WHEN IS IT A GOOD TIME TO ISSUE DEBT?

< Jessica Matsumori, S&P Global Ratings Jeffrey Bethke, DePaul University Susan Gilbert, University of Pittsburgh

AGENDA Introductions The Challenge:

Long Term Capital Planning/Needs

The Options: In or Out-of-“The Box” Solutions

The “Right” Solution: How Do We Decide What’s Best for Us?

Key Takeaways

OVERVIEW

How can management teams balance capital planning and debt needs while maintaining financial objectives?

Best practices/red flags for capital planning and debt

issuance How does S&P view management and governance,

financial management policies, and debt issuance Creative strategies and case studies

STANDARD AND POOR’S OVERVIEW

S&P rates almost 600 universities globally

Americas: • Approximately 560

US public and private universities

• 8 Canadian universities

• 3 Mexican universities

Europe: • 6 UK public

universities

Australia: • 3 public universities

S&P’S HIGHER EDUCATION RATINGS UNIVERSE

SECTOR SUMMARY: USPF HIGHER EDUCATION

AAA Rated Higher Education Entities in United States by S&P Ratings Services

PRIVATE PUBLIC Columbia University University of Texas System Grinnell College University of Virginia Harvard University University of Michigan Massachusetts Institute of Technology University of North Carolina at Chapel Hill Northwestern University Indiana University Pomona College Purdue University Princeton Theological Seminary Texas A&M University Princeton University Rice University Stanford University Swarthmore College Washington University Yale University

Your dedicated USPF Higher Education Ratings team has over 150 years combined Credit and Sector experience

Analytical Excellence Manager

Analytical Manager/ Sector Lead

Senior Analysts

Robin Prunty MD, New York +212 438 2081 Experience: 28 years

Laura MacDonald Sr. Director, NY +212-438-2519 Experience: 25 years Jessica Matsumori Sr. Director, SF +415-371-5083 Experience: 15 years

Debra Boyd Director, Los Angeles +415-371-5063 Experience: 14 years Charlene Butterfield Director, NY +212-438-2741 Experience: 17years

Kenneth Rodgers Director, NY +212-438-2087 Experience: 36 years Jessica Wood Director, Chicago +312-233-7004 Experience: 14 years

Source: U.S. Public College And University Fiscal 2014 Median Ratios and U.S. Not-For-Profit Private Universities' Fiscal 2014 Median Ratios, published July 10, 2015

DEPAUL UNIVERSITY OVERVIEW

DEPAUL UNIVERSITY A SNAPSHOT Founded in 1898

Largest Catholic university in the U.S. Among the 10 largest private universities in the U.S. 10 colleges enrolling 23,000 students St. Vincent DePaul – respect, compassion, charity Catholic, Urban, Vincentian

Two Chicago Campuses Downtown / Loop

1.9 million sqft in six high-rise buildings Commerce, Law, Technology, Communications

Lincoln Park Neighborhood 45 acres 1.9 million sqft in 47 buildings (2,400 beds) LA&SS, Science & Health, Education, Music, Theatre

At FYE 2016 [unaudited] $423 Million endowment + $94 Million reserves and

$64 Million operating funds $570 operating revenues / 6.9% operating margin

Debt Portfolio A / A2 / A long-term ratings with Stable Outlooks $345 Million of bonds and notes outstanding at FYE 2016

UNIVERSITY OF PITTSBURGH OVERVIEW

UNIVERSITY OF PITTSBURGH A SNAPSHOT State-related Research University Founded in 1787

Commonwealth appropriation ~ 7% of operating revenues Commonwealth appoints one-third of voting board of trustees

Five Campus System in Western PA Main campus – Oakland, Pittsburgh

132 urban acres Over 100 academic, research, administrative buildings and residence halls

Regional campuses - Johnstown, Greensburg, Bradford and Titusville 32,714 FTE students

42-story Cathedral of Learning, on Pitt’s Main Campus Tallest educational building in the Western Hemisphere (4th in the world) Designated landmark in the National Register of Historic Places Home to 30 Nationality Rooms, also designated as historical landmarks

At FYE 2016 [unaudited] $3.5 Billion endowment + $558 Million operating funds portfolio $726 Million in research grants and contracts

34% of operating revenues (ranks 5th in NIH funding) $2.1 Billion in operating revenue

Debt Portfolio AA+ / Aa1 long-term ratings with Stable Outlooks $941 Million of bonds and notes outstanding at FYE 2016 [unaudited]: 77% fixed rate + 23% variable rate

THE CHALLENGE: LONG TERM CAPITAL PLANNING/NEEDS

DEALING WITH MAINTENANCE: A SERIOUS CREDIT CHALLENGE Deferred Maintenance is a financial challenge for both public and private

Institutions Aging Facilities & IT Growing student demand for amenities

Significant deferred maintenance can create financial & debt pressure for

institutions

S&P views a low level of deferred maintenance a credit positive Defined as institutions with an average age of plant of < 10 years Limited deferred maintenance indicates that facilities are more likely

to attract and retain high-quality students

DEPAUL UNIVERSITY DEFERRED MAINTENANCE & LONG-TERM CAPITAL PLANNING

No Deferred Maintenance Policy

Routine Capital Maintenance Budget $11-14 Million / year Approximately 2% of operating budget

