Washington State University Debt Report to Regents January 26, 2017
Overview Debt Policy Governing Principles Debt Profile for Fiscal Year 2016 Rating Information Update Internal Analysis Market Conditions Appendix Selected Peer Universities 1
Debt Policy Governing Principles No debt will be issued without prior approval of the Regents The University will comply with all applicable laws, regulations, and bond covenants Debt is a limited resource that will be used to fund only capital projects that are consistent with the University s mission and strategic priorities, and its capital plan The University s overall debt status and outlook will be reported to the Regents at least annually 2
Debt Profile for Fiscal Year 2016 3
Debt Activities During Fiscal Year 2016 In May, the University issued General Revenue and Refunding Bonds, generating proceeds for the following purposes: Renovation of the Chinook Building on the Pullman campus for student use ($32.0 million of proceeds) Construction of a Student Union Building on the Tri-Cities campus ($4.3 million of proceeds) Refunded three bond series generating net present value savings of $8.3 million (12.8% of refunded par), approximately $630,000 per year Series NPV Savings Par Amount Refunded % Savings of Refunded Par Approximate Average Annual Savings (1) Athletic Facilities Revenue Bonds, Series 2007 $2,126,273 $17,585,000 12.09% $160,000 Housing and Dining System Revenue Bonds, 2008 3,333,509 21,505,000 15.50 195,000 Recreation Center Revenue Bonds, 2009 2,900,658 26,150,000 11.09 275,000 (1) Athletic Bonds, 2007 Annual savings from FY 2018 to 2032 ($125,396 in FY 2017) Housing and Dining Bonds, 2008 Annual savings from FY 2019 to 2039 ($103,356 from FY 2017 to 2018) Recreation Center Bonds, 2009 Annual savings from FY 2020 to 2032 ($80,475 from FY 2017 to 2019) 4
Current Bond Debt Profile Approximately $316 million of new debt issued in the past 5 years (FY 2012-2016) 10 year principal pay down (FY 2017-2026) of currently outstanding debt is 39% 2017 fiscal year end outstanding principal: $608.2 million Project Fiscal Year Debt Issued Martin Stadium Improvements 2012 $73,835,000 Biomedical Health Sciences Building 2013 27,355,000 Athletic Facilities Improvements 2013 41,640,000 Northside Residence Hall 2014 36,205,000 Clean Technology Laboratory 2014 18,130,000 Digital Classroom Facilities 2015 47,430,000 Spokane Teaching Health Center 2015 13,670,000 Elson S. Floyd Cultural Center 2015 13,800,000 Washington Building Health Center 2015 6,000,000 Public Safety Building 2015 6,470,000 Tri Cities Student Union Building 2016 3,660,000 Renovation of Chinook Building 2016 27,320,000 Total: $315,515,000 Outstanding Revenue Bonds by Type $164,240,000 $428,405,000 General Revenue Bonds Auxiliary Revenue Bonds 5
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 Millions $700 $600 Outstanding Principal By Purpose 35% 20% Athletics System Housing and Dining Parking System $500 19% Student Facilities $400 25% 1% Academics and Research $300 $200 $100 $0 Housing & Dining Athletic Facilities Parking System Academics and Research Student Facilities 6
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 Millions Annual Debt Service by Purpose Fiscal year 2017 annual debt service: $52.7 million $60 $50 $40 $30 $20 $10 $0 Housing & Dining Athletic System Parking System Academics and Research Student Facilities 7
Bond Rating Update 8
Rating Activities During Fiscal Year 2016 Moody s WSU utilizes both Moody s and S&P for bond rating services On April 20, 2016, Moody's affirmed all WSU ratings but adjusted the outlook to negative citing: Reduction in WSU s financial flexibility Debt and expense growth outpacing revenue and resource growth Growth in operating commitments with the implementation of strategic initiatives Slow net tuition revenue growth with state tuition freezes Housing & Dining Recreation Center Student Fee Trust & Building General Revenue Moody s Rating Aa2 Aa2 Aa2 Aa2 Aa2 9
