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Centralization of Operating Investments (February 2006 – August 2007)
The Office of Finance played a key role in ensuring the U.T. System’s operating funds would be invested in a manner that improves the expected investment return on operating funds while ensuring adequate liquidity for the institutions. In addition to conceiving of the original “Centralization” idea in 2002, the Office of Finance contributed to its success and ensured that this critical project was implemented on schedule by revising its liquidity arrangements, leading discussions with the bond rating agencies, revising Regents’ Rules, establishing an allocation and rebalancing policy, and setting up a monitoring and enforcement mechanism which is ongoing. From the February 1, 2006 implementation date through FY 2007, this strategy has added $163 million of incremental value to the System.
Effective September 1, 2007, the Allocation Policy was amended to set a revised target for investment of 10% in the STF and 90% in the ITF. This will hopefully further improve investment returns while continuing to maintain more than adequate liquidity for the institutions.
Financial Advisor Fee Savings (FY 2007)
The U.T. System is the only state issuer in Texas that does not regularly utilize a financial advisor to assist in issuing debt. The Office of Finance models, plans, and executes all bond transactions (with the exception of the bond underwriting itself). The Office of Finance maintains relationships directly with each credit rating agency providing updates on the financial and operational status of the System and works with each agency to achieve the highest possible credit ratings. Large state issuers such as the Texas A&M System, the Texas Public Finance Authority, the Veterans Land Board, and the Water Development Board use financial advisors on all of their bond deals and rating agency relationships. Based on a conservative financial advisor fee estimate of $0.50 per $1,000 of bonds issued, by providing its own financial advisory services, the Office of Finance saved the U.T. System over $640,000 in FY 2007.
UTIMCO Oversight and Reporting Process (FY 2007)
In October of 2003, the Office of Finance was asked by the Board of Regents to improve communications with and oversight of UTIMCO, consistent with the Board’s fiduciary responsibilities for the management of all System funds. Significant accomplishments for FY 2007 include:
- UTIMCO’s hire of a general counsel and decision to hire an independent chief compliance officer, both advocated by investment oversight staff.
- A successful transition from full-time oversight to part-time oversight.
- Early identification of significant potential risk issues related to leverage and asset classification.
- Completion of a definitive five-year UTIMCO Total Investment Management Cost Effectiveness Study, circulated in February 2007, with “value added” calculated by Cambridge Associates.
- Completion of UTIMCO FY 2008 Budget Review.
- Completion of the analysis of NACUBO Endowment data, comparing policy portfolio asset allocation and UTIMCO performance to peers.
Banking and Treasury Review (FY 2007)
Throughout FY 2007, the Office of Finance has been leading a Treasury working groupl, consisting of cash managers from many of the U. T. System institutions, representatives from U. T. System Administration, and Ms. Linda Patterson of Patterson & Associates. The implementation team is in the process of “standardizing” certain treasury activities and accomplished a number of objectives in FY 2007.
- The U. T. System-wide treasury policies became effective September 1, 2007. Among other requirements, the new treasury policies require that regular audits are performed for treasury activities.
- The U. T. System-wide banking RFP was issued on August 27, 2007. RFP responses are due in late September, with the selection of new banking institutions to be effective on March 1, 2008. The banking RFP includes a solicitation of new pricing for merchant card services.
- Surveys have been conducted to confirm the existence of treasury disaster recovery plans at all of the U. T. System institutions and System Administration, most of which were created as part of the U. T. System-wide business continuity planning process.
- A new collateral system has been created and rolled out by the Office of Finance for use by the U. T. System institutions to streamline the collateral process. In addition, the need for collateral will be minimized through implementation of the banking RFP, which requires "sweep" accounts where possible.
A final report on the results of the Treasury Working Group will be presented to the U. T. System Board of Regents in spring 2008.
Cash Defeasance of Revenue Financing System Bonds, Series 1998A and 1998C (August 2007)
On August 24, 2007, the Office of Finance executed the cash defeasance of $3,605,000 of outstanding RFS Bonds, Series 1998A and $5,390,000 of RFS Bonds, Series 1998C. Both of these series of bonds funded tuition revenue bond projects. These transactions will eliminate the need to ask the State for reimbursement of future TRB debt service totaling $12,534,712 that would have been required from 2008-2019 had the System not executed the defeasance transactions.
