University of Idaho Debt Policy Dated: December 8, 2016

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1 University of Idaho Debt Policy Dated: December 8, 2016 The University of Idaho ( UI or the University ) is Idaho's major public research university, serving a land-grant mission in support of Idaho's economy and society by educating students at the undergraduate, graduate and professional levels to meet the needs of Idaho and the region. UI maintains a strategic plan. The strategic plan is connected to several key components of UI operations budgeting, enrollment planning, accreditation, program prioritization, hiring, capital construction planning and fundraising. Purpose of Debt Policy Debt is a limited resource that must be managed strategically in order to best support UI s priorities. The use of debt plays a critical role in ensuring adequate and cost-effective funding for its capital plan and operating needs. Any new debt issuance must be approved by the Idaho State Board of Education (the SBOE ) which also serves as the Regents of the University of Idaho. UI is required to abide by and obtain approval in accordance with SBOE policy (V) Financial Affairs, (K) Construction Projects, (for purposes of this subsection, a major capital project is one for which the project cost exceeds $1,000,000). The objectives of this debt policy are as follows: 1. Outline the governing principles to debt issuance. 2. Provide guidance on the available borrowing options. 3. Identify metrics to monitor debt capacity and affordability. 4. Identify debt structuring practices. 5. Establish a framework for analyzing and managing debt portfolio risk and opportunities. 6. Identify and establish guidance for selection of ancillary service providers. 7. Provide an ongoing monitoring and reporting framework. 1. Governing Principles The following is a list of the University s governing principles regarding debt issuance: a) No debt will be issued without the prior approval of the SBOE. b) UI will comply with all applicable laws, regulations, and bond covenants. c) Debt is a limited resource that will be used to fund only capital projects that are consistent with UI s mission, strategic priorities, and capital plan. d) UI will establish an internal compliance plan and will engage in regular debt monitoring under that plan to ensure compliance with this policy, bond resolutions, post issuance compliance requirements and other requirements. e) UI s overall debt status and outlook will be reported to SBOE, at least annually. f) For each project financed, UI will identify a source of repayment sufficient in security and amount to support debt service over the life of the financing, as well as operating costs. g) In general, a competitive sale will be utilized, but UI may utilize a negotiated or private sale when appropriate. h) UI will not enter into any derivative transactions without first adopting a derivatives policy. University of Idaho Debt Policy Page 1

2 2. Borrowing Options UI may incur debt, with or without the issuance of bonds, to be used for a project (as that term is defined in SBOE policy (V) Financial Affairs, (F) Bonds and Other Indebtedness as a cross-reference to section , Idaho Code). In addition to the approval of the issuance of bonds, the SBOE shall act by formal resolution and by a majority roll call vote of all the members of the SBOE to approve the terms of any debt financing transaction. Such indebtedness is not an obligation of the State of Idaho but is an obligation solely of the UI and SBOE. Student fees, rentals, charges for the use of the projected facility, or other revenue may be pledged or otherwise encumbered to pay the indebtedness. Refunding bonds also may be issued. In addition to bonds payable from University revenues, other forms of direct and indirect debt covered by this policy may include but are not limited to: Capital leases Operating leases (considered indirect debt) Bank loans, lines of credit and any other debt instruments provided by third party credit providers Public-Private Partnerships UI also has limited ability to finance projects through the Idaho State Building Authority (the Authority ), whose purpose is to assist in the acquisition, construction, operation and financing of State governmental facilities and facilities of community college districts. The Authority issues bonds secured by annual rental equal to the debt service on the bonds, plus certain administrative costs of the Authority and any required deposits to reserve or operating funds. All facilities leases are subject to annual renewal and once renewed, the annual rents are payable subject to annual appropriation by the State of Idaho. UI recognizes that it has limited control over projects financed through the Authority which require approval from the State when University revenues are not the source of repayment. Therefore, these decisions are outside of the scope of this debt policy. However, UI will consider such debt in its overall assessment of debt capacity and affordability as described below. 3. Debt Capacity and Affordability Debt capacity is a subjective measure, typically associated with balance sheet strength and the ability to repay debt on demand. UI s risk tolerance will inform the amount of leverage that can comfortably be assumed. Debt affordability is also a subjective measure and typically associated with income statement strength. Operating performance and the ability to meet debt service requirements will inform the affordability of existing and additional debt. UI recognizes that its strategy and mission must be the primary drivers of its capital investment and use of debt. Although external credit ratings provide a view on debt capacity and affordability, UI will not manage its debt portfolio to achieve a specific rating. The University will monitor six financial ratios to evaluate its debt capacity and affordability, as described on the following page. These ratios will be evaluated comprehensively and in aggregate, no one ratio holding priority over another. Also outlined with the ratios are the specific targets or targeted ranges that UI will strive to achieve, with the understanding that there may be circumstances and mission critical future projects that drive some ratios temporarily outside of the targeted values. University of Idaho Debt Policy Page 2

