The University of Chicago

Financial Services


1801 Debt Management

Subject Area: Debt Financing
Responsible Office: Financial Services
Sponsor: Chief Financial Officer
Originally Issued: October 1992
Revised: August 2000, February 2004, October 2007, January 2010, January 2015
Refer Questions To: John Kroll, 773-702-1941

Purpose: To establish responsibility for issuance and management of external debt


  1. Responsibility – The Executive Vice President for Administration and Chief Financial Officer is responsible for the recommendation to issue external debt.
  2. Approval – All external debt financings, including issuance of taxable or tax-exempt debt, the structure of that debt, bank lines of credit, and liquidity enhancements must be approved by the Board of Trustees.
  3. Debt Capacity of the University – The Debt capacity of the University will be governed by its ability to support annual debt service through the operating budget and the long-term credit rating of the University assigned by the rating agencies.
  4. Refunding and Restructuring of Debt – Management will periodically review all outstanding debt to determine if there are refunding opportunities that would provide a net economic benefit to the University.
  5. Debt Service and Compliance – Financial Services is responsible for administering debt service requirements and ensuring compliance with applicable debt covenants.

Following is a background discussion of this policy.


I. Introduction

The University of Chicago funds its operational and capital needs from a variety of sources. The University has predictable annual revenue that derives from tuition and other charges as well as a draw on its endowment. These sources support the annual operating budget including ongoing facilities maintenance. Donations and proceeds from debt issuance can be two other major sources of funds to provide support for new programs and capital needs. However, with each new program or capital project, whether funded from donations or debt, comes an increase in the operating budget. This necessitates careful planning and resource allocation, as well as prudent funding decisions.

II. The Capital Planning Process

  1. Funding Capital Projects

    The University needs to continuously invest in its physical plant through an ongoing program of renovation and renewal, strategic property acquisition, elimination of deferred maintenance, and new construction. In order to pursue a policy of continuous capital investment the University must rely on a diversity of revenue sources, including unrestricted financial assets, fundraising, and debt.

    The University recognizes that the use of debt to underwrite capital projects is but one, albeit critically important, alternative among several. The amount of debt that the University has at any given time must be viewed as a function of two critically important factors: its ability to service that debt through the operating budget without crowding out the resources needed to underwrite other critically important non-capital activities; and its capacity to maintain a certain minimum credit rating among the major rating agencies.

    Assuming that most all of fundraising is fungible, proposed capital projects need to be judged not just against other capital projects, but also against non-capital projects. In the absence of qualitative measures the likes of which might be employed in a for-profit environment to guide resource allocation decisions, an academic priority-setting process that balances the numerous competing needs of the University should guide University resource allocation decisions. Implicit in this process is the understanding that there is little, if any, difference in funding capital projects from gifts or from debt. They both absorb resources that could be used for other purposes.

    The University’s endowment is also a potential source of funds that could be used to underwrite capital projects. While Universities have generally not withdrawn funds functioning as endowment to fund capital projects, it is an alternative that at least at the outset is essentially identical to raising debt. From a balance sheet perspective, whether funds are withdrawn from the endowment or raised as debt, there is, at the outset, no effect on net liquidity. From an income statement perspective, again, the effects of withdrawing funds from endowment or raising debt are essentially the same. Taking funds from the endowment reduces revenue to the operating budget; adding debt increases costs in the form of debt service. Clearly, a careful and periodic analysis of the University’s long-term investment return assumptions should guide decisions regarding the use of debt to underwrite long-term capital projects. Moreover, that same analysis should be applied to the use of gifts for capital projects. Where possible, consideration should be given to establishing funds in quasi endowment with capital gifts and borrowing funds for project completion.

  2. Resource Allocation

    The question of resource allocation in a University is a difficult one. It is difficult because it involves numerous tradeoffs, not all of which are easily understood. The obvious ones that present themselves have to do with the linkage between capital and non-capital projects, the process by which capital priorities are established, and the extent to which resources, particularly those that derive from development efforts, are fungible.