Optional Redemption of Revenue Financing System Bonds, Series 2001A (August 2007)
On August 1, 2007, the Office of Finance optionally redeemed $4.6 million of outstanding RFS Bonds, Series 2001A. The Series 2001A bonds were issued to refund RFS Bonds, Series 1996A&B. In connection with the Series 2001A bonds, the System entered into two LIBOR-based, fixed-payer swaps. The optional redemption was necessary to match the reduction in the notional amount of the outstanding swaps. Through August 15, 2007, the synthetic refunding involving the two swap agreements has produced debt service savings of $7.4 million or $6.6 million on a present value basis.
Bond Enhancement Agreements (May 2007)
The Office of Finance worked extensively with the Office of Governmental Affairs and members of the legislature to provide information on key bills affecting municipal finance, including SB 968 and SB 1332. As a result of this work, SB 968 was passed and provides specific authority to the U. T. Board of Regents to execute bond enhancement agreements on both the RFS and PUF debt programs, which is expected to greatly benefit the System in reducing its future borrowing costs and in better managing interest rate risk. In August, the Board of Regents approved a revised Interest Rate Swap Policy incorporating this new statutory authority.
Forward Starting Swaps (March 2007)
On March 2, 2007, the Office of Finance capitalized on historically low interest rates by executing two forward-starting, fixed-payer BMA swaps to hedge interest rate risk on $400 million of RFS bonds expected to be priced in early 2008. With the rise in rates since then, the swaps had a positive mark-to-market value of $6.8 million as of August 31, 2007. The swaps are expected to be terminated later this year and the proceeds applied as a reduction to the amount of debt needed to fund the related capital projects for the institutions.
2006 CMS Basis Swaps (February 2007)
On May 10, 2006, the Office of Finance competitively bid two CMS basis swaps with the System agreeing to pay interest based on the BMA index and receive interest based on 67% of 5-Yr. LIBOR plus 22.1 basis points. On February 27, 2007, the Office of Finance terminated both swaps to capture $5.25 million in value as a result of significant drop in BMA/LIBOR ratios. Including the $965,000 that the System had received since May 2006 when the swaps were originated, the total benefit of these swaps was $6.215 million. This is unrestricted money that has been budgeted for a variety of special System Administration projects.
Permanent University Fund Refunding Bonds, Series 2006B&C (December 2006)
On December 20, 2006, the Office of Finance priced $284.065 million of PUF Refunding Bonds, Series 2006B and $97.755 million of PUF Bonds, Series 2006C. In order to capture attractive interest rates, the transaction was executed in less than 10 days—the fastest issuance in the history of the U.T. System. Proceeds from the Series 2006B bonds were used to refund certain outstanding PUF bonds and produced $17.3 million of present value debt service savings. By executing both refundings in concert, the Office of Finance was able to increase the PV savings by $638,000. The all-in cost of debt (TIC) was 4.16% with an underwriter’s discount of $3.56 per bond and a low total cost of issuance of $4.29 per bond. The Series 2006C bonds were issued to refund $100 million of outstanding PUF Flexible Rate Notes to provide long-term financing for PUF projects approved by the Board. The Series 2006C bonds extend to 2035 and were structured to wrap around the existing PUF debt service to create a more level overall debt service profile. The Series 2006C bonds have a 20.1 year average life and were issued at an attractive all-in TIC of 4.47%.
PUF Arbitrage Exemption (December 2006)
Arbitrage rules restrict the earnings on investments of tax-exempt bond proceeds to a yield that does not exceed the yield on the bonds to which the funds relate. If the federal arbitrage rules applied to PUF investments, an amount of PUF investments (corresponding to the amount of tax-exempt bonds issued) would have to be invested at a restricted yield. For example, if the U. T. System issued $500 million of tax-exempt PUF bonds at a 5% yield, $500 million of PUF investments would have to be invested at a yield of 5% or less. Therefore, subjecting PUF investments to the federal arbitrage rules would reduce PUF income available for higher education purposes.
