University of South Florida Financing
Corp.
University of South Florida; Auxiliary System; Public Coll/Univ - Unlimited
Student Fees
Primary Credit Analyst:
Carolyn McLean, New York (1) 212-438-2383; [email protected]
Secondary Contact:
Bianca Gaytan-Burrell, Dallas (1) 214-871-1416; [email protected]
Table Of Contents
Rationale
Outlook
Enterprise Profile
Financial Profile
Related Criteria And Research
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University of South Florida Financing Corp.
University of South Florida; Auxiliary - System;
Public Coll/Univ - Unlimited Student Fees
Credit Profile
US$87.7 mil rmktng certs of parts (Usf Housing System) ser 2012A
Long Term Rating
A+/Stable
New
AA-/Stable
New
US$36.225 mil cap imp rfdg rev bnds (Usf Housing System)
Long Term Rating
US$28.03 mil rfdg certs of part (Usf Housing System) ser 2015A
Long Term Rating
A+/Stable
New
Rationale
Standard & Poor's Ratings Services assigned its 'AA-' long-term rating to the University of South Florida Financing
Corp.'s (USFFC) series 2015 capital improvement refunding bonds, and its 'A+' rating to the corporation's series 2015A
and 2012A certificates of participation (COPs), issued for the University of South Florida (USF).
We also affirmed our 'AA-' issuer credit rating on USF and the 'AA-' rating on the university's unlimited-student-fee
parking bonds and the 'A+' rating on the housing bonds issued by USFFC. The outlook is stable for all ratings.
The series 2015 revenue refunding bonds (Marshall Center Project) will refinance the series 2005C COPs. The bonds
are secured by a pledge of a fee charged to all students which is not capped, as well as additional gross revenues
associated with Marshall Center. Therefore, we view it as an unlimited-student-fee pledge, which consider is on parity
with the parking revenue bond and the ICR. The series 2015A COPs will refinance the series 2005A COPs with no
change in maturity; the bonds will continue to be secured by revenues from the auxiliary housing system. The series
2012A COPs are being remarketed in a fixed-rate public bond mode, from a variable-rate direct purchase bank debt.
The series 2012A will also maintain existing maturity and will continue to be secured by revenues from the auxiliary
housing system. There is no new-money debt in this transaction.
The unlimited-student-fee rating reflects USF's strong market position in the state as the second-largest research
university with diverse revenue sources and consistent state support despite declines in funding in fiscal 2012, and
adequate financial resources.
Enrollment has shown consistent growth and demand has remained stable, further supporting the 'AA-' rating. The
rating on the auxiliary revenue bonds reflects the housing system's very strong demand, consistently strong coverage,
and good cash position. We believe that strong financial management as well as the comprehensive nature of the
housing system support the rating.
The ICR reflects our view of USF's:
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• Historically balanced operating surpluses with the exception of 2012, which resulted in a modest deficit after
significant cuts in state funding;
• Strong financial resources for a public university, with university and direct-support organization (DSO) cash and
investments of $1.2 billion as of June 30, 2014, or 73% of adjusted operating expenses and 274% of debt;
• Good demand and consistent enrollment and status as a comprehensive research university;
• Strong support from the state for higher education and one of the nation's lowest in-state tuition rates; and
• Experienced management team and comprehensive governing policies, reflected in management's ability to react
quickly to the changing economy and operating environment.
Credit factors we believe partly mitigate USF's credit strengths include:
• Limited state capital funding through Public Educational Capital Outlay (PECO) funds and other sources; and
• Increased competition with the University of Central Florida, University of Florida, and Florida State University
because they vie for the same students and resources.
The rating on the housing system debt reflects our view that continued strong demand and occupancy will generate
sustainable strong net coverage. The rating also reflects the strong connection between the auxiliary system and the
university and its continued effective management of the system. USFFC is a USF DSO that supports the university by
operating as a financing conduit, which allows the university greater flexibility in the management of new projects. At
present, USFFC manages a number of projects, including housing and parking facilities, the Marshall Student Center,
and various athletic and medical facilities.
We do not expect the university to issue any additional debt in the next two years, although it has expressed plans to
build replacement and new housing on campus using a public-private partnership (PPP) arrangement. The university is
currently determining the final structure of the transaction. We will evaluate the impact of the new privatized housing
at the time that a contract is finalized.
Founded in 1956, the University of South Florida had a headcount enrollment of 48,578 students for fall 2014, which is
slightly higher than previous years. The main (and largest) campus is in Tampa with additional campuses in St.
