ASC—Docket October 16, 2014
Board of Trustees Finance & Administration Committee Thursday, October 16, 2014 Docket October 16, 2014
The Board of Trustees of Oregon State University
Finance and Administration Committee Meeting October 16, 2014 1:00-4:30 pm Robert Family Event Room, 126 Austin Hall
Agenda
1. Call to Order/Roll/Declaration of a Quorum (Schueler)
2. Consent Item a. Approval of Minutes of July 8, 2014 Finance and Administration Committee Meeting (Schueler) ...... F-2
3. Action Items a. FY15 and FY16 Committee Work Plan and Meeting Schedule (Schueler) ...... F-4 b. Proposed Acceptance of Matteson Property Gift (Ford, Pawlowski) ...... F-6 i. Attachment A: Matteson Property Location ...... F-8 ii. Attachment B: College of Forestry General Plan for Matteson Property ..... F-9 c. Proposed Public University Fund Investment Policy (Ford, Green, Spyke-PFM) ...... F-11 i. Attachment A: Public University Fund Investment Policy ...... F-13 d. Proposed University Treasury Management Policies (Ford, Green, Musselman-PFM) ...... F-18 i. Attachment A: University Internal Bank Policy (Green, Musselman-PFM) F-23 ii. Attachment B: University Investment Policy (Green, Spyke-PFM) ...... F-26 iii. Attachment C: University Debt Policy (Green, Musselman-PFM) ...... F-31 e. FY14 Q4 Operating Management Report (Ford, Green, Bloomer) ...... F-41
4. Discussion Items a. FY15 Operating Budget (Ford, Bloomer) ...... F-42 b. 2015-17 State Funding Process (Ford, Lewis) ...... F-44 c. State Treasury Managed Endowment Fund Verbal Update (Ford, Green) ...... F-52
5. Education Items a. Bond Rating Process – “Bonds 102” (Ford, Green, Musselman-PFM) ...... F-53 b. Long-range Capital Plan Development Process – “Capital 102” (Ford, Pawlowski) ... F-62
6. Adjournment
OSU Board of Trustees F&A Committee Page F-1 AGENDA Docket October 16, 2014
The Board of Trustees of Oregon State University
Regular Meeting of the Finance & Administration Committee July 8, 2014 President’s Conference Room, Kerr Administration Building Oregon State University, Corvallis, Oregon
DRAFT MINUTES
Committee Members Present: Mark Baldwin, Darry Callahan, Elson Floyd (vice chair), Laura Naumes, Taylor Sarman, Kirk Schueler (chair), Mike Thorne, Pat Reser (ex officio), Glenn Ford (ex officio)
Other Trustees Present: Michele Longo Eder, Brenda McComb
University Staff Present: Sherm Bloomer, Mike Green, Mark Huey, Jan Lewis, Kirk Pawlowski, Linda Powell, Meg Reeves, Melanie Rose, Patti Snopkowski, Marcia Stuart, Ryan Winklepleck
1. Call to Order Committee Chair Kirk Schueler called the meeting to order at 9:01 a.m., asked the Assistant Board Secretary to call the roll, and noted a quorum.
2. Review and Approval of March 12, 2014 Meeting Minutes On a motion made and seconded, the Committee approved the minutes of the March 12, 2014 meeting of the Finance and Administration Committee as presented.
3. Information Items
a. 2015-17 Legislative Operating and Capital Funding Request Submittals to the Higher Education Coordinating Committee Vice President for Finance and Administration Glenn Ford reported that a few minor adjustments were made to the funding request following the March 13, 2014 Board Meeting in order to comport with additional information requests from the HECC. The Executive and Audit Committee reviewed and approved the changes at the committee’s March 28 and April 22 meetings. Approval by the Executive and Audit Committee followed Board approval of that committee’s actions at the Board’s March 13, 2014 meeting.
b. Financing Capital Investment—“Bonds 101” At the request of the Board Chair, Associate Vice President for Finance and Administration Mike Green presented an overview of financing capital investment in order to give trustees a better understanding of bonding options that exist for the University.
c. “Capital Planning 101” University Architect and Executive Director of Capital Planning and Development Kirk Pawlowski presented an overview of capital planning at Oregon State. He summarized the major capital investments that have been made between 2004 and
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2013 and noted the major capital investments for 2015-17 the Board approved at its March meeting.
d. Quarterly Management Reports The committee discussed the importance of quarterly financial management reports that will assist the Committee, the Board and the University in tracking performance of the University’s annual operating budget. In addition, the committee reviewed the proposed format and topics for the reports.
e. Audit RFP Process Chief Audit Executive Patti Snopkowski informed the committee that the University will be issuing a Request for Proposal for an external audit firm to perform the annual financial statement and federal compliance audits. Ms. Snopkowski noted that the Executive and Audit Committee will approve the selection of the firm and that the Finance and Administration Committee will be kept informed of the firm’s activities.
4. Action Item
a. Review and Approval of the OSU Fiscal Year 2014-15 Operating Budgets Following a presentation by Director of Budget and Fiscal Planning Sherm Bloomer on the University’s proposed FY 2014-15 operating budgets, the Committee unanimously approved a motion to move the item forward to the Board for its review and approval at the July 18, 2014 Board Meeting.
5. Other Items Staff was asked to continue to develop a long-range capital plan aligned with the University’s strategic plan and to seek Committee and Board approval of that capital plan. The Committee requested staff to develop debt strategies and policies for the Committee’s review and approval. The Committee recommended that staff develop some initial financial targets, such as fund balance as a percent of revenue, which the Committee and Board could use to communicate policy and direction. The Committee noted that the evolution of its and Board’s budget review and approval process should include additional detail and trend and forecast information in order to create over time more context for trustees’ review, discussion and decision-making.
6. Adjournment There being no other business, the meeting was adjourned at 12:02 p.m.
Respectfully submitted,
Mark Huey Assistant Secretary to the Board
OSU Board of Trustees F&A Committee Page F-3 CONSENT ITEM Docket October 16, 2014
FY15 and FY16 Committee Work Plan and Meeting Schedule
October 2014 Review and Approve Minutes of July 2014 Committee Meeting (*) Review and Accept the FY15 Committee Work Plan and Meeting Schedule (*) Receive Briefing, Accept and Recommend to the Full Board: Matteson Property Gift (*) Review, Accept and Recommend to the Full Board: Public University Fund Investment Policy (*) Review, Accept and Recommend to the Full Board: University Treasury Management Policies (*) • University Internal Bank Policy (*) • University Investment Policy (*) • University Debt Policy (*) Receive an Update on the Bond Rating Process (Bonds 102) Receive an Update on the Long-Range Capital Plan Development Process (Capital 102) Review and Accept the FY14 Q4 Operating Management Report (*) Receive an Update on the FY15 Operating Budget Receive an Update on the 2015-2017 State Funding Process Receive an Update on State Treasury Managed Endowment Fund
Mid-Period (date TBD): 1-Hour Telephonic Meeting Review and Accept the FY15 Q1 Operating Management Report (*) Review and Accept the FY15 Q1 Investment Report (*)
January 2015 Review and Accept the FY14 External Auditor Annual Report (joint 1-hour meeting with Executive & Audit Committee) (*) Review the FY14 Financial Statement Analysis Discuss Budget Detail, Trends, Financial Targets and Metrics
March 2015 Review and Approve/Recommend to the Board FY16 Tuition Rates & Mandatory Student Fees (*) Review the FY16 Operating Budget Outlook Preliminary Review of the FY16 Capital Plan Review the Long-Range Capital Plan Review and Approve Financial Targets and Metrics (*) Review and Accept the FY15 Q2 Operating Management Report (*) Review and Accept the FY15 Q2 Investment Report (*)
May 2015 Review and Approve/Recommend to the Board the FY16 Capital Plan (*) Review and Approve/Recommend to the Board the FY16 Operating Budget (*) Review and Approve/Recommend to the Board the Long-Range Capital Plan (*) Review the Long-Range Operating Budget Forecast Review and Accept the FY15 Q3 Operating Management Report (*) Review and Accept the FY15 Q3 Investment Report (*)
Mid-Period (date TBD): 1-Hour Telephonic Meeting Develop and Accept the FY16 Committee Work Plan and Meeting Schedule (*) Review and Accept the FY15 Q4 Operating Management Report (*) Review and Accept the FY15 Q4 Investment Report (*)
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October 2015 Annual Review of University Investment Policy Annual Review of University Debt Policy Receive an Update on the FY16 Operating Budget
Mid-Period (date TBD): 1-Hour Telephonic Meeting Review and Accept the FY16 Q1 Operating Management Report (*) Review and Accept the FY16 Q1 Investment Report (*)
January 2016 Review and Accept the FY15 External Auditor Annual Report (joint 1-hour meeting with Executive & Audit Committee) (*) Review the FY15 Financial Statement Analysis Discuss Budget Trends, Financial Targets and Metrics
Mid-Period (date TBD): 1-Hour Telephonic Meeting Review and Accept the FY16 Q2 Operating Management Report (*) Review and Accept the FY16 Q2 Investment Report (*)
March 2016 Review and Approve/Recommend to the Board FY17 Tuition Rates & Mandatory Student Fees (*) Review the FY17 Operating Budget Outlook Preliminary Review of the FY17 Capital Plan Review the Long-Range Capital Plan Review the Current Financial Targets and Metrics
Mid-Period (date TBD): 1-Hour Telephonic Meeting Review and Accept the FY16 Q3 Operating Management Report (*) Review and Accept the FY16 Q3 Investment Report (*)
May 2016 Review and Approve/Recommend to the Board the FY17 Capital Plan (*) Review and Approve/Recommend to the Board the FY17 Operating Budget (*) Review and Approve/Recommend to the Board the Long-Range Capital Plan (*) Review the Long-Range Operating Budget Forecast
TBD/As Needed Review the State Revenue Outlook, State Funding and Relevant Legislative Updates Review and Approve/Recommend to the Board the Biennial Legislative Funding Request to the HECC Provide Educational Opportunities/Meeting Agenda Items/Presentations for F&A Committee Members
(*) Action items
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Proposed Acceptance of Matteson Property Gift
BACKGROUND
Request for approval to accept gift of the following real property:
The Matteson Property is comprised of five parcels of timber property, zoned Exclusive Forest and Conservation District, totaling approximately 181.11 acres. The property is located in Washington County, Oregon - west of Henry Hagg Lake (see Attachment A). With a value of $2,120,000, based on a December 2013 land appraisal, the property is a gift from the estate of Marion Matteson in memory of his mother, Rubie P. Matteson, for use by the Oregon State University (OSU) College of Forestry.
OSU is in receipt of an independent third-party Phase I Environmental Assessment, which has also been reviewed by OSU’s Office of Environmental Health and Safety. The third-party assessment is favorable and no environmental concerns have been identified in either the report or in the OSU staff review.
The Oregon State University College of Forestry has reviewed the Timber Inventory and Appraisal initiated by the Matteson Estate dated March 2014. The College of Forestry is in agreement with the report’s documented timber valuation, the projected expenditures associated with harvesting and reforestation, and the projected net return of approximately $80,000 - $90,000 per year. The College of Forestry has also projected that the cost of maintaining the Matteson property will be approximately $2,025 per year and will include road and culvert maintenance, fire protection, and weed control. These operations and maintenance costs will be funded via periodic timber harvests from the property.
Following initial evaluation of the proposed gift, OSU and the OSU Foundation agreed that the property, if accepted, will be transferred to Oregon State University. Jeff Comfort, OSU Foundation’s Vice President for Principal Gifts and Gift Planning is assisting OSU’s Office of Capital Planning and Development with the transaction and serves as the primary point of contact with the Matteson Estate attorney.
Acceptance of the Matteson Property Gift will support OSU’s Strategic Goal of providing impact and reach for OSU throughout the state and beyond. In addition, approval of the gift is consistent with OSU’s commitment to enhancing the following signature area of distinction: Advancing the Science of Sustainable Earth Ecosystems, as described in OSU’s Strategic Plan 3.0.
