Annual. Investment Policy Report. August 18, 2011 Board of Trustees Finance & Audit Workgroup

Transcription

1 Annual Investment Policy Report August 18, 2011 Board of Trustees Finance & Audit Workgroup

2 Annual Investment Policy Report Policy Requirements (Policy Adopted 2006) Establish an investment program for maximum return with an acceptable degree of risk and at an acceptable cost. Establish a framework for active, professional, investment management. States responsibilities of the parties involved to structure and manage investment portfolios, evaluate returns and risks, and to report investment performance. Under the Policy, the University CFO and University Treasurer are authorized to prudently manage funds of the University; the CFOs of the DSOs are authorized to manage funds of the DSOs. Investments shall not be made unless approved by the University CFO or Treasurer or DSO CFO. The Treasurer or DSO CFO will provide an Investment Report to the University CFO and the Board of Trustees on the Investment Performance compared to Primary and Secondary Objectives. [ 2 ]

3 Annual Investment Policy Report Policy Objectives Primary Performance Objective A total portfolio return which outperforms appropriate market returns over a rolling 3-year horizon, net of expenses. Secondary Performance Objective A rolling 5-year total return of greater than the rate of inflation (CPI) plus 5.00% (3.00% for fixed income), after fees and expenses. [ 3 ]

4 Annual Investment Policy Report USF Investment Management Large and Growing USF System Cash & Investments $1.2 Billion Portfolios Governed by Investment Committees Independent Members with Investment Expertise. Balanced Investment Management Investment Committees and Management (Treasurer and DSO CFOs) Retain Authority and Responsibility, Utilize Investment Consultants and Diverse Investment Managers. Investment Portfolios are a Source of USF Balance Sheet Strength, Store of Value for Gifts and Donations, and Source of Long-Term Earnings. S&P states that USF has strong liquidity levels for a public university in our opinion, with cash and investments of $1.1 billion or 88% of operating expenses and 211% of outstanding debt. [ 4 ]

5 Annual Investment Policy Report USF Investment Portfolios 10 USF Investment Portfolios Defined by Legal Entities: Foundation Endowment - $368 million University Portfolio - $572 million 8 DSO Portfolios - $243 million 60% of the Total Portfolio is Comprised of Short-Term Cash and Investments. 40% of the Total Portfolio is Comprised of Long-Term Investments. 95% of the Combined Portfolio is Comprised of Marketable Securities. All Portfolios are in Compliance with the Investment Policy. [ 5 ]

6 Annual Investment Policy Report Investment Performance 1-Year Combined Investment Return = 6.66%, Underperformed Index Combined Return underperformed index by 9 basis points. Endowment returned 14.5%, though underperformed its policy index by 60 basis points. 3-Year Combined Investment Return = 3.75%, Exceeds Index Combined Return exceeded index by 46 basis points. 8 of 10 portfolio returns exceeded index returns. 5-Year Combined Investment Return = 4.19%, Exceeds Index Index equals CPI + adjusted return objective Combined return exceeded index by 16 basis points 5 portfolios above and 5 portfolios below 5-year index returns [ 6 ]

7 USF INVESTMENT REPORT As of March 31, 2011 (In Thousands) TOTAL PORTFOLIO INVESTMENT PORTFOLIO BALANCES Combined 1 Endowment Operating Funds ASSET CLASS USF TOTAL INVESTMENTS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA MSSC HPCC RESEARCH ALUMNI SUNDOME SHORT TERM Cash Equivalent (< 180 days) $267,064 $114,043 $72,728 $29,577 $40,117 $1,337 $6,985 $1,940 $378 $283 Fixed Income - Domestic (+ 180 days) $442,306 $413,683 $12,900 $2,002 $13,721 SHORT TERM SUBTOTAL $709,370 $0 $527,726 $72,728 $29,577 $53,017 $1,337 $8,987 $15,661 $378 $283 LONG TERM Fixed Income - Domestic $141,232 $83,445 $58,747 $3,880 $1,325 Fixed Income - Foreign Equity - Domestic $139,168 $139,168 $5,443 $3,644 $1,195 Equity - Foreign $92,788 $80,451 $11,222 $3,147 $1,115 $2,107 $691 Real Assets $44,006 $32,090 $10,066 $1,255 $1,850 $840 $275 Alternative Investments $56,569 $32,810 $22,657 $1,283 $1,102 $859 $282 LONG TERM SUBTOTAL $473,763 $367,964 $43,945 $0 $69,875 $4,067 $0 $0 $11,330 $3,768 $0 TOTAL PORTFOLIO $1,183,133 $367,964 $571,671 $72,728 $99,452 $57,084 $1,337 $8,987 $26,991 $4,146 $283 TOTAL PORTFOLIO as of 3/31/10 $1,039,996 $339,179 $517,684 $34,496 $93,501 $40,116 $1,762 $7,000 $27,187 $3,423 $480 1 FOUNDATION Operating Funds totaling $14,392,000 invested in the ENDOWMENT Fund are eliminated in the Consolidated Investment balances. RESEARCH FOUNDATION Operating Funds totaling $9,636,000 invested in the ENDOWMENT Fund are eliminated in the Consolidated Investment balances. ALUMNI ASSOCIATION Operating Funds totaling $4,091,000 invested in the Foundation OPERATING and ENDOWMENT Funds are eliminated in the Consolidated Investment balances. [ 7 ]