Petersburg and Sarasota. The university is the state's only urban-located research institution. The university primarily
competes with other large public universities in the state, including University of Central Florida, University of Florida,
and Florida State University.
Outlook
The stable outlook reflects our view that over the next two years, USF will maintain good operating performance,
financial resource ratios in line with current levels, and solid demand and enrollment. We also expect that over the
next two years demand for housing and student services will likely generate sufficient net revenues that exceed
coverage requirements for the auxiliary housing bonds.
We could consider a positive rating action over the next two years if the university experiences stabilized operating
and capital appropriations while strengthening other revenue sources in a sustainable manner, improves financial
ratios relative to the rating category, and minimizes additional debt issuance. Barring a significant increase in debt
without commensurate growth in financial resources, we believe a negative rating action during the outlook period is
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unlikely given the university's strong financial position and stable enrollment and demand.
Enterprise Profile
Demand and enrollment
USF demonstrates continued enrollment growth, solid demand and good student quality. As of fall 2014, total
enrollment was 48,578, or 39,165 full-time equivalents (FTE), about 76% of whom are undergraduates. Over the past
several years, enrollment has increased only slightly on a year-over-year basis, reflecting management's goal of
limiting FTE enrollment to 40,000. Transfer students continue to matriculate at nearly 5,000 annually, supported by
strong articulation agreements across Florida higher education institutions. In addition, graduate and professional
program enrollment also grew slightly over previous years, to 10,555 (7,397 FTE) in fall 2014. Continued enrollment
growth is impressive given that the state of Florida chose to make Florida Polytechnic, formerly the Lakeland campus
of USF, a separate entity of its own at the beginning of fiscal 2013. Management states that overall enrollment was not
affected by the spinoff, but that the financial results in fiscal 2013 reflected a cost to transfer the assets of Florida
Polytechnic. We expect continued modest growth in enrollment in the next few years.
Demand has remained stable over the last few years with good selectivity relative to its peers and solid matriculation
rates. In fall 2014, selectivity was 43% and matriculation was 30%, which are consistent with historical results.
Freshmen retention was also a strong 87%, supported in part by good student quality, as measured by the average
entering class SAT score of 1191 and the average ACT score of 27 – both above the national average. The university
continues to broaden its diversity by drawing from all parts of the state but, as a whole, remains primarily an in-state
institution with approximately 87% of fall 2014 students listed as Florida residents. We expect demand to remain
strong in coming years.
After many years of double-digit in-state tuition growth, the last two years have shown flat tuition rates; the Florida
resident tuition costs are $6,410 and $20,910 (including room and board) while the out-of-state costs are $17,324 and
$31,824, respectively. The current leadership in Florida has held tuition rates steady to maintain affordability. We note
the tuition levels are modest relative to other state university systems and the cost remains attractive to students, both
in-state and out-of-state.
Management
The university reports no major management changes over the past year. The president has been with the university
over 10 years and, according to management, is expected to continue as president for the near term. The university
recently hired a new head of the health group, which includes the college of medicine, other health-related colleges,
and associated research functions. We believe that this appointment underscores the university's strategy to build and
improve health-related programs. Management plans to move its medical college campus to downtown Tampa, closer
to the associated hospitals, after a donor gifted a parcel of land to the university for development. USF expects to fund
this project with a combination of state appropriations and fundraising. Over the same time, the board of trustees has
been stable other than normal turnover. We believe that management is quite capable, has a great deal of experience,
and has adequate policies and practices relative to peers. We do not expect material changes in management
positions, practices, or policies in the near term.
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Financial Profile
State appropriations
In our view, Florida has traditionally provided strong support for higher education, although adverse economic
conditions resulted in a significant decline in funding in 2012, which was reinstated in subsequent years and is
expected to steadily increase. Additionally, the state has decreased the funding available for capital projects,
specifically related to PECO, which is funded through a utility tax that we do not expect to materially change in the
next few years.
USF's state appropriations reached their lowest point in fiscal 2013 at $251 million, 18% lower than the previous year.
Fiscal 2014's state appropriations rose 29% to $322.5 million, a level more in line with prerecession funding levels.
Fiscal 2015 appropriations were a modest increase over fiscal 2014 and we expect further increases as the economy in
Florida rebounds. The state also added a portion of performance-based funding based on a variety of metrics in fiscal
2014. Management states that it compares favorably to metrics included in the performance-based funding and
expects to continue to receive additional funding as a result of good performance. Although we view this favorably, the
portion of performance funding is still relatively modest when compared to total state operating appropriations.
