University Policy Number 2111
Responsible Office: Senior Vice President for Administration and Finance
Related Law & Policy:
- Policy 2109: Asset Capitalization
- Policy 2115: Private Business Use
- Virginia College Building Authority Post Issuance Compliance Policy for Tax-Exempt Qualified Obligations
- Treasury Board of the Commonwealth of Virginia Post Issuance Compliance Policy for Tax-Exempt Qualified Obligations
- Interest Rate Swap Guidelines
This policy applies to all debt financing activities of the University. Component units of the University may undertake debt financings, which are not covered by this policy. This policy supersedes the University’s Debt Policy No. 2111 that was approved on July 23, 2007.
II. Policy Statement
George Mason University’s mission as a public, comprehensive, research university in the National CapitalRegion in the Commonwealth of Virginia is to create an innovative and inclusive academic community committed to creating a more just, free, and prosperous world. One of the largest four-year public universities in the Commonwealth, the University continues to grow and expand its programs and mission within the region and the State.
The use of debt is an important funding mechanism for the University’s capital plan. This policy links the use of debt to the University’s mission and strategic goals during this continued period of growth.
The objectives of the debt policy are to:
1) Provide guidelines for debt capacity and affordability assessment in order to maintain the long-term financial health of the University
2) Establish a framework for allocating the use of debt to projects that most support the mission and strategic goals of the University
3) Outline debt management and risk considerations
4) Provide debt reporting guidelines
Oversight and Approval
The Board of Visitors shall authorize the issuance of debt and execution of financing agreements. Additionally, federal tax law requires that the Board of Visitors pass a Reimbursement Resolution when required.
The Office of the Senior Vice President for Administration and Finance (“Senior Vice President”) is responsible for implementing this policy and for all debt financing activities of the University.
Compliance, Reporting and Monitoring
The Board of Visitors shall no less than annually, and upon requests for debt authorization, review University compliance with this policy. The Senior Vice President will report to the Board of Visitors on the University’s debt capacity, debt affordability, and overall financial strength to demonstrate compliance with this policy. The Senior Vice President may establish a debt advisory team to serve in an advisory capacity on debt-related matters.”
The University seeks to manage its debt and overall financial profile as follows:
1) Identify and prioritize projects for debt financing that are critical to the mission and advance the strategic objectives of the University
2) Strategically allocate the University’s debt capacity to these projects
3) Align the financial position of the University consistent with a minimum rating in the “A” category in order to:
- Maintain access to the capital markets on a standalone basis
- Obtain favorable costs of capital, flexibility, and favorable terms
4) Optimize the University’s debt composition within its desired risk management profile
5) Manage the debt repayment schedule of the portfolio in order to preserve debt capacity and flexibility over the longer term, while meeting the liquidity and strategic objectives of the University.
It is essential that the University has cost effective access to capital. The University recognizes that debt as a source of capital is limited. The University will make decisions relative to the use of debt as it considers each capital project in the context of the University’s mission.
The University will evaluate the funding sources (including but not limited to state funding, cash reserves, philanthropy, self-funding, and debt funding) for proposed capital projects in the context of the project’s role in supporting the University’s mission and strategic priorities. The University will establish its strategic priorities for capital projects and debt capacity in conjunction with preparation of the six-year capital plan, which is reviewed annually and updated bi-annually. Business plans for debt-funded projects must address the plan to support debt service.
Debt Capacity and Affordability
In evaluating its debt capacity, debt affordability, and overall financial strength, the University will consider its current debt levels, future debt financings, and overall financial health of the University. Debt capacity considers the University’s financial resources and the University’s ability to leverage its financial resources to finance certain capital projects. Debt affordability considers the University’s ability to pay the debt service on an annual basis through its operating budget and identified revenue streams.
The University will benchmark Key Financial Indicators to external sources such as higher education medians for the “A” rating category published by nationally recognized rating agency services (such as Moody’s or S&P), universities in its national peer group, or other public universities in the Commonwealth. The University evaluates its performance against these measures with a long-term view and will monitor the trend of the ratios over time. The University recognizes that financing a strategically important project may cause one or more of the financial ratios to perform poorly against the trend, median or peer comparison in the short-term, but the University takes a long term view and evaluates the project accordingly. Based on changing market conditions, the University may change the Key Financial Indicators to better monitor the financial health of the University.
The University views its debt holistically and will manage its debt level, debt composition, and risk profile from a portfolio standpoint.
In considering available financing structures and funding sources, the University will evaluate the benefits, risks, and costs of each financing structure and funding source, including the optimal way to access capital. The financing structure is reviewed within the context of the goals of this policy, and the University performs a financial and risk analysis to determine the impact of the proposed financing on select financial ratios.
The University may actively manage its debt portfolio to take advantage of current market conditions, either to generate savings, take advantage of financing structures that would optimize its debt structure in the context of its goals, or for strategic purposes.
The University recognizes there is a correlation between risk and cost, and there are risks it may assume in order to optimize its debt portfolio. The University also recognizes its debt portfolio risks should be viewed holistically and in the context of its assets, liabilities and operations.
The University evaluates the risks of its debt portfolio to inform decisions regarding the debt structure of the existing portfolio and that of potential new debt.
Risks in the debt portfolio can be broadly categorized as interest rate risk, liquidity risk, and counterparty risk. Interest rate risk impacts the budget and its ability to absorb volatility in interest expense. Liquidity risk impacts the balance sheet and its ability to absorb unexpected calls on liquidity. Counterparty risk represents the impact a counterparty may have on the University’s access to the capital markets and its impact on the interest rate and liquidity risk of the University. In addition, the University considers the risks associated with concentration of banking services, credit, and counterparty providers, in order to diversify its dependency risk on individual financial institutions.