CONDITIONS OF GIFT PROPERTY
The conditions of the gift of property generally state that the property will be actively managed on an ongoing basis in order to produce income from forest-related activities on the property, and that any net income from forest-related activities or public use will provide funding for College of Forestry programs, exclusively. The conditions of the gift also provide Mr. Matteson’s personal representative (Personal Representative) with full discretion to negotiate and evaluate terms proposed by Oregon State University for utilization of the property. The Oregon State University College of Forestry presented the attached “General Plan for the Matteson Property” (General Plan – Attachment B). The Personal Representative reviewed this
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plan and agreed that it is acceptable for fulfilling the terms and conditions set forth in the Marion Matteson Will.
PROPOSED GIFT AGREEMENT CONDITIONS
1. The property will be named the “Rubie P. Matteson Demonstration Forest” (Forest).
2. The Forest will be actively managed to provide income exclusively for the programs of the College of Forestry and not for any other departments, colleges or programs of Oregon State University. The funds derived from forest operations may be used to support new teaching, research, outreach and engagement initiatives within the College of Forestry.
3. “Active management” of the Forest shall be determined by the College of Forestry giving consideration to its educational, research, outreach and engagement, fiscal goals, market conditions, and standard forest practices.
4. The College of Forestry will reasonably maintain and make improvements to the Forest in order to encourage and protect native species and to make the Forest more useable for year-round public enjoyment.
5. Public access to the Forest may consist of non-motorized walk-in recreation including hiking, running, horseback riding, and mountain biking. The College of Forestry may adopt a more restrictive policy for public access.
6. The College of Forestry will use the Forest for a variety of purposes, which may include, without limitation.
a. Demonstration of state-of-the-art forest management methods; b. Extension classes and tours through the Extension Forestry and Natural Resources Program on a variety of topics including thinning, reforestation, wildlife habitat enhancement, and methods of timber harvest; c. Demonstration areas to show to the public different thinning methods and tree spacing as well as to show how forests are harvested and replanted; and d. Interpretive stops and displays to help educate the public about the benefits of forests and forest management.
7. The College of Forestry will continuously maintain the Forest pursuant to this agreement and the General Plan for a minimum period of 20 years from the date the property is transferred to the College of Forestry.
Staff Recommendation to the Committee
Staff propose that the Board of Trustees’ Finance and Administration Committee recommend that the Board accept the Matteson Property Gift to Oregon State University of five parcels of timber property, zoned Exclusive Forest and Conservation District, totaling approximately 181.11 acres in Washington County, Oregon.
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Attachment A
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Proposed Public University Fund Investment Policy
INTRODUCTION
As noted in the University Treasury Management Policies docket (pages F-18 through F-40), the Oregon University System (System) worked with key partners over the past several years to improve the treasury management practices of the System via the establishment of an Internal Bank. To implement the investment pooling concepts of the Internal Bank, the System, working with the State Treasurer and the Oregon Investment Council, established a pooled investment fund, the OUS Fund, to combine cash balances from all System universities for liquidity management and investment purposes. One of the key factors in the legislature’s decision to approve the changes made by SB 270 was that some of the benefits of being a System would be retained under the new governance structure. One of those important benefits was that certain aspects of the Internal Bank would be maintained, including the pooling of cash balances for investment purposes. During the 2014 Legislative Session, HB 4018 established the Public University Fund for the purposes of pooling cash balances of the public universities. Under the provisions of HB 4018, public universities that desired to participate in the Public University Fund (P.U.F.) would select one of the participating public universities as the “Designated University” under the statute. The Designated University would have the responsibility and authority to administer the P.U.F., working with the State Treasurer and the Oregon Investment Council to establish the investment policy and manage the investments of the P.U.F. In order to ensure that the benefits of pooling the cash balances of all public universities would continue to be available, Oregon State University (University) agreed to be the Designated University. The University is also a participating public university; accordingly, Oregon State University’s cash balances are invested in the P.U.F.
In order to facilitate the July 1, 2014 changeover from pooling cash balances in the OUS Fund to the Public University Fund (P.U.F.), the P.U.F. Investment Policy was developed by the System, working with Public Financial Management, Inc. (PFM), and it was subsequently approved by the Oregon State Treasurer’s Office and the Oregon Investment Council. On July 1, 2014, the cash balances of the public universities that elected to participate in the P.U.F., Eastern Oregon University, Oregon Institute of Technology, Oregon State University, Portland State University, Southern Oregon University and Western Oregon University, were transferred into the P.U.F.
Because the University has agreed to take on the statutory role of Designated University, it has the responsibility and authority to administer the investment of monies in the P.U.F. At the University’s request, PFM has reviewed the proposed investment policy for the P.U.F. Staff request that the Board review and approve that policy, which is in Attachment A. The University has also contracted for a portion of the time of the University Shared Services Enterprises’ Director of Treasury Operations to carry out the day-to-day management activities of the P.U.F. The University Vice President for Finance and Administration has delegated to the University Associate Vice President for Finance and Administration, formerly the Associate Vice Chancellor for Finance and Administration for the System, who had responsibility to manage the activities of the OUS Fund, the oversight responsibility for the daily administration activities of the P.U.F.
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PUBLIC UNIVERSITY FUND INVESTMENT POLICY (See Attachment A) The P.U.F.’s investment policy establishes the investment guidelines pertaining to the assets of all public universities participating in the P.U.F. The following provisions are included:
• Scope – Delineates the scope of the Public University Fund investment policy. • Policy – Describes the policy under which the segregation of the P.U.F. at the Oregon State Treasury (OST) is authorized, vests authority for investing monies in the P.U.F. with OST investment officers, requires investment activity to be in accordance with the portfolio rules of the P.U.F. and documented in compliance with OST policies and procedures. • Compliance Application and Procedures – Sets forth the compliance program that the OST will follow to monitor the investments, identify instances of non-compliance with the investment policy, provide reports on compliance, and verify resolution of instances of non-compliance. • Portfolio Rules for the P.U.F. – Delineates the scope, objective, portfolio allocation and risk profile, permitted holdings, diversification, counterparties, strategy, investment restrictions, policy compliance, and the performance expectations and reviews relative to the P.U.F.
SUMMARY The administration of the P.U.F. is an important role that the University plays in furthering the goals of public higher education in Oregon. It allows for the State’s public universities, including Oregon State, to have access to a professionally managed investment vehicle that efficiently provides daily liquidity, while accessing longer term investments.
Staff Recommendation to the Committee Staff propose that the OSU Board of Trustees’ Finance and Administration Committee recommend to the Board that it approve the Public University Fund Investment Policy included as Attachment A.
OSU Board of Trustees F&A Committee Page F-12 ACTION ITEMS Attachment A - Public University Fund Investment Policy OFFICE OF THE STATE TREASURER Investment Manual Policies and Procedures Activity Reference: 04.03.05
FUNCTION: Oregon Public University Fund Investments ACTIVITY: Portfolio Rules
SCOPE: The Oregon Investment Council (OIC) has, with advice from the Treasurer and Oregon State Treasury (OST) investment staff, adopted a policy and specific rules for investing the Public University Fund (PUF). These rules are included in Appendix A.
POLICY: Funds meeting Oregon State Treasury (OST) requirements are eligible for segregated investment management by the Investment Division of the OST and within guidelines approved by the OIC. Investments shall be authorized by an OST investment officer and documented in accordance with OST policies and procedures.
Funds shall be invested in accordance with the policies and procedures outlined in this policy and in accordance with statute established by HB 4018, section 7.
COMPLIANCE APPLICATION AND PROCEDURES
OST shall provide an investment compliance program to accomplish the following objectives: a) monitor and evaluate portfolios, asset classes, and other investment funds to determine compliance with OST policies and contractual obligations; b) identify instances of non-compliance and develop appropriate resolution strategies; c) provide relevant compliance information and reports to OST management and the OIC, as appropriate; and d) verify resolution by the appropriate individual or manager within the appropriate time frame.
Resolution of Non-Compliance. If PUF investments are found to be a) out of compliance with one or more adopted investment guidelines or b) managed inconsistently with governing policy and objectives, investment staff shall bring the investments into compliance as soon as is prudently feasible. Actions to bring the portfolio back into compliance and justification for such actions, including documentation of proposed and actual resolution strategies shall be coordinated with the OST investment compliance program.
Appendices (Attached):
A. Portfolio Rules for the Public University Fund
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Appendix A
Portfolio Rules for the Public University Fund
Adopted July 30, 2014
1. Scope: These rules apply to the investment of funds from all eligible and approved participants in the Public University Fund (“PUF”), and are established under the authority of, and shall not supersede, the requirements established under ORS Chapter 293 and HB 4018 of Oregon Laws 2014.
2. Objective: Provide adequate liquidity for PUF participant cash flow requirements. Manage the portfolio to maximize total return over a long term horizon within the desired risk parameters.
3. Portfolio Allocation and Risk Profile: Allocation parameters listed in the table below are intended to be general guidelines, not hard limits subject to OST Compliance monitoring.
Strategy Name Allocation Objective Type Liquidity Short- The purpose of the short-term portfolio is Principal Term to assure adequate cash for operations. reservation Investment management efforts shall be conducted to maintain an allocation to the short-term portfolio equivalent to not less than approximately six (6) months of average monthly operating expenses. This short-term portfolio allocation may also be determined using the results of a cash flow analysis. Core Intermediat Investment management efforts shall be Higher total e-Term conducted to allocate to the intermediate- return versus term portfolio any cash balances in excess short-term of those necessary to meet the portfolio as requirements for the short-term portfolio. measured by Funds allocated to the intermediate-term the OSTF yield portfolio should not exceed $300 million. over a 3-year trailing period.
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Long-Term Investment management efforts shall be Higher total conducted to allocate to the long-term return versus portfolio any cash balances in excess of the benchmark those necessary to meet the requirements index over a 5- for the short-term portfolio. Funds year trailing allocated to the long-term portfolio should period. not exceed $120 million.
4. Permitted Holdings Short-Term Portfolio: The Oregon Short-Term Fund (OSTF); and Any securities eligible for purchase in the OSTF. The OSTF is governed by the Oregon Investment Council (OIC) and OST-adopted policies and guidelines as documented in OIC Policy 04.02.03.
Intermediate-Term Portfolio: Any holdings eligible for the Short-Term portfolio; The Oregon Intermediate-Term Pool (OITP); and Any securities eligible for purchase in OITP which is governed by Oregon Investment Council (OIC) and OST-adopted policies and guidelines as documented in OIC Policy 04.03.04.
Long Term Portfolio: Any holdings eligible for the Intermediate-Term Portfolio; Obligations issued or guaranteed by the U.S. Treasury or by U.S. federal agencies and instrumentalities, including inflation-indexed obligations with stated maturities less than 15.25 years; Non-U.S. Government Securities and their Instrumentalities; o Non-U.S. government securities and Instrumentalities with a minimum rating of one or more of Aa2/AA/AA by Moody’s Investors Services, Standard & Poor’s or Fitch, respectively, and with a stated maturity less than 15.25 years at the time of purchase. Municipal debt with a minimum rating of one or more of A3/A-/A- by Moody’s Investors Services, Standard & Poor’s or Fitch, respectively, and with a final maturity less than 15.25 years at the time of purchase; Corporate indebtedness with minimum investment grade ratings by one or more of Moody’s Investors Services, Standard & Poor’s or Fitch, respectively, and with a stated maturity less than 15.25 years at the time of purchase; Asset-backed securities rated AAA at the time of purchase with a weighted average life of less than 5.25 years; Commercial mortgage-backed securities (CMBS) rated AAA at the time of purchase with a weighted average life of less than 5.25 years;
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U.S. agency residential mortgage-backed securities (MBS) and residential mortgage related securities with a weighted average life of less than 5.25 years.
5. Diversification The portfolio should be adequately diversified consistent with the following parameters: No more than 3% of portfolio par value may be invested in a single security with the notable exception of obligations issued or guaranteed by the U.S. Treasury or by U.S. federal agencies and instrumentalities; and No more than 5% of portfolio par value may be invested in the securities of a single issuer with the notable exception of obligations issued or guaranteed by the U.S. Treasury or by U.S. federal agencies and instrumentalities.