Like many universities in Florida, capital appropriations were cut significantly at USF. Although nominal levels of
capital appropriations have been low in the past several years, USF states it has received a meaningful portion of
capital funds from the state. We expect that capital funding will strengthen slightly over time, although the Florida
leaderhip's debt-averse stance will, we believe, limit the state's ability to fund capital projects beyond current levels in
the near term. The university notes that the state has committed to financing most of the cost of building its new
medical campus in downtown Tampa with appropriations of approximately $112 million, payable over the next several
years. Construction of the new facility is expected to start in fall 2016.
Financial operations
Operating performance has been consistently positive with solid revenue diversity relative to peers. Fiscal 2014
operating performance resulted in a $107.5 million surplus, or a good 6.5% operating margin. Performance was
stronger than in the past two years, due in large part to improved state funding. Stronger returns also contributed to
the results although if investment income were adjusted to previous levels, performance would have remained positive
on an adjusted basis. We expect fiscal 2015 to close with another operating surplus, although it will be more modest,
given pressures from maintaining flat tuition levels and tight research revenue due to the current federal research
funding environment.
Overall, we consider revenues diverse; in fiscal 2014, 37% of revenues came from students (tuition and auxiliary
sources), 18% from state appropriations, 12% from grants and contracts, 10% from tax revenue, and the remainder
from other support and investments. We believe that this diversity is a key credit strength of the university and that the
mix will remain stable.
Management reports relatively stable research grants and contracts revenue over the last few years, with slight
declines in fiscal 2011-2013. USF expects to continue expanding its research capacity, particularly after the expansion
of its health campus in downtown Tampa. Approximately half of research grants are federally funded by National
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Institutes of Health, which we believe could reduce its funding. However, management is working to diversify funding
sources and have received grants from the Department of Defense, among other agencies, in the last two fiscal years.
In Florida, only the University of Florida receives more research grant funding than USF. In spite of national declines
in federal research funding, management believes various programs, including a new cybersecurity degree program,
will continue to drive research revenue to the university. We believe that research revenue will likely remain stable at
best given the current federal environment.
Housing system
The security for the housing system is a gross revenues pledge that continues to provide strong coverage and which
we view as strong pledge due to the size of the system with 5,908 beds on two campuses and occupancy rates near, at,
or above 100%. The fiscal 2014 gross revenues of $50 million and net revenues of $22.8 million provide good net 1.39x
coverage of debt service, which is roughly equal to maximum annual debt service (MADS). Management plans to take
approximately 1,000 beds off line as it closes a current housing complex in order to build a new one. Management
expects to sustain solid coverage even as it reduces the number of beds in the next few years. As the university's
housing serves only a small percentage of its full-time undergraduates, we expect demand and occupancy to remain
strong. The comprehensive and multicampus nature of the housing revenues further supports the 'A+' rating.
Financial resources
Including its DSOs, the university has solid adjusted unrestricted net assets of $494 million in fiscal 2014, representing
30% of adjusted operating expenses and, when including reserves, 113% of outstanding debt. As of the same date,
cash and investments, including the DSOs, were $1.2 billion, equal to 73% of adjusted operating expenses and 274% of
debt. We expect financial resource levels in the next few years to remain consistent with current ratios. The three bond
issuances in 2015 are all refundings, so we do not expect an impact on the financial resource ratios.
The investments are made up of university and DSO operating funds, as well as an endowment held by the foundation.
The foundation endowment funds totaled about $447 million as of June 30, 2014, with another $583 in other long-term
funds. The asset allocation of the total funds as of the same date was 14% cash, 43% fixed income, 18% domestic
equity, 14% international equity, 4% real assets, and 6% alternatives. We believe that the asset allocation is
conservative and liquid, providing the university with adequate access to liquid resources if necessary.
The university's investment policy requires the allocation of investments to short-term operating portfolios first, which
we believe supports our view that USF has solid financial resources. USF's investment policy and investment
committees govern all investments. The university uses outside investment managers to manage individual portfolios.
Fundraising
While the university is still quite young, it has more than 224,000 alumni; however, we understand that many alumni
have not yet reached their peak-giving years. Nevertheless, the university is currently in a $1 billion campaign and has
raised approximately $830 million to date and expects to reach or exceed the goal by 2018. We believe the solid
fundraising will support USF's growth and help to offset reduced capital appropriation from the state.
