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.
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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.
Endowment and Debt Management Forum
7
Debt Issuance is a Two-Way Decision Process
Top Down – Strategy Approach
Bottom Up – Project Approach
◦ Institutional Strategic Plan
◦ Financial Projections
◦ Capital Budgeting Process
◦ Specific Funding Plan
- Identifies Capital Needs
- Project Expense Budget
- Prioritizes Needs
- Revenue Generation Plans
- Analyzes Financial Results
- Sources of Funding and Financing
◦ Debt/Leverage Policies and
Guidelines
- Repayment Schedules
◦ Financial Objectives
◦ Financing Action plan
Endowment and Debt Management Forum
8
Institutional Strategic Plan
Identifies institutional goals and objectives and important elements including :
◦ Mission
◦ Values
◦ Objectives
◦ Priorities
◦ Risk Tolerance
Endowment and Debt Management Forum
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.
Endowment and Debt Management Forum
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.
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
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
Endowment and Debt Management Forum
15
Contact Information
Mary Peloquin-Dodd
North Carolina State University
Holladay Hall
Suite B, Box 7010
Raleigh, NC 27695
Phone: (919) 515-2143
Email: [email protected]
Jeff Amburgey
Berea College
101 Chestnut , Lincoln Hall
Berea, Kentucky 40404
Phone: (859) 985-3088
Email: [email protected]
Carl Balsam
North Park University
3225 West Foster Ave
Old Main, 3rd floor
Chicago, Illinois 60625
Phone: (773) 244-5596
Email: [email protected]
Lorrie DuPont
RBC Capital Markets
500 W. Madison, 25th Floor
Chicago, Illinois 60661
Phone: (312) 559-1644
Email: [email protected]