The University of Texas System

1
The University of Texas System
Revenue Financing System Debt
Capacity Update Finance and Planning Committee
Meeting February 9, 2005
2
Revenue Financing System
3
Revenue Financing System (continued)
4
U. T. System Credit Strengths and Risks
5
Strength 1 Strong Student DemandTotal U. T.
System Fall Enrollment
Source Headcount as reported by the Texas
Higher Education Coordinating Board
6
Strength 2 Diversified Revenue
Stream Contribution to Revenues (Fiscal Year
2005 Budget)



7
Revenue Diversity Varies by InstitutionCompariso
n of Revenue Sources (Fiscal Year 2005 Budget)
8
Strength 3 Strong Private Sector Support
Millions by Fiscal Year
9
Strength 4 Strong Financial Resource Base
Millions by Fiscal Year
Represents U. T. Systems two-thirds share of
the PUF.
10
Risk 1 Large and Growing Capital ProgramU.
T. System Six-Year Capital Improvement Program by
Funding Source
Millions by Fiscal Year
11
Risk 2 Growing Debt Usage Annual RFS Debt
Service by Type by Fiscal Year
12
Risk 3 Declining Debt Service Coverage
GASB 34/35 Accounting Change
Per discussions with Moodys, these ratios
include amounts associated with the AUF and H.B.
1839 excellence funds that appear as transfers in
the Statement of Revenues, Expenses and Change in
Net Assets.
13
Steps Taken to Mitigate Negative Credit Trends

• The Office of Finance has taken advantage of
  lower interest rates to refund 698 million of
  relatively high-cost RFS debt since 2001, thereby
  reducing future debt service by 33.5 million
  (present value).
• Internal credit standards were toughened in FY
  2002, making it slightly more difficult for U. T.
  System institutions to access RFS debt.
• The Office of Finance has improved
  asset/liability matching by extending the average
  maturity of its debt and making greater use of
  lower-cost variable rate debt.

14
Credit Statistics
15
Actual Debt Service Coverage - FY 2004
Actual Debt Service Coverage Operating
Surplus Depreciation Interest Expense Total
Principal and Interest Payments
16
Actual Debt Service to Operations(Debt Burden) -
FY 2004
Actual Debt Service to Operations Annual
Debt Service Total Operating Expenses
17
Expendable Financial Resources to Debt - FY 2004
Expendable Financial Resources to Debt
Unrestricted Net Assets Restricted Expendable
Net Assets
Direct Debt
18
Proposed Credit Standards

• The Office of Finance proposes that RFS debt
  capacity be based on an institutions six-year
  forecast meeting or exceeding at least two of the
  three following credit ratios as calculated by
  Moodys
• A minimum Actual Debt Service Coverage ratio of
  1.80 times
• A maximum Actual Debt Service to Operations (Debt
  Burden) of 5.0
• A minimum Expendable Financial Resources to Debt
  ratio of 1.0 times.
• Moodys and the Office of Finance believe that
  debt capacity is a strategic concept and cannot
  be determined by formulas and ratios alone.
  However, these standards will serve as the
  foundation for determining access to RFS debt.

19
Proposed Credit Standards, Cont.

• The minimum credit standards are intended to
  approximate a very low investment grade credit
  rating on a stand-alone basis.
• All ratios are calculated with TRB debt service
  and appropriations. See the Appendix to this
  presentation for ratios that exclude TRBs.
• For FY 2004, one institution did not meet the
  minimum Actual Debt Service Coverage ratio, four
  exceeded the maximum Actual Debt Service to
  Operations ratio, and three were below the
  minimum Expendable Financial Resources to Debt
  ratio.
• Based on these standards alone, three
  institutions would not have access to additional
  RFS debt with the exception of TRB projects and
  self-supporting projects that generate a minimum
  1.30 times debt service coverage (exclusive of
  depreciation and interest income).

20
Observations

• The U. T. System is a strong credit and has
  additional RFS debt capacity however, based on
  current trends, the U. T. System is steadily
  using up its RFS debt capacity at the Aaa/AAA
  credit level.
• The current 4.98 billion CIP has more than
  doubled in size since 2000.
• The Office of Finance expects to issue almost 1
  billion of new revenue debt over the next 24
  months.
• Annual RFS debt service is projected to increase
  from approximately 100 million in FY 2000 to
  approximately 250 million in FY 2005.
• The institutions have identified an additional
  5.2 billion of capital projects on the futures
  list.
• Large capital needs and low interest rates
  continue to make RFS debt an attractive source of
  funding.

21
Observations, cont.

• The Systems credit deterioration has been caused
  primarily by greater utilization of RFS debt,
  including TRBs, rather than a general decline in
  operating performance.
• As a minimum standard, the RFS Master Resolution
  only requires the Board to certify that an
  institution can meet its debt service
  obligations. It does not require that it be met
  at an Aaa/AAA standard.
• The Office of Finances internal credit standards
  are set at a very low investment grade level.
• Nevertheless, most institutions have little or no
  RFS debt capacity. Those with no debt capacity
  can still access RFS debt to fund TRB projects
  and strong revenue-generating projects (on a
  case-by-case basis).

22
AppendixCredit Ratios with and without Tuition
Revenue Bonds
23
Actual Debt Service Coverage - FY 2004
Actual Debt Service Coverage Operating
Surplus Depreciation Interest Expense Total
Principal and Interest Payments
24
Actual Debt Service to Operations(Debt Burden) -
FY 2004
Actual Debt Service to Operations Annual
Debt Service Total Operating Expenses
25
Expendable Financial Resources to Debt - FY 2004
Expendable Financial Resources to Debt
Unrestricted Net Assets Restricted Expendable
Net Assets
Direct Debt