3 1) Debt Burden Ratio Actual debt service divided by total operating expenses plus non-operating expenses less depreciation and plus actual principal payments Measures UI s dependence on debt to finance its mission and the relative cost of borrowing to overall expenditures. SBOE policy V. Financial Affairs limits this ratio to no greater than 8.0%. Target: UI strives to limit the Debt Burden Ratio to no greater than 5%. 2) Debt Repayment Ability Maximum Annual Debt Service as a Percent of Operating Expenditures Measures the flexibility to service future debt service in times of weakened financial performance. Target: UI strives to limit the Debt Repayment Ability Ratio to no greater than 5%. 3) Spendable Cash and Investments to Total Debt Cash and investments (at the University and affiliated Foundations) plus funds held in trust by others plus pledges receivable reported in permanently restricted net assets, less permanently restricted net assets, divided by Total Debt Measures the ability to repay bondholders from wealth that can be accessed over time or for a specific purpose. Target: UI targets a minimum Spendable Cash and Investments to Total Debt ratio of 0.75 times. 4) Total Debt to Cash Flow Total Debt divided by operating income plus depreciation, amortization, interest, and other large non-cash expenses Measures the ability to repay its debt from the profitability of its current operations, as opposed to financial reserves, and is a measure of debt affordability. Target: UI strives to maintain a Total Debt to Cash Flow ratio of less than 10 times. 5) Debt Service Coverage Operating income plus depreciation, amortization, interest, and other large non-cash expenses divided by actual debt service payments Measures the sufficiency of operations on a cash flow basis to cover debt service. Target: UI s Debt Service Coverage target is no less than 2 times. 6) Viability Ratio Expendable net assets divided by long-term debt Measures the ability to repay debt with available financial resources. It is a measure of balance sheet leverage and indicates the flexibility to issue additional debt to further the University s mission. Target: UI targets a minimum Viability Ratio of 75%. All ratio calculations will be based on industry standards and include all direct debt and will include University Foundation data. In addition to bonds and bank debt, direct debt includes capital leases and any off-balance sheet or similar financing structures that would be considered similar financing structures that would affect UI s credit rating. Indirect debt, such as operating leases, is excluded from the above calculations. However, indirect debt is considered part of the University s comprehensive debt, which is a broader measure of the University s debt obligations. The University recognizes that the use of indirect debt has an impact on debt capacity and affordability. Prior to the issuance of any new debt, the University Vice President for Finance will evaluate the impact on these ratios for discussion with University Administration. University of Idaho Debt Policy Page 3

4 4. Debt Structuring Practices UI will utilize the following debt structuring practices: State law (Section of the Idaho Code) directs that bond final maturity must not exceed forty (40) years from the date of issuance. UI strives for a final bond maturity that does not exceed thirty (30) years from the date of issuance. The useful life of the asset being financed will be taken into consideration when determining the repayment period. State law (Section of the Idaho Code) directs all sales will be at a price of not less than par and accrued interest. In general, fixed rate debt will be utilized, but UI may incur debt bearing interest at variable rates when appropriate for a particular financing plan and taking into account bond market considerations, UI s liquidity position, and risks associated with variable rate debt (including interest rate risk, remarketing risk, and liquidity renewal risk). UI may issue either tax-exempt or taxable debt, taking into account the following factors: the opinion of bond counsel on use of bond proceeds restrictions, potential use of the facility being financed, post issuance compliance burden, current market rates and cost comparison of debt, and other factors as applicable. UI will seek redemption provisions that will preserve the future call value of the debt obligations. UI will consider credit enhancement when it is cost beneficial and/or materially increases the liquidity of the debt obligations in the secondary market. UI will consider the use of capitalized interest when financing construction costs when revenues pledged to the repayment of the debt would be delayed during the period of construction. UI will limit capitalized interest to no longer than 24 months. 5. Debt Portfolio Risk and Opportunity Management The University will actively manage the risks and opportunities in its debt portfolio. This includes monitoring and seeking opportunities to mitigate risk. However, the University recognizes that in certain situations it may be prudent to assume risk if the potential benefits outweigh the potential risks. In all cases, the University will only assume risk if the University is adequately compensated. Debt Portfolio Risk Framework Debt portfolio risks can be categorized as either components of interest rate risk or liquidity risk. Interest rate risk components impact the University s cost of funds and can generally be budgeted for and managed as part of the University s operations. Liquidity risk components represent more immediate and unexpected events that may require the University to draw on its financial resources. The University will seek to quantify these risks whenever possible as part of its management of the debt portfolio. Described below are key components of these risks. Interest Rate Risk Components Market Rate Risk Credit Risk Tax Risk Customarily thought of as interest rate risk, but limited to market risk only (e.g., risk that interest rates in general will rise due to inflation expectations or other reasons) Risk that any actual or perceived changes in creditworthiness result in a higher cost of capital Risk that any actual or potential changes in Federal and/or State law will adversely impact the pricing or availability of tax-exempt debt University of Idaho Debt Policy Page 4