Tax-Exempt Finance for NR CapEx Post Issuance Compliance Challenges

Operating Surplus Set-Asides / Internal Financing

Conservative Planning & Budgeting

Responsibility to Future Generations

UNIVERSITY OF PITTSBURGH LONG-TERM CAPITAL PLANNING PROCESS Facility Condition Assessment (FCA) ~ Provides Baseline Data

2006: conducted on a portion of the main campus facilities 2015: conducted on all buildings across all 5 campuses, including owned utilities

Comprehensive inspection: bottom to top, inside outside, underground Facilities Management staff reconciles FCA report with actual renovation and repair activity

Independently, a focused-assessment performed on 5 significant buildings (2015) Space utilization, alignment with academic and research priorities, programmatic use, occupants

Current 12-Year Facilities Plan (FY 2007-2018) Three phases of 4 years each Focus on preservation and renewal

New Facilities Plan (in-process) ~ Institute “Rolling” FCA to Support a 5-year Refresh of Overall Facilities Plan Benefits:

Refreshed data reduces future uncertainty Agile Facilities Plan can accommodate unplanned opportunities and/or new initiatives Capital projects will be compliant with current and changing codes

Anticipated approval by board of trustees ~ spring 2017

Direct linkage to University Strategic Priorities Stakeholders: Facilities Management, CFO, Provost, Dean-School of Medicine Must manage and align faculty expectations with strategic goals and financial considerations Where should the programmatic renovations and upgrades occur? Separate from Educational/General segment, both Auxiliaries and School of Medicine develop their own

stand-alone funding plan(s), with review and approval by the CFO

Prioritized Deferred Maintenance: Key Benefits

Allows the conversation

Replaces emotion with reason

Strategy drives the deployment of capital

Provides great guidance to fundraisers

Supports risk management

OPTIONS: IN OR OUT-OF-“THE BOX” SOLUTIONS

1,729-bed dorm

Three Universities

Stand-alone issuer

Financials

Challenges

DEPAUL UNIVERSITY UNIVERSITY CENTER OF CHICAGO

10,000-seat Arena

Public-Private Partnership

Complementary Objectives

Made Possible by Mutual Interests

Shared Revenues

DEPAUL UNIVERSITY MCCORMICK PLACE EVENT CENTER

DEPAUL UNIVERSITY MCCORMICK PLACE EVENT CENTER

DEPAUL UNIVERSITY MCCORMICK PLACE EVENT CENTER

ISSUING DEBT

Fixed vs. Variable Rate Tax-Exempt vs. Taxable Duration /Amortization P3s / Indirect Debt Direct Placement/Bank Debt Derivative products Green Bonds Debt / Liquidity policies

RISK STRUCTURE RELATIVE TO DEBT Is there a risk management structure in place?

Buy-in by the organization

Defined risk tolerance or risk appetite

Communicated to the Board

THE “RIGHT” SOLUTION: HOW DO WE DECIDE WHAT’S BEST FOR US?

A RATING AGENCY PERSPECTIVE: KEY BENEFITS OF FINANCIAL POLICIES

• Defines the institution’s philosophies on financial planning and related topics (debt)

• Supports long-term liquidity, financial, and capital budget planning and forecasts

• Requires prioritization and strategic planning

• Provides Board comfort!

• Portfolio rather than transaction approach

• Debt Policy - Quantifies risk tolerance levels (capacity and affordability)

• Rating and cost of capital stability

• Strategic benchmarking to peers

MANAGEMENT AND GOVERNANCE

Governance is a very important factor in evaluation of credit profile Mgt and Gov weighed 10% of the overall Enterprise Profile

assessment, & Financial Mgt Policies weighed 10% of the overall Financial Profile assessment Encompasses the broad range of oversight and direction

conducted by a university's board representatives, executives, and functional managers

Assessment of the effectiveness of management considers:

Strategic competence Operational effectiveness Ability to manage risks

UNIVERSITY OF PITTSBURGH FINANCING THE CAPITAL PLAN

Focus on Fundraising Mastering the donor cultivation cycle; effective stewardship ~ managing long-term relationships Have sufficient resources been invested here? (time, human capital, financial resources) Successful philanthropy can serve as a strategic driver, when compared to other critical challenges

(state support, tuition-increase restrictions)

Judicious Approach to Incremental Debt It’s not “How much debt can we issue?”