Issuer and security level restrictions shall not apply to OSTF or OITP holdings.
6. Counterparties A list of all broker/dealer and custodian counterparties will be provided to PUF’s Designated University annually.
7. Strategy: Maintain an average (measured by market value) credit rating of at least single-A, excluding OSTF and OITP holdings. If a security is rated by more than one rating agency, the lowest rating is used to determine the average rating; In the Long-Term Portfolio, maintain an average modified duration level of +/-20% of the custom fixed income benchmark up to a maximum of 7.5 years; and Structure maturities to provide reinvestment opportunities that are staggered. No more than 15% of the long-term portfolio should mature in a single, 3- month time period. This stipulation is intended to be a general guideline, not a hard limit subject to OST Compliance monitoring.
8. Investment Restrictions: All investments will be in U.S. dollar denominated securities; All investments will be non-convertible to equity; Collateralized debt obligations (CDO), Collateralized Loan obligations (CLO) and Z-tranche investments are not permitted; Investments in Alt-A, sub-prime, limited documentation or other “sub-prime” residential mortgage pools are not permitted. There shall be no use of leverage in any investments (excluding use of securities in a securities lending program). Structured securities such as ABS, MBS and CMBS shall not be considered as using leverage;
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For newly issued securities with unassigned ratings, “expected ratings” may be used as a proxy for assigned ratings up to 30 business days after settlement date; and Maximum market value exposures (excluding underlying holdings in OSTF and OITP) shall be limited as follows:
U.S. Treasury Obligations 100% U.S. Agency Obligations 50% U.S. Corporate Indebtedness 50% Municipal Indebtedness 30% Asset-backed Securities (ABS) 20% Mortgage-backed Securities (MBS) 30% Commercial Mortgage-backed Securities (CMBS) 10% Structured Securities (Combined ABS, MBS and CMBS) 50%
9. Policy Compliance: OST Investment Staff will submit a written action plan to the Designated University regarding any investment downgraded by at least one rating agency to below investment grade within 10 days of the downgrade. The plan may indicate why the investment should continue to be held and/or outline an exit strategy; and OST Staff will consult with the PUF Designated University, on a pre-trade basis, if an investment trade or trades will result in a cumulative net loss greater than 1% over 3 months prior to trade settlement date.
10. Performance Expectations/Reviews: Over a 5-year trailing period, the Long-Term portfolio is expected to outperform the Bank of America Merrill Lynch 5-7 Year AAA-AA U.S. Corporate & Government Index (B3B0); OST will provide the PUF Designated University with a monthly report of all non-passive compliance violations of this policy’s guidelines; and Investment reviews between OST investment staff and the designated PUF University will occur quarterly and focus on: Performance relative to objectives; Adherence to this policy; and Trading activity.
SAMPLE FORMS, DOCUMENTS OR REPORTS:
None
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Proposed University Treasury Management Policies
INTRODUCTION
Over the past several years, the Oregon University System (System) worked with the Oregon Legislature, the State Treasurer, the Department of Justice, financial advisors, bond counsel, and key financial managers to improve the treasury management practices of the System via the establishment of an Internal Bank. Pursuant to SB 270, System policies automatically became Oregon State University (University) policies on July 1, 2014, and the University began implementation of its own Internal Bank.
An Internal Bank is a separate accounting and operating entity designated to hold and invest all University operating cash balances and to manage the university-paid long-term debt portfolio for the University. The purpose of the Internal Bank is to facilitate the long-term financial stability of the University through effective asset/liability management strategies and optimize the organization’s capacity to access the capital markets in the amounts needed at a reasonable price.
The benefits of implementing an Internal Bank, as well as the key policies necessary for its operation, are delineated below.
KEY BENEFITS OF IMPLEMENTING AN INTERNAL BANK
Universities across the country are finding creative ways to improve their treasury function. With declining state revenues appropriated to public colleges and universities, the level of operating assets needed to hedge the volatility in a more tuition-dependent environment has been increasing. Universities are beginning to pool operating assets for investment purposes to decrease the volatility of operating cash flows. With these increasing levels of operating assets and the decreased volatility that accrues through pooling, the opportunities for expanding the investment practices applied to these assets (with an appropriate risk-return profile) have become more attractive.
Additionally, universities have begun looking at long-term debt management from a portfolio perspective. The traditional approach to long-term debt management, where fixed-rate securities are issued and the debt service related to proceeds allocated to specific projects is tied to the underlying debt, is giving way to a portfolio approach to debt management. With a portfolio approach, the terms of long-term debt and the timing of issuance can be negotiated more strategically, taking into consideration the current capital markets. True variable-rate debt can be introduced and maintained at an appropriate level to lower the overall cost of capital and its debt service volatility can be mitigated through both a blended rate and through the volatility of returns on operating assets. The repayment schedule relating to allocations of proceeds can be more flexible (unbound by the underlying debt issuance), based on blended rates and different repayment time frames.
Bringing the pooled approach to managing cash balances and investing operating assets together with the portfolio approach to managing long-term debt in the Internal Bank allows tighter asset/liability matching and greater efficiencies in accessing the capital markets, both from the investment and long-term debt perspectives.
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MANAGEMENT AND INVESTMENT OF OPERATING ASSETS
The objectives of a pooled cash and investment management structure are to:
• Pool operating assets to decrease cash flow volatility and better manage liquidity. • Manage the investment of operating assets from an overall risk basis, rather than a security-type approach. • Maximize return on operating assets within a prudent risk/return profile. • Increase revenues and net assets of the University.
All University cash will be pooled and invested with the following objectives:
Safety – Safety of principal will be the foremost objective of the investment program. Investments of the University will be undertaken in a manner that seeks to ensure preservation of capital in the portfolio. The University will seek to mitigate credit and interest rate risk.
Liquidity – The investment portfolio of the University will remain sufficiently liquid to enable it to meet its cash flow requirements including payroll, accounts payable and debt service.
Return on Investment – The investment portfolio will be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into consideration the safety and liquidity needs of the portfolio.
MANAGEMENT OF UNIVERSITY-PAID DEBT (XI-F(1) and OSU Revenue Bonds)
With the passage of several key legislative changes over the past eight years, including SB 270, the University has the needed flexibility to manage its university-paid debt as a portfolio. The University is authorized to issue fixed-rate and variable-rate debt, enter into interest rate swap agreements, and enter into lines of credit or issue commercial paper (CP) or use its own liquidity to provide interim financing for construction projects. With this flexibility, the University has begun pooling and managing its University-paid debt as a portfolio.
Under the pooled approach, utilizing its own liquidity, lines of credit or CP, the University is able to begin its capital investments on a schedule that is uninhibited by the timing of long-term debt issuances. The University times and structures the underlying long-term debt issuance to fund the repayment of interim funding and provide the remainder of the funds needed for capital investments to provide for the lowest cost of capital, utilizing a mix of fixed and floating-rate debt. The University provides the construction funds to each borrowing department via a loan from the Internal Bank at a cost of capital that is established based on the interest costs of the entire portfolio of debt—a blended cost of capital. This effectively de-links the debt payments made by the borrowing department to the Internal Bank from the debt service payments made by the Internal Bank to the bond-holders. The Internal Bank strategically manages the University-paid debt via continuous management of the entire debt portfolio and setting an equitable blended rate to all borrowing departments.
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This approach to the management of University-paid debt has the following advantages:
Minimizing the Cost of Capital The University will minimize its cost of capital by providing interim financing to lower interest costs during construction, by limiting the portion of taxable debt issued, and by maintaining a portion of the University’s outstanding debt on a floating-rate basis. Due to the financing flexibility and typically low interest cost associated with variable-rate debt, it is desirable to have the flexibility to maintain a portion of the University’s aggregate debt on a floating-rate basis. However, variable-rate debt also introduces volatility to the University’s debt service obligations. Therefore, the University will balance the mix of variable and fixed-rate debt according to a target guideline that will be established based on the University’s ability to hedge such exposure either through interest earned on its operating cash balances, through reserves maintained for that purpose, or some combination thereof. The actual percentage of variable-rate debt outstanding will fluctuate from time-to-time due in part to financing needs, utilization of lines of credit or CP, and prevailing market interest rates.
Managing Volatility The University will manage interest rate volatility by establishing a standard “blended cost of capital” charged to the departments by the Internal Bank that is sufficient to cover debt interest costs, fund the administrative costs of the Internal Bank, and build a reserve to hedge variable- rate movement.
Providing Greater Flexibility and Clearer Planning Horizons The University provides greater flexibility and clearer planning horizons to its departments by de-linking the actual debt service payments on outstanding debt from the campus projects that the debt funded. Utilizing internal loans from the Internal Bank to fund their capital investments, campus departments can:
• Better predict their debt service costs at the beginning of a project. • Take out debt on terms more tailored to their specific project. • Repay debt early. • Focus their concern on managing the project and less on the financing.
By establishing a blended cost of capital, departments can worry less about the interest rate markets and the timing of bond issuances, focusing instead on the project itself.
Maximizing Allowable Arbitrage Earnings The University will maximize allowable arbitrage earnings by strategically entering the capital markets and through strategic management of any debt sinking funds to help avoid arbitrage rebate.
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OPERATION
In order to continue operating the Internal Bank with appropriate controls and risk mitigation processes, there are several policies that need to be reviewed and approved by the Board. These policies are:
• Internal Bank Policy • Investment Policy • Debt Policy
INTERNAL BANK POLICY (See Attachment A)
The Internal Bank Policy establishes the Internal Bank and sets forth its purpose and major operating parameters. The following provisions are included:
• Purpose of the Internal Bank Policy – Describes the purpose of the Internal Bank and its guiding policy. • Management of the Internal Bank – The University Vice President for Finance and Administration delegates to the University Associate Vice President of Finance and Administration the responsibility to manage the Internal Bank and sets forth his/her roles and responsibilities, including both management responsibilities and reporting requirements. • Operations of the Internal Bank: o Establishes the approvals required for certain transactions of the Internal Bank. o Lists the funds available for internal lending via the Central Loan Program. o Describes the process for establishing and maintaining the Deposit Interest Rate. o Describes the process for establishing the Internal Lending Rate. o Provides for the establishment of Internal Bank Reserves.
INVESTMENT POLICY (See Attachment B)
This policy establishes the investment guidelines pertaining to the operating assets of the University. The following provisions are included:
• Purpose of the Investment Policy – Discusses the basic purpose of the Investment Policy. • Scope – Sets forth the specific types of investments that are covered by the Investment Policy. • Prudence – Describes the standards that guide the investing activities of the University with respect to this investment category. • Objectives – Sets forth the primary objectives of the investing activities of the University with respect to this investment category. • Delegation of Authority – Delineates the delegation of investment management authority from the Oregon State University Board of Trustees (Board) to the University Vice President of Finance and Administration. • Ethics and Conflicts of Interest – Discusses the responsibilities of and disclosures to be made by the University officers and employees with respect to personal activities and interests that could conflict with their investment management activities.
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• Permitted Investment Instruments – Sets forth investment limits and lists the various investment instruments available to the University with respect to this investment category. • Maximum Maturity – Provides the maximum investment maturity and portfolio duration limits. • Safekeeping and Custody – Sets forth the custody and safekeeping procedures and requirements. • Reporting Requirements – Describes the frequency and contents of periodic reports to the Board on investment activity and performance. • Review of Investment Policy – Requires biennial review of the Investment Policy by the Board.