    While there are no straightforward answers readily available, the following principles should serve to guide capital resource allocation decisions:

    • The allocation of financial resources to capital projects is principally the responsibility of the administration, with the proper involvement and oversight of the Board of Trustees through its system of committees.
    • The capital resource allocation process by necessity must be an outgrowth of the University’s commitment to a systematic capital planning process that is linked directly to long-range financial planning.
    • The decision to allocate resources to a capital project must be driven by the administration’s independent assessment of the critical needs of the University.
    • While it is the case that donor funding is a critically important factor in the process of continuous capital investment, donor funding must be guided as much as possible by priorities established by the administration in consultation with the appropriate trustee committees, rather than donor funding serving as a driver in the setting of priorities.
    • All capital projects should be put in some order of priority. Those projects at the top of the list would require the lowest percentage of donor support, while those at the bottom of the list would require substantial donor support. This does not mean that high priority projects should not be considered for donor support in that the highest priority projects could also have the greatest donor appeal.
  3. Starting Capital Projects

    The question of when a capital project can begin is not a straightforward one, and the answer is that it depends. In the case of projects that are to be funded entirely from debt or unrestricted financial assets, the decision process is less complicated. Capital projects that are to be funded from gift proceeds present a more complicated set of factors that require careful consideration. Obviously, the issue has to do with when gift proceeds will arrive at the University and the cash flow needs that are a function of the pace at which construction proceeds. Once a capital project emerges from the rigorous planning and priority setting process described above and is approved by the Campus Planning and Facilities Committee of the Board of Trustees, a certain amount of momentum emerges and there is tremendous pressure to begin, even in the absence of funds. Borrowing in anticipation of gift receipts is an alternative to waiting. This decision recognizes that there are circumstances under which it is best to begin a project as soon as possible, even in the absence of donor support. At the same time, given the financial implications of starting capital projects in anticipation of receiving gift funds, the administration and the Trustees will need to review information that indicates that the underlying fundraising initiative is likely to be successful.

    With those considerations in mind it shall be the policy of the University that certain levels of fundraising must be attained at critical junctures of the project – at the time of architect selection when soft costs begin to be incurred, and at the time of construction when substantial hard costs will be incurred. Capital projects at the University that are put in a priority category that requires them to be funded from gift receipts shall be governed by the 25 – 85 rule, meaning that 25 percent of the cost of the project must be raised in gifts and pledges before an architect can be selected, and that 85 percent of the cost of the project must be raised in gifts and pledges before construction can begin. At the same time, this policy recognizes that from time to time there will be donor supported capital projects that are so important to the academic mission of the University that they should proceed without meeting the milestones noted above. Any exceptions to this rule will require the approval of the Financial Planning and Campus Planning and Facilities Committees of the Board of Trustees.

III. General Principles Regarding the Use of Debt

The following principles will serve to guide the University’s use and management of debt. These principles are intended to apply to all debt of the University, both short and long-term, including capital leases, revenue bonds, certificates of participation in financing leases and other similar capital market borrowings.

  1. Debt Capacity Criteria

    1. Credit Rating. The University shall maintain a long-term credit rating in the AA category through its management of the operating budget and its balance sheet. The University shall not propose issuance of incremental debt if it would cause the long-term bond rating from Moody’s Investors Service and Standard & Poor’s to fall below the AA category. More specifically, the pro forma issuance of debt shall not result in a rating below the Aa3/AA- level.
    2. Total Resources to Debt. The University shall strive to maintain the level of total resources to debt above 3:1. This ratio is a broad measure of the University’s leverage position. Total Resources is defined as total net assets less net investment in plant, or less the difference between the University’s value of property, plant and equipment and debt related to such assets.
    3. Expendable Resources to Operations. The University shall strive to keep the level of expendable resources to operations above 1.75:1. While this measure of liquidity is less directly affected by the issuance of new debt, it does provide a useful indication of a financial cushion relative to operations. An expendable resource is defined as net assets less net investment in plant less permanently restricted net assets.
    4. Interest to Operations. While debt service to operations has traditionally been used to asses debt service burden, the increasing use of bullet maturities and other variations of deferred principal makes the calculation of debt service more difficult. Moreover, maturing debt can be, and frequently is, extended to increase the average life of the debt in accordance with the economic life of the assets financed. As a result, the regular payments of interest, which generally cannot be deferred, are a more appropriate measure of the current burden on operations from debt. The University shall strive to keep interest expense at no more than five percent of operating expenses.
  2. Length and Structure of Debt Maturity

    It is the policy of the University that debt will be structured so as to be consistent with a fair and equitable allocation of costs to current and future beneficiaries or users of the asset(s) being financed with the proceeds of debt. The intent of this policy is to require that debt be issued only for a time period that is consistent with the life of the project for which the debt was issued. Tax-exempt debt must meet the “120 percent of useful life” test set forth in federal tax law. This test requires that tax-exempt borrowings be limited to a term of not more than 120 percent of the estimated useful life of the asset(s) being financed with the proceeds of the issue.