5 Bank Liquidity or Credit Facility Re-pricing Risk Risk that the cost of liquidity facilities to support uncommitted debt or working capital lines of credit will increase Liquidity Risk Components Roll/Remarketing Risk Bank Liquidity or Credit Facility Renewal Risk Failure of a Liquidity Facility Provider Risk that put bonds, commercial paper, variable rate demand bonds or similar products cannot be rolled or remarketed Risk that liquidity facilities to support uncommitted debt or working capital lines of credit may not be available at all or on acceptable terms Risk that a liquidity facility provider ceases to operate due to bankruptcy or other cause Derivative Products Derivative products, including interest rate swaps, may be employed primarily to manage or hedge the University s interest rate exposure. UI will not enter into any derivative transactions without first adopting a derivatives policy. At this time, the University has no plans to utilize derivative products. Prior to the issuance of any derivative product agreement, the University will seek approval from the SBOE, amend the Debt Policy and adopt guidelines for the use of derivatives. Variable Rate Exposure Exposure to variable interest rates in the University s portfolio may be desirable in order to: Take advantage of repayment and restructuring flexibility. Benefit from historically lower average interest costs. Reduce interest rate risk by providing a match or natural hedge between anticipated interest payments and the projected cash flows from the University s cash and investments. Diversify its pool of potential investors and gain additional access to capital markets The University will monitor the risks from variable rate exposure based on the debt portfolio risk framework. In addition, as a general guideline, the amount of variable rate debt outstanding shall not exceed 20% of the University s overall debt portfolio. Refinancing Opportunities The University will monitor the debt portfolio on a periodic basis to identify opportunities to lower its cost of funding or to optimize its risk position by refinancing or restructuring outstanding debt. The University may also seek to refinance debt for legal reasons, such as to ensure compliance with IRS regulations or to address any bond document related issues. Before proceeding with any refinancing or restructuring transaction, the University will ensure that any transaction complies with applicable Idaho State Law and is approved by the SBOE. University of Idaho Debt Policy Page 5

6 6. Selection of Service Providers The Vice President for Finance or his/her designee shall be responsible for establishing a selection process for securing professional services related to the issuance or management of debt. The professional services shall be provided by qualified professionals and firms with experience in municipal finance, higher education and providing such services to Idaho-based entities. Described below are guidelines for the selection and hiring of professional service providers: a) Bond Counsel The University s Office of General Counsel and the Vice President for Finance shall jointly appoint a qualified bond counsel firm, or issue a request for proposals seeking qualified counsel. b) Financial Advisor/Municipal Advisor The Vice President for Finance shall select a financial advisor who is a registered municipal advisor to assist the University with the issuance and management of debt, as well as with ongoing strategic and financial planning advice. Selection may be done on the basis of a request for proposals. UI will consider only firms which are Registered Municipal Advisor Representatives with the Securities and Exchange Commission (SEC), and project management staff who have passed the MSRB s Series 50 Exam. This provider shall also be independent of any firm seeking to underwrite UI s debt. c) Underwriters The Vice President for Finance shall select underwriters to execute the sale of bonds on the University s behalf, selected by a request for proposals or determined by a competitive bond sale. d) Banks and Other Credit Providers The Vice President for Finance shall select banks or other credit providers to provide financing on an interim or permanent basis for operating or capital purposes. e) Other Service Providers The Vice President for Finance shall periodically solicit for providers of other services necessary to carry out the debt issuance and management activities of the University, including disclosure counsel, paying agent, escrow agent, verification agent, trustee, and services related to post- issuance compliance, among others. 7. Debt Policy Monitoring and Reporting The Vice President for Finance will periodically review the Debt Policy to ensure it remains consistent with the University s objectives and industry standards. Any recommendations for changes to the policy will be brought to the University Administration. On at least an annual basis, the Vice President for Finance, in conjunction with the University s financial advisor/municipal advisor, will review the University s debt capacity and affordability ratios and will report any concerns to University Administration and the SBOE. In addition, as part of the SBOE approval process for external financings, the Vice President for Finance will inform the SBOE of the impact on the University s debt capacity and affordability ratios, as well as the operating budget. In order to access tax-exempt financing, the University must comply with all applicable IRS regulations including, but not limited to, regulations relating to the use of bond proceeds, the use of bond financed facilities, and arbitrage in order to maintain the bond s tax-exempt status. The University will ensure that pre-issuance and post-issuance compliance procedures are in place to ensure full compliance. University of Idaho Debt Policy Page 6