DEBT POLICY (See Attachment C)
The Debt Policy establishes the guidelines pertaining to the issuance of debt and the management of the debt portfolio. The following provisions are included:
• Purpose of the Debt Policy – Discusses the objectives and goals of the Debt Policy. • Bond Programs– Details the range of bond financing options available to the University for its capital investment financing needs. • Scope of the Debt Policy – Sets forth the specific types of University debt that is covered by the Debt Policy. • Capital Investment Funding Prioritization – References the University’s capital planning and financing prioritization process. • Debt Management Approval Process – Describes how debt financing for capital investments is approved. • Selection of Finance Consultants and Service Providers – Delineates the guidelines for the selection and hiring of bond counsel, financial advisors, underwriters, banks, other credit providers, and other service providers. • Debt Capacity and Affordability – Sets forth the procedures and financial indicators to be used to assess debt capacity and affordability. • Financing Sources – Details the various financing structures and funding sources available to the University. • Compliance with IRS Regulations – Summarizes the various IRS regulations regarding the usage of tax-exempt bond proceeds in order to maintain the bonds’ tax-exempt status. • Debt Portfolio Risk and Opportunity Management – Discusses debt portfolio risks, the use of derivative products, limitations on variable rate debt exposure, and the monitoring of refinancing opportunities. • Central Loan Program Management – Summarizes provisions and benefits of the internal loan program. • Debt Policy Monitoring and Reporting – Details the debt policy monitoring and debt capacity and affordability reporting process.
Staff Recommendation to the Committee
Staff propose that the OSU Board of Trustees’ Finance and Administration Committee recommend to the Board that it approve the Internal Bank Policy (Attachment A), the Investment Policy (Attachment B), and the Debt Policy (Attachment C).
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Attachment A DRAFT Oregon State University Internal Bank Policy
I. Purpose of the Internal Bank Policy
The Oregon State University Board of Trustees (Board) has established within the Office of the Vice President for Finance and Administration an Internal Bank that will operate in perpetuity with the following objectives:
a) To more efficiently and effectively carry out the treasury management function within Oregon State University (University); b) To facilitate the long-term financial stability of the University through effective asset/liability management strategies and optimizing the University’s capacity to access the capital markets at a reasonable cost; and c) To accumulate unrestricted net assets for the University.
The Internal Bank integrates the three primary functions of treasury management: (1) cash management, (2) limited term investment management (i.e., management of non-endowment assets), and (3) debt management (both short- and long-term). In order to integrate these functions, the Internal Bank will operate as follows:
• Cash and limited term assets of all University departments and units are pooled for investment purposes, and the Internal Bank is charged with the responsibility to manage those funds to maximize investment returns with a prudent level of risk while assuring necessary liquidity. • Financing necessary for capital investments approved pursuant to University policy is provided by the Internal Bank to departments or units through a Central Loan Program: o Interim financing may be provided for capital investments in anticipation of philanthropy, planned issuance of long-term debt or from other sources of funds. o Permanent financing may be provided for projects with an identified repayment source and will include an amortization schedule for a term consistent with the useful life of the project. • The University’s debt is managed in a portfolio approach and the Internal Bank is charged with the responsibility to minimize the University’s cost of capital within a prudent level of risk.
II. Management of the Internal Bank
The Internal Bank will be the responsibility of the University Vice President for Finance and Administration. The University Vice President for Finance and Administration delegates to the University Associate Vice President for Finance and Administration the responsibility for management of the Internal Bank, who may employ staff to provide the services that align with the goals of the Internal Bank. The Internal Bank’s operating expenses will be paid out of the Internal Bank’s income, generated by interest rate spreads and service fees.
The University Associate Vice President for Finance and Administration will be responsible for:
• Establishing the internal lending rate. • Establishing and maintaining the Central Loan Program.
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• Managing the University’s operating asset investments and debt portfolio. • Developing and maintaining related internal control processes and procedures. • Accounting for the operation of the Internal Bank. • Developing financial and other performance monitoring reports. • Developing and implementing operating policies and procedures. • Developing and managing the annual operating budget of the Internal Bank. • Maintaining access to adequate liquidity sources to meet the needs of the University.
The Internal Bank may contract with professional advisory firms to assist with the management of the investment and debt portfolio, as described in the University’s Investment Policy and Debt Policy.
The operation of the Internal Bank will comply with all applicable federal and state statutes, rules and policies. Where applicable, the Internal Bank will coordinate and cooperate with the Oregon State Treasurer and Department of Administrative Services in making investment and debt financing decisions.
The University Associate Vice President for Finance and Administration will monitor the operating performance of the Internal Bank and its ability to achieve stated long-term goals. The Vice President for Finance and Administration will annually report to the Board on the Internal Bank’s performance. Any material adverse change in performance will be reported to the Board.
III. Operations of the Internal Bank
Required Approvals
The University Vice President for Finance and Administration will make recommendations to the Board’s Finance and Administration Committee and request approval for the following transactions:
a) Investment of operating assets that fall outside of the Oregon State University Investment Policy or related policies. b) Issuance of new debt for capital or operating purposes in accordance with the Oregon State University Debt Policy. c) Transactions to acquire external forms of interim financing, such as bank lines of credit or commercial paper for liquidity purposes. d) Transactions to manage the debt portfolio in accordance with the Oregon State University Debt Policy.
Funds Available for Internal Lending via the Central Loan Program
In accordance with the Debt Policy, the University will operate a Central Loan Program. Funds available for lending include the following:
1. Proceeds from new debt issuance 2. Proceeds from repayment of internal loans via the Central Loan Program 3. Internal Bank liquidity, to be provided through University cash or external borrowing, after considering:
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i. Anticipated external debt service requirements ii. Operating cash flow needs iii. Operating costs of the Internal Bank iv. Adequacy of Internal Bank reserves, such as an interest rate reserve
Deposit Interest Rate
The University Associate Vice President for Finance and Administration, in consultation with the University Vice President for Finance and Administration, will develop procedures to establish the interest rate to be credited to departments or units that have funds on deposit in the Internal Bank. The rate will be periodically evaluated and adjusted as necessary.
Internal Lending Rate
Annually, the University Associate Vice President for Finance and Administration, in consultation with the University Vice President for Finance and Administration, will establish the Central Loan Program interest rates, which may vary based on internal loan duration. It is the goal and objective to establish those rates to remain in perpetuity. However, it is understood, should the capital markets behave in an unanticipated manner and the reserves available to the Internal Bank are projected to become depleted or excessively large, the Central Loan Program interest rates may be modified on all loans outstanding, including loans that relate to financings undertaken before the establishment of the Internal Bank. This is critical to ensure the interest rate adjustment is equitable across borrowers and is not unfairly applied to only the projects financed subsequent to the establishment of the Internal Bank.
Internal Bank Reserves
The Internal Bank may build and maintain an Interest Rate Reserve to hedge future volatility in debt and investment markets by:
1. Charging a spread between the investment income generated on operating cash and limited term assets and the amount credited to departments or units that have deposits with the Internal Bank. 2. Charging a spread between the Internal Lending Rates charged to internal borrowers and the blended opportunity cost of capital.
The University Associate Vice President for Finance and Administration, in consultation with the University Vice President for Finance and Administration, may establish additional reserves to be held by the Internal Bank that align with its goals and objectives.
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Attachment B DRAFT Oregon State University Investment Policy
I. Purpose of the Investment Policy
The purpose of this document is to identify the policies for prudent investment of Oregon State University (“University”) funds by providing guidelines for suitable investments while maximizing the efficiency of the University’s cash management program.
The investment policies and practices of the University are based on state law and prudent money management. All funds will be deposited and invested in accordance with this Policy and all statutes, ordinances and policies governing the University.
II. Scope
It is intended that this policy cover all funds (except quasi-endowment, endowment, and retirement funds) and investment activities under the direction of the Oregon State University Board of Trustees (Board).
III. Prudence
The Vice President for Finance and Administration, Associate Vice President for Finance and Administration and the Board are fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the University, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the University.
IV. Objectives
The primary objectives, in priority order, of the investment activities of the University shall be:
1. Safety — Safety of principal is the foremost objective of the investment program. Investments of the University shall be undertaken in a manner that seeks to ensure preservation of capital in the portfolio. The University shall seek to mitigate credit and interest rate risk.
a. Credit Risk. The University will minimize credit risk, the risk of loss due to the financial failure of the security issuer or backer, by: • Pre-qualifying the financial institutions, broker/dealers, and advisers with which the University conducts business. • Diversifying the investment portfolio so that potential losses on individual securities will be minimized. • Actively monitoring the investment portfolio holdings.
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b. Interest Rate Risk. The University will minimize the risk that the market value of securities in the portfolio will fall due to changes in general interest rates by: • Structuring the investment portfolio to provide enough liquidity to meet cash flow needs. • Maintaining a conservative duration target. • Structuring the portfolio to consist largely of securities with active secondary or resale market.
2. Liquidity — The investment portfolio of the University will remain sufficiently liquid to enable the University to meet its cash flow requirements including but not limited to payroll, payroll related liabilities, accounts payable, and debt service.
3. Return on Investment — The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into consideration the safety and liquidity needs of the portfolio.
V. Delegation of Authority
The management responsibility for the investment program is hereby delegated by the University Vice President for Finance and Administration to the University Associate Vice President for Finance and Administration. The Associate Vice President will monitor and review all investments for consistency with this investment policy. The Associate Vice President may delegate investment decision-making and execution authority to an investment advisor. The advisor shall follow the policy and such other written instructions as are provided.
VI. Ethics and Conflict of Interest
Officers and employees involved in the investment process shall refrain from personal activity that could conflict with the proper execution and management of the investment program, or that could impair their ability to make impartial decisions. Officers and employees shall disclose any material interests in financial institutions with which they conduct business. Disclosure shall be made to the governing body. They shall further disclose any personal financial/investment positions that could be related to the performance of the investment portfolio. Employees and officers shall refrain from undertaking personal investment transactions with the same individual with whom business is conducted on behalf of the University.
VII. Permitted Investment Instruments
Where this section specifies a percentage limitation for a particular security type, that percentage is applicable only on the date of purchase. Credit criteria listed in this section refers to the credit rating at the time the security is purchased. If an investment’s credit rating falls below the minimum rating required at the time of purchase, the Associate Vice President for Finance and Administration will perform a timely review and decide whether to sell or hold the investment.
The University will limit investments in any one non-government issuer, except investment pools, to no more than 5% regardless of security type.
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Investment Pools
1. The Public University Fund established by Section 7 of House Bill 4018.
2. The Oregon Short-Term Investment Fund (OSTF)/Pool as managed by the Oregon State Treasury in accordance with the terms approved by the Oregon Investment Council.
3. The Oregon Intermediate Term Pool (OITP) as managed by the Oregon State Treasury in accordance with the terms approved by the Oregon Investment Council.
4. Any other investment pools managed by the Oregon State Treasury in accordance with terms approved by the Oregon Investment Council.
Prior to investing in any investment pool, the University will review the pool’s governing document, prospectus (if available), permitted investments, fees, and management.
Securities and Registered Funds
1. U.S. Treasuries. United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which the full faith and credit of the United States are pledged for the payment of principal and interest.
2. U.S. Agency Obligations. Federal agency, instrumentalities of the United States, or United States government-sponsored enterprise obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies, instrumentalities, or United States government-sponsored enterprises.
3. Municipal Obligations. Lawfully issued debt obligations of the agencies and instrumentalities of any State or their political subdivisions in the United States with a long-term rating of at least ‘A’ or the equivalent from two Nationally Recognized Statistical Rating Organizations (NRSRO) or with the highest rating for short-term municipal debt. The maximum percent of the portfolio that may be allocated to this sector is 25%.
4. Bankers' Acceptances. Issued by domestic banks or domestic offices of foreign banks, which are eligible for purchase by the Federal Reserve System with a maturity of 180 days or less. The issuing corporation, or its guarantor, must have a short-term debt rating of at least “A-1” or the equivalent from two NRSROs. The maximum percent of the portfolio that may be allocated to this sector is 25%.
5. Time Deposits. Certificates of deposit or time deposits of domestic banks and domestic branches of foreign banks with a short-term debt rating of at least “A-1” or the equivalent from two NRSROs.
6. Negotiable Certificates of Deposit. Negotiable certificates of deposit issued by a nationally or state-chartered bank, a savings association or a federal association, a state or federal credit union, or by a state or federally-licensed branch of a foreign bank. The maximum percent of the portfolio that may be allocated to this sector is 25%.