8 USF INVESTMENT REPORT As of March 31, 2011 TOTAL PORTFOLIO PORTFOLIO ASSET ALLOCATION Policy Endowment Operating Funds ASSET CLASS LIMITS Minimum Maximum FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA MSSC HPCC RESEARCH ALUMNI SUNDOME SHORT TERM Cash Equivalent (< 180 days) 0% 100% 22% 100% 100% 76% 100% 78% 12% 100% 100% Fixed Income - Domestic (180 days +) 0% 90% 78% 24% 22% 88% SHORT TERM TOTAL 0% 100% 100% 100% 100% 100% 100% 100% 100% 100% LONG TERM Fixed Income - Domestic 20% 75% 23% 84% 1 34% 35% Fixed Income - Foreign 0% 20% Equity - Domestic 25% 75% 38% 8% 1 32% 32% Equity - Foreign 0% 25% 22% 9% 4% 8% 19% 18% Real Assets 0% 20% 8% 8% 2% 13% 7% 7% Alternative Investments 0% 20% 9% 18% 2% 8% 8% 8% LONG TERM TOTAL 100% 35% 2 0% 100% 29% 3 0% 0% 100% 100% 0% 1 FOUNDATION exception to Investment Policy Asset Allocation Guidelines granted on December 7, The UNIVERSITY is implementing its long-term investment portfolio over a period of time according to its Implementation Plan. 3 UMSA is implementing its long-term investment portfolio over a period of time according to direction from its Investment Committee. [ 8 ]

9 USF INVESTMENT REPORT As of March 31, 2011 TOTAL PORTFOLIO PERFORMANCE OBJECTIVE - 1 YEAR ANNUAL AVERAGE Endowment Operating Funds ASSET CLASS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA MSSC HPCC RESEARCH ALUMNI SUNDOME SHORT TERM Cash Equivalent (< 180 days) 0.24% 0.02% 0.20 % 0.09% 0.02% 0.25% 0.21% 0.17 % 0.25% Fixed Income - Domestic (180 days +) 3.16% 7.43% 2.97% 2.97% LONG TERM Fixed Income - Domestic 9.11% 6.29 % 9.11% 7.85% Fixed Income - Foreign Equity - Domestic % % % % Equity - Foreign % 10.70% % 10.70% % % Real Assets % 24.80% % 24.80% % % Alternative Investments ¹ NA 5.95% NA 5.95% NA NA WEIGHTED PORTFOLIO RETURN ² % 3.10% 0.02% 5.80 % 2.37 % 0.02% 0.86% 7.61 % % 0.25% POLICY INDEX / WEIGHTED INDEX RETURN % 3.07% 0.02% 4.70% 2.23% 0.02% 0.84% 7.94 % % 0.18% RELATIVE PORTFOLIO RETURN (0.60)% 0.03 % 0.00% 1.10 % 0.14% 0.00 % 0.02% (0.33)% (0.21)% 0.07% COMBINED 1-YEAR RETURNS 6.66 % COMBINED 1-YEAR INDEX RETURNS 6.75 % WEIGHTED 1-YEAR RELATIVE RETURNS (0.09)% ¹ The Endowment Private Equity and Venture Capital Investments do not lend themselves well to interim return calculations. ² FOUNDATION Endowment and Operating Fund Performance and Weighted Index Returns are based on 1-year average daily balances, not period-end balances. ³ Information not available, certain investments have not been in existance for 1 year. [ 9 ]