Rating Activities During Fiscal Year 2016 S&P On April 21, 2016, S&P affirmed all ratings but adjusted the outlooks to negative due to: Declining financial resources as measured by unrestricted net assets Growing operating deficits that could continue in future years S&P Rating Housing & Dining A Recreation Center A+ Student Fee A+ Trust & Building A+ General Revenue A+ S&P placed WSU on credit watch in connection with review of their Higher Education Scoring Model in November 2016 On December 14, 2016 S&P downgraded the University to an A+ citing the financial trends identified in their April report The outlook was changed to stable as a result of WSU s financial management efforts which S&P believes will strengthen financial performance over time 10
Number of Rated Institutions Moody's Rating Distribution of Public Higher Education Institutions Moody s S&P A Category (128 Institutions) Aaa Aa1 AAA AA+ 70 Aa Category (106 Institutions) 65 Aa2 AA Aa3 AA- A1 A+ A2 A 60 50 40 37 54 40 A3 A- Moody s rating carries a negative outlook and S&P carries a stable outlook 30 20 10 8 15 23 0 Aaa Aa1 Aa2 Aa3 A1 A2 A3 S&P Equivalent: (AAA) (AA+) (AA) (AA-) (A+) (A) (A-) 11
Internal Analysis 12
Debt Policy Ratios The table below shows the University Debt Policy Ratios Ratios FY FY 2016 (1) 2015 (2) Debt Service Coverage (Higher is stronger) 1.62x 1.52x Debt Service to Operations (Lower is stronger) 4.13% 4.09% Debt Burden Ratio (Lower is stronger) 4.35% 4.31% Unrestricted Financial Resources to Direct Debt (Higher is stronger) -0.10x -0.01x (1) Information is calculated using unaudited 2016 financials (2) Calculated using audited 2015 financials 13
Key Credit Ratios Comparison to Selected Peers and Medians Desired Actual Preliminary Direction Direction WSU 2016 WSU 2015 Moody's Aa2 Median (1) Median of Selected Peers (2) Spendable Cash & Investments to Operating Expenses (x) 0.2 0.3 0.6 0.8 Spendable Cash & Investments to Total Debt (x) 0.3 0.5 1.3 1.4 Operating Margin (%) -6.0-6.1 3.4 3.9 Annual Debt Service Coverage (x) 1.6 1.5 2.4 2.7 Reputation and Pricing Power (Annual Change in Operating Revenue (%) 3.9 2.9 5.7 5.4 Total Tuition Discount (%) 38.7 36.9 31.5 23.9 Total Debt (Millions) $711 $692 $657 $587 Source: Moody s MFRA data as of August 15, 2016 (1) Median of all public universities with a Moody s credit rating of Aa2 (37 total) (2) Median of 9 selected peer universities with similar FTE enrollment, outstanding debt, operating revenue and an Aa Moody s rating, 6 universities are in the top 25 public research institution ratings and 5 universities were identified by the Institutional Effectiveness Council as Institutional Peers used to benchmark progress in the 2014-19 strategic plan. See Appendix A for a full list of the selected peer universities 14
Coverage by Auxiliary Housing & Dining* Student Recreation Center Compton Union Building Trust & Building Fee* Athletics - Phase 1 FY 2016 Actual FY 2015 Actual Coverage Requirement Basis 2.86x 2.62x 1.25x Net Revenue 1.29x 1.32x 1.00x Net Revenue 1.05x 1.06x 1.00x Net Revenue >1.00x >1.00x 1.00x 1.03x 1.03x 1.00x Sum Sufficient Pledged Revenue Parking 3.84x 3.59x 1.25x Net Revenue Note: Higher ratio is stronger *External Covenant 15
Market Conditions 16
Interest Rate Trends 4.50% 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% Municipal Market Data (MMD) "AA" Revenue Yield Curve 2014 Sale Current 2015 Sale 2016 Sale 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Maturity Current (1/5/2017) 2016 Sale (5/3/2016) 2015 Sale (2/11/2015) 2014 Sale (1/23/2014) 17
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Interest Rate Trends 7.0% 25-Bond Revenue Index 6.5% 6.0% 5.5% 5.0% 4.5% H&D Rev Bonds, 2008 Trust and Building Fee Bonds 2009A & 2009B TIC: 3.945% (1) H&D Rev Bonds, 2010 (BABs) TIC: 4.714% TIC: 4.785% (1) Athletic Bonds, 2007 TIC: 4.414% General Rev General Rev Bonds, 2014 Bonds, 2012B TIC: 3.987% TIC: 3.225% General Rev Bonds, 2016 TIC: 2.833% 4.0% 3.5% 3.0% 2.5% Student Recreation Center Bonds, H&D Rev 2009 Ref Bonds, TIC: 4.017% 2010 TIC: 3.283% General Rev Bonds, 2012 TIC: 3.539% General Rev Bonds, 2013 TIC: 3.317% General Rev Bonds, 2015 TIC: 3.534% (1) Assumes full BABs subsidy of 35% of interest payable 18
Appendix Selected Peer Universities Rated Aa by Moody s Peers among the Top 25 Public Research Universities North Carolina State University at Raleigh University of Delaware Virginia Polytechnic Institute and State University University of Alabama University of Kansas University of Oregon Other Financial Peers Iowa State University Oregon State University Colorado State University WSU Identified Strategic Plan Peer Institution 19