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7. Commercial Paper. “Prime quality” commercial paper, with a maturity of 270 days or less, issued by domestic corporations (corporations organized and operating under the laws of the United States or any state thereof) provided that the issuing corporation, or its guarantor, has a short-term debt rating of at least “A-1” or the equivalent from two NRSROs. The maximum percent of the portfolio that may be allocated to this sector is 25%.
8. Corporate Notes. Corporate and depository institution debt securities issued by corporations organized and operating within the United States or by depository institutions licensed by the U.S. or any state, and operating within the U.S. Corporate notes must have a long-term rating of at least ‘A’ or the equivalent from two NRSROs. The maximum percent of the portfolio that may be allocated to this sector is 30%.
9. Asset-backed Securities. Mortgage pass-through security, collateralized mortgage obligation, mortgage-backed or other pay-through bond, equipment lease-backed certificate, consumer receivable pass-through certificate, or consumer receivable-backed bond which is rated at least “AA” or the equivalent from two NRSROs. The maximum percent of the portfolio that may be allocated to this sector is 20%.
10. Money Market Mutual Funds. Shares in an open-end, no-load investment funds provided such fund:
a) Is registered under the Federal Investment Company Act of 1940, b) Is rated “AAAm” or “AAAm-G” or the equivalent by a NRSRO, and c) Complies with the requirements of Rule 2(a)-7, or any successor rule, of the United States Securities and Exchange Commission.
Before investing in any mutual fund, the University will obtain a copy of the fund’s prospectus and review permitted investments, fees, and management.
VIII. Maximum Maturity
Maturities shall be based on a review of cash flow forecasts. Maturities will be scheduled to permit the University to meet all projected obligations.
Unless otherwise noted within this investment policy, the University may not invest in a security with a final maturity that exceeds ten years from the date of purchase. The maximum duration of the University’s portfolio (which incorporates a bond's yield, coupon, final maturity and call features into one number, expressed in years, that indicates how price-sensitive a bond or portfolio is to changes in interest rates) may not exceed 5 years.
IX. Safekeeping and Custody
The assets of the University shall be secured through third-party custody and safekeeping procedures. Bearer instruments shall be held only through third-party institutions.
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X. Reporting Requirements
The University Vice President for Finance and Administration, or his/her delegate, will present to the Board quarterly investment reports, which will include:
Investment Pools and Registered Funds
• Cost basis • Market value • Dividend income • Dividend yield • Quarterly performance
Securities
• Description of investment instrument • Interest rate or yield to maturity • Purchase date • Maturity date • Purchase price • Par value • Current market value as of the date of the report and the source of this valuation • Overall portfolio yield based on cost
XI. Biennial Review of Investment Policy
The University Vice President for Finance and Administration, or his/her delegate, will present the Investment Policy to the Board for review on a biennial basis.
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Attachment C DRAFT Oregon State University Debt Policy
I. Purpose of the Debt Policy
In support of its mission, Oregon State University (University) maintains a long-term strategic plan. The strategic plan establishes University-wide priorities as well as divisional programmatic objectives. In support of its strategic plan, the University maintains a capital plan to support these priorities and objectives.
The Debt Policy formalizes the link between the University’s strategic plan and the issuance of debt. Debt is a limited resource that must be managed strategically in order to best support the University’s priorities. The University’s use of debt plays a critical role in ensuring adequate and cost-effective funding for its capital plan and operating needs. By linking the objectives of the Debt Policy to the University’s strategic objectives, the University increases the likelihood of achieving its mission.
The objectives of this policy are to:
a) Outline the University’s philosophy on debt. b) Provide guidance for the use of bonding programs available to the University. c) Establish a control framework for approving and managing debt including reporting guidelines. d) Identify metrics to monitor debt capacity and affordability. e) Identify financing sources available to the University. f) Establish a framework for analyzing and managing debt portfolio risk and opportunities. g) Describe the goals of a Central Loan Program within the University’s Internal Bank. h) Provide an ongoing monitoring and reporting framework.
Under the policy, debt is being managed to achieve the following goals:
a) Maintain access to financial markets: capital, money and bank markets. b) Manage the University’s credit rating to maintain the highest possible creditworthiness based on the strategic needs of the University. c) Optimize the University’s debt mix (e.g. fixed/floating rate mix, average life, weighted average cost of capital, liquidity objectives, etc.). d) Ensure funds are available to support future capital investments and strategic initiatives. e) Coordinate debt management decisions with asset management decisions to optimize the overall funding and portfolio management strategies.
II. Bond Programs
The University has a range of State and University bond financing options available for its capital investment financing needs, as described below.
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State General Obligation (GO) Bonds
State GO Bonds are backed by the full faith and credit of the State of Oregon and are authorized by Articles in the Oregon Constitution specific to each GO bonding program, as shown below. Bond issuance must be authorized by legislative action and repayment may come from the State or the University.
Article XI-F(1) Bonds • Used for higher education projects. • Typically issued for auxiliary enterprise projects as the University must demonstrate sufficient operating revenues to pay debt service and operate the project. • General Fund appropriations may not be used to repay bonds. Article XI-G Bonds • Used for higher education projects which are authorized to receive aid from the State General Fund. • Limited to financing academic facilities. • The Legislature or the University must provide a dollar-for-dollar match to XI-G bonds, which cannot be from proceeds of another GO bond. • Future General Fund appropriations are ‘guaranteed’ to repay XI- G bonds. Article XI-M Bonds • Used to plan and implement seismic rehabilitation of public education buildings. • Future General Fund appropriations are ‘guaranteed’ to repay XI- M bonds. Article XI-Q Bonds • Used to finance both personal property acquisition and capital construction. • Repayment source is determined by legislative action.
Lottery Bonds
Lottery bonds are backed by lottery revenues and may be used for educational projects authorized by legislative action. Repayment is made from future lottery revenues.
State Energy Loan Program (“SELP”) Loans
SELP Loans are offered and approved by the Oregon Department of Energy for projects that save energy, produce energy from renewable resources or use recycled materials to create products, or use alternative fuels. SELP Loans are financed by State GO Bonds and repayment is generally made from university revenues, although they can be repaid using State General Fund appropriations as authorized by legislative action.
Availability of State Bonding Program
The availability of State bonding programs is subject to:
• The State’s debt capacity • Compliance with lottery revenue bond covenants • Legislative approval
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Revenue Bonds
In addition to State bonding programs, the University may issue University Revenue Bonds based on its own credit rating. University Revenue Bonds may be backed by a general or specific revenue pledge of the University. No legislative action is required for the issuance of University Revenue Bonds.
Bond Program Selection
University Revenue Bonds potentially offer the most flexibility in funding capital investments. Important advantages include:
1. Provide a source of matching funds for State GO Bonds. 2. Project timing is not constrained by the legislative approval process. 3. Access to funds is not constrained by competing legislative priorities. 4. Funding is not constrained by State debt capacity limits or lottery revenue bond covenants.
While these represent important considerations, the University recognizes that other State bond programs may be preferable depending on the circumstances, especially if State or lottery funds are the source of repayment. As a general guideline, the University will pursue the bond program that results in the lowest cost of funds and/or the most favorable terms while considering timing and project constraints.
III. Scope of Debt Policy
The University recognizes it has limited control over debt issuance and management decisions for State GO and Lottery Bonds when University revenues are not the source of repayment. As such, these decisions are not included in the scope of the Debt Policy. However, the University will consider such debt in its overall assessment of debt capacity and affordability. In addition to bonds payable from University revenues, other forms of direct and indirect debt covered by this policy may include but are not limited to:
• Capital leases • Operating leases (considered indirect debt) • Bank loans, lines of credit and any other debt instruments provided by third party credit providers • Off-balance sheet financing structures • Public-Private Partnerships
IV. Capital Investment Funding Prioritization
The University will implement a capital planning process in which capital investments are vetted for debt financing based on their economics, strategic importance and other relevant factors. The capital plan will be reviewed and approved by the Board periodically, and only Board- approved capital investments will be eligible for funding, with the exception of specific debt or lease transactions that have been delegated to the University Vice President for Finance and Administration.
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V. Debt Management Approval Process
The University Vice President for Finance and Administration is responsible for implementing this policy and for all debt financing activities of the University. This policy provides the framework for debt management decisions.
All new debt issuances will be authorized through an Oregon State University Board of Trustees (Board) resolution that includes any specific parameters regarding the size, structure and pricing of the transaction. The University Vice President for Finance and Administration will report to the Board’s Finance and Administration Committee, no less than annually, any issues that may impact the University’s debt capacity resulting from unanticipated changes in operating or investment performance.
VI. Selection of Finance Consultants and Service Providers
The University Vice President for Finance and Administration or his/her designee shall be responsible for establishing a selection process for securing professional services related to the issuance or management of debt. The professional services shall be provided by qualified professionals and firms with experience in municipal finance, higher education and providing such services to Oregon-based entities.
Described below are guidelines for the selection and hiring of professional service providers:
a) Bond Counsel - The University’s Office of General Counsel and the Vice President for Finance and Administration may jointly appoint a qualified bond counsel firm. b) Financial Advisor - The University Vice President for Finance and Administration may select a financial advisor to assist the University with the issuance and management of debt, as well as with ongoing strategic and financial planning advice. c) Underwriters - The University Vice President for Finance and Administration may select underwriters to execute the sale of bonds on the University’s behalf. d) Banks and other Credit Providers - The University Vice President for Finance and Administration may select banks or other credit providers to provide financing on an interim or permanent basis for operating or capital purposes. e) Other Service Providers - The University Vice President for Finance and Administration may periodically solicit for providers of other services necessary to carry out the debt issuance and management activities of the University, including disclosure counsel, paying agent, escrow agent, verification agent, trustee, and services related to post- issuance compliance, among others.
VII. Debt Capacity and Affordability
Debt capacity is a subjective measure, typically associated with balance sheet strength and the ability to repay debt on demand. The University’s risk tolerance will inform the amount of leverage that can comfortably be assumed.
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Debt affordability is also a subjective measure and typically associated with income statement strength. Operating performance and the ability to meet debt service requirements will inform the affordability of existing and additional debt.
The University recognizes that its strategy and mission must be the primary drivers of its capital investment and use of debt. Although external credit ratings provide a view on debt capacity and affordability, the University will not manage its debt portfolio to achieve a specific rating. Success in achieving University objectives will result in a stronger financial profile and higher ratings over time.
The University will monitor five financial ratios to assist the Board in evaluating debt capacity and affordability, as described below.
1. Viability Ratio (balance sheet leverage ratio) Expendable Resources (inclusive of Foundations) / Debt Measures the ability to repay debt with financial resources and the ability to use debt to strategically advance the University’s mission
2. Primary Reserve Ratio (income statement leverage ratio) Expendable Resources (inclusive of Foundations) / Total Expenditures Measures whether financial resources are sufficient and flexible enough to support OSU’s mission
3. Debt Burden Ratio (affordability ratio) Debt Service / Total Expenditures Minus Depreciation Plus Principal Payments Measures OSU’s dependence on debt to finance its mission and the relative cost of borrowing to overall expenditures Guideline maximum debt burden ratio = 7%
4. Debt Service Coverage (affordability ratio) 3-Year Average Net Operating Income Plus Non-Operating Revenues Plus Interest and Depreciation / Debt Service Measures the sufficiency of operations on a cash flow basis to cover debt service
5. Debt / Revenues (income statement leverage and affordability ratio) Measures the amount of leverage relative to the size of operations
All ratio calculations will be based on industry standards and include all ‘direct debt’. In addition to bonds and bank debt, direct debt includes capital leases and any off-balance sheet or similar financing structures that would be considered on-credit.
Indirect debt, such as operating leases, is excluded from the above calculations. However, indirect debt is considered part of the University’s ‘comprehensive debt’, which is a broader measure of the University’s debt obligations. The University recognizes that the use of indirect debt has an impact on debt capacity and affordability.
