USM Legislative Testimony

Response to DLS USMO Issues & Recommendations

The Chancellor should comment on how USM plans to improve its credit outlook, including increasing the unrestricted fund balance.

USM Response:

The System is facing a significant challenge over the next decade in providing facilities to accommodate the significant growth in enrollment, as well as maintaining current facilities at minimally acceptable standards. To meet the funding need for the capital budget required for these
facilities, while not compromising the financial health of its institutions, the System must issue prudent amounts of debt each year.  A high bond rating ensures that interest costs on borrowing remain relatively low, and represents an external and objective market assessment of the state of the
System's fiscal condition.  Like the State of Maryland, the System places a high degree of importance on maintaining its bond rating.

Tight fiscal times place pressure on the rating agencies primary benchmark of maintaining available resources at a minimum of 50% of outstanding debt. The System has as a goal to increase the fund balance by an amount equal to 1% of the State Supported appropriation.

After taking the $29 million fund balance reduction to close the state's FY 2003 budget gap the USM's net increase in fund balance was $11.2 million. In FY 2004 the two year combined reduction in state funding of $122 million increased the challenge on the system to maintain its bond rating. The institutions were compelled to make extreme reductions in spending and increase tuition in order to maintain the fund balance at an acceptable level relative to outstanding debt.

The System has adopted a five year goal of increasing the ratio of unrestricted fund balances to outstanding debt from the current 54% to 65%. This plan involves moderate steps to increase unrestricted fund balances while at the same time reducing annual debt issuance each year.

Our plan is to be re-evaluated annually, and changes in the plan may be required in response to events outside of the System's control (investment returns for example).  The System has already reduced the planned level of debt issuance significantly from about $90 million per year to $65 million per year, in response to the reduction in fund balance during FY 2002.   It is believed that further reductions in the debt issuance plans will impair the System's ability to accommodate planned enrollment growth, or maintain its facilities at minimal levels.  As a result, the emphasis of the plan is to also increase the System's available resources, through planned or budgeted increased in unrestricted fund balances.