Debt
As of June 30, 2014, the university had approximately $437 million of debt. Of the total, a portion is secured by
unlimited student fees, and the majority is secured by gross revenues of the housing auxiliary system, which we view
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as a narrower pledge of revenues than the unlimited-student-fee bonds. The housing bonds, secured by a gross
revenue pledge, are all on parity. This includes all gross income and revenues of facilities owned by USFFC, including
existing student housing facilities on both the Tampa and St. Petersburg campuses, a structured parking facility located
on the St. Petersburg campus. There is also a small portion of debt secured by revenues from the health care system,
athletic facilities, and the USF research foundation bonds. Although we do not expect the university to issue additional
debt in the near term, we expect management to enter into a PPP to build replacement- and new-bed housing on the
Tampa campus. We will evaluate the credit impact at the time an agreement and structure is reached with a developer,
although we believe the university does have some capacity for additional debt at the current rating.
In September 2013, the university took a $20 million direct purchase taxable loan with Sun Trust Bank to reimburse
itself for a portion of the costs associated with the renovation of the Sun Dome and Convocation Center – USF's
multipurpose arena on campus. The loan is secured by pledged revenues from the arena and do not include additional
pledges of the university. It is not cross-collateralized with any existing debt of the university and as such poses, in our
view, minimal liquidity or additional credit risk for USF. In 2012 the university refunded its housing variable-rate
demand bonds (VRDBs) for $158 million of direct placement bonds with Wells Fargo Bank. In fiscal 2013, the research
foundation refunded $36 million of VRDBs, which we did not rate, with a direct purchase loan with BB&T Bank. The
bonds were previously structured as VRDBs and were restructured into bank loans to avoid remarketing and renewal
risk associated with the letter of credit structure. The terms of the direct purchase loans do not include cross-default
provisions, financial covenants, or events of default beyond nonpayment, which we view as conservative. The
university is remarketing a portion of these direct placement bonds with the current transaction.
Standard & Poor's does not have an underlying rating (SPUR) on any of USF DSOs' synthetically fixed-rate debt.
Currently, the DSOs are a party to eight swaps. Six of these swaps have no collateral posting requirement and only
USF has the right to terminate the swaps. As of June 30, 2014, the aggregate fair value of the swaps was negative $24.5
million and USF was posting collateral of approximately $7 million for the two swaps with collateral posting
requirements. The swap portfolio is diverse in terms of counterparties and expiration dates. USF has debt and
derivative policies and continues to manage its complex debt and derivative portfolios successfully. The university is
terminating one of the swaps with the remarketing of the series 2012A COPs.
The bond covenants require a look-back test to the previous year before USF can issue additional debt and the bonds
must be on parity. The covenants also require a pro forma test of the two fiscal years following project financing. In
addition, the covenants require that net revenues must exceed 110% of MADS plus 100% of operating expenses for
those years. Existing and pro forma revenues and expenses provide solid coverage to meet covenant requirements and
for MADS on a net basis. The university foundation has agreed to provide additional support for the difference
between the activity and student-fee revenue and the allocable portion of MADS, if required, for the series 2010A and
B COPs.
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University of South Florida
--Fiscal year ended June 30--
Medians
2015
2014
2013
2012
2011
Public Colleges &
Universities 'AA' 2013
Headcount
48,578
48,330
47,854
47,362
47,800
35,330
Full-time equivalent
39,165
38,951
38,634
37,990
38,026
30,807
Freshman acceptance rate (%)
42.9
42.1
42.7
37.2
42.7
67.1
Freshman matriculation rate (%)
30.1
31.7
31.8
30.6
32.9
38.0
Undergraduates as a % of total
enrollment (%)
76.0
76.6
77.5
77.8
78.1
77.5
Freshman retention (%)
87.1
86.8
86.0
85.6
87.6
84.0
Graduation rates (five years) (%)
N.A.
60.1
57.1
49.9
44.5
55.2
Adjusted operating revenue ($000s)
N.A.
1,754,327
1,518,146
1,445,139
1,592,837
MNR
Adjusted operating expense ($000s)
N.A.
1,646,808
1,491,643
1,500,295
1,496,698
MNR
Net adjusted operating income
($000s)
N.A.
107,519
26,503
(55,156)
96,139
MNR
Estimated operating gain/loss before
depreciation ($000s)
N.A.
176,644
98,162
12,985
163,542
MNR
Change in unrestricted net assets
(UNA; $000s)
N.A.
52,101
(24,570)
(54,317)
54,647
MNR
State operating appropriations ($000s)
N.A.
322,514
250,932
305,549
329,219
MNR
State appropriations to revenue (%)
N.A.
18.4
16.5
21.1
20.7
21.4
Student dependence (%)
N.A.
