Purpose:
To govern the use of debt under the three primary debt programs used to
finance capital projects
Date Approved:
May
8, 2003
Background:
The
Board adopted The University of Texas System Debt Policy to govern the use of
debt under the Revenue Financing System (RFS), the Permanent University
Fund (PUF), and the Higher Education Assistance Fund (HEAF), which are the
three primary debt programs used to finance capital projects within the
U. T. System.
This policy governs the use of debt to finance capital projects within
The University of Texas System (System). The prudent use of debt can help the System achieve its strategic
objectives while maintaining a credit rating that appropriately balances
financial flexibility with cost of capital.
The System issues debt through three primary programs: the Revenue Financing System (RFS), the
Permanent University Fund (PUF), and the Higher Education Assistance
Fund (HEAF). This policy will
govern the issuance of all System debt.
Revenue Financing System - The RFS was created by the Board of Regents
of The University of Texas System (Board) through the adoption of a Master
Resolution on February 14, 1991. The
Board established the RFS for the purpose of assembling the System’s
revenue-supported debt capacity into a single financing program in order to
provide a cost-effective debt program to component institutions of the System
and to maximize the financing options available to the Board.
Permanent University Fund - Article VII, Section 18 of the Texas
Constitution authorizes the Board to issue bonds and notes secured by the
System’s interest in the Available University Fund (AUF). The AUF consists of distributions from the
total return of PUF investments. The
Constitution limits the amount of PUF debt that may be issued by the System to
20% of the cost value of investments and other assets of the PUF. The Constitution prohibits the issuance of
PUF debt for auxiliary projects.
Higher Education Assistance Fund (HEAF) - Article VII, Section 17 of the
Texas Constitution authorizes the Board to issue bonds and notes secured by
pledged revenues consisting of up to 50% of the money allocated annually to the
Board for U. T. Pan American and U. T. Brownsville. Bonds issued under this authority are
typically referred to as HEAF bonds or constitutional appropriation bonds. The
Constitution prohibits the issuance of HEAF debt for auxiliary projects, except
to the extent of a project’s use for educational and general activities.
All debt incurred by the
System will be issued or incurred pursuant to resolutions approved by the Board
and in accordance with the general laws of the State of Texas, including
particularly Article VII, Sections 17 and 18 of the Texas
Constitution, Chapters 55 and 65 of the Texas Education Code, and
Chapters 1207 and 1371 of the Texas Government Code. Before any debt can be issued, the System
must obtain an opinion from bond counsel that the issue complies with
applicable Texas and federal laws. The
System must also receive the necessary approvals from both the Texas Bond
Review Board and the Texas Attorney General.
Any debt must be issued in
strict compliance with applicable law. The following debt guidelines will apply:
I. Project Funding - The System will
borrow money, through the issuance of debt, to finance only those projects that
have been approved for financing by the Board. Capital projects are generally evaluated and prioritized through the
System’s Capital Improvement Program. For construction projects that require debt financing, bond proceeds
will be provided only after design development approval and appropriation of
funds by the Board of Regents.
II. Interest Rate Exposure - The Office
of Finance will evaluate and determine the appropriate amount of its interest
rate exposure, defined as the possible increase in capital costs resulting from
rising short-term interest rates. The
System will limit its variable rate debt in accordance with rating agency
guidelines for assessing the debt structure of peer institutions of higher
education with comparable credit ratings. In determining the amount of variable rate debt, the Office of Finance
will evaluate the level of variable rate assets that may be available to
provide a natural hedge to interest rate fluctuations. The System will seek to minimize its cost of
capital within a prudent level of exposure to interest rate volatility. The System shall broadly target variable
rate debt of 30-50% of total outstanding debt.
