The University of Akron Fee Pledge Request of $37 Million Submitted to the Ohio Department of Higher Education June 7, 2018
1. Transaction Overview: The University of Akron is seeking approval of a fee pledge request to secure a potential refinancing opportunity. A summary of the proposed transaction, not to exceed $37.0 million, is attached (Attachments A and B). The transaction includes a tax-exempt component of $12.2 million (Series 2012 Bonds), and a taxable portion of 15.7 million (bond Series 2010A). The transaction s aim is to restructure current outstanding bond principal payments over the next five years. The transaction will provide a more consistent debt retirement schedule, and will also provide the University with cash flow relief over the next five years as it changes its recruitment efforts, and is in the process of a comprehensive review of its academic program offerings. The impact of the refinancing will not increase the University s outstanding bond principal and will not extend the overall debt maturity. In addition, the University is also including an approximate $5.0 million liability owed to the University of Akron Foundation for property secured on the University s behalf. The University and its Foundation partnered to acquire properties (30) on the east border of the University s campus removing many blighted properties, while also securing land for future development. The impact of the $5.0 million is shown in the analysis. 2. Fee Impact: The proposed debt issuance will have no direct impact on student tuition and fees. While the University may use unrestricted student fee revenues to support the debt service and other potential operating costs, student fees are not expected to increase as a direct result of this request. 3. Ratio Analysis: Background Senate Bill 6 of the 122nd General Assembly was enacted into law in 1997. It is designed to increase financial accountability of state colleges and universities by using a standard set of measures with which to monitor the fiscal health of campuses. Using the year-end audited financial statements submitted by each public institution, the Ohio Department of Higher Education (ODHE) annually applies these standards to monitor individual campus finances. In addition, Senate Bill 6 requires state colleges and universities to submit quarterly financial reports to the ODHE within 30 days after the end of each fiscal quarter. Ratio Analysis Methodology In order to meet the legislative intent of Senate Bill 6, the ODHE computes three ratios from which four scores are generated. The data and methodology used to conduct the ratio analysis along with The University s figures are as follows:
The University of Akron (in millions) Financial Statement Categories 2013 2014 2015 2016 2017 Expendable net assets Plant debt Total Revenues T otal operating expenses The sum of unrestricted net assets and restricted expendable net assets Total long-term debt (including the current portion thereof), including but not limited to bonds payable, notes payable, and capital lease obligations Total operating revenues, plus total non-operating revenues, plus capital appropriations, capital grants and gifts, and additions to permanent endowments Total operating expenses, plus interest on long-term debt $158.2 $176.8 $168.6 $160.8 $181.7 $407.9 $474.0 $453.6 $441.4 $430.8 $492.6 $497.9 $469.4 $463.8 $453.7 $506.6 $490.0 $479.9 $453.6 $434.2 Total non-operating expenses All expenses reported as non-operating with the exception of interest expenses $0.1 $0.2 $0.4 $0.8 $0.0 Change in total net assets Total revenues (operating and non-operating) less total expenses (operating and non-operating) ($14.2) $7.7 ($10.9) $9.3 $19.5 The methodology for calculating the three ratios and the composite score is as follows: Viability ratio: Expendable net assets divided by plant debt. Primary Reserve ratio: Expendable net assets divided by total operating expenses. Net Income ratio: Change in total net assets divided by total revenues. Composite Score: A weighted summary score of all three ratios. This is the primary indicator of fiscal health. Assignment of Scores Based on the calculations described above, each ratio is assigned a score ranging from zero to five according to the criteria listed in the table below. A score of 5 indicates the highest degree of fiscal strength in each category. Composite Ratio Scores Ratio Weight 0 1 2 3 4 5 Viability Ratio 30% < 0 0 to.29.30 to.59.6 to.99 1.0 to 2.5 > 2.5 or N/A Primary Reserve Ratio 50% < -.1 -.1 to.049.05 to.099.10 to.249.25 to.49.5 or greater Net Income Ratio 20% < -.05 -.05 to 0 0 to.009.01 to.029.03 to.049.05 or greater NOTE: A composite score of or below 1.75 for two consecutive years would result in an institution being placed on fiscal watch. The highest composite score possible is 5.00.
