Financial Services Policy 13 – Debt Policy

A. Objectives:

  1. Prudent utilization of debt to provide a low cost source of capital to fund capital projects and other strategic initiatives in order to achieve the University’s mission and strategic objectives.
  2. Management of the University’s overall debt level in order to provide appropriate access to capital and to maintain a credit rating deemed acceptable by the Board. The minimum acceptable underlying rating for a University issue is the single “A” category by the major rating agencies.
  3. Management of the University debt portfolio by balancing the goal of attaining the lowest cost of capital with the goal of minimizing interest rate risk.
  4. Management of outstanding debt over time to achieve a low cost of capital and to take advantage of interest rate cycles and refunding opportunities.
  5. Assure projects financed have a feasible plan of repayment.

B. Legal Authority for Financings

University financings will conform to the authority granted by North Carolina and Federal laws.

  1. General Revenue Bonds

    The Board of Governors of the University of North Carolina is authorized under Chapter 116 of the General Statutes of North Carolina as amended, to issue, subject to the approval of the Director of Budget, at one time or from time to time, special obligation bonds of the Board, for the purpose of paying all or any part of the cost of acquiring, constructing or providing one or more capital facilities at UNCG or refunding any bonds issued under any provision of any Article of Chapter 116 for the benefit of UNCG.

  2. Energy Savings Performance Contracts

    UNCG has the power, pursuant to Chapter 142, Article 8 of the General Statutes of North Carolina, to enter into installment financing contracts to finance the purchase of personal property, including equipment for energy savings projects. For energy savings projects, approval is required by the Office of State Budget and Management, the State Treasurer, the State Energy Office, and the Council of State.

  3. Interest Rate Swaps

    Interest rate swaps and other derivative products are authorized under Chapter 159 of the General Statutes of North Carolina. In general, interest rate swaps are utilized to reduce the cost and/or risk of existing or planned University debt. By using swaps in a prudent manner, the University can take advantage of market opportunities to reduce debt service cost and/or interest rate risk. The use of swaps must be tied directly to University debt instruments. Swaps may not be utilized for speculative purposes.

C. Assignment of Responsibilities

  1. The University takes a comprehensive team approach relative to managing debt. The “Debt Management Team” consists of the Vice Chancellor for Business Affairs (VC – Business Affairs), the Associate Vice Chancellor for Finance (AVC – Finance), the Director of Financial Planning & Budgets (Budget Director), the University Controller (Controller), the Bond Legal Counsel (Bond Counsel), and the Financial Advisor.
  2. The VC – Business Affairs participates in the executive level capital planning for all University Facilities. For Self-liquidating Capital Projects, the VC – Business Affairs coordinates through the Associate Vice Chancellor for Facilities, the development and periodic updating of the self-liquidating capital projects multi-year plan, which is the basis for defining the debt needs.
  3. The AVC – Finance works closely with the VC – Business Affairs and the Budget Director in the selection of the primary advisors on debt. These primary advisors are the Bond Counsel and the Financial Advisor, who are engaged for a period of years, upon approval by the Vice President for Finance of the University of North Carolina. It is the AVC – Finance’s role to work with the Financial Advisor and assess debt capacity based on the current outstanding debt and any planned issues, including the multi-year Self-Liquidating Capital Projects plan. If it is determined that the University will reach its debt capacity from issuing debt on the proposed projects, then priorities and timing will be addressed with the VC – Business Affairs and the project owners to best meet the overall needs of the University. During the year, the Associate Vice Chancellor for Finance meets periodically with the Financial Advisor and/or Bond Counsel other members of the Management Team to discuss debt needs, opportunities and options, including any upcoming debt issues and/or refundings. If action is warranted, the entire team is pulled together to decide upon the merits and, if justified, to define a plan to accomplish the debt issuance, refunding, swap, liquidation or other initiative.
  4. It is the Budget Director’s primary role to assemble the project description and required financial and statistical information, review the official statements and to do the reporting required by the SEC (NRMSIR).
  5. It is the role of the Financial Advisor and Bond Counsel to recommend the approach and financing instrument to best meet the needs of the University and to coordinate the RFP and selection of financial institutions and/or underwriters. The Bond Counsel secures the most favorable terms and covenants, and coordinates the preparation of legal documents with input and review by the Debt Management Team. The Financial Advisor coordinates the preparation of the details of the financing and insurance or other credit enhancements. The Financial Advisor also coordinates review and rating by the appropriate rating agencies.
  6. It is the Controller’s primary role to coordinate receipt and distribution of proceeds, payments to fiscal agents, allocations of debt service payments to project owners, arbitrage calculations and reporting, and financial reporting.