CFO’s role: “Can we afford to service the debt?” Examination of all sources of available funding (reserves, state support, fundraising/gifts, external

debt) Balancing act: providing financial flexibility at a relative low cost; maintaining strong credit ratings;

acknowledging strategic priorities

Fiscal Discipline: Managing External Debt Service alongside Internal Debt Service Smoothing the debt service

University internally sets aside annual debt service, removing volatility to operating budget Funded Depreciation Reserve strategy ~ funding plan formalized in FY2006

Sensitivity Analysis with Incremental Debt Financial metrics compared to Rating Agency median ratios

UNIVERSITY OF PITTSBURGH FUNDED DEPRECIATION RESERVE STRATEGY

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FYE2006

FYE2007

FYE2008

FYE2009

FYE2010

FYE2011

FYE2012

FYE2013

FYE2014

FYE2015

FYE2016

FYE2017

FYE2018

FYE2019

FYE2020

FYE2021

Cumulative Spending Funding

Cumulative Funding Balance Spending

FYE 2006 1.0 1.0 FYE 2007 2.0 3.0 FYE 2008 3.0 6.0 FYE 2009 4.0 10.0 FYE 2010 5.0 15.0 FYE 2011 6.0 21.0 FYE 2012 7.0 28.0 FYE 2013 8.0 36.0 FYE 2014 9.0 30.0 (15.0) FYE 2015 10.0 25.0 (15.0) FYE 2016 11.0 21.0 (15.0) FYE 2017 12.0 18.0 (15.0) FYE 2018 13.0 16.0 (15.0) FYE 2019 14.0 15.0 (15.0) FYE 2020 15.0 15.0 (15.0) FYE 2021 16.0 15.0 (16.0)

Dollars in millions

Initial Draw

METRICS & MODELING Six-year financial projections

Key Ratios Available Funds to LT Obligations Available Funds to Expenses Operating Margin

KEY TAKEAWAYS

SOME KEY TAKEAWAYS Mgt & gov, policies & practices are important Communicate, communicate, communicate (with your Board….and

also with your rating agency/ies) Prioritization is critical Remain FLEXIBLE

explore all possibilities & don’t be afraid to be creative Don’t box yourself in – leave room to take advantage of future

opportunities Revenues can change, but debt service (most often) is fixed Continually refresh plan/assumptions

APPENDIX

A RATING AGENCY PERSPECTIVE: DOS & DON’TS

Assessment Definitions

Elements Extremely Strong Strong Vulnerable

Long-term planning policies

Multiyear financial and capital plans exist where future issues are identified along with possible solutions. Well-documented and realistic assumptions support the plans, and the plans are used for drawing up budgets to support a strong commitment to financial discipline. Targets are included in the budget and adhered to consistently.

Multiyear projections are done only informally that lack detail on assumptions and implications. Some assumptions may be optimistic but are recognized as such.

There is an absence of medium-term financial planning, reflecting a short-term approach. The financial strategy is aggressive and based on unrealistic assumptions without clear financial benchmarks.

A RATING AGENCY PERSPECTIVE: DO’S & DON’TS Assessment Definitions

Elements Extremely Strong Strong Vulnerable

Transparency and disclosure policies

Timely and detailed financial reports, possibly regulated by law, on all operating segments exist and are published several times a year. Reports use accrual-based accounting concepts and include both consolidated and segment-level reporting if applicable. No material audit findings or qualifications exist. The effective and integrated use of counting and reporting software provides data as needed on short notice for information and control purposes.

Published reports are produced once a year. Both accrual and cash-based elements may exist. The report is independently audited, and only minor qualifications exist. Data for reporting and control analysis exists periodically, but requires significant resources to generate.

Financial reporting is basic and incomplete. It may be communicated with material delays. Accounting standards are limited or unclear. An audit does not exist or has significant findings.

Investment management policies

There is a well-defined long-term investment policy with asset allocation targets that are appropriate to the university’s liabilities, investment office sophistication, and potential capital needs. Actual accomplishments against declared investment policies are followed up consistently.

There is a formal investment policy; however, the asset allocation targets are aggressive or concentrated such that there is increased risk, or there is an informal investment policy

There is no investment policy. If there is one, the policy is more aggressive than that of peer universities, and there is some significant concentration in the asset allocation.

A RATING AGENCY PERSPECTIVE: DOS & DON’TS… Assessment Definitions

Elements Extremely Strong Strong Vulnerable

Reserve and liquidity policies

A well-defined, formal operating reserve and liquidity policy exists. The policy links reserve levels to cash flow needs. Management has historically adhered to the policy and is expected to continue to do so. Cash and debt management functions are centralized and integrated.

A reserve policy exists, but it may be less formal or the level has less connection to the university’s unique characteristics. The university has historically adhered to the policy. Cash management is less centralized and may not be integrated with debt management.

No reserve or liquidity policies exist, or if they do, they are not followed. Cash management is highly decentralized.

Debt management policies

A debt management policy with well-prescribed debt limits exists. The policy dictates that long-term debt is used only for capital expenditures. The policy is detailed, actively monitored, and risk-averse. If derivatives are allowed, detailed policies prudently limit their uses.

A basic policy exists and includes provisions that long-term debt be used for capital expenditures and refinancing of long-term borrowings. Derivatives are only used for hedging purposes.

No effective policies exist. The university uses long-term debt to cover liquidity needs and regularly breaches debt limits. Debt management is aggressive, or derivatives are used for speculative purposes.