    The use of bullet maturities is not precluded by this policy if it can be demonstrated that the retirement of such bullet maturities has been adequately and appropriately planned for.
  3. The Use of Calls, Derivatives and Other Hedging Products

    The University will seek to maintain flexibility in its debt portfolio as insurance against unforeseen capital needs. Accordingly, the University may consider, with the approval of the Financial Planning Committee of the Board of Trustees, the use of call options, derivatives and other synthetic products when such use functions to either reduce the University's overall cost of capital and/or provides structuring advantages not available in the traditional public finance marketplace.

    The issuance of debt without a call provision, or with a call provision longer than ten years requires the approval of the Financial Planning Committee of the Board of Trustees in that under certain circumstances, such as the sale, disposition or sharing of any asset financed with tax-exempt debt may first require the repayment of such debt. Moreover, in some interest rate environments and because of potential future tax changes, long-term non-callable debt may work to the disadvantage of the University.
  4. Fixed and Variable Rate Debt

    The University will always seek to borrow in the interest rate market that provides the lowest possible cost of funds, consistent with the prudent consideration and management of interest rate risk. Long-term fixed rate debt is usually reflective of the greater credit and inflation risks that may occur over long periods than are interest rates that can vary in response to these forces.

    Variable rate debt is defined as all debt with a rate of interest that must be reset except for any debt that is synthetically fixed by way of an interest rate swap. As such, commercial paper notes or tender date bonds with mandatory conversions shall be considered variable rate bonds.

    Further, in calculating the amount of variable rate debt, the University shall deduct the average amount of short-term cash or cash equivalent investments it held over the last year or expects to hold over the current or next year. The purpose of this is to consider the extent to which the risk associated with variable rate debt is hedged by short-term cash or cash equivalent investments.

    Any debt swapped from a fixed rate to a variable rate shall be considered variable rate debt.

    This policy makes no direct recommendations regarding the use of any particular variable rate product but anticipates the University will regularly assess traditional variable rate products as well as developing markets for new products such as auction rate securities, alternative forms of liquidity, tender bonds, and synthetic floating rate debt.

    The University may choose to issue debt securities that pay a rate of interest that is fixed at the time of the offering of the securities, or at some date in the future, according to a prearranged mechanism. The University may elect to control its interest rate exposure on such fixed rate debt through the use of products designed to offset such risks, as discussed below.

    The University will consider the use of non-traditional financial products on a case-by-case basis. Examples of such non-traditional products include: interest rate swaps, interest rate caps and collars, “synthetic” refunding transactions and float contracts. The use of such non-traditional products will only be undertaken upon the recommendation of the Chief Financial Officer and with the approval of the Financial Planning Committee of the Board of Trustees.

    This policy recognizes that the selection of the type of interest rate arises from the specific facts and circumstances of individual borrowings, and is driven by factors such as the expected life of the debt, the interest rate environment, the probability of changes in interest rates over the expected life of the borrowing, the mix of assets and liabilities on the University’s balance sheet, and demonstrated investor preferences for one type of rate over the other. As a general rule, variable rate borrowings present the least costly funds, albeit at somewhat greater risk.

    The University believes that the issuance procedures and costs associated with permanent, fixed rate debt should limit the use of such debt to circumstances where interest rates are historically low, the borrowing can be accomplished at better than representative rates for similarly situated issuers, and the assets being financed have long useful lives.

    In view of these considerations it is the policy of the University to maintain, over long periods of time, a mix of fixed rate debt to variable rate debt that is roughly equal.
  5. Refunding and Restructuring of Debt

    Periodic reviews of all outstanding debt will be undertaken to determine refunding opportunities. Refunding will be considered (within federal tax law constraints) if and when there is a net economic benefit of the refunding or the refunding is essential in order to modernize covenants essential to the University’s financial or operating position.

    In general, refunding for economic savings will be undertaken when net present value savings of at least three percent of the refunded debt can be achieved. Refunding with savings of less than three percent or with negative savings may be considered if there is a compelling policy objective such as to restructure principal or any financial or legal covenants that prove disadvantageous to the University.

IV. Administration of this Policy

The Chief Financial Officer is the University officer responsible for the management of the University’s debt portfolio and implementation of this policy in consultation with other University officers including the Vice President and Chief Investment Officer and the Associate Vice President for Finance.

On an annual basis the Chief Financial Officer will undertake a review of the University’s debt portfolio, with particular attention to the various criteria set forth in this policy, and shall report the findings of such a review to the Financial Planning Committee of the Board of Trustees.