Credit rating improvement boosts UA's ability to acquire debt
Regents from the Arizona Board of Regents listen intently during a meeting in the North Ballroom in the Student Union Memorial Center on Thursday, Nov. 17. UA's credit rating is improving, but the university's next president will have to maintain debt financing.
UA's outstanding debt is projected to be $1.15 billion in the 2017 fiscal year, according to a report presented to the Arizona Board of Regents. Due to improving financial health, the cost of managing this debt has decreased in recent years, freeing up revenue sources, according to UA’s Chief Financial Officer Gregg Goldman.
Next year, the UA will spend 5.3 percent of revenue, or $104.2 million, to pay off debts and interest. If revenue grows as expected and with no unplanned debts accrued, the UA will spend only 2.3 percent of revenue servicing its debt by the year 2025.
Moody’s, an investor service which provides institutions with a credit rating, upgraded the UA from a negative to a stable outlook in 2015. Moody’s Investors Service credits the University of Arizona Health Network’s merger with Banner Health for the sudden change.
“The merger resolved UAHN’s financial liabilities, which Moody’s perceived could have adversely affected the UA,” Goldman said.
The UAHN was never directly intertwined with UA’s finances, but its loss of $6 million a month last year created a negative liability for the university, according to Chris Sigurdson, UA’s vice president of communications.
The increased rating immediately opened the opportunity to reduce interests paid by $850,000 on bonds sold to investors funding the Bioscience Partnership Building, Goldman said.
After the regents and the Arizona Legislature’s Joint Committee on Capital Review approve a proposal for the UA to obtain debt to maintain or finance infrastructure, the university sells bonds to investors. These investors, in turn, resell the university’s debt to institutions or individuals.
An improved credit rating allows the UA to decrease interest the university pays on these bonds. As a result, the university's capacity to hold debt increases and newly freed revenue can be reinvested or spent in other ways on campus, Goldman said.
A decrease in interest payments and continual payments to lower UA debts will continue to decrease the percent of revenue spent on servicing UA’s current and planned debt.
There are two types of debt held by the university: 29 percent is considered auxiliary debt and 71 percent academic debt. Auxiliary debt funds the construction of residence halls and parking garages. Revenue to pay auxiliary debts stems from students’ payments to live in dorms or utilize parking garages or the resources the structure provides.
Academic debt pays to construct new academic buildings and thereby expand research capability and student capacity. Tuition and funds from the state provide the revenue necessary to pay off the debt taken to cover the upfront costs.
These types of debts constitute an investment in the university, which increase revenue over time by increasing student capacity and research quality, quantity and funding.
In the past, the UA acquired debt to fund deferred maintenance and infrastructure repair.
According to Goldman, the UA currently has $131 million in deferred maintenance costs and by 2025, an estimated $1 billion will be necessary to resolve UA’s deferred maintenance.
Although debt in the past has funded deferred maintenance, Goldman said he'd rather not borrow funds to address deferred maintenance. Rather, Goldman hopes opportunities will be found to fund UA’s deferred maintenance.
The UA currently has 170 days cash on hand, meaning it possesses the necessary funds to pay all operating costs from the next 170 days. When UA President Ann Weaver Hart began her tenure at the university, the UA had 80 days cash on hand, significantly below the 175 day average of similar universities.
This demonstrates the improving financial health of the university providing stability to investors and saving the university money.
Hart has expressed her desire that her successor has the resources available to pursue policies to move the university forward. Under Hart, the yearly cost of the university’s debt sits well below the eight percent of yearly revenue limit.
Goldman said the new UA president will set the direction on the acquisition of new debt and the projects funded by such debt.
Goldman commends the presidential search committee for not limiting its search to candidates with extensive academic backgrounds. The UA is a $2.2 billion yearly enterprise and the next president must be able to balance the business aspects of the university with its core academic message, according to Goldman.
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