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Sec. 1 Purpose
In 2015, the Board of Regents approved the Internal Lending Program (“ILP”) to provide capital financing to U. T. System institutions at uniform and stable rates. Furthermore, this comprehensive construct enables the Office of Finance to create value by employing alternative external debt structures thereby lowering the System’s cost of capital, while leveraging UTIMCO investment alternatives to achieve excess returns on ILP balances over the long-term.
Sec. 2 Scope
This policy will govern the administration of the ILP involving capital projects to be financed with Revenue Financing System (RFS) debt. This policy does not apply to Tuition Revenue Bonds or Permanent University Fund debt as these debt programs are not part of the ILP.
Sec. 3 Principles
Effective management of the U. T. System’s RFS debt program is critical in financing capital infrastructure necessary for U. T. institutions to achieve their respective missions while optimizing the use of limited financial resources. The ILP is a mechanism to provide the System the ability to optimize the RFS debt portfolio in furtherance of the following goals:
- Managing financial risks to U. T. System Administration and U. T. institutions;
- Reducing and stabilizing loan rates and related cost volatility for individual institutions;
- Generating available funds to be invested strategically by the Board of Regents to benefit U. T. institutions; and
- Providing consistency and transparency of financing activities to relevant stakeholders.
Sec. 4 Legal Authority
All RFS debt incurred by the U. T. System will be issued or incurred pursuant to resolutions approved by the Board of Regents and in accordance with the general laws of the State of Texas, including Chapter 55 and Chapter 65 of the Texas Education Code and Chapter 1371 of the Texas Government Code. Each RFS bond resolution will list the officers and employees of the U. T. System authorized by the Board of Regents to act as a U. T. System Representative as defined therein. Before any external debt can be issued, the U. T. System must obtain: (i) an opinion from counsel that the issue complies with applicable Texas and federal laws; (ii) approval from the Texas Bond Review Board; and (iii) approval from the Texas Attorney General.
Sec. 5 Eligible ILP Participants
Only (i) U.T. institutions that are members of the Revenue Financing System, and (ii) System Administration are authorized to finance capital projects through the ILP.
Sec. 6 Delegation of Authority
The Board of Regents delegated to the Executive Vice Chancellor for Business Affairs the power and authority to take all actions and to make all decisions and interpretations that may be necessary or appropriate to administer and operate the ILP. This includes, but is not limited to, establishing appropriate lending rates and terms, determining appropriate interest rate buffers, deciding whether and how to invest or use fund balances, making return assumptions, determining liquidity and reserve levels, and assessing the amount of strategic funding available.
Sec. 7 Investment Management
Funds held in the ILP and not yet expended for other eligible purposes will be invested in funds managed by UTIMCO, including the Short Term Fund (STF), the Intermediate Term Fund (ITF) and the Long Term Fund (LTF). The Executive Vice Chancellor for Business Affairs is authorized to determine how ILP assets are allocated across investment funds managed by UTIMCO, exercising reasonable care, skill, and caution, considering the purposes, terms, liquidity requirements, external debt requirements, and other circumstances of the ILP, and taking into consideration the investment of all ILP assets rather than any single investment.
Sec. 8 Liquidity
The ILP will maintain cash and cash equivalents that when combined with projected revenues will be sufficient to make debt service payments, to make distributions for strategic funding, and to fund other debt-related costs. For purposes of calculating ILP liquidity, collateral posted by the System’s swap counterparties and held by the System in the STF will be excluded. Unless otherwise determined by the Executive Vice Chancellor for Business Affairs, following consultation with the Chancellor, the timing of distributions for strategic funding will be managed to maintain sufficient liquidity in the ILP.
Sec. 9 Minimum ILP Reserves
ILP reserves will be calculated as follows:
- assets, including cash and cash equivalents, investments, projected payments on ILP loans, investment earnings and other debt-related revenues;
- less liabilities, including principal and interest payments on external debt, distributions for strategic funding; and other debt-related costs such as paying agent fees, dealer fees, legal fees, remarketing agent fees, etc.
Consistent with the authority delegated by the Board of Regents to the Executive Vice Chancellor for Business Affairs, as noted in Section 6, ILP management will regularly evaluate prevailing loan rates and the amounts available for strategic funding to ensure that ILP reserves remain positive throughout the projected term of the ILP and will update the Chancellor on the amount available for such funding prior to processing a recommendation for funding authorization.
Sec. 10 Maximum Loan Terms
Loans for financing capital equipment are typically amortized over 3-10 years. Loans for capital projects are typically made for a term of 20-30 years at the ILP loan rates depending on the useful life of the project. The maximum term for ILP loans will not exceed the term provided in Texas Education Code, Section 55.14.
Sec. 11 Strategic Funding
The Executive Vice Chancellor for Business Affairs will review the amount of strategic funding available and will periodically report this information to the Board of Regents on at least an annual basis, generally prior to or concurrent with consideration of the fiscal year operating budget. The Executive Vice Chancellor for Business Affairs will consult with the Chancellor, the Executive Vice Chancellor for Academic Affairs, and the Executive Vice Chancellor for Health Affairs on a process to periodically solicit proposals from the institutions for strategic funding from the ILP to be brought forward for consideration by the Board of Regents. All strategic investments from the ILP require approval of the Board of Regents. Strategic funding from the ILP at academic or health-related institutions will be monitored by the respective Executive Vice Chancellor to ensure the funds were expended appropriately and to determine if the strategic objectives were achieved. Reporting requirements may be established at the time the strategic funding is presented for approval.
Sec. 12 Policy Adjustments
When the level of ILP assets moves outside of a pre-determined range, the System can employ various measures to rebalance the portfolio. For instance, when assets move below the set threshold, the System can reduce/pause strategic investments until ILP reserves are replenished to acceptable levels. From a longer-term perspective, the System has the option of increasing loan rates to rebalance the ILP portfolio. To the extent that asset levels move above a pre-determined maximum, the System can increase strategic investments, provide one-time rebates to ILP borrowers, or as a final alternative, lower the ILP blended rate.
While it is important for the ILP to maintain the right relative size, it is imperative for the ILP to avoid a position under which it cannot pay external debt holders. The downside risks of default or illiquidity far outweigh the risks of maintaining excess capital and liquidity. Excess ILP reserves can be invested for significant additional benefit to the System over the long-term.
The ILP rates and this policy will be reviewed annually by the Office of Finance.