10 USF INVESTMENT REPORT As of March 31, 2011 TOTAL PORTFOLIO PRIMARY PERFORMANCE OBJECTIVE - 3 YEAR ANNUAL AVERAGE Endowment Operating Funds ASSET CLASS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA MSSC HPCC RESEARCH ALUMNI SUNDOME SHORT TERM Cash Equivalent (< 180 days) 0.71% 0.30% NA % 0.30% 0.64% 0.94% 0.05% 0.64% Fixed Income - Domestic (180 days +) 3.64% 3.64% 3.64% 3.64% LONG TERM Fixed Income - Domestic 8.44% 7.07% 8.44% 7.98% Fixed Income - Foreign Equity - Domestic 5.70 % 5.70 % 5.70 % 5.70 % Equity - Foreign (1.80)% NA 3 (1.80)% NA 3 (1.80)% (1.80)% Real Assets (24.30)% NA 3 (24.30)% NA 3 (24.30)% (24.30)% Alternative Investments 1 NA NA 3 NA NA 3 NA NA WEIGHTED PORTFOLIO RETURN % 3.90% 0.30% 3.60% 1.83% 0.30% 1.31% 3.85 % 4.32 % 0.64% POLICY INDEX / WEIGHTED INDEX RETURN 3.80 % 3.51% 0.39% 3.40% 1.68% 0.39% 1.22% 3.53 % 3.67 % 0.50% RELATIVE PORTFOLIO RETURN 0.80 % 0.39 % (0.09)% 0.20 % 0.15 % (0.09)% 0.09 % 0.32 % 0.65 % 0.14 % COMBINED 3-YEAR RETURNS 3.75 % COMBINED 3-YEAR INDEX RETURNS 3.29 % WEIGHTED 3-YEAR RELATIVE RETURNS 0.46 % 1 The Endowment Private Equity and Venture Capital Investments do not lend themselves well to interim return calculations. 2 FOUNDATION Endowment and Operating Fund Performance and Weighted Index Returns are based on 3-year average daily balances, not period-end balances. 3 Information not available, certain investments have not been in existance for 3 years. [ 10 ]

11 USF INVESTMENT REPORT As of March 31, 2011 LONG TERM PORTFOLIO SECONDARY PERFORMANCE OBJECTIVE - 5 YEAR ANNUAL AVERAGE Endowment Operating Funds ASSET CLASS FOUNDATION UNIVERSITY FINANCING FOUNDATION UMSA MSSC HPCC RESEARCH ALUMNI SUNDOME SHORT TERM Cash Equivalent (< 180 days) 2.48% 1.91% NA % 1.91% 2.44% 2.60% 1.91% 2.44% Fixed Income - Domestic (180 days +) 5.11% 5.08% 5.08% 5.08% LONG TERM Fixed Income - Domestic 7.78% 6.91% 7.78% 7.49% Fixed Income - Foreign Equity - Domestic 3.50 % 3.50 % 3.50 % 3.50 % Equity - Foreign 3.40% NA % NA % 3.40% Real Assets (14.70)% NA 7 (14.70)% NA 7 (14.70)% (14.70)% Alternative Investments 1 NA NA 7 NA NA 7 NA NA WEIGHTED PORTFOLIO RETURN % 4.54% 1.91% 4.70% 2.87% 1.91% 3.03% 4.53% 4.28% 2.44% INFLATION BENCHMARK - CPI INDEX 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% 2.27% RETURN OBJECTIVE - LONG-TERM % 0.00% 0.00% 2.33% 0.00% 0.00% 0.00% 1.90% 3.89% 0.00% RETURN OBJECTIVE - ACTIVELY MANAGED % 0.00% 0.00% 0.31% 0.00% 0.00% 0.00% 0.17% 0.37% 0.00% RELATIVE PORTFOLIO RETURN 6 (3.00)% 2.27% (0.36)% (0.22)% 0.60 % (0.36)% 0.76% 0.19 % (2.25)% 0.17% COMBINED 5-YEAR RETURNS 4.19 % INFLATION BENCHMARK - CPI INDEX 2.27 % COMBINED RETURN OBJECT - LONG-TERM 1.61 % COMBINED RETURN OBJECT - ACTIVE MGR 0.15 % WEIGHTED 12-MONTH RELATIVE RETURNS 0.16 % 1 The Endowment Private Equity and Venture Capital Investments do not lend themselves well to interim return calculations. 2 FOUNDATION Endowment and Operating Fund Performance is based on 5-year average daily balances, not period-end balances. 3 UNIVERSITY fixed income portion of its short-term portfolio is based on the Vanguard's Bond Index Fund's returns (beginning January 2008) 4 Only Long-Term Funds are subject to the Policy Return Objective of 3.0% for fixed income and 5.0% for all other asset classes. The Return Objective is calculated based on period-end balances, not 5-year daily average balances. Thus, the Relative Portfolio Return may be affected by changes in asset classes over this period. The Return Objective is weighted between the Short Term Portfolio and the Long Term Portfolio based on period-end balances. 5 Only Long-Term Funds are subject to the Policy Return Objectives for Actively Managed Portfolios of 0.5%. The Return Objective is calculated based on period-end balances, not 5-year daily average balances. Thus, the Relative Portfolio Return may be affected by changes in asset classes over this period. The Return Objective is weighted between the Short Term Portfolio and the Long Term Portfolio based on period-end balances. 6 All entities employ 5-year index benchmarks to assess investment performance in addition to the Policy's real return Secondary Performance benchmark. 7 Information not available, certain investments have not been in existance for 5 years. [ 11 ]

