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Financial Advisor Fee Savings (FY 2008)
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 $516,000 in FY 2008.
Banking and Treasury Review (FY 2008)
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 2008 are as follows:
- The U. T. System-wide treasury policies became effective September 1, 2007.
- The selection of four banks was finalized at the December BOR meeting.
- Signed new master banking services agreements and depository agreements with Bank of America, Frost Bank, JPMorgan Chase, and Wells Fargo and all System institutions will be operating under new master agreements by 12/31/08.
- Agreements should save 10-20% for the average institution with savings ranging from 0% - 50% and greater in first year due to one-time incentives.
- Negotiated lower merchant card fee structure for implementation in December. Expected savings of $500,000 over three years.
- 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 2008)
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 2008 include:
- UTIMCO hired a general counsel and chief compliance officer, consistent with the recommendation from investment oversight staff.
- Completion of UTIMCO FY 2009 Budget Review.
- Completion of the analysis of NACUBO Endowment data, comparing policy portfolio asset allocation and UTIMCO performance to peers.
- Establishment of better, more professional, more transparent relations with UTIMCO staff and outside UTIMCO directors.
Creation of Business Development Function (FY 2008)
The U. T. System and its institutions are continuously working on strategic and tactical investments, alliances, joint ventures, acquisitions, and partnerships that are intended to advance their objectives. These transactions frequently have a material impact on the participating institution and typically require approval by the U. T. System Board of Regents and/or System Administration. Often, transactions are brought to the attention of System Administration in the latter stages of negotiation and structuring. The sophistication and methodologies used to structure the transactions vary widely by institution. The creation of a standard business plan template by the Office of Finance in 2007 has improved this situation but problems persist.
Effective September 1, 2008, the Office of Finance will be responsible for ensuring that all financial transactions requiring Board of Regents’ and/or System Administration approval are completed in a timely, professional, and value-adding manner. This will involve providing assistance to the institutions to effectively negotiate, structure, analyze, and close transactions. On behalf of the institutions, the Office of Finance will coordinate with and obtain assistance from various System Administration departments as needed, including Health Affairs, Academic Affairs, Finance, Real Estate, the Office of General Counsel, and the Office of Facilities, Planning, and Construction. Coordination with outside professionals and consultants will also be required.
Permanent Flexible Rate Notes (November 2007 and April 2008)
On November 6, 2007, the Office of Finance sold $150 million of PUF Flexible Rate Notes to fund ongoing construction costs on capital projects. The November FRNs were sold through a competitive bidding process, which resulted in 11 bidding firms. Lehman Brothers submitted the winning bid with an initial coupon rate of 3.75% and a true interest cost of 3.37%.
Subsequently, on April 2, 2008, the Office of Finance sold a second tranche of $150 million of PUF FRNs to fund ongoing construction costs on capital projects. The April FRNs were sold through a competitive bidding process, which resulted in 11 bidding firms. Goldman Sachs submitted the winning bid with an initial coupon rate of 2.50% and a true interest cost of 1.48%.
Revenue Financing System Bonds, Series 2007B (December 2007)
On December 4, 2007, the Office of Finance capitalized on low interest rates by executing two forward-starting, fixed-payer SIFMA swaps to lock in $30.2 million of present value refunding savings related to outstanding RFS Bonds, Series 2003B and Series 2004D. The $346.35 million of Series 2007B variable rate bonds were sold at an all-in true interest cost of 3.87%. Total savings (nominal) from the transaction equal $49.4 million or approximately $1,900,000 annually from fiscal year 2009-2034.
Revenue Financing System Bonds, Series 2008B (March 2008)
On March 18, 2008, the Office of Finance successfully issued $685.4 million of the RFS Bonds, Series 2008B, which had been converted to synthetic fixed-rate through three SIFMA fixed-payer swaps with JPMorgan Chase and Morgan Stanley Capital Services, locking in an all-in fixed rate of 3.82% for thirty year debt with an average life of 16.7 years. The transaction permanently financed 41 capital projects, refunding $462 million of outstanding commercial paper, refunding $35 million of outstanding RFS 1998B Bonds for $1.58 million of present value savings (4.6%), and providing $182 million of new money to fund ongoing construction costs.
A few important points about this transaction:
- The transaction locks in a low long-term fixed rate for 41 projects at 12 of our institutions. The 3.82% rate is well below what was budgeted for these projects and represents significant savings for the institutions (relative to budget).