Prior to the issuance of any new debt, the University Vice President for Finance and Administration will evaluate the impact on these ratios for discussion with the Finance and Administration Committee of the Board.
OSU Board of Trustees F&A Committee Page F-35 ACTION ITEMS Docket October 16, 2014
VIII. Financing Sources
The University has access to a wide range of financing structures and funding sources, each with specific benefits, risks and costs. All potential funding sources are reviewed by management within the context of the Debt Policy and the overall portfolio to ensure that any financial product or structure is consistent with the University’s objectives. Regardless of what financing structure is utilized, due-diligence review must be performed for each transaction, and may include (i) quantification of potential risks and benefits, (ii) analysis of the impact on the University’s long-term creditworthiness, debt capacity and debt affordability, and (iii) impact on the budget.
The University may access funds from either the capital markets or directly from banks and other third parties. Described below are some of the main financing structures and funding sources available to the University:
• Tax-Exempt Debt. Tax-exempt debt is a significant component of the University’s capitalization due in part to its substantial cost benefits. The University manages the debt portfolio to maximize utilization of tax-exempt debt relative to taxable debt whenever possible, recognizing that the University must adhere to Internal Revenue Service (“IRS”) regulations regarding the use of facilities financed by tax-exempt debt, among other restrictions.
• Taxable Debt. In instances where capital investments do not qualify for tax-exempt debt or more flexibility is desired, the use of taxable debt may be considered. In addition, taxable debt may be used to finance working capital or other operating needs which are not eligible for tax-exempt financing.
• Fixed Rate Debt. Fixed rate debt, in which the interest rate is fixed until maturity, represents a significant component of the University’s capitalization. Fixed rate debt provides budgetary certainty but is typically more restrictive in its prepayment flexibility compared to short-term or variable rate debt.
• Internal or External Sources of Liquidity. The University may use internal funds or external funds, which may include bank lines of credit, floating rate notes, or commercial paper, to provide funds to the Internal Bank for interim financing of projects in anticipation of philanthropy, planned issuance of long-term debt or reimbursement/repayment from other sources of funds. The use of external sources of liquidity may provide greater flexibility relative to the timing and structuring of individual transactions. The external sources of liquidity are a form of short-term financing and are generally variable rate debt.
• Other Types of Variable Rate Debt. The University may desire more variable rate exposure in its capital structure to potentially lower its overall cost of capital, provide greater redemption or refinancing flexibility compared to fixed rate debt, or to diversify its debt portfolio, among other reasons. Products, such as Variable Rate Demand Bonds, Floating Rate Notes and other structures in which the interest rate is periodically reset based on an index or remarketing, can potentially provide these benefits. The University
OSU Board of Trustees F&A Committee Page F-36 ACTION ITEMS Docket October 16, 2014
recognizes that these structures also have risks that must be weighed against the potential benefits.
• Bank Products. Rather than accessing funds via the capital markets, the University may find it more advantageous to access funding from banks or other third parties. Some considerations in evaluating the attractiveness of private sources of capital include cost of funds, size of borrowing, timing constraints and other terms.
• Capital and Operating Leases. Lease structures provide another source of funding for capital investments and other needs. The University recognizes that capital leases and operating leases may constitute direct or indirect debt for credit purposes. Before entering into a lease agreement, the University will assess the economics, risks and benefits compared to other forms of financing.
• Off-Balance Sheet Financing, including Public-Private Partnerships. Third parties may provide other types of funding for capital investments and other needs. The University recognizes that these structures can be more expensive than traditional debt structures, and may carry risks beyond financing risk, including risks to the University’s reputation and student experience. The University recognizes that these structures may have a direct or indirect impact on the University’s debt position or overall credit profile. The University will evaluate the potential financial and qualitative risks and benefits of these structures before entering into any contracts or agreements.
IX. Compliance with IRS Regulations
In order to access tax-exempt financing, the University must comply with all applicable IRS regulations including, but not limited to, regulations relating to the use of bond proceeds, the use of bond financed facilities, and arbitrage in order to maintain the bond’s tax-exempt status. The University will ensure that pre-issuance and post-issuance compliance procedures are in place to ensure full compliance.
X. Debt Portfolio Risk and Opportunity Management
The University will actively manage the risks and opportunities in its debt portfolio. This includes monitoring and seeking opportunities to mitigate risk. However, the University recognizes that in certain situations it may be prudent to assume risk if the potential benefits outweigh the potential risks. In all cases, the University will only assume risk if the University is adequately compensated.
Debt Portfolio Risk Framework
Debt portfolio risks can be categorized as either components of interest rate risk or liquidity risk. Interest rate risk components impact the University’s cost of funds and can generally be budgeted for and managed as part of the University’s operations. Liquidity risk components represent more immediate and unexpected events that may require the University to draw on its financial resources. The University will seek to quantify these risks whenever possible as part of its management of the debt portfolio. Described below are key components of these risks.
OSU Board of Trustees F&A Committee Page F-37 ACTION ITEMS Docket October 16, 2014
Interest Rate Risk Components Market Rate Risk Customarily thought of as interest rate risk, but limited to market risk only (e.g. risk that interest rates in general will rise due to inflation expectations or other reasons) Credit Risk Risk that any actual or perceived changes in creditworthiness result in a higher cost of capital Tax Risk Risk that any actual or potential changes in Federal and/or State law will adversely impact the pricing or availability of tax-exempt debt Bank Liquidity or Credit Facility Re-pricing Risk Risk that the cost of liquidity facilities to support uncommitted debt or working capital lines of credit will increase Basis Risk* Risk that interest rate hedges will be inefficient Swap Counterparty Credit Risk* Risk that expected payments from swap counterparties are not received
Liquidity Risk Components Roll/Remarketing Risk Risk that put bonds, commercial paper, variable rate demand bonds or similar products cannot be rolled or remarketed Bank Liquidity 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 due to bankruptcy or other cause Swap Collateralization Risk* Risk that collateral may need to be posted under a swap agreement Swap Termination Risk* Risk of a an involuntary termination triggered by an automatic termination event * Risks related to derivative products. As noted below, the University has no plans to utilize derivative products at this time.
Derivative Products
Derivative products, including interest rate swaps, may be employed primarily to manage or hedge the University’s interest rate exposure. Before executing any derivative product, the University will consider the State’s Interest Rate Swap Policy and any other requirements of the State Treasurer.
At this time, the University has no plans to utilize derivative products. Prior to the issuance of any derivative product agreement, the University will seek approval from the Board to amend the Debt Policy and adopt guidelines for the use of derivatives.
OSU Board of Trustees F&A Committee Page F-38 ACTION ITEMS Docket October 16, 2014
Variable Rate Exposure
Exposure to variable interest rates in the University’s portfolio may be desirable in order to:
• Take advantage of repayment and restructuring flexibility • Benefit from historically lower average interest costs • Reduce interest rate risk by providing a match or natural hedge between anticipated interest payments and the projected cash flows from the University’s cash and investments • Diversify its pool of potential investors and gain additional access to capital markets
The University will monitor the risks from variable rate exposure based on the debt portfolio risk framework. In addition, as a general guideline, the amount of variable rate debt outstanding shall not exceed 20% of the University’s overall debt portfolio.
Refinancing Opportunities
The University will monitor the debt portfolio on a periodic basis to identify opportunities to lower its cost of funding or to optimize its risk position by refinancing or restructuring outstanding debt. The University may also seek to refinance debt for legal reasons, such as to ensure compliance with IRS regulations or to address any bond document related issues. Before proceeding with any refinancing or restructuring transaction, the University will ensure that any transaction complies with applicable Oregon State Law and Administrative Rules.
XI. Central Loan Program Management
In accordance with the University’s Internal Bank Policy, the University has adopted a Central Loan Program under which it provides funding for projects through internal loans. These loans are de-linked from the University’s external debt obligations and other financing sources. The University will manage and optimize its debt obligations on a portfolio basis. As a general guideline, the loan repayment schedule for a particular project will not be tied to a specific bond issue. The interest rate charged on internal loans will be a blended rate that reflects the University’s expected cost of capital plus the funding of any reserves, such as an interest rate stabilization fund, and expenses deemed necessary to the operation of the Internal Bank. The blended rate will be reset periodically in accordance with the Internal Bank Policy. The benefits of the Central Loan Program include:
a) Enabling the structuring of transactions in the best economic interests of the University which may not be possible on a project-specific basis. b) Providing continual access to capital for internal borrowers rather than having to wait for a bond issue or other type of financing to be completed. c) Funding specific projects with predictable financial terms. d) Enabling the funding of projects based on strategic need independent of external financing market conditions. e) Reducing volatility and providing a more stable cost of funds over time for internal borrowers. f) Permitting prepayment of internal loans without penalty. g) Achieving equity among internal borrowers through a blended rate.
OSU Board of Trustees F&A Committee Page F-39 ACTION ITEMS Docket October 16, 2014
XII. Debt Policy Monitoring and Reporting
The University Vice President for Finance and Administration will periodically review the Debt Policy to ensure it remains consistent with the University’s objectives and industry standards. Any recommendations for changes to the policy will be brought to the Finance and Administration Committee.
On at least an annual basis, the University Vice President for Finance and Administration will review the University’s debt capacity and affordability ratios and will report any concerns to the Finance and Administration Committee of the Board. In addition, as part of the Board approval process for external financings, the University Vice President for Finance and Administration will inform the Board of the impact on the University’s debt capacity and affordability ratios, as well as the operating budget.
OSU Board of Trustees F&A Committee Page F-40 ACTION ITEMS Docket October 16, 2014
FY14 Q4 Operating Management Report
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Report is under development.
OSU Board of Trustees F&A Committee Page F-41 ACTION ITEMS Docket October 16, 2014
FY15 Budget Update
The principal adjustments to initial budget estimates at this point in the fiscal year are to revenues associated with student enrollments. Enrollment numbers are not final until the fourth week of the term when students complete their final course drops and adds. Updated revenue estimates for all operating budgets are shown in the attached table.
Education and General (E&G) Operations
Revenues expected from State and other sources remain constant for Corvallis, Bend, and the Statewide Public Services.
At Bend, we are estimating a $275,000 increase in expected tuition revenues. Headcount is expected to be up slightly and the average credit hour load per student is expected to increase. This is preliminary, as enrollments at Bend can change through the fourth week of the term as a higher proportion of students register later there than in Corvallis.
At Corvallis, the net tuition revenue is projected to be lower than the original budget by $1.14M (0.4%). This is from a combination of several factors. Overall enrollments are up, but the mix of students has changed with significant increases in Ecampus enrollments (where all students are charged the resident tuition rate) and lower rates of increase in Corvallis-based resident and non-resident students. The net result is a projected gross tuition decrease from the original budget of $1.83M that is offset by $0.69M less spending in financial aid. The balance of the tuition change is in adjustments to graduate and professional enrollments. This variance is within the contingency funding set aside in E&G. If the tuition shortfall increases, adjustments will be made to unit operating budgets for winter and spring terms.
Self-support Operations
Self-support revenues are estimated to be higher than the original budget by $1.24M.
Restricted Funds
The restricted fund operations are on target. F&A recovery numbers for July and August 2014 were tracking closely to expected revenue.
OSU Board of Trustees F&A Committee DISCUSSION ITEMS
Page F-42 Docket October 16, 2014
OSU Board of Trustees F&A Committee DISCUSSION ITEMS
Page F-43 Docket October 16, 2014
2015-17 State Funding Process Update
Agency Request Budget (ARB) Approved by the Higher Education Coordinating Commission
On August 14, 2014, the Higher Education Coordinating Commission (HECC) approved an Agency Request Budget (ARB) for 2015-17. This request includes funding for:
• HECC operations
• Public universities o Operations via the Public University Support Fund – the state’s contribution to the operation of instructional and support services to students and faculty, research and public service programs, and administrative support services. o Discrete state programs affiliated with public universities (for Oregon State University (OSU), this includes the Climate Change Research Institute, Signature Research Centers, Institute for Natural Resources, Fermentation Science, and the Oceangoing Research Vessel). o Debt service – to pay state-backed debt for capital projects approved in prior biennia. o OSU Statewide Public Services – separate appropriations for the Agricultural Experiment Station, Extension Service, and Forest Research Laboratory.