III. Amortization - The amortization of tax-exempt debt will be
based on the types of assets financed, the expected availability of cash flows
to meet debt service requirements, and tax regulations. Generally, the amortization of tax-exempt
debt should not exceed the useful life of the financed asset and may never
exceed the Internal Revenue Service limit of 120% of the useful life of the
financed asset. The maximum maturity of
RFS debt is limited to 50 years by Chapter 55 of the Texas Education
Code. The maximum maturity of PUF
debt is limited to 30 years by Article VII, Section 18 of the Texas
Constitution. The maximum maturity of HEAF debt is limited to
10 years by Article VII, Section 17 of the Texas Constitution.
IV. Financial Ratios - The System will use
selected actual and pro forma financial ratios, consistent with major credit
rating agency criteria, to ensure the System is operating within appropriate
financial bounds. Although other ratios
may also be evaluated, the primary financial ratios to be analyzed include the
debt service coverage ratio, the debt burden ratio, and the leverage ratio.
V. Economies of Scale - Debt financings will be coordinated to
the extent practical so that multiple project needs can be accommodated in a
single borrowing, thereby increasing the efficiency of the debt issuance. Since many issuance costs do not vary with
the size of a borrowing, a large bond issue increases the efficiency of the
financing by spreading fixed costs over a greater number of projects.
VI. Refunding Opportunities - The Office of Finance will
actively consider refinancing of outstanding debt issues when net savings for
that refinancing measured on a net present value basis are positive. Since there are limitations on the number of
allowable refinancings, it is important to use refinancing opportunities
wisely. In evaluating refunding opportunities, the Office
of Finance will consider the value of the call option to be exercised, including
the amount of time to the call date and the amount of time from the call date
to maturity. Based on these and other
factors, the Office of Finance will determine the minimum savings threshold for
any particular refunding transaction. Refundings that do not produce savings may be considered under certain
circumstances, such as eliminating restrictive bond covenants or other
situations that produce a greater benefit to the System.
VII. Disclosure - The Office of Finance will provide updated
financial information and operating data and timely notice of specified
material events to each nationally recognized municipal securities information
repository and any State information depository, pursuant to its continuing
disclosure undertakings with respect to Rule 15c2-12 promulgated by the
Securities and Exchange Commission.
VIII. Hedging Instruments - The Office of
Finance will consider the use of interest rate swaps and other interest rate
risk management tools after carefully evaluating the risks and benefits of any
proposed transaction in accordance with the U. T. System Interest Rate
Swap Policy. By using swaps in a
prudent manner, the System can take advantage of market opportunities to
minimize expected costs and manage interest rate risk. As outlined in the U. T. System
Interest Rate Swap Policy, the use of swaps must be tied directly to System
debt instruments. The System shall not
enter into swap transactions for speculative purposes.
IX. Project Financing - The Office of Finance will consider
the use of project financing in those limited circumstances where the benefits
of such a transaction exceed the increased costs. Project financing can be a
useful financing technique in certain circumstances; however, these
transactions are typically less efficient and more costly than traditional
financing due to lower credit ratings, fewer economies of scale, the funding of
a reserve fund, and the cost of bond insurance. Project financing does not preserve or increase debt capacity
relative to traditional financing. The
credit rating agencies and the System include project debt when assessing the
debt capacity of component institutions.
X. Taxable Debt - The System may use taxable debt for those
projects that have an intended use or other characteristics that preclude the
use of tax-exempt debt. The System will
strive to allocate its available resources, including equity capital, among its
various capital projects to minimize or eliminate the need to issue taxable
debt, thereby minimizing the System’s cost of capital. Any use of taxable debt would require
separate Board approval and be subject to the same statutory requirements as
tax-exempt debt.
XI. Reporting Requirements - The Annual Financial Report
(AFR), prepared by the System and presented to the Board, will discuss the
status of all outstanding bond and note indebtedness. The AFR presented to the Board provides detailed information on
the System’s outstanding bonds and notes including, by series, the amount
outstanding, interest rates, maturity dates, a summary of the changes in
outstanding indebtedness, and the associated debt service requirements.
Last
reviewed May 2003
Purpose
Financing
Programs
Authority
Debt Guidelines