Prudent Debt Management Practices (FY 2010)
The tax exempt bond markets continued to experience higher than normal volatility during FY 2010. Once again, the Office of Finance was able to successfully navigate the market through prudent and conservative risk management practices, and differentiate itself among its peers in the following ways:
- Significant use of long-term fixed rate debt, including the issuance of more than $750 million of fixed rate Build America Bonds (BABs).
- Reduced weighted average cost of RFS debt to 3.55% with average life of 14 years, excluding commercial paper.
- Diversification of remarketing agents for variable rate debt.
- Emphasis on transparency – the U. T. System’s bond disclosure practices are widely regarded as “best in class.” In 2009, the U. T. System became the first higher education institution in the country to post its liquidity profile online (and now updated quarterly).
- Well established debt and swap policies.
- Relatively frequent communications with the credit rating agencies.
Overall, the turmoil in the financial markets contributed to value creation in the debt portfolio. Commercial paper rates remained at historically low levels at fiscal year end at 0.29%. The System also experienced superior trading levels for its $1.4 billion of variable rate demand bonds (VRDBs). As a result of active management decisions by Office of Finance staff and external remarketing agents, the rates for U. T. System VRDBs averaged 7.4 basis points less than the benchmark SIFMA index, resulting in more than $1.06 million of value-added during fiscal year 2010.
Financial Advisor Fee Savings (FY 2010)
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 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 Texas Water Development Board rely on financial advisors to manage 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 $675,000 in FY 2010. These savings contribute significantly to the U. T. System’s status as the low cost issuer of debt among state agencies per Texas Bond Review Board data.
Banking and Treasury Review (FY 2010)
In 2007, the Office of Finance led a Treasury working group, 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. Results for FY 2010 are as follows:
- The new banking agreements result in savings of 10%-20% for the average institution with overall savings ranging from 0%-50% per institution. Overall savings for FY 2010 total over $500,000: one-third from one-time incentives (fee waivers) and two-thirds from ongoing savings.
- Negotiated lower merchant card fee structure in FY 2008. Original expectations were for $500,000 of savings over three years. Based on current estimates, we are now expecting savings of $590,000 in the first two years and $900,000 over three years. The increase in savings is due to greater than forecast growth in card payments being accepted at UT System merchant locations.
- Negotiated an agreement with American Express during FY 2010 to standardize pricing and service levels under a new master agreement for System institutions. Overall savings are estimated to be $150,000 to $180,000 per year.
- Assisted institutions with their payment processing issues; support institutions on their PCI DSS compliance validation and audit requirements; monitor vendor service agreement and relationship; coordinated annual meeting with Global Payments.
UTIMCO Oversight and Reporting Process (FY 2010)
The Office of Finance is responsible for providing staff oversight of UTIMCO, consistent with the Board’s fiduciary responsibilities for the management of all System funds. Significant accomplishments for FY 2010 include:
- Completion of UTIMCO FY 2011 Budget Review (to be finalized in November).
- Completion of the analysis of NACUBO Endowment data, comparing policy portfolio asset allocation and UTIMCO performance to peers.
- Establishment of more transparent relations with UTIMCO staff and outside UTIMCO directors.
- Participation in all UTIMCO Board and Committee meetings; reviewed and summarized Board meeting materials.
- Review and assess total costs of UTIMCO for FY 2009.
- Participation in the annual policy review process.
- Monitored derivative use.
Business Development Function (FY 2010)
Effective September 1, 2008, the Office of Finance became responsible for ensuring that all referred financial transactions requiring Board of Regents’ and/or System Administration approval are completed in a timely, professional, and value-adding manner. During FY 2010, the Office of Finance successfully participated in several projects including the Resource Availability Study, the San Antonio “Single Research University” merger review, UTMB Galveston’s Ike-related capital plan, UTSW’s New University Hospital, and U. T. Austin’s Brackenridge plan.