D. Debt Management Strategies

  1. Fixed versus variable rate allocation

    The University will assess prevailing market interest rates and the current debt mix to determine whether to issue fixed or variable rate debt. Variable rate debt can provide a lower cost of capital, but introduces additional risks. To limit this risk, variable rate debt will be no more than 40% of the overall debt outstanding. Variable rate exposure may be achieved directly through debt issuance or indirectly by entering into an interest rate swap contract.

  2. Methods of Sale

    The University will consider various methods of sale. Negotiated and competitive sales will be considered on an individual transaction basis. Issue size and complexity will be factors in determining which method of sale to pursue. A retail sales approach may be implemented if deemed appropriate for the particular transaction.

  3. Purchase of Insurance or Credit Enhancement

    The University will evaluate insurance and credit enhancement opportunities and utilize them if they are deemed cost effective.

  4. Refunding Targets

    The University will monitor its debt portfolio for refunding and/or restructuring opportunities. Advance refunding transactions must weigh the current opportunity against possible future refunding opportunities. In general, for a stand-alone refunding, the University will enter into a transaction that produces greater than 3% net present value savings, with this threshold higher for those transactions with a long escrow, such as advance refundings. The savings threshold can be less for refundings combined with new issues or other refundings, or for business reasons such as freeing up a reserve fund.

  5. Selection of Underwriters and Participants on the Selling Team

    The University will utilize a request for proposal process to select senior and co-managing underwriters for University debt issuance. The University will reserve the right to utilize a competitive process for any debt issue.

  6. Efficiency of Issuance

    The University will combine capital projects within a reasonable time horizon into a single issuance to save costs, to the extent that it is feasible. For small issues even after combining, the University of North Carolina bond pool will be utilized if the timing meets UNCG’s needs and it is cost effective and efficient for UNCG. For larger issues, the bond pool will be utilized if significant cost savings can be realized as well as being efficient and timely for UNCG. Stand alone issues will be utilized when in the best interest of UNCG upon approval of the Vice President for Finance.

  7. Integrity of Revenue Streams

    The revenue system (housing & dining, or parking, or student fees, etc.) for each self-liquidating capital project must stand on its own bottom line, supported by a revenue stream that can fully liquidate the debt over the amortization period in a fiscally sound manner. Debt service costs will be allocated to the capital project owners in proportion to the projects participation in the borrowing.

  8. Debt Service Leveling and Reserve for Variable Rate Debt Fluctuations

    The University will allocate debt service costs on capital projects funded with variable rate debt to the capital project owners on a fixed rate basis, effective at the time of issue, over the course of the amortization period. The differences between the allocation and the actual debt service will be placed in a reserve and returned to the project owners at the end of the amortization period. This is effectively an internal hedge to protect business operations from wide fluctuation in variable rates over the life of the debt with a leveling factor. Interest income will be allocated to the reserve.

E. Debt Compliance and Reporting

  1. Continuing Disclosure Compliance

    The University will meet the ongoing disclosure requirements in accordance with SEC Rule 15c2-12 (NRMSIR). The University will submit all reporting required with respect to outstanding bonds or certificates of participation to which such Rule is applicable.

  2. Arbitrage Rebate Compliance

    The University will comply with arbitrage requirements on invested tax-exempt bond proceeds. Arbitrage calculations will be performed as needed.