Score 5.0 4.5 4.0 3.4 3.5 3.2 3.2 2.8 2.8 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2013 2014 2015 2016 2017 Composite Score 2.8 3.2 2.8 3.2 3.4 Weighted Viability 0.6 0.6 0.6 0.6 0.6 Weighted Primary Reserve 2.0 2.0 2.0 2.0 2.0 Weighted Net Income 0.2 0.6 0.2 0.6 0.8 Composite Score Fiscal Year 2017 3.4 Amount (in millions) $500 $400 5.0 4.0 Viability Ratio $300 $200 $100 $0 2013 2014 2015 2016 2017 3.0 2.0 1.0 0.0 The Viability Ratio measures the availability of expendable net assets to cover debt should The University need to settle its obligations as of the balance sheet date. Expendable net assets Plant debt Unweighted Viability ratio Amount (in millions) $600 $500 $400 $300 $200 $100 $0 2013 2014 2015 2016 2017 Expendable net assets Total operating expenses Unweighted Primary Reserve ratio 5.0 4.0 3.0 2.0 1.0 0.0 Primary Reserve Ratio The Primary Reserve Ratio measures the financial strength of The University by indicating how long the institution could function using the expendable reserves without relying on additional net assets generated by operations. Amount (in millions) $550 $450 $350 $250 $150 $50 -$50 2013 2014 2015 2016 2017 Changes in net assets Total revenues Unweighted Net income ratio 5.0 4.0 3.0 2.0 1.0 0.0 Net Income Ratio The Net Income Ratio measures The University's profitability or ability to operate within its means. Continued gains or losses measured by the ratio will impact all the other fundamental elements of financial health over time. The refunding of the series 2010A and 2012 bonds plus the issuance for the amount owed to the Foundation do not impact the financial ratios of the University because these liabilities were already included in the current SB 6 calculation.
4. Financial Outlook and Bond Rating: Excerpts from the recent Moody s rating review are as follows (A1, stable outlook): Market profile: enrollment strategies coupled with programmatic strength should stabilize enrollment Akron's broad array of programs, highlighted by strengths in niche areas such as polymer science, mechanical engineering, and performing arts will continue to support the university's very good strategic positioning. Following years of enrollment declines, incoming class enrollment is showing signs of stabilizing with first year fall 2017 undergraduate matriculation up over 10% compared to the prior year. The university is pursuing several strategies, which, if successful, should increase enrollment and improve retention. First, it will differentiate itself from its competitors by targeting higher caliber students. As a result, the university expects the fall 2018 incoming class to be slightly below fall 2017's but, by targeting students with a high academic profile, freshman to sophomore retention which was 73% in fall 2017, should improve. Additionally, it is continuing to reach out to non-traditional aged students and looking to capture more outof-state students. Favorably, Akron's number of dually enrolled high school students is growing. Lastly, the university has launched a guaranteed scholarship program for incoming students with aid levels increasing annually. After two years with no tuition increases for in-state undergraduate students, the university will introduce the Ohio State Tuition Guarantee in fall 2018 for fiscal 2019. Under the guarantee, tuition and fees will increase 6% for incoming freshmen and remain at that level for three additional years. Future incoming classes will potentially have higher guaranteed tuition, indexed to inflation, subject to State approval. Operating performance: expense reductions mitigating tough revenue environment Despite demand challenges and tuition pricing constraints, the university's operating performance will remain stable driven by controlling expenses. Akron has reduced expenses over 14% since fiscal 2013 driving higher operating cash flow margins averaging over 16% in fiscal 2016 and 2017. Expense management has been a key area of focus for the university which has eliminated positions, implemented a voluntary retirement program for faculty (approx. 