University System of Maryland Maintains Strong Debt Ratings as USM Issues $115 Million in Revenue Bonds to Finance Capital Projects
Baltimore, Md. (Feb. 11, 2019) – The University System of Maryland (USM) has auctioned $115M in revenue bonds to finance ongoing capital projects at institutions across the state while maintaining strong ratings from the nation’s three primary-bond rating agencies.
The USM issues debt each year to fund one year’s worth of expected spending on capital projects that the Board of Regents authorizes. At any point in time, there is a pool of 70 to 80 capital projects with unspent authorizations totaling more than $250M, meaning that the USM will be required to issue additional revenue bonds sometime in 2020 to fund the remainder of already-approved capital projects.
Significantly, the USM realized $6 million in reduced interest costs than had been initially projected by the system’s financial advisors, Public Financial Management (PFM). The $6M savings occurred through a reduction in true interest costs (TIC) by 25 basis points (or one-quarter of 1 percent.) The auction resulted in an actual true interest cost of 2.90%, 25 basis points lower than the projected 3.15% rate.
(The TIC is a measure of financing cost that takes into account the actual cost of issuing a bond and the sale-price premium bond purchasers were willing to pay for USM bonds. A lower TIC represents a cost savings to the institution issuing a bond, since the institution will owe a reduced amount of interest owed to bondholders.)
The three primary bond-rating agencies reaffirmed the system’s bond ratings. Each rating was only one level down from the highest possible grade of AAA, with a "stable" outlook, in part due to analysts’ confidence in the quality of leadership and management across the system. For this series of bonds, USM has again received high ratings of AA+ from Fitch ratings, Aa1 from Moody's Investor Services, and AA+ from Standard & Poor's.
“The USM's effectiveness in maintaining such sound fiscal operations has the direct result of true savings that benefit our students and state taxpayers," said USM Chancellor Robert L. Caret. "It is rewarding to receive this affirmation from the nation's principal bond-ratings agencies, and a positive reflection on the stewardship of the Board of Regents, campus presidents, and USM finance staff.”
In addition, the USM also auctioned $38M of revenue bonds issued to refinance almost $45M of revenue bonds originally issued in 2009 under the Federal Build America Bonds program.
Build America Bonds were part of the 2009 American Recovery and Reinvestment Act, or ARRA, under which not-for-profit issuers of debt could issue taxable bonds and receive a 35% interest subsidy from the federal government. The refinancing component of the bond sale was sold at a true interest cost of 2.06%, producing “present value” savings on future debt service of more than 10% of the refinanced debt.
The favorable interest rates achieved through the auction of USM revenue bonds is in large measure a reflection of strong and disciplined leadership on the part of the Board of Regents and Chancellor, and the difficult day-to-day work of university presidents and management to operate campuses in an environment of fiscal responsibility and accountability.
The strong ratings are especially impressive in the context of a broader economic climate nationally that has challenged colleges and universities in recent years.
The USM benefits from an effective partnership with the administration of Gov. Larry Hogan and the Maryland General Assembly.
The state's support of the USM's mission as a system of public higher education has resulted in affordable tuition, support of key initiatives, and construction of important capital improvement projects on campuses to support current students and attract prospective students.
A team of executives from USM’s Department of Finance and Administration, headed by recently appointed Vice Chancellor Ellen Herbst and a leadership team in the USM controller’s office that includes Bob Page, Celeste Denson, and Samantha Norris, prepares extensively to demonstrate USM’s stable financial management in meetings with the bond ratings agencies in New York’s financial district.
The responsible management of financial resources helps the USM to pursue its core missions in teaching and research.
Contact: Mike Lurie