37.0
40.4
39.8
33.8
MNR
Healthcare operations dependence
(%)
N.A.
N.A.
N.A.
N.A.
N.A.
MNR
Research dependence (%)
N.A.
N.A.
N.A.
N.A.
N.A.
MNR
Endowment and investment income
dependence (%)
N.A.
6.2
4.2
0.9
6.2
MNR
Outstanding debt ($000s)
N.A.
437,940
436,421
452,527
463,466
627,000
Proposed debt ($000s)
N.A.
155,000
N.A.
N.A.
N.A.
MNR
Total pro forma debt ($000s)
N.A.
437,940
N.A.
N.A.
N.A.
MNR
Pro forma MADS
N.A.
N.A.
N.A.
N.A.
N.A.
MNR
Current debt service burden (%)
N.A.
0.29
0.33
0.30
0.38
4.10
Current MADS burden (%)
N.A.
2.06
2.14
2.13
2.09
MNR
Pro forma MADS burden (%)
N.A.
N.A.
N.A.
N.A.
N.A.
MNR
Endowment market value ($000s)
N.A.
449,777
391,673
357,302
371,064
585,062
Related foundation market value
($000s)
N.A.
672,763
500,515
461,246
473,219
524,896
Cash and investments ($000s)
N.A.
1,200,536
1,050,239
1,078,365
1,224,122
MNR
UNA ($000s)
N.A.
413,730
361,629
386,199
440,516
MNR
Adjusted UNA ($000s)
N.A.
494,097
428,383
427,126
465,532
MNR
Enrollment and demand
Income statement
Debt
Financial resource ratios
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University of South Florida (cont.)
Cash and investments to operations
(%)
N.A.
72.9
70.4
71.9
81.8
66.9
Cash and investments to debt (%)
N.A.
274.1
240.6
238.3
264.1
168.0
Cash and investments to pro forma
debt (%)
N.A.
274.1
N.A.
N.A.
N.A.
MNR
Adjusted UNA to operations (%)
N.A.
30.0
28.7
28.5
31.1
MNR
Adjusted UNA plus debt service
reserve to debt (%)
N.A.
113.0
98.8
95.0
103.5
88.3
Adjusted UNA plus debt service
reserve to pro forma debt (%)
N.A.
113.0
N.A.
N.A.
N.A.
MNR
Average age of plant (years)
N.A.
8.3
7.8
7.7
7.9
12.1
OPEB liability to total liabilities (%)
N.A.
9.1
7.3
4.9
2.8
5.3
N.A.--Not available. MNR--Median not reported. MADS--Maximum annual debt service. Total adjusted operating revenue = unrestricted revenue
less realized and unrealized gains/losses and financial aid. Total adjusted operating expense = unrestricted expense plus financial aid expense.
Net operating margin = 100*(net adjusted operating income/adjusted operating expense). Tuition dependence = 100*(gross tuition
revenue/adjusted operating revenue). Current debt service burden = 100*(current debt service expense/adjusted operating expenses). Current
MADS burden = 100*(maximum annual debt service expense/adjusted operating expenses). Cash and investments = cash + short-term &
long-term investments Expendable resources = unrestricted net assets + temp. restricted net assets - (net PPE- outstanding debt). Average age of
plant = accumulated depreciation/depreciation and amortization expense.
Related Criteria And Research
Related Criteria
• USPF Criteria: Higher Education, June 19, 2007
• USPF Criteria: Contingent Liquidity Risks, March 5, 2012
Related Research
• Alternative Financing: Disclosure Is Critical To Credit Analysis In Public Finance, Feb. 18, 2014
• Standard & Poor's Reclassifies 157 U.S. Public Universities; They Are No Longer Government-Related Entities, Dec.
5, 2014
Ratings Detail (As Of April 3, 2015)
University of South Florida Financing Corporation cert of parts
Long Term Rating
A+/Stable
Affirmed
AA-/Stable
Affirmed
University of South Florida ICR
Long Term Rating
Florida
University of South Florida, Florida
Florida Brd of Governors (University of South Florida) pkg fac
Unenhanced Rating
AA-(SPUR)/Stable
Affirmed
Florida (Florida Board of Education) (University of South Florida) pkg fac
Unenhanced Rating
AA-(SPUR)/Stable
Affirmed
University of South Florida Fincg Corp, Florida
University of South Florida, Florida
University of South Florida Fincg Corp
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Ratings Detail (As Of April 3, 2015) (cont.)
Unenhanced Rating
A+(SPUR)/Stable
Affirmed
Many issues are enhanced by bond insurance.
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