Policy 114

Approved Board of Governors 2014.10

LIABILITY MANAGEMENT

1. PURPOSE

   The purpose of this Liability Management Policy ("Policy") is to outline the University of Ottawa's ("University") general philosophy on the use of debt and debt affordability and to establish specific financial measures that will be used to monitor the impact of debt on the financial strength of the University.

   Since debt management and the use of capital are key components of the overall financial management of the University, this Policy should be applied in conjunction with Policy 55, Budget Management.

   In terms of the application of this Policy, debt is defined as per Generally Accepted Accounting Principles (GAAP) for not-for-profit organizations, and used to prepare the audited financial statements of the University. 

2. OBJECTIVES
   1. The objectives of this Policy are:
      1. to ensure that debt is used prudently to meet the key strategic objectives of the University;
      2. to ensure that the University maintains access to capital markets;
      3. to align the strategic use of debt with the University's investment policies in order to manage the overall cost of capital, minimize long-term costs for debt service, and ensure the overall level of risk does not exceed acceptable levels;
      4. to take into account the University's assets, liabilities and market conditions when evaluating different debt strategies and instruments, including bridge financing and derivative products; and
      5. to guide ongoing relationships with the rating agencies, bond purchasers and other external constituents by communicating the management's approach to the financing strategies undertaken by the University.
3. POLICY RATIOS
   1. University management shall have the authority to manage the assets and liabilities of the University in compliance with policy ratios (or financial measures). These policy ratios shall be used by the University as guidelines to determine the University's optimal amount of outstanding debt by measuring the impact of outstanding debt on financial position. These policy ratios shall be subject to review by the University on a regular basis.
   2. For the purposes of this Policy, the policy ratios shall be as follows:
      1. Ratio 1 – Unrestricted Liquidity-to-Debt Ratio: This ratio measures net assets relative to liabilities (balance sheet leverage) and is an indicator of debt capacity and of the medium- to long-term health of the University's balance sheet. It measures the availability of net assets that are expendable over outsanding aggregate external debt.
         
         The University has established a threshold of a minimum 0.5x coverage
         
         Unrestr. Oper. Net Assets + Intern. Restrict. Net Assets + Intern. Restrict.Endowment Funds - Ancillary Services Net Assets > 0.5x
         Total University External Debt - Ancillary Services - External Debt
      2. Ratio 2 – Debt Burden: This ratio measures a key determinant of debt affordability and the proportion of the ressources of the University used to support the cost of debt. This ratio measures the percentage of operating revenue dedicated to replaying the University's current and potential debt burden.
         
         Pension fund special payments (above current service costs) are repayment of pension fund liabilities. Consequently, these special payments are included in the ratio definition, since pension fund liability is considered a long-term liability and  these special payments reduce the future capacity of the University to afford debt.
         
         The University has established a debt burden threshold of 5% of revenue.
         
         Annual Principal + Annual Interest + Capital Contributions to Sinking Fund + Pension Deficit Special Payments <5%
         Total Revenue - Amortization of Capital Assets + Annual Princapal+ Capital Contribution to Sinking Fund 
4. DEBT PORTFOLIO MANAGEMENT CONSIDERATIONS
   1. University management shall ensure that capital projects will continue to use a mix of financing sources, including internally restricted assets, unrestricted resources, philanthropy, external debt and general grants, as debt will be considered a perpetual component of the University's capital structure. 
   2. Debt will be managed by University management on a long-term portfolio basis consistent with the long-term objectives of managing the University's balance sheet as a whole, rather than viewing long-term assets and liabilities separately. 
   3. The specific amounts, types and uses of debt selected by University management shall be designed to help the University achieve the lowest cost of capital consistent with the University's risk tolerance profile. 
   4. The University has established its policy ratio thresholds at levels that are expected to maintain flexibility to fund future projects and to ensure that sufficient funds are available to meet future operational requirements. 
   5. It is understood that the policy ratios in the Policy are standard industry measures of financial strength used by recognized credit rating agencies to assess the credit quality of issuers, and that the thresholds are based on standard measures for AA-rated institutions to maintain the University's competitive financial profile. 
   6. The policy ratios and associated thresholds are University-established guidelines; they are not to be considered as legal convenants by the University. 
   7. Notwithstanding the provisions of this Policy, ancillary services projects, including Sports Services, financed by external debt will be approved on a case-by-case basis, based on the long-term financial sustainability of the project. 
5. RESTRICTIONS 
   1. The University may only use external debt financing to meet the funding requirements of capital projects or plans (as defined by GAAP) that have been approved by the Board of Governors (the "Board"). 
   2. External debt may not be issued, nor may credit facilities be established by University management without prior Board authorization. 
6. RESPONSIBILITY AND AUTHORITY
   1. University management has the authority to implement external debt financing transactions consistent with this Policy and in accordance with stated procedures approved by the Board.
   2. The Finance and Treasury Committee of the Board shall oversee implementation of external debt financing transactions and shall monitor the asset and liability structure related to this Policy.
7. PERIODIC REVIEW AND REPORTING
   1. University management shall report the policy ratios to the Finance and Treasury Committee of the Board on at least an annual basis. Such reports shall include actual results based on the University's audited financial statements, as well as prospective calculations based on the five-year forecast to identify deterioration of the financial outlook in advance.
   2. Additional ratios, including debt-to-FTE and total debt-to-revenue, will be managed by Administration to provide the Finance and Treasury Committee with a more complete understanding of the University's credits and financial profile. 
   3. Notwithstanding section 7.1, if the five-year forecast of the University indicates that unrestricted liquidity–to-debt is expected to fall below 0.5x and debt burden is expected to exceed 5%, a management review shall be conducted to develop action plans to rectify the pending situation.
   4. This Policy will be reviewed on a regular basis to ensure it remains consistent with the University's objectives and the external environment.
   5. The Finance and Treasury Committee of the Board may recommend revisions to this Policy, if deemed desirable.
8. EXCEPTIONS TO POLICY
   1. No exceptions shall be made to this Policy without the prior written consent of the Board.

Revised April 7, 2014

(Office of the Vice-President, Resources)