On Wednesday, Sept. 14, at the UC Board of Regents meeting, a debt policy proposal was made in response to the university system’s growing loan debt. Since the end of 2008, the UC system’s diversified debt portfolio has grown from $6.79 billion to around $17.2 billion. The loan debt was acquired in the process of funding items such as building repairs, pension plans and the construction of new medical centers and student housing.
Despite receiving low interest rates on borrowing and federal tax exemptions on university financing, the UC system is heading toward its debt capacity, or the amount of money a debtor is able to borrow in a specified period of time. The three main borrowing vehicles used by the UC includes the General Revenue Bond (GRB), Limited Project Revenue Bond (LPRB) and Medical Center Pooled Revenue Bond. On occasion, third-party debt is utilized for specific purposes.
The proposal was made by the financial and capital strategies committee to address how debt would be managed moving forward into the future. The agenda of the committee explained, “The purpose of the University’s Debt Policy will be to govern the use, structuring and management of debt used to finance capital and other projects across the System. The overarching goal of the Policy will be to ensure that the University maintains ready access to the debt capital markets to meet the University’s financing needs to invest in its mission and financial health.” The proposal specifically is set to address debt management, establish guidelines for approving, structuring and managing debt, set approval standards for the debt capital program and assign responsibility for handling debt post-issuance.
In 2014, two major credit ratings agencies, Moody and Fitch, downgraded the system’s credit rating, thereby affecting drive access to capital markets as well as the university’s cost of capital. Credit ratings measure the ability of a debtor to repay their borrowings in a timely manner.
According to UC Chief Financial Officer Nathan Brostrom, approximately 3.7 percent of the UC’s budget is comprised of debt payments. Brostrom along with the UC Debt Strategy Task Force met in 2014 to address the issues raised by the Regents Committee on Long Range Planning. In January of 2015 came the debt policy proposal, along with other strategies that could be implemented to handle the university’s funding needs in the future.
The proposed debt policy will be included on the California ballot for the November election and will set parameters on the system’s borrowing.