50 employees), and prudent use of capital investment. The university is also in the process of evaluating its programmatic offerings. Favorably, the 6% tuition increase for incoming in-state freshmen and subsequent three-year tuition freeze for the fall 2018 class will augment revenue beginning in fiscal 2019, but will constrain revenue growth in later years. For fall 2017, the university reduced its graduate tuition waiver and stipend funding to improve net tuition revenue; additional reductions may be pursued. Continued spending discipline will help mitigate, but not fully offset, the revenue challenges Akron is facing until the university's expense base is reduced to a size that meaningfully supports the new, lower enrollment levels. Sustained generation of double digit operating cash flow margins is critical to cover high annual debt service. Favorably, the university has benefited under the state's performance funding model. State operating support, representing 27% of fiscal 2017 operating revenue, has increased nearly 15% since fiscal 2013. However, management estimates that fiscal 2018 state funding will decline by approximately 4% versus the prior year. The university believes its strategy to target more academically qualified students will translate into higher state performance-based funding in future years. ERVICE S PUBLIC FINANCE Wealth and liquidity: strong financial reserves and healthy philanthropy The university's financial cushion for debt and operations will remain relatively stable and in line with the median for A1-rated public universities. Spendable cash and investments have improved since fiscal 2016 and provided 0.7x coverage of both debt and operations at the end of fiscal 2017. Akron's overall wealth is credit strength with nearly $435 million in total cash and investments over double the median for A1-rated public universities. Akron's philanthropic support has been healthy, with three-year gift revenue of $22
million, nearly 5x higher than A1-rated peers. The university is currently in the midst of a $20 million scholarship campaign towards which approximately $9 million has been raised to date. Akron's liquidity position will remain sound and serves as a stabilizing factor in the event of operating pressures. The university had 195 days of monthly cash on hand as of fiscal end 2017, well above the Moody s A1-rated public university median of 138 days. Favorably, an all fixed rate debt structure and no unfunded capital commitments provide little risk. Current University of Akron Bond Ratings The University bond ratings were reviewed/revised in May of 2018 indicating the University s profile remains strong and stable. University Bond Rating Moody s A1 Stable May, 2018 Fitch A+ Stable May, 2018 5. Institutional Plant Debt: The University of Akron continues to prudently manage its entire fixed rate debt portfolio. The University has $401,945,911 of outstanding debt as of June 30, 2017.This amount represents a combination of general receipts bonds ($384,483,411) and capital lease/other commitments ($17,462,000). The annual commitment to service the outstanding debt for Fiscal Year 2018 (pending this transaction) is approximately $38 million. The repayment sources allocated for Fiscal Year 2017 debt service consisted of a combination of user fees (65%) and a general fund allocation (35%). All outstanding debt is fixed rate in nature. 6. Campus contact: Brian E. Davis Associate Vice-President and Controller Akron, Ohio 44325-6221 Office: 330.972.6084 Cell: 330-612-1209 Bdavis@Uakron.edu
