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Debt Policy


Introduction

To fulfill its mission, the University of the Pacific must make capital investments. Debt--especially tax-exempt debt-- is recognized as an important and continuing source of the University's capital to fund improvements necessary to achieve the University's mission and strategic objectives. This policy provides the framework by which decisions will be made regarding the use of debt to finance University capital projects.

Objectives 

  1. To provide guidelines to the Regents and Administration on  the  use  of debt to support the University's capital needs, while achieving the lowest overall cost of capital.
  2. To provide selected financial ratios with specific targets to ensure that the University continues to operate within appropriate financial parameters while allowing the University to maintain financial stability and the highest acceptable credit rating that permits it to continue to issue debt at favorable rates.
  3. To bridge the cash flow gap between the University's available funds and its capital needs.

Debt Definition

Debt is defined to include all short and long term obligations, guarantees, and instruments that have the effect of committing the University to future payments. The assumption of debt, both direct and indirect, will be subject to Regents' approval. Any debt issued by subsidiary entities is subject to these policies. To fulfill their fiduciary responsibilities, it is critical that the Board of Regents and management know the extent of debt obligations. 

 

Debt Allocation

Given that the University has limited debt capacity, University administration will allocate the use of debt financing for the University's benefit only with the approval of the Board of Regents. This allocation includes the prioritization of debt resources among all uses, including academic projects, equipment financing, real estate investment, financial opportunities, and other projects. In allocating debt, the following guidelines will be used:

  • Core Mission. Only projects which relate to the core mission of the University will be considered for tax-exempt debt financing;
  • New revenue stream or budgetary savings. A project that has a related revenue stream or can create budgetary savings will receive priority consideration, however, this priority consideration is not meant to exclude other projects that are key to the University's mission. For these projects, the use of debt must be supported by an achievable financial plan that includes servicing the debt and meeting any new or increased operating costs, which could include the funding of a replacement and renovation reserve. For projects that can create budgetary savings, the budget will be reduced to fund the debt service and any additional savings will be invested into other critical capital projects.
  • Length of useful life. The useful life of a project will be taken into account when considering long-term debt for capital investment.
  • Capacity to attract outside funds.  Fund raising for capital gifts are expected to be a major source of financing the University's capital investments. Philanthropy, project-generating revenues, Federal and State grants, expendable reserves, and other sources are expected to finance a portion of the cost of a project. Debt is to be used conservatively and strategically.
  • Other considerations. The factors above are not intended to be allĀ­ inclusive. Judgment by management and the Regents ultimately will determine the use and amount of debt.

Credit Rating Maintenance

Maintaining the highest acceptable credit rating is a primary objective of this policy because doing so will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting its strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit rating with the bond rating agencies.

Timely and complete access to financial information. To ensure the maintenance and achievement of this objective, the Board expects Management to provide the rating agencies with full and timely access to required information.

  • Financial Ratio Tests. The following four key financial ratios, which are consistent with the measures used by rating agencies, will be used by the University in determining debt capacity.

Because the rating agencies monitor a number of other statistics and ratios in developing their opinions, Management is expected to review annually all key-rating agencies' ratios to monitor compliance with rating guidelines. The following four ratios are not to be exceeded using the forecast of the current year without express approval of the Board of Regents:

Ratio 1: Expendable Resources To Debt 

Expendable Resources to Debt = (Total Unrestricted and Temporarily Restricted Net Assets less Net Investment in Plant)/ Outstanding Debt

 

This leverage ratio measures the availability of assets, excluding permanently restricted assets, to cover debt should the University be required to repay its outstanding obligations.  The target for this ratio is to be no less than 125%.

Ratio 2: Debt Service To Operations

Debt Service to Operations = Actual Debt Service/Total Expenses

The debt service to operations ratio measures the percentage of debt service to the total annual operating expenses of the University. By maintaining an appropriate proportion of debt service to total expenses, other critical and strategic needs can be met as part of the expense base. The target for this ratio is to be no greater than 5%.

Ratio 3: Total Resources To Debt

Unrestricted Resources to Debt = (Total unrestricted resources)I Outstanding Debt

The unrestricted asset to debt ratio measures the availability of all-unrestricted assets of the University that could be used if the University was required to pay the total debt obligation. The target for this ratio is to be no less than 100%.

Ratio 4: Debt Overage

Finally, the University has covenanted that, so long as any of the 1997 and 1998 bonds are outstanding, it will maintain unrestricted and temporarily restricted assets, (including plant assets after adding back depreciation and amortization), equal to at least 200% of its total outstanding debt.

Annual Debt Report

The Office of the Vice-President for Business and Finance will provide an annual debt report to the Board of Regents. The debt report will cover updated ratios, debt outstanding, annual debt service, available capacity, and bond rating.

Bi-annual Policy Review

The Debt Policy will be reviewed by the Finance Committee of the Board of Regents at least every two years and modified as necessary to reflect changing conditions.

About This Policy
Last Updated
10/30/2015
Original Issue Date
5/25/2000

Responsible Department
Board of Regents