12 Annual Debt Management Policy Report August 18, 2011 Board of Trustees Finance & Audit Workgroup

13 Annual Debt Management Policy Report Policy Requirements (Policy Adopted 2006) To fulfill its mission, the University will need to make strategic capital investments in its facilities that could affect the University s credit. Evaluate the appropriate mix of funding sources, the capital funding structure and the appropriate use of leverage. Conform to the authority granted by Florida and Federal laws, the Board of Trustees and the Board of Governors Debt Management Guidelines for Capital Outlay Projects and be conducted to promote the interests of the University. The Policy is implemented, reviewed and monitored by the University CFO, the Treasurer and the DSO CFO. [ 2 ]

14 Annual Debt Management Policy Report Policy Objectives Identify Eligible Projects for Debt Financing Critical to the mission of the University, ensure that debt capacity is optimally utilized and are self-funded with associated revenues. Maintain Favorable Access to Capital Manage the timing and overall level of debt to ensure low-cost and timely access to the capital markets. Limit Risk Within the Debt Portfolio Balance goal of achieving the lowest cost of capital with the goal of limiting exposure to interest rate risk and other financing and credit risks. Manage Credit to Maintain the Highest Possible Credit Rating Maintaining the highest possible credit ratings will facilitate the issuance of debt at a favorable cost; limit outstanding debt to a level that will maintain acceptable credit ratings from the credit rating agencies. [ 3 ]

15 Annual Debt Management Policy Report USF Debt Management USF Credit Rating = AA2 (Moody s) Rating Reflects University s Strong Student Demand Reflecting Positive Demographic Trends and Relatively Low Net Tuition per Student Rating Reflects Concerns About Variable Rate Debt and Budget Pressures at the State Level USF Rating Outlook Stable Moody s expects USF to maintain a stable student marketing position, a solid financial resource base, a balanced operating performance with continued growth in net tuition per student and to bolster its research enterprise. [ 4 ]

16 Annual Debt Management Policy Report USF Debt Management Program The PFM Group, the leading financial advisor to higher education institutions in the U.S., analyzed USF s debt management program. Conclusions PFM believes that USF s current approach to issuing debt through its Master Finance Program, which created the University s 5 financing Systems, is the most efficient and appropriate method available to Florida public universities. USF s existing Systems are NOT constrained by material financial covenants. USF has responded appropriately and aggressively to changes in the capital markets. [ 5 ]

17 Annual Debt Management Policy Report Debt Management Trends Freshman Acceptance Rate 60.0% 58.8% 55.0% 50.0% 51.2% 50.3% 45.9% 45.0% 42.2% 42.7% 40.0% [ 6 ]