After six years of efforts by the Office of Finance, on December 9, 2006, the U. S. Congress amended Section 206 of the Tax Increase Prevention and Reconciliation Act of 2005, thereby providing a permanent exemption from federal arbitrage rules for the PUF.
Revenue Financing System Bonds, Series 2006C,D,E&F (November 2006)
The Office of Finance priced $896.465 million RFS Bonds, Series 2006C,D,E&F on November 29, 2006—the largest bond transaction in the history of Texas higher education. The Series 2006C bonds advance refunded $177.8 million of outstanding TRBs, producing debt service savings to the State of $13.2 million ($9.0 million on a present value basis). The Series 2006D bonds advance refunded $340.7 million of outstanding RFS bonds, producing debt service savings to the System of $15.9 million ($11.4 million on a present value basis). By combining the new money issuance with the refinancing, the arbitrage yield was increased by 0.08%, which increased the refunding savings by $2.5 million.
The Series 2006E bonds were issued to provide long-term financing for certain TRB projects, including a portion of the Galveston National Lab, at an all-in cost (TIC) of 4.04% with an average life of 10.3 years. The Series 2006F bonds were structured to provide individual amortization schedules tailored for each of the 20 capital projects financed as part of the issue, including a portion of the DKR-Texas Memorial Stadium expansion, at an all-in cost (TIC) of 4.34% with an average life of 18.5 years. The total cost of issuance of $4.27 per bond will likely rate as the lowest cost long-term fixed-rate transaction in Texas this year.
Energy Utility Task Force (November 2006)
The Associate Vice Chancellor for Finance has served as Chairman of the Energy Utility Task Force (EUTF) since its inception in February 2001. The EUTF continues to see a substantial reduction in System-wide energy use and reduced price risk through the use of risk management tools to hedge utility purchases. Through FY 2006, the U.T. System achieved cumulative savings of $30.5 million in five years. The data for FY 2007 will be updated in September.
RFS Equipment Financing Program (FY 2007)
During FY 2007, the Office of Finance financed more than $72 million of equipment purchases for U. T. System institutions through its Revenue Financing System Commercial Paper Note, Series A program. The equipment financing program offers U. T. System institutions a very attractive financing alternative to more expensive vendor financing. For FY 2007, the weighted average interest rate on the RFS Commercial Paper Note, Series A program was 3.62%, which is significantly less expensive than conventional vendor financing.
Arbitrage Rebate (FY 2007)
The Office of Finance prepares all of the necessary arbitrage rebate calculations required by the IRS in connection with the investment of tax-exempt bond proceeds. Most state agencies hire an arbitrage rebate consultant to perform these calculations. By preparing these calculations internally, the System avoided paying arbitrage rebate consultants an estimated $50,000 - $75,000 in FY 2007. During FY 2007, the Office of Finance enhanced its process of tracking and allocating expenditures of bond proceeds resulting in greater flexibility in meeting arbitrage spending exceptions, thereby reducing the likelihood of having to rebate any arbitrage generated in the future.
Capital Project Financing (FY 2007)
In addition to the $100 million issued to finance various PUF projects, the Office of Finance financed more than $558 million of capital projects for U. T. System institutions through its Revenue Financing System program during the last 12 months. As of August 31, 2007, the weighted average yield on the $2.8 billion of outstanding RFS fixed-rate bonds was 4.00% with a weighted average maturity of 12 years.
Other Accomplishments (FY 2007)
- Creation of Cash Management Manual documenting all procedures
- Completion of institutional 6-year RFS debt capacity forecasts/debt ratio model
- Modeling of constitutional and financial PUF debt capacity
- Creation of electronic capital project folders
- Procurement and implementation of Future Perfect strategic modeling software at UTD and UTSA
- Modeling for Dell Pediatric Research Institute, Academic Health Center, and CTRC
- Assistance with Shared Services initiative; OFPC modeling; Real Estate transactions, etc.
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