2009 NACUBO Higher Education Accounting Forum

1. Page 1
2009 NACUBO Higher Education Accounting Forum
Debt Management and Liquidity Concurrent Session
April 2009

2. Page 2
• History of Debt
• A Brief Recap of 2008
• Heightened Awareness
• Liquidity is Key
• Integrated Debt Management
• What Should We Do Now
• UVa Example
• Budget
• Furman Central Bank Discussion
• Conclusions
Table of Contents

3. Page 3
A History of Debt
• Neither a borrower nor a lender be…
• If we have to have it, pay it off as quickly as possible.
• Variable debt seems cheap.
• Swaps seem cheap.
• Debt is a perpetual component of the balance sheet.
• Debt for capital and operating purposes.
• Wait—we were supposed to be investing in bonds?
• Future – What is the “right” role of leverage.

4. Page 4
A Brief Recap of 2008
• Virtually all borrowers impacted
• Auction rate market implodes
• Bank liquidity dries up
• Swap collateralization and mark-to-market
• Bond insurance all but gone
• Investors look past ratings
• Lehman was A-rated—what do ratings mean?
• Spotty market access and widening spreads
• Debt office has been increasingly busy
• Difficult to focus on strategy/long-term given
upheavals in the markets.
• Declining budgets, more time and responsibilities.
• Next shoe dropped…then another…how many
shoes are there?
• Revisit Debt Policy
• Hope on the horizon—significant new opportunities
from Washington (e.g., Build America Bonds, new
“Bank Qualified” limits, and changes to Alternative
Minimum Tax.
SIFMA Rates VS Auction Rates
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
5/31/06 2/8/07 10/20/07 6/30/08 3/11/09
SIFMA Auction Rate 7-Day Index
SIFMA Index
Equity Market Indices
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
5/31/2006 12/17/2006 7/5/2007 1/21/2008 8/8/2008 2/24/2009
S&P 500
Dow Jones

5. Page 5
Heightened Awareness
• Senior officers increasingly interested in debt portfolio
• Pro: Greater focus on debt portfolio
• Con: greater focus on debt portfolio.
• Less time, more updates.
• Governing board more involved
• Increased reporting requirements.
• Elevated sensitivity to risk.
• Broader assessment of risk.
• Perspective from other industries (e.g., Finance, Government) that may be more affected by the
current crisis.
• Long-term, increased understanding and focus on risk is beneficial—in the short term, lots of work
with limited options.

6. Page 6
Liquidity Is Key
“The market can stay irrational longer than you can stay solvent”
- John Maynard Keynes
• In the past (i.e., before 2008) growing desire to have “cashless” University (i.e., liquidity is too
expensive), investment in longer-term illiquid assets.
• Liquidity – A free lunch turned into an overpriced meal.
• How do we manage this – liquidity at all costs?
• Balances with cost of capital
• When will the situation change? How do we manage?
• Impact of liquidity different for each institution, but the effect is the same:
• Most revenue sources under pressure
• Uncertainty regarding projections
• Swap collateralization requirements
• Variable rate bond support
• Increased desire for cash balances (“what if scenarios”)
• State funding
• Capital calls/endowment asset allocation
• Stresses on cash flow (gift receipts, tuition collections)
• But if effect is similar is the response the same? No.

7. Page 7
Liquidity (Cont.)
• Methods to Address Liquidity
• First, understand liquidity needs (different than accounting, cash basis has not been paramount)
• Tail wagging dog: liquidity driving debt decisions instead of policy
• For some, the need is not as significant. Need to educate Board and have the data
• Increase cash internally
• Identify the time period – 1 year, 5 year, 10 year (I hope not!)
• Restructure debt portfolio/reduce exposure
• Issue taxable debt
• Internal—not external (i.e., rating agency)—guidelines are best place to start
• What is the risk that a higher education institution will encounter severe stress?
• What is the impact on the rest of the market?