In addition, the Office of Finance initiated and completed a process to audit five projects to determine if the projects met their initial goals and projections. This audit was completed in the summer of 2010. Projects audited include 1) U. T. Southwestern’s acquisition of Zale Lipshy and St. Paul Hospitals; 2) U. T. Dallas’ Natural Science and Engineering Research Building (NSERB); 3) U. T. Arlington’s Kalpana Chawla Hall; 4) U. T. Tyler’s Ornelas Residence Hall, and; 5) U. T. Health Science Center’s Expansion of Student Housing (aka El Paseo).
Self-Liquidity Savings (FY 2010)
The U. T. System has various commercial paper programs and variable rate demand bonds programs authorized up to a maximum aggregate amount of $3.16 billion to finance capital improvements across the System. Because these types of securities allow investors to liquidate their holdings through a “put” or “tender,” the System must provide liquidity to purchase these securities in the event the remarketing agent is unable to remarket the security to new investors. Most municipal issuers purchase a liquidity facility, in the form of a letter of credit or standby bond purchase agreement, from a bank. In order to save external liquidity fees, the Office of Finance staff has structured these debt programs and negotiated dealer agreements containing certain restrictions to allow the System to use internal funds to support these variable rate programs and achieve the highest credit ratings without paying external liquidity fees. Decisions by Office of Finance staff to actively structure and manage these programs to permit the utilization of internal liquidity support has resulted in more than $15.7 million of value-added during fiscal year 2010 based on a conservative fee estimate of 50 basis points for bank liquidity.
Review of New University Hospital at UT Southwestern Medical Center (FY 2010)
The Office of Finance was asked to review UTSW’s “New University Hospital” project, an $800 million replacement of the aging St. Paul University hospital in Dallas. A detailed memorandum was prepared analyzing the merits of the project and concluding that the project was not likely to have a negative affect on the System’s credit rating because; 1) UTSW had a proven track record in profitably running hospitals (as evidenced by the performance of the St. Paul and Zale Lipshy hospitals that were acquired on January 1, 2005), and; 2) UTSW had sufficient financial resources and fundraising ability to withstand any potential shortfalls.
Permanent University Fund Bonds, Series 2009A (September 2009)
On September 17, 2009, the Office of Finance successfully issued the $250 million Permanent University Fund Taxable Bonds, Series 2009A, which represented the first taxable PUF bonds ever marketed to investors. The Series 2009A bonds were priced at a spread of 100 basis points over the 30-year U.S. Treasury, which equates to a yield of 5.262%. This pricing represented the tightest spread of any 30-year Build America Bond that had been issued to date, and after the 35% Build America Bond subsidy, the System’s net cost of funds is 3.42% for bonds with an average life of 28 years. By issuing taxable Build America Bonds and receiving a 35% credit, the Office of Finance was able to save 85 basis points compared to traditional tax-exempt financing. Additionally, the aggressive underwriter’s spread of $6.25 per bond compared to a spread of $8.75 per bond that was more typical of other taxable, corporate and university borrowers at that time.
Revenue Financing System Bonds, Series 2010A (March 2010)
On March 3, 2010, the System priced $331.4 million of the Series 2010A bonds to permanently finance various tuition revenue bond (TRB) projects across the System. The bonds were sold at an all-in true interest cost of 3.25%, resulting in significant savings to the State compared to the standard 6.0% interest rate assumption used by the State of Texas when budgeting TRB debt service. The total underwriter’s discount of $3.99 per bond will likely rank as the lowest underwriting spread in Texas this year. The System was able to negotiate extremely aggressive pricing with the spread on the longest maturity (2024) of 17 basis points over MMD. By comparison, a State of Texas G.O. transaction was priced by the Veteran’s Land Board at 35 bps over the MMD index on Feb. 16th and another Texas G.O. transaction was priced by the Texas Higher Education Coordinating Board on Feb. 11th at 30 bps over MMD. Due in part to this very successful financing, the U.T. System was able to return $17.1 million of general revenue appropriations back to the State at the end of fiscal year 2010.