• Community colleges
• Oregon Health & Science University
• Office of Student Access and Completion (OSAC), including the Oregon Opportunity Grant (OOG).
The ARB process is statutorily required and must comply with Department of Administrative Services (DAS) instructions which are developed under the direction of the Governor. The primary constraint for 2015-17 is that the request cannot exceed the 2013-15 Legislatively Approved Budget by more than 20%. The DAS requirements also limit “current service level” increases to 3%.
The ARB is advisory to the Governor and the Oregon Education Investment Board (OEIB) and the official submission was due by August 29, 2014. The HECC and the OEIB will continue to interact with the Governor’s office as the Governor prepares a budget recommendation for the legislature. The Governor’s Recommended Budget (GRB) is due to the Oregon Legislature by December 1 for an incumbent governor (February 1 for a governor-elect). The Legislature typically finalizes the Legislatively Adopted Budget (LAB) late in the session in June.
While OSU Statewide Public Service Programs and certain State Programs are directed to individual universities, the Public University Support Fund is not university-specific. Once funding is legislatively approved, the HECC is charged with allocating the Public University Support Fund among the universities. This funding discussion generally pertains to all seven public universities combined.
OSU Board of Trustees F&A Committee Page F-44 DISCUSSION ITEMS Docket October 16, 2014
DAS provided HECC with an initial base budget known as the Current Service Level (CSL). This includes increases to cover mandatory debt service payments, adjustments for any one- time funding, “roll-up” of any partial biennial funding in 2013-15 to full biennial level in 2015-17, and a general inflation increase of 3.3%. Note that the general inflation factor used by DAS does not typically reflect the actual inflation experienced by higher education.
Major Components of the Agency Request Budget
Beyond the inflationary increases and other adjustments, the ARB includes a number of important increases, a number of which are addressed in the “Continuing Conversations” section below:
The 2013 tuition buy-downs would be fully funded in 2015-17; if those were not included, any proposed tuition increases for 2015-16 would have to be escalated to recover that lost revenue base.
Oregon Opportunity Grants (OOG) would increase by an additional $65.8 million.
The Public University Support Fund would increase by an additional $39.3 million.
Sports Lottery would be restored to 1% of lottery revenues after several years of legislative caps below that level.
Capital
At the request of Oregon’s seven public university presidents, and in recognition of limited state resources, the vice presidents for finance and administration met and collaboratively organized all of the capital requests into three tiers. They agreed that the highest priority was funding for deferred maintenance. HECC concurred and has proposed a funding level of $65 million for capital repair and renewal for the universities. While HECC staff subsequently prioritized the capital projects in Tier 1, they indicated they would include all projects (Tier 1 prioritized as well as unranked projects in Tiers 2 and 3) in the ARB for consideration by the Governor. The total state funding requested for Tier 1 projects is $351 million, which is significantly higher than the level of capital funding approved for 2013-15 of $242 million.
OSU has three of the fourteen university-specific projects in Tier 1:
• OSU Forest Science Complex (Ranked #2) • Marine Studies Campus Phase I (Ranked #4) • Accessibility/ADA Improvements (Ranked #13)
Funding for the OSU Oceangoing Research Vessel (part of the State Programs category) was increased from $300,000 to $619,800 for 2015-17.
OSU Board of Trustees F&A Committee Page F-45 DISCUSSION ITEMS Docket October 16, 2014
Continuing Conversations
• The original approach for the proposed incremental increase in the Oregon Opportunity Grant was a focus on awards limited to the first two years of study; the full impact of that proposed focus has yet to be fully analyzed and vetted with the four-year institutions. Conversations are continuing between HECC staff and financial aid representatives from the seven universities. The $65.8 million increase could roll-up to $130 million in the following biennium, raising concern about the sustainability of that level of funding and the potential drain on university-funded financial aid to students in need.
• Funding levels for the Statewide Public Services (Agricultural Experiment Station, Extension Service, and the Forest Research Laboratory combined) would only increase by 3.3%, significantly less than the 24% combined increase in the joint university presidents’ recommendation in a letter to the HECC.
• While state agencies are allowed to submit requests with 20% increases, the Governor’s budget is statutorily required to balance to state revenue forecasts. Because the most recent forecast for 2015-17 indicates an increase in net General Fund revenue of 10.7%, the only way the education sector could increase by 20% would be at the expense of other competing state needs. In addition, there are other compelling programs within the education sector – such as the implementation of legislatively mandated all-day kindergarten – that will be competing against university funding.
• Once the Legislature does approve a budget for higher education, the HECC is charged with the distribution of the Public University Support Fund. The HECC has convened a group of university representatives along with an outside consultant to develop a proposal for a new allocation formula. This group will make a recommendation to the HECC in the November/December time frame. It is anticipated that whatever new formula the HECC adopts will be effective for distributing the funding approved by the 2015 legislature.
• The HECC is now also responsible for allocation of Sports Lottery funding. Historically this was done via formulas approved by the State Board of Higher Education. For 2013- 15, the legislature restricted the amounts to be allocated to OSU and the University of Oregon, with the remaining funds allocated by the Oregon University System formula. In anticipation of the HECC considering Sports Lottery allocation for 2015-17, the public university vice presidents for finance and administration will be reviewing recommendation options, within the understanding that the legislature can continue to prescribe set amounts for any given university. Both the funding level and allocation methodology for Sports Lottery will be subject to further conversations among the universities, as well as with executive and legislative branches.
• The future of the Engineering and Technology Industry Council (ETIC) funding has been evolving. The OEIB recently approved the FY15 allocations and OSU will receive a funding level comparable to what would have been allocated under the State Board of Higher Education methodology. However, significant changes in the priorities and formulas for allocating ETIC funding in 2015-17 have been discussed by the ETIC Board and OEIB. OSU is continuing to work on securing a long-term commitment to this funding, as it is an integral part of our Engineering programs.
OSU Board of Trustees F&A Committee Page F-46 DISCUSSION ITEMS Docket October 16, 2014
Historic Aspect
At the August 14, 2014 meeting, a joint letter from all seven public university presidents and all seventeen community college presidents was submitted to the HECC. It was noted that such a collaborative communication had not ever occurred in anyone’s memory. Representatives of both universities and community colleges indicated that the ARB’s level of funding would only “hold the line” on serving students. Commissioners encouraged HECC Executive Director Ben Cannon to include narrative in the ARB or the cover letter to the Governor indicating that the 20% increase within the ARB’s limitations would not be sufficient to advance the 40-40-20 goal, which would align with the presidents’ letter that set forth the level of funding that would be required to “move the needle.” Within the submitted ARB, the HECC made several contextual references to the level of state funding – historically and in relation to the current request. Select quotes from pages 99-103 of the ARB:
State support for our community colleges and universities has declined by 34 percent on a per student basis over the past five years. As a result, Oregon ranks 47th of the 50 states in state appropriations per student in our public postsecondary institutions.
It is important to note that Oregon's postsecondary institutions have experienced years of insufficient state appropriation levels combined with steep and steady enrollment gains, so the 20% limit on the recommended increases to the Legislatively Adopted Budget results in a recommended investment that falls significantly short of actual needs. A long term strategy of reinvestment in institutional funding for its public universities and community colleges is warranted in order to support vital support programs to increase attainment and completion, and reach 40-40-20. The HECC will be proposing this in its upcoming work on a budgeting model that projects the actual costs of meeting the State's goals over a 10-year period.
Demographic trends in Oregon suggest that future students are more likely to be the first in their families to attend college and require more mentoring, coaching and support services to be successful and achieve their full potential in postsecondary settings. Oregon's community colleges and universities require additional resources to respond to these challenges, while they are focused on efficiencies within and outside of the classroom, such as greater use of online learning, more college credits earned in high schools, accelerated pathways and credit for prior learning, to meet the needs and ensure the success of a new generation of Oregon students.
The cumulative effects of insufficient funding levels have also created a backlog of costs at the institutional level, such as deferred maintenance in buildings and infrastructure. In addition to affordability and productivity, investment in capacity is critical to student success, and this recommended budget includes prioritizations of capital projects for the public universities and community colleges.
Achieving the 40-40-20 goals will empower Oregon's people and invigorate its economy. Despite diminishing state support and increasing cost shifts to individuals for the pursuit of postsecondary education, students who complete two year and four year degrees stand to gain significant benefits in the form of employment and income. Investments in postsecondary access, affordability, and college success will not only prepare Oregonians to prosper in their careers, innovate, and contribute to their communities, but will help to reverse decades of relative decline in personal income in Oregon and establish a virtuous cycle of rising incomes, more revenue to invest in education, a more productive workforce and greater prosperity.
OSU Board of Trustees F&A Committee Page F-47 DISCUSSION ITEMS Docket October 16, 2014
To be clear, the HECC believes that if the state were simply to reallocate current resources- without making significant new investments in institutional support- the state would not see notable gains in student achievement. The additional institutional investments proposed in this ARB should be understood, therefore, as a down payment on helping institutions to make the changes that will be required to support many more students towards completion, in conjunction with formula changes that help ensure those resources are dedicated to supporting student success. That said, this proposal was developed within the parameters established by the Governor's Office for the Agency Request Budget and does not reflect the HECC's view of the total state resources that would be necessary in order to take a full "stair step" towards the 40- 40-20 goal.
The table below compares the HECC Agency Request Budget with three other funding levels:
• The original appropriation for 2007-09 – considered a “high point” of legislative support for higher education • The current 2013-15 biennial funding level • The “consensus” funding level supported by the seven university presidents
Preliminary Funding Level Comparisons 2007-09 2013-15 2015-17 Options Public University State Appropriation Category Original Legislatively HECC Presidents - (General Fund and Lottery Funds) Appropriation Approved Agency Request Consensus Funding (SB 5515) Budget Budget (ARB) Level Public University Support Fund (PUSF) $ 646,608,631 $ 520,545,512 $ 594,000,000 $ 742,000,000 State Programs 45,740,165 25,505,757 10,596,516 13,000,000 "Education & General" Subtotal 692,348,796 546,051,269 604,596,516 755,000,000
Statewide Public Services 110,208,278 101,155,580 104,493,713 125,000,000 Sports Lottery 12,683,423 8,000,000 11,397,647 11,397,647 Debt Service (General Fund and Lottery) 52,678,582 114,736,795 162,033,060 162,033,060
Grand Total $ 867,919,079 $ 769,943,644 $ 882,520,936 $ 1,053,430,707
PUSF: Average annual funding per fundable/resident student FTE: Nominal dollars $ 5,368 $ 4,148 $ 4,682 $ 5,848
Inflation adjusted to 2008 using the Higher Education Price Index (HEPI) $ 5,368 $ 3,695 $ 3,931 $ 4,910
2015-17 funding level for current FTE that would match 2007 funding level $ 811,100,544
OSU Board of Trustees F&A Committee Page F-48 DISCUSSION ITEMS Docket October 16, 2014
A Look Back at State Funding Levels for Higher Education
For historical context in higher education’s participation in state funding, the following chart illustrates funding levels by major state program area (using data from the Legislative Fiscal Office 2013-15 Budget Highlights Update).
