, Progress Reports, and Additional Bonds Tests. Monitor position/performance of any derivatives positions Timely disclose material events as required in continuing disclosure document 13
Periodic Monitoring Periodic Monitoring is required for compliance of debt with university policies, state statutes and/or bond documents: Monitor compliance with institutional debt policy Meet Continuing Disclosure and ongoing financial reporting obligations timely Review use of financed facilities monitor for change in use Monitor renewal or any credit or liquidity facilities Monitor interest rates for refinancing opportunities 14
Conclusions Benefits (and Burdens) Accrue to Institutions that use Leverage Debt/leverage can be a good source of funding to maintain and improve capital facilities Potentially lowers cost of capital opportunity cost to using university funds Permits institution to pay for the cost of a facility over its useful life Provides for current facilities payable from future revenues, gifts, grants or pledges Post Financial Crisis debt structure decisions have been driven by a greater focus on risk management. Established guidelines should drive decisions Debt/leverage is a long-term institutional obligation, with implications for future board members, administrators and students 15
Contact Information Mary Peloquin-Dodd Jeff Amburgey North Carolina State University Berea College Holladay Hall 101 Chestnut, Lincoln Hall Suite B, Box 7010 Berea, Kentucky 40404 Raleigh, NC 27695 Phone: (859) 985-3088 Phone: (919) 515-2143 Email: jeff_amburgey@berea.edu Email: mary_peloquin-dodd@ncsu.edu Carl Balsam Lorrie DuPont North Park University RBC Capital Markets 3225 West Foster Ave 500 W. Madison, 25 th Floor Old Main, 3rd floor Chicago, Illinois 60661 Chicago, Illinois 60625 Phone: (312) 559-1644 Phone: (773) 244-5596 Email: lorrie.dupont@rbccm.com Email: cbalsam@northpark.edu