Revenue Financing System Refunding Bonds, Series 2010B (April 2010)
On April 14, 2010, the System issued $380.4 million of the Series 2010B bonds to advance refund $393.7 million of outstanding RFS bonds to capture significant debt service savings for various U.T. institutions. The Series 2010B transaction produced total debt service savings of $25.8 million ($19.9 million on a present value basis equating to 5.05% of the refunded bonds). Even under difficult market conditions, the System was again able to achieve an all-in true interest cost of 3.25% with an underwriter’s spread of $3.99 per bond.
Revenue Financing System Bonds, Series 2010D (June 2010)
On June 30, 2010, the Office of Finance issued $516.2 million of Revenue Financing System Taxable Bonds, Series 2010D with a final maturity of 2042 at an all-in true interest cost of 3.23%, resulting in very attractive financing rates for U. T. institutions. The System saved 96 basis points by utilizing Build America Bonds (BABs) versus traditional tax-exempt bonds. In addition, the System’s bonds priced at a very attractive spread to Treasuries:
- In 2030, U. T. BABs priced at +100. By comparison, the Aa2/AA Memphis G.O. priced at +175 and the Aa2/AA+/AA+ Broward County Sales Tax bond priced at +215.
- In 2042, U. T. BABs priced at +104. By comparison, the City of San Antonio G.O. bonds also rated Aaa/AAA/AAA priced at +180 with a 10-yr. par call. After adjusting yields by 35-40 bps for the par call, U. T. BABs priced approximately 40 basis points lower than a comparably rated San Antonio G.O. BAB priced the week before.
- The coupon/yield on the 2040 San Antonio G. O. of 6.038% is 90 basis points higher than the coupon/yield on the U. T. Series 2010D 2042 maturity of 5.134%.
This transaction also marked the first time that foreign investors have purchased UT bonds, including BlueCrest Capital Management, which participated in the BAB investor conference held earlier in June and with whom the Office of Finance held one-on-one discussions with prior to pricing.
PUF Commercial Paper Program (August 2010)
In August 2008, the Office of Finance received approval to implement a $500 million PUF commercial paper program to replace the System’s previous $400 million PUF Flexible Rate Note program. The PUF commercial paper program is more efficient and provides additional capacity to fund the System’s capital improvement program. On August 4, 2010, the System issued $260 million of PUF taxable commercial paper notes through competitive bid. The System received strong investor demand, receiving 11 bids for two different tranches of notes with the winning bids at very aggressive levels of 0.10% and 0.15%.
RFS Equipment Financing Program (FY 2010)
During FY 2010, the Office of Finance financed $60.9 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 2010, the weighted average interest rate on the RFS Commercial Paper Note, Series A program was 0.28%, which is significantly less expensive than conventional vendor financing, resulting in significant savings for U. T. institutions.
Enhanced Swap Monitoring and Swap Effectiveness Testing
During the year, the Office of Finance significantly enhanced its swap monitoring tool, which it uses to formally monitor its $2 billion swap portfolio on a weekly basis to analyze the mark-to-market valuation for each swap and to help assess potential counterparty credit risk and collateral posting requirements. Office of Finance staff also conducted various effectiveness testing of each of the System’s swap as required by a new accounting pronouncement, GASB 53. Each of the System’s outstanding swap agreements was tested and was determined to be effective in accordance with GASB 53 requirements.
Arbitrage Rebate (FY 2010)
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 - $100,000 in FY 2010.
Other Accomplishments (FY 2010)
- Support for Shared Services data centers and application projects
- Support for numerous Real Estate projects
- Formal documentation of significant debt and cash management procedures, including:
- Tracking new fixed-rate bond issuances using the DBC Debt Manager application;
- Requesting approval for and activation of new wire instructions;
- Utilizing the Bloomberg Swap Manager application to track our various swap agreements, and;
- Paying semiannual, fixed-rate PUF and RFS (TRB and non-TRB) bond debt service.
- Assisting UTIMCO with negotiating PUF commodity ISDAs and other forward sale activities