Share of State Funding by Program Area General Fund and Lottery Funds Combined - Public Universities Include All Seven Institutions (Data Source: Legislative Fiscal Office 2013-15 Budget Highlights Update)
100% 5.7% 5.6% 4.7% 4.6% Public Universities (previously OUS) Includes Public University Support Fund, State 90% Programs, Statewide Public Services, Debt Service, and Sports Lottery) All Other Education 80% (K-12, CC, OSAC, OHSU, OEIB, HECC) 45.5% 47.0% 49.4% 47.2% 70% Human Services
60%
Public Safety 50%
40% 26.6% 25.7% 22.4% 24.3% Judicial Branch; Administration; Legislative Branch; Miscellaneous 30%
Natural Resources; Economic and Community 20% 12.8% 13.2% 13.3% 12.6% Development; Transportation; Consumer and Business Services 10% 5.6% 5.6% 6.1% 6.2% 4.1% 4.1% 3.8% 4.0% 0% 2007-09 2009-11 2011-13 2013-15 Actual Actual Legislatively Legislatively Approved Approved
OSU Board of Trustees F&A Committee Page F-49 DISCUSSION ITEMS Docket October 16, 2014
For an understanding of how funding levels fluctuate at each phase of the state’s budget process, the following chart illustrates funding levels by phase for the last several biennia as well as the stages-to-date for the 2015-17 biennium.
State Funding Phases for Public Universities All Appropriation Categories (General Funds and Lottery Funds Combined, in millions) $1,200.0
$1,100.0 < Consensus Funding Level
$1,000.0
$900.0
$800.0 2007-09
$700.0 2009-11 2011-13 2013-15 $600.0 2015-17
$500.0
$400.0 PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5 DAS Current Agency Governor's Legislatively End-of-biennium Service Request Recommended Adopted Actuals Level Budget Budget Budget (2013-15 is to-date; (CSL) (ARB) (GRB) (LAB) 2015-17 is Consensus Funding Level)
OSU Board of Trustees F&A Committee Page F-50 DISCUSSION ITEMS Docket October 16, 2014
A Look Forward to the Next Steps in 2015-17 Funding Process
HECC submits 2015-17 Agency Request Budget (ARB) to Governor Aug 31
2015-17 Governor’s Recommended Budget (GRB) submitted to Legislature o Due date for incumbent Governor Dec 1 o Due date for Governor-elect Feb 1
Start of 2015 Legislative Session Feb 1 All seven public universities are developing a coordinated approach to the 2015 session.
Presentations to legislative committees o Senate Education and Workforce Development o House Higher Education and Workforce Development o Ways and Means Subcommittee on Education o Ways and Means Subcommittee on Capital Construction
Ways and Means Co-Chairs release their budget recommendations ~ March
Final appropriation bill and bond bill approved Late June/early July
Omnibus/”Christmas Tree” bill approved End of session
The final appropriations as of the end of session will constitute the 2015-17 Legislatively Adopted Budget (LAB). Other funding actions can occur during the 2016 short session or by Emergency Board action during interim legislative days, as well as by fiscally triggered Governor’s budget reductions. The funding level after any subsequent appropriations or budget reductions will constitute the 2015-17 Legislatively Approved Budget. This will become the starting point for development of the 2017-19 Budget.
OSU Board of Trustees F&A Committee Page F-51 DISCUSSION ITEMS Docket October 16, 2014
State Treasury Managed Endowment Fund Verbal Update
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A verbal update will be provided during the Finance and Administration Committee meeting.
OSU Board of Trustees F&A Committee Page F-52 DISCUSSION ITEMS “Bonds 102”
Introduction to the Bond Rating Process October 16, 2014
Page F-53 Establishing OSU’s Bond Rating
• OSU’s debt issued through the State benefited from the State’s general
obligation bond rating. • OSU has not previously requested its own independent rating. • Rating agency opinions help investors gauge the relative risk and therefore determine the value and interest rate of bonds in the municipal market. • Three major credit rating agencies offer forward-looking opinions about the ability and willingness of an issuer to meet its financial obligations in full and on time:
o Standard & Poor’s Corporation (“S&P”) o Moody’s Investors Service (“Moody’s”) o Fitch Ratings (“Fitch”)
Slide 1
Page F-54 Credit Rating Process
• Each of the credit rating agencies has its own approach to evaluating the credit risk of public university credits. • All agencies use a combination of qualitative and quantitative factors to assess the credit quality. • Credit ratings are assigned only upon request by an issuer of bonds, typically at the time a new bond is being sold. • Each rated issuer is subject to annual surveillance.
• Costs associated with a bond rating that are paid by the university:
o A fee at the time of bond issuance
o An annual surveillance fee
Slide 2
Page F-55 Credit Rating Process
• When new bonds share a lien with outstanding bonds, all “parity obligations” will carry the same rating. Therefore, any rating change (whether upward or downward) would apply to new and outstanding parity bonds. Moody's S&P Fitch Definition Aaa AAA AAA Highest quality, lowest default risk Aa1 AA+ AA+ Aa2 AA AA High quality, very low default risk Aa3 AA- AA- A1 A+ A+ A2 A A Upper-medium grade, low default risk A3 A- A- Baa1 BBB+ BBB+ Investment Grade Investment Baa2 BBB BBB Medium-grade, low default risk Baa3 BBB- BBB- Ba1 BB+ BB+ Ba2 BB BB Speculative, elevated vulnerability to default risk Ba3 BB- BB- B1 B+ B+ B2 B B Speculative, material default risk is present B3 B- B- Caa1 CCC+ Caa2 CCC CCC Very High credit risk Caa3 CCC- Ca CC Speculative Grade Speculative CCC High likelihood of default C C D DDD \ \ DD In default Slide 3 \ \ D
Page F-56 Holistic Credit Review
Rating agencies will perform a holistic review of OSU and its component units:
OSU Foundation and Agricultural State of Research Oregon OSU Balance Foundation Sheet and Performance - Funding Operating Level Performance - Economic Outlook
Land-grant, OSU Market Sea-grant, Position Space-grant Credit Enrollment and Sun-grant Rating Selectivity
Research OSU Long- Federal, State term Strategy and Local Governance and Goals and Management
Slide 4
Page F-57 Rating Approach – Qualitative Factors
• All rating agencies use a combination of qualitative and quantitative factors to assess credit quality. • Key qualitative factors:
o Background and history of the issuer o Political and regulatory environment o Management quality, experience, track record, and attitude toward risk o Management and governance structure and communication o Overall strategy and philosophy, strategic plan • Need to convey: OSU is a land-grant institution with Carnegie Foundation’s top designation for research institutions and its prestigious Community Engagement classification, a long operating history, a highly regarded president and management team, and a well-qualified Board of Trustees. • Qualitative factors can influence the rating. Slide5
Page F-58
Rating Approach – Quantitative Factors
Monthly Liquidity to Operating Revenue, • Shown to the right are Monthly Days Cash Demand Debt, 5% 10% on Hand, 5% Primary Selectivity, quantitative factors considered Debt to Operating 5% Revenues, 5% by Moody’s Investors Service. Expendable Financial Primary Resources to Matriculation, 5% Operations, 5% Expendable Financial Net Tuition per Resources to Direct • Based on FY 2013 financial Student, 10% Debt, 5% statements, the quantitative factors alone indicate an Aa3 Total Cash and Average Gifts per Investments, 10% Student, 5% rating of the University.
Revenue Diversity, Operating Cash Flow 10% Margin, 10%
Average Debt Service Coverage, 10%
Slide 6
Page F-59 Timeline
• The rating agencies will be invited for an on-campus visit to tour the campus and meet with the President, Vice President for Finance and
Administration, and executive management team. • A key timing element is having audited FY2014 financials available at the time of the on-campus visit.
Rating Process * Fall 2014 (in process) October 2014 November 2014 December 2014 January 2015 Spring 2015 Receive Preparation of Rating Update Request Public Rating Agency Public Rating Material rating material Rating On campus visit 10-30 days prior to sale
October 16-17, 2014 Receive Private January 15-16, 2014 Bond OSU Board Meeting Ratings OSU Board Meeting Sale
* Tentative – actual timing will depend on target date for bond issuance.
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Page F-60 Questions?
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Page F-61 “Capital Planning 102”
Long-range Capital Plan Development Process October 16, 2014
Page F-62 Plan Objectives
Oregon State University ‘s Capital Plan integrates major and minor academic program and infrastructure needs /solutions and creates a capital investment portfolio framework. The framework will serve as the foundation for future development of the annual capital budget and annual update of our long-range plan.
• Integration: OSU’s Capital Plan will identify all capital projects, programs, potential fund sources and timelines as a current-to-date summary of potential future capital investment opportunities.
• Investment Prioritization: Investment/Benefit criteria which directly support OSU’s Strategic Plan 3.0, provide positive impact to operating budget efficiencies, and leverage funding opportunities.
• State Capital Resources: OSU’s capital needs will continue to require much more than the State of Oregon can likely support - particularly infrastructure and the burgeoning deferred maintenance recapitalization requirements necessary to support our core teaching and research missions.
• Resource Partnerships: OSU will actively explore potential public-private partnerships critical in fulfilling the capital investment approaches and priorities in our Long-range Capital Plan. In addition, program planning activities with OSU colleges/schools/campuses will continue to clarify high-priority philanthropic opportunities for pursuit by the OSU Foundation.
Slide 1 Page F-63 Projected Board of Trustees Deliverables
Annual and 10-Year-Rolling Capital Plan Update • Consolidated University-wide and school/college/unit capital and space requests reports • Projected capital costs from benchmarks database • Projected square foot and infrastructure capacity impacts and associated projected costs • Projected schedule – Cash flow analytics • Available funding – Including requests for central funds/debt capacity and all other potential fund sources • Annual operating and maintenance costs
Annual Capital Funding Opportunities Update • Philanthropy – Feasibility confirmed by the OSU Foundation • Debt – Capacity and affordability analytics • Reserves – Colleges/schools/units • Public-private partnership opportunities
Semi-Annual Report on “Approved Projects” in Planning, Design, and Construction • Budget/expenditure, program, and schedule updates • Constraints and opportunities summaries
Slide 2 Page F-64 Key Recent Actions
1. Capital Investment Request Solicitation: July-September 2014 • Vice President for Finance & Administration solicited requests for major (>$5M) and minor (<$5M) capital investments from all OSU colleges, schools and major administrative units, IT and infrastructure work groups, Hatfield Marine Science Center, and OSU-Cascades • Requests solicited for space assets from all OSU colleges and schools, IT and infrastructure work groups, Hatfield Marine Science Center, and OSU-Cascades • Requested prioritization of capital and space needs in three timeframes: • Short Term: 1-2 Years • Mid Term: 3-5 Years • Long Term: 5-10 years • Major requests > $5M • New buildings, renovations, and major infrastructure investments • Minor requests < $5M • Program renewal/renovation needs including instructional space improvements • Capital- related planning/feasibility assessments • Building systems renewal • C ampus-wide infrastructure systems 2. OSU Capital Planning Database Development: August-December 2014
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Page F-65 OSU Annual and 10-Year Capital Plan Process
August - December January - March April - July Space & Capital Budget Capital Capital Needs Development Allocation
Assessment
Performance Progress Monitoring
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Page F-66 OSU Annual and 10-Year Capital Plan Process Annual Needs Assessment
Needs Assessment Activities Annual/ Annual Biennial • Annual solicitation of major requests >$5M Capital Capital • Annual solicitation of minor requests <$5M Budget • Ongoing update to OSU capital plan Allocation database to support integrated and comprehensive OSU financial modeling • Annual updates to State capital funding requests, OSU annual capital budget, and OSU 10-year capital plan • Assess ongoing capital and space requests
Performance Progress Monitoring
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Page F-67 OSU Annual and 10-Year Capital Plan Process Annual Capital Budget Development
Space and Capital Budget Annual/ Capital Needs Development Activities Biennial Assessment Capital • Review updated 10-year capital plan Allocation • Review proposed State-debt capital funding request • Review proposed non-State debt funded capital investments • Update proposed State-debt minor capital building renewal investments (DM and Program Renewal) • Annual Board of Trustees review of capital budget and treasury funding update • Annual Board of Trustees capital budget approval
Performance Progress Monitoring
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Page F-68 OSU Annual and 10-Year Capital Plan Process Annual Capital Allocation
Capital Allocation Space and Capital Capital Budget • Final capital resource Needs Development implementation schedules Assessment established • Formal notification of allocations • Capital scope and fund source agreements developed • Individual projects commence with approved project agreements in place
Performance Progress Monitoring
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Page F-69 Questions?
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Page F-70