- The transaction is being conducted with internal liquidity, thereby saving a minimum of 15 basis points in today’s market ($1+ million annually).
- We could have saved an additional $30 million by swapping to a percentage of LIBOR rather than BMA/SIFMA. We chose not to execute a LIBOR-based swap because the 0.44% savings for taking tax risk is less than average relative to prior periods.
- We executed a $375 million swap with one counterparty, JPMorganChase, which we had previously planned to split between Lehman Brothers and JPMorganChase. However, JPMorganChase was willing to do the swaps for 1.5 basis points less than Lehman, representing a savings of more than $1 million. In addition, JPMorganChase was a significantly stronger counterparty credit than Lehman (Aaa versus A1).
Enhanced Swap Monitoring
The Office of Finance created a real-time swap monitoring tool, linked to Bloomberg data feeds, 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 helps assess potential counterparty credit risk and collateral posting requirements.
Creation of Capital Expenditure Policy
The Office of Finance, led by Lisa Baird and assisted by OFPC, created a new Capital Expenditure Policy (UTS168) that provides institutions guidance in the capital expenditure process, from project approval to project closure. The policy also provides System Administration offices with a uniform method for documenting the full capital expenditure lifecycle so that capital expenditure activity is effectively communicated to the Board of Regents. The new policy has the following effects:
- Expand the authority of institutions to expend institutional funds on preliminary (i.e., design and development) project costs from 3% to 5% of total project costs.
- Introduce a new and simpler online Project Planning Form for submitting projects to the Board.
- Eliminate the biennial Capital Improvement Program adoption process. In reality, the CIP is a dynamic program that is updated at least quarterly as new projects are approved, amended, or deleted. The Board of Regents will receive formal updates annually on the status of the CIP rather than biennially.
- Require that PUF debt funding lapse if construction has not commenced on a project within 36 months of approval by the Board of Regents, unless extended for one year by the Chancellor.
- Require that unexpended PUF LERR debt funding lapse six months after the fiscal year in which it is approved, unless extended for one year by the Controller.
- Expand the scope of the CIP to include Repair and Rehabilitation projects funded with PUF LERR debt, regardless of the amount.
- Implement a formal gift funding procedure that requires the use of RFS debt capacity to "backstop" gift funding that has not been received or committed (as evidenced by a signed gift instrument) at the time of final Board of Regents' approval.
Expansion of Future Perfect
The Office of Finance, led by William Huang, contracted with Public Financial Management to develop campus financial models for the purpose of assessing various strategic options that the campuses may pursue. The Office of Finance has now worked with six academic institutions in this development process.
Expansion of Interim Financing Programs
In August 2008, the Office of Finance expanded its Revenue Financing System commercial paper programs from an aggregate $800 million maximum authorization to a combined $1.25 billion commercial paper program. The Office of Finance also initiated a $500 million PUF commercial paper program to replace the System’s previous $400 million PUF Flexible Rate Note program. The expanded programs are expected to be more efficient, provide additional capacity to fund the System’s growing CIP, and permit the System to earn an estimated $5-$10 million per year of increased net interest margin.
RFS Equipment Financing Program (FY 2008)
During FY 2008, the Office of Finance financed more than $66 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 2008, the weighted average interest rate on the RFS Commercial Paper Note, Series A program was 2.71%, which is significantly less expensive than conventional vendor financing.
Arbitrage Rebate (FY 2008)
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 2008. During FY 2008, 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 2008)
In addition to the $300 million issued to finance various PUF projects, the $182 million of new money financed via RFS Bonds, Series 2008B, and the $66 million of equipment financing, the Office of Finance financed approximately $600 million of capital projects for U. T. System institutions through its Revenue Financing System commercial paper program during the last 12 months for capital projects. As of August 31, 2008, the weighted average yield on the RFS commercial paper program was 2.74%, which includes approximately $20 million taxable commercial paper outstanding during FY08. As of August 31, 2008, the weighted average yield on the $3.4 billion of outstanding RFS fixed-rate bonds was 3.87% with a weighted average maturity of 12.5 years.
Other Accomplishments (FY 2008)
- Creation of Debt Management Manual documenting all procedures
- Assistance with Shared Services initiative; OFPC modeling; Real Estate transactions, etc.
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