The University recognizes the value and flexibility that short-term debt or variable rate financing may contribute to its debt portfolio. The University also recognizes that cost alone should not drive debt portfolio management decisions, as the lowest cost alternative may expose the University to an unacceptable level of risk. While interest rate risks associated with variable rate debt can be mitigated through asset/liability management, liquidity risk and access to the market risk remain in certain financing structures. The University will maintain Committed Debt of no less than 70% of its total debt portfolio.
The University may consider the use of derivative products in order to achieve the goals outlined in this policy. Derivatives may be undertaken by the University only upon quantification and evaluation of their risks and in accordance with the University’s Interest Rate Swap Guidelines.
Post Issuance Compliance
The University adheres to the post issuance compliance procedures established through the Treasury Board and the Virginia College Building Authority to ensure it complies with federal tax law requirements for the use of tax-exempt debt. The University established a Private Business Use Policy for the ongoing use of facilities in order to ensure it meets federal tax law requirements for the use of tax-exempt debt financed facilities.
Key Financial Indicators
Examples of Key Financial Indicators include the following higher education medians (as provided in the Moody’s Public College and University Financial Ratio Definitions report):
a. Expendable Resources to Debt: this ratio measures the availability of liquid and expendable net assets to aggregate debt and is a determinant of medium- to long-term financial health based on the strength of its balance sheet. Expendable financial resources are the sum of unrestricted net assets plus restricted net assets and temporarily restricted net assets less foundation net investment in plant.
Expendable financial resources divided by direct debt
b. Debt Service to Adjusted Operating Expenses: this ratio measures the percentage of operating expenses that support debt service and is a determinant of the University’s operating flexibility to finance existing obligations and new initiatives. Adjusted operating expense is the total operating expense plus interest expense.
Debt service divided by Adjusted operating expenses times 100
c. Debt Service Coverage Ratio: this ratio measures the University’s ability to cover debt service requirements with operating revenues and is a determinant of the strength of the operating income to meet its annual obligations.
Operating surplus (deficit) plus interest and depreciation
divided by annual debt service
d. Days Cash on Hand:: this ratio measures the number of days the University is able to operate (cover its cash operating expenses) from unrestricted cash and investments that can be liquid annually and is a determinant of the liquidity and flexibility the University maintains to finance existing obligations, potential liquidity funding, and new initiatives.
Annual liquidity times 365 divided by total expenses less depreciation and
unusually large non-cash expenses
e. Expendable Resources to Operating Expenses: this ratio measures the availability of liquid and expendable net assets to operating expenses and is a determinant of the financial health of the University to meet its current obligations. Expendable financial resources are the sum of unrestricted net assets plus restricted net assets and temporarily restricted net assets less foundation net investment in plant.
Expendable financial resources divided by total operating expenses
1) Committed Debt is defined as any debt that is either committed to maturity without a put option by the credit provider or bondholder, or has a put option that is exercisable in no less than two years.
2) Debt Composition describes the different types of financing structures that comprise the University’s outstanding debt obligations. The financing structures include but are not limited to fixed rate, variable rate, short-term, long-term, direct debt, indirect debt, public
debt, private debt, and capital leases.
a. Interest Rate Risks, may include the following:
Market Rate Risk – Traditionally thought of as interest rate risk, but limited to market risk only (risk that interest rates will rise)
Credit Risk – Risk that any actual or perceived change in creditworthiness will result in a higher cost of capital
Tax Risk – Risk that any actual or potential change in Federal and/or State law will adversely impact the pricing or availability of tax-exempt debt
Basis Risk – Risk that interest rate hedges will be inefficient or mismatched
Bank Liquidity or Credit Facility Repricing Risk – Risk that the cost of liquidity facilities to support uncommitted debt or working lines of credit will increase
Swap Counterparty Risk – Risk that expected payments from swap counterparties are not received
b. Liquidity Risk, may include the following:
Roll/Remarketing Risk – Risk that put bonds, commercial paper or variable rate demand bonds cannot be remarketed or rolled over
Bank Liquidity Facility or Credit Facility Renewal Risk – Risk that liquidity facilities to support uncommitted debt or working capital lines of credit may not be available at all or on acceptable terms
Failure of a Liquidity Facility Provider – Risk that a liquidity facility provider ceases to operate
Swap Collateralization Risk – Risk that collateral may need to be posted under a swap agreement
Swap Termination Risk – Risk of voluntary or involuntary termination of a swap contract
c. Counterparty Risk, may include the following:
Commonwealth of Virginia Risk – Risk that the Commonwealth of Virginia is downgraded, resulting in an increased cost of capital or policies change regarding financing programs
Financial Institutions Risk- Risk that a change in regulations or credit quality of a banking partner could result in an increased interest cost, liquidity risk, or change in terms of service arrangement.
4) Reimbursement Resolution is a Board approved resolution declaring its intent to issue tax-exempt debt in order to reimburse the University for expenditures incurred more than 60 days prior. The resolution does not obligate or authorize the University to issue tax-exempt debt for the identified projects. In accordance with federal tax law, the University may issue debt to reimburse itself up to three years after the adoption of a Reimbursement Resolution.
A. Effective Date:
Approved by the Board of Visitors by Resolution on February 5, 2014.
B. Date of Most Recent Review:
IV. Timetable for Review
This policy, and any related procedures, shall be reviewed annually.