18 Annual Debt Management Policy Report Debt Management Trends Operating Profit $50.0 $40.0 $47.9 $39.1 $30.0 $25.0 Millions $20.0 $10.0 $6.0 $6.3 $0.0 ($10.0) ($20.0) ($12.5) EST [ 7 ]

19 Annual Debt Management Policy Report Debt Management Trends Unrestricted Net Assets $400 $350 $328 $320 $341 $386 $397 $300 $259 Millions $250 $200 $150 $100 $50 $ EST [ 8 ]

20 Annual Debt Management Policy Report Debt Management Trends Outstanding Debt $500 $459 $459 $426 $455 $450 Millions $400 $350 $300 $250 $355 $361 Fixed Hedged Variable $200 $150 $100 $50 $ EST [ 9 ]

21 Annual Debt Management Policy Report Debt Management Trends New Debt Issuance $100 $96 $90 $80 $70 Fixed Variable Millions $60 $50 $47 $42 $51 $40 $30 $29 $20 $10 $0 $ [ 10 ]

22 Annual Debt Management Policy Report Debt Capacity Assessment Ratios (and Desired Trend) PROFITABILITY 2011 EST Moody s Median USF Relative to Peers Operating Margin () 5.1% 2.7% 4.2% 0.6% 0.6% 1.6% Below LEVERAGE Debt Service Coverage () 10.6x 8.1x 8.6x 9.7x 9.9x 2.6x Above Debt / Operating Expense ( ) 1.0% 1.0% 1.1% 0.6% 0.6% 3.3% Above LIQUIDITY Expendable Financial Resources / Debt () 1.0x 0.9x 0.9x 1.2x 1.1x 1.2x Below Total Financial Resources / Debt () 2.3x 1.9x 1.8x 2.2x 2.1x 1.7x Above Expendable Financial Resources / Operating Exp () 0.4x 0.4x 0.5x 0.5x 0.5x 0.4x Above [ 11 ]

23 UNIVERSITY OF SOUTH FLORIDA & AFFILIATES 5-YEAR FINANCIAL PERFORMANCE ($, in thousands) University of South Florida Historical Key Financial Statistics FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 Estimated Total Cash & Investments 313, , , , , ,656 Invested in capital assets 535, , , , , ,325 Unrestricted net assets 259, , , , , ,445 Restricted expendable net assets 133, , , , , ,083 Less: Invested in capital projects (92,250) (170,964) (238,355) (216,781) (158,876) (170,876) Expendable Financial Resources 300, , , , , ,652 Restricted for Nonexpendable (Endowment) 395, , , , , ,926 Peer Medians (AA2) Moody's Investors Service Total Financial Resources 695, , , , , , ,400 FY 2011 Total Debt 355, , , , , , ,800 Depreciation 43,603 45,742 46,003 39,657 48,974 50,500 Interest 3,174 4,081 4,028 3,972 2,324 2,500 Principal payments on debt 4,404 5,145 5,291 5,649 3,594 3,500 Actual annual debt service 7,578 9,226 9,318 9,621 5,918 6,000 Income Statement Revenues: Tuition Revenue 169, , , , , ,000 Less: Scholarship Discounts & Allowances (45,435) (47,732) (52,309) (56,685) (70,894) (65,000) Less: Scholarships & Fellowships Expense (58,098) (66,772) (71,133) (80,109) (89,620) (94,000) Net Auxiliary Enterprise Revenue/CU 64,293 76,157 79,785 90,694 99, ,000 Net Invest Earnings & Gains and Losses 3,021 19,318 25,005 22,956 26,588 14,527 Grants and contracts 284, , , , , ,000 Sales and Services of Educational Depts 657 1, , ,000 Other operating revenue 6,378 6,554 15,923 7,492 7,731 8,000 State Appropriations 319, , , , , ,000 Other Nonoperating Revenue 62,405 65,400 70,688 85, , ,744 Total Revenues 806, , , , ,883 1,021,271 1,205,200 Expenses: Compensation & Employee Benefits 573, , , , , ,000 Depreciation 43,603 45,742 46,003 39,657 48,974 50,500 Interest 3,174 4,081 4,028 3,972 2,324 2,500 Other expenditures 198, , , , , ,000 Total Operating Expenses 819, , , , ,854 1,015,000 1,184,600 Operating Profit (12,516) 47,943 25,006 39,111 6,029 6,271 20,600 Operating Ratios Operating Margin (%) (1.55%) 5.10% 2.68% 4.16% 0.62% 0.61% 1.60% Operating Cash Flow Margin (%) 3.85% 9.97% 7.62% 8.38% 5.64% 5.56% 9.30% Debt Service Coverage (multiple) Capital Ratios Debt Service to Operations (%) 0.92% 1.03% 1.03% 1.07% 0.61% 0.59% 3.30% Expendable Resources to Debt (multiple) Percentage of Variable Rate Debt (%) 56.0% 54.0% 63.0% 63.0% 62.0% 59.0% Expendable Resources to Puttable Debt (multiple) Total Resources to Debt (multiple) Expendable Resources to Operations (multiple) Market Data and Ratios Total Enrollment FTE (#) 35,227 36,892 39,153 39,649 40,858 41,805 34,060 Fall Freshman Selectivity (Acceptance Rate) (%) 58.8% 51.2% 50.3% 45.9% 42.2% 42.7% 66.3% Fall Freshman Matriculation (Yield Rate) (%) 42.7% 38.8% 34.6% 35.8% 31.8% 32.9% 39.8% Net Tuition per student ($) $ 3,527 $ 3,631 $ 3,632 $ 4,115 $ 4,189 $ 4,425 $ 6,755 State Appropriation per student ($) $ 9,065 $ 10,528 $ 9,413 $ 8,730 $ 8,036 $ 7,894 $ 10,143 Educational Expenses per student ($) $ 23,263 $ 24,177 $ 23,157 $ 22,721 $ 23,713 $ 24,279 $ 26,032 Total Tuition Discount (%) 61.0% 63.0% 63.5% 62.2% 66.3% 63.6% 29.8% [ 12 ]