8. Page 8
Integrated Debt Management
• No side of the balance sheet is an island.
• Need to coordinate with Treasury, Endowment, Budget offices/committees.
• Need comprehensive risk, liquidity, cash assessment.
• Improved lines of communication – team solutions.
• Multidisciplinary approach of the management side.
• Leads to more creativity, solutions--improved institutional results.

9. Page 9
What Should We Do Now?
• Continue taking a long-term view (that has always been higher education’s strength). There will be a
bright future with opportunities.
• Perform integrated modeling and determine worst-case (real worst case scenarios). Does the
institution have the risk tolerance? Are risks being evaluated and priced appropriately?
• Ensure that management can articulate realistic contingency plans.
• Educate senior staff and the Board of risks in the portfolio – especially risks that were not apparent in
the past.
• Minimize surprises.
• Develop a Plan B (and Plan C!) for contingencies.
• Don’t assume access to capital is guaranteed.
• Review the debt portfolio to ensure it remains appropriate given potential revision to institution
risk assessment.
• Model range of budget impacts.
• Keep everyone informed, reach out to colleagues.
• Closely monitor student demand and financial aid statistics.
• Build flexibility into operating expenditures.
• Review and update (if necessary debt policy).
• Institution credit review.

10. Page 10
What Should We Do Know (cont.)?
• Maintain close watch on liquidity.
• Limit/diversify exposure to third parties (banks/credit
providers)
• Keep everyone informed.
• Look for strategic opportunities:
• Increase in bank qualified debt limit from $10 million to
$30 million.
• Repeal of alternative minimum tax for new private-
activity bonds.
• Authorization for financial institutions to purchase more
municipal bonds.
• Build America Bond program.
• Other stimulus funds available to educational
institutions (e.g. funds for projects aimed at energy
efficiency).
• Architects, contractors, subcontractors, engineers –
willing to discount services substantially.
• Faculty and senior pools are particularly strong for
those institutions still able to hire.

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UVa Example
• Liquidity and Debt Outlook for 2009
• Overall Plan – Proactive with regard to business risks
• Liquidity Risk Mitigation
– Pre-fund capital expenditures
– Increase amount and quality of liquid holdings
– Internal Bank providing internal liquidity
– Develop or update cash forecast
• Capital Markets Risk Mitigation
– Issuing bonds on earlier than needed timeline
– Taking advantage of ARRA through BAB’s
• Credit Risk Mitigation
– Underwriters
– Investment firms
– Commercial banking

12. Page 12
Budget
• Provide various debt cost assumptions, including contingencies depending on risks in the portfolio
• Outline a plan to address potential increased costs
• Especially important given other budgetary pressures
• Blended rate/ central budgeting can be helpful
• Common at large diversified research institution
• Can be useful at smaller, centralized schools
• Board involvement – focus on portfolio, not transactions
• Develops a more predictable cost of funds/ reduces variance (I would have said like
endowment payout, but not anymore)
• Avoids knee jerk reaction to problems – which usually results in suboptimal long-term
decisions
• Furman Example

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Furman Central Bank Discussion
• Highlights of Furman's Debt Policy
• Delineates specific responsibilities of the Board of Trustees and staff.
• Specifies key ratios to be used to ensure that debt remains within acceptable levels.
• Promulgates ranges for fixed and variable rate debt and derivatives.
• Outlines the Central Bank concept.
• Central Bank at Furman
• Insulates operating budget from shifts in short term rates.
• Current blended rate is the higher of the trailing 25 years or 12 months SIFMA average.
• Investment of central bank proceeds is key.

14. Page 14
Conclusions
• Leverage is a tool—and it’s becoming better
understood.
• Liquidity isn’t free—and when it’s expensive, it’s
very expensive.
• Debt—and its risks—should be addressed
institutionally.
• Blended rate and central budgeting can mitigate
many of the current problems.
• Plan for expected results, but be prepared to
experience stress cases.