ATTACHMENT A Savings Summary The University of Akron Series 2018 - Restructuring by Series (incl. $5.0 million new money) Date Prior Debt Service Total Refunding Debt Service Savings Present Value to 08/28/2018 @ 3.91% 6/30/2019 $5,722,970 $500,407 $5,222,563 $5,154,570 6/30/2020 6,539,310 1,464,605 5,074,705 4,820,170 6/30/2021 6,535,140 1,464,605 5,070,535 4,634,983 6/30/2022 6,532,000 1,464,605 5,067,395 4,457,813 6/30/2023 6,528,670 1,464,605 5,064,065 4,287,253 6/30/2024 3,632,000 1,464,605 2,167,395 1,765,878 6/30/2025 0 1,464,605 (1,464,605) (1,148,381) 6/30/2026 0 1,464,605 (1,464,605) (1,105,169) 6/30/2027 0 1,464,605 (1,464,605) (1,063,583) 6/30/2028 0 1,464,605 (1,464,605) (1,023,562) 6/30/2029 0 1,464,605 (1,464,605) (985,047) 6/30/2030 0 5,294,605 (5,294,605) (3,426,990) 6/30/2031 0 5,293,745 (5,293,745) (3,297,502) 6/30/2032 0 5,294,170 (5,294,170) (3,173,676) 6/30/2033 0 5,295,290 (5,295,290) (3,054,902) 6/30/2034 0 2,156,500 (2,156,500) (1,197,291) 6/30/2035 0 2,157,000 (2,157,000) (1,152,506) 6/30/2036 0 2,159,000 (2,159,000) (1,110,167) 6/30/2037 0 2,157,250 (2,157,250) (1,067,528) 6/30/2038 0 2,156,750 (2,156,750) (1,027,120) 6/30/2039 0 2,157,250 (2,157,250) (988,700) 6/30/2040 0 2,158,500 (2,158,500) (952,048) 6/30/2041 0 2,155,250 (2,155,250) (914,845) 6/30/2042 0 2,152,500 (2,152,500) (879,297) $35,490,090 $55,734,267 ($20,244,177) ($2,447,647) Savings Summary PV of savings from cash flow -$2,447,647 Plus: Refunding funds on hand $6,689 Net PV Savings -$2,440,959
ATTACHMENT B Savings Summary The University of Akron Series 2018 - Restructuring Total Debt Service (inc. $5.0 million new money) Date Prior Debt Service Refunding Debt Service Savings Present Value to 08/28/2018 @ 3.91% 6/30/2019 $38,293,826 $33,071,263 $5,222,563 $5,154,570 6/30/2020 38,256,340 33,181,635 5,074,705 4,820,170 6/30/2021 38,193,572 33,123,037 5,070,535 4,634,983 6/30/2022 38,123,764 33,056,369 5,067,395 4,457,813 6/30/2023 36,218,985 31,154,920 5,064,065 4,287,253 6/30/2024 39,872,175 37,704,780 2,167,395 1,765,878 6/30/2025 36,081,515 37,546,120 (1,464,605) (1,148,381) 6/30/2026 36,022,376 37,486,981 (1,464,605) (1,105,169) 6/30/2027 31,611,470 33,076,075 (1,464,605) (1,063,583) 6/30/2028 31,799,500 33,264,105 (1,464,605) (1,023,562) 6/30/2029 46,723,000 48,187,605 (1,464,605) (985,047) 6/30/2030 20,381,063 25,675,668 (5,294,605) (3,426,990) 6/30/2031 20,445,113 25,738,858 (5,293,745) (3,297,502) 6/30/2032 20,211,163 25,505,333 (5,294,170) (3,173,676) 6/30/2033 19,544,913 24,840,203 (5,295,290) (3,054,902) 6/30/2034 18,014,913 20,171,413 (2,156,500) (1,197,291) 6/30/2035 18,017,400 20,174,400 (2,157,000) (1,152,506) 6/30/2036 16,099,850 18,258,850 (2,159,000) (1,110,167) 6/30/2037 16,107,700 18,264,950 (2,157,250) (1,067,528) 6/30/2038 16,024,350 18,181,100 (2,156,750) (1,027,120) 6/30/2039 2,352,500 4,509,750 (2,157,250) (988,700) 6/30/2040 2,357,500 4,516,000 (2,158,500) (952,048) 6/30/2041 2,350,313 4,505,563 (2,155,250) (914,845) 6/30/2042 2,351,250 4,503,750 (2,152,500) (879,297) $585,454,551 $605,698,728 ($20,244,177) ($2,447,647) Savings Summary PV of savings from cash flow -$2,447,647 Plus: Refunding funds on hand $6,689 Net PV Savings -$2,440,959