24 USF DEBT PROFILE As of June 30, 2011 USF Party Financing (Housing) Financing (Health) Financing (Athletics) Research USF TOTAL / WEIGHTED Bond Issue Series 2005A Fixed Series 2005B Hedged & Variable Series 2005C Fixed Series 2007 Hedged Series 2010A Fixed Series 2010B Fixed Series 2006A Hedged Series 2007 Hedged Series 2010 CAMLS Fixed Series 2003A Fixed (assigned from Foundation) Series 2010A Fixed Series 2010B Fixed Series 1999 Hedged Series 2004A Hedged Series 2004B Hedged (Taxable) Series 2004C Hedged (Taxable) Parking & Bookstore Revenue Bonds Fixed Outstanding Amount of Bond $37,750,000 $78,200,000 $12,250,000 $39,930,000 $72,175,000 $2,860,000 $15,140,000 $45,020,000 $22,365,000 $20,000,000 $9,905,000 $10,000,000 $13,500,000 $7,600,000 $18,455,000 $2,580,000 $10,635,000 $36,407,763 Total Outstanding Amt per Entity $258,305,000 $87,385,000 $33,405,000 $39,270,000 $36,407,763 $454,772,763 Fixed Rate 4.24% 3.22% 0.25% 4.48% 3.55% 4.42% 5.53% 3.58% 3.40% 4.01% 3.14% 5.21% 4.01% 4.46% 3.52% 5.17% 5.26% 4.40% Weighted Fixed Rate per Entity 3.66% 3.63% 4.11% 4.28% 4.40% 3.80% NOTE: This presentation excludes shorter term debt such as equipment financing and installment purchases. [ 13 ]

25 Annual Derivatives Policy Report August 18, 2011 Board of Trustees Finance & Audit Workgroup

26 Annual Derivatives Policy Report Policy Requirements (Policy Adopted 2006) Derivative instruments such as interest rate swaps are maintained to reduce exposure to particular markets and financial instruments. Derivative instruments are intended to reduce or eliminate risk. Derivative instruments may not be used for speculative purposes. Derivative instruments will conform to authority granted by Florida and Federal laws, the Board of Trustees and the Board of Governors Debt Management Guidelines for Capital Outlay Projects and be conducted to promote the interests of the University. The Policy is implemented, reviewed and monitored by the University CFO, the Treasurer and the DSO CFO. [ 2 ]

27 Annual Derivatives Policy Report Policy Objectives Hedge, mitigate or reduce risk exposures. Avoid open, unhedged derivative transactions. Counterparties must be rated AA- or better at inception. Derivative transactions should be constructed to minimize risks associated with hedging activities, such as counterparty risk, termination risk, basis risk, tax risk, amortization risk, rollover risk and liquidity risk. Legal and financial experts will be used to ensure that the instruments accomplish the intended purpose and protect the interests of the University. [ 3 ]

28 Annual Derivatives Policy Report USF Derivatives Management USF s $257 Million of Swaps Provide an Effective Hedge Against Interest Rate Risk Associated with Variable Rate Debt USF Monitors Change in Fair Value of Swaps (Daily/Monthly, Report Quarterly) and Monitors Counterparty Credit Quality Quarterly Swap Structures Protect USF 6 of 8 swaps have no collateral posting requirement 2 swaps now have a collateral posting requirement due to bond insurer downgrade Only USF has the right to terminate swaps USF Will Carefully Consider Swap Renewal Prior to Termination Remaining terms 4 to 26 years Moody s states that the University s Affiliates (DSOs) are sophisticated users of swaps and they have managed their exposure well in a difficult interest rate environment by budgeting conservatively for monthly swap payments and tracking rate changes on a weekly basis. [ 4 ]

29 USF DERIVATIVES PROFILE As of June 30, 2011 USF Party Financing Research TOTAL / WEIGHTED Bond Issue Series 2005B Housing Series 2007 Housing Series 2006A Health Series 2007 Health Series 1999 Series 2004A Series 2004B Series 2004C Counterparty Royal Bank of Canada Royal Bank of Canada Morgan Stanley Royal Bank of Canada Bank of America Bank of America Bank of America Bank of America Counterparty Credit Rating Initial Underlying Bond Issue Initial Amount of Swap Remaining Amount of Swap Aa1 Aa1 A2 Aa1 Aa3 Aa3 Aa3 Aa3 $92,250,000 $73,700,000 $47,315,000 $22,830,000 $11,500,000 $18,455,000 $4,635,000 $11,455,000 $282,140,000 $80,000,000 $73,700,000 $47,315,000 $22,830,000 $11,500,000 $18,455,000 $4,635,000 $11,455,000 $269,890,000 $78,200,000 $72,175,000 $45,020,000 $22,365,000 $7,600,000 $18,455,000 $2,580,000 $10,635,000 $257,030,000 Effective Date 5/25/2005 9/25/2007 3/16/ /19/2007 6/1/2001 4/1/2006 4/1/2006 4/1/2006 Initial Term 10 yrs 30 yrs 10 yrs 10 yrs 18 yrs 10 yrs 9 yrs 10 yrs Expiration Date 5/25/2015 9/25/2037 3/16/ /19/2017 6/1/2019 4/1/2016 4/1/2015 4/1/2016 Fixed Rate 3.22% 3.55% 3.58% 3.40% 4.46% 3.52% 5.17% 5.26% 3.55% Floating Index Rate 67% LIBOR 67% LIBOR 67% LIBOR 67% LIBOR 67% LIBOR 67% LIBOR 100% LIBOR 100% LIBOR Fair Value of Swap at 6/30/10 (w/ FAS 157 Adj) Fair Value of Swap at 6/30/11 Change in Fair Value - Income Statement (8,260,260) (11,979,235) (5,671,080) (2,770,420) (1,201,596) (2,156,866) (296,484) (1,796,174) (34,132,115) (7,814,968) (10,002,079) (5,411,837) (2,622,281) (1,041,690) (2,035,150) (224,092) (1,672,240) (30,824,337) 445,292 1,977, , , , ,716 72, ,934 3,307,778 Total per USF Party 2,422, , ,948 3,307,778 USF Optional Termination Right Collateral Posting A1 - A3 Yes Yes Yes Yes Yes Yes Yes Yes $10,000,000 $10,000,000 None None None None None None Collateral Posting Requirement Amount over threshold Amount over threshold None None Counterparty is LOC Bank Counterparty is LOC Bank Counterparty is LOC Bank Counterparty is LOC Bank [ 5 ]