BOV-010: Liquidity ManagementDate: 11/13/2015 Status: Final
The University desires to establish a liquidity management policy that documents its liquidity management practices.
There are no terms that require definition.
WHEREAS, the University manages its liquidity to provide for sufficient cash flow to support operations, satisfy the remarketing risk for its putable debt, and support its credit ratings; and
WHEREAS, the University wishes to formalize its liquidity management approach and establish parameters under which it manages its liquidity; and
WHEREAS, Chapter 9, Title 23 of the Code of Virginia of 1950, as amended (the "Virginia Code"), establishes a public corporation under the name and style of The Rector and Visitors of the University of Virginia (the "University") which is governed by a Board of Visitors (the "Board"); and
WHEREAS, Title 23 of the Virginia Code classifies the University as an educational institution of the Commonwealth of Virginia; and
WHEREAS, by Chapter 4.10, Title 23 of the Virginia Code (as amended, the "Act"), the University entered into a management agreement with the Commonwealth of Virginia which was enacted as Chapter 3 of Chapter 933 of the 2006 Virginia Acts of Assembly, which, as amended, classifies the University as a public institution of higher education and empowers the University with the authority to undertake and implement the acquisition of any interest in land, including improvements on the acquired land at the time of acquisition, new construction, improvements or renovations and to borrow money and make, issue, and sell bonds of the University for such purposes, including the refinancing of any such facilities; and
WHEREAS, the Act further authorizes the University to provide for the payment of the principal of and the interest on any bonds from any one or more of the following sources: (i) its revenues generally; (ii) income and revenues derived from the operation, sale, or lease of a particular project or projects, whether or not they are financed or refinanced from the proceeds of such bonds, notes, or other obligations; (iii) funds realized from the enforcement of security interests or other liens or obligations securing such bonds, notes, or other obligations; (iv) proceeds from the sale of bonds, notes, or other obligations; (v) payments under letters of credit, policies of municipal bond insurance, guarantees, or other credit enhancements; (vi) any reserve or sinking funds created to secure such payment; (vii) accounts receivable of the University; or (viii) other available funds of the University; and
WHEREAS, the University intends to utilize operating lines of credit as a source of back-up liquidity to support the general operations of the University; and
WHEREAS, the Board of Visitors anticipates that the operating lines of credit will be secured by a general revenue pledge of the University and not be in any way a debt of the Commonwealth of Virginia (the "Commonwealth") and shall not create or constitute any indebtedness or obligation of the Commonwealth, either legal, moral, or otherwise;
RESOLVED, the Board of Visitors approves the University’s Liquidity Policy, presented as an Appendix; and
RESOLVED FURTHER, the Board of Visitors authorizes the University’s Executive Vice President & Chief Operating Officer to enter into up to $300 million of lines of credit with one or more financial institutions; and
RESOLVED FURTHER, the President of the University or the Executive Vice President and Chief Operating Officer of the University is hereby authorized to negotiate, execute, and deliver certain documents related to the operating lines of credit; and
RESOLVED FURTHER, all acts of all officers of the University which are in conformity with the purposes and intent of this Resolution and in carrying out the plans presented at this meeting are ratified, approved, and affirmed.
University of Virginia
Liquidity Management Policy
November 13, 2015
Table of Contents
- Scope and Objectives
- Liquidity Management
- Risk Management
This policy documents the University of Virginia’s liquidity management guidelines. Within the context of this document, liquidity is defined as cash and cash equivalents, access to cash, and the convertibility of assets to cash in order to meet operating and financial needs during the operating cycle.
Liquidity risk is defined as an inability to meet payment obligations in a timely manner when they become due and the risk that assets may not be convertible into cash when needed. Liquidity risk is categorized into three risk types:
• Operating liquidity risk occurs when the University cannot fund its operating expenses due to insufficient liquid cash holdings.
• Financing liquidity risk occurs as a result of external financing activities and the potential for those financings to come due before maturity (e.g., commercial paper, putable debt, credit lines)
• Market liquidity risk occurs when the University is unable to convert assets into cash without significant losses.
This policy serves an important governance function by providing a framework to define liquidity, establishing and assigning responsibilities for managing the institution’s liquidity needs, evaluating the appropriate level of liquidity for the institution, and outlining sources of liquidity and procedures to access liquidity when needed. The objectives of this policy are to:
- Outline the University’s philosophy on liquidity management
- Establish a control framework for managing liquidity
- Establish liquidity management guidelines
The liquidity policy is meant to work in tandem with the University’s Board-approved Debt Policy, Working Capital Investment Policy, and Interest Rate Risk Management Policy.
II. Scope and Objectives
The policy governs University-wide liquidity management, including the Academic Divisions and the Medical Center. The policy does not govern liquidity management at University-affiliated foundations, including the University of Virginia Investment Management Company (“UVIMCO”).
The policy exists to provide a framework under which the University seeks to achieve its liquidity management goals. The goals include providing sufficient liquidity to support the:
- cash flow needs of the annual operating cycle
- remarketing risk for the University’s putable debt
- University’s credit ratings
The Office of the Executive Vice President and Chief Operating Officer (“EVP & COO”) is responsible for implementing this policy and all liquidity activity for the University. This policy and any subsequent, material changes to the policy will be approved by the University’s Board of Visitors.
The University’s Office of the Treasurer manages liquidity and works in close coordination with the Medical Center and the UVIMCO to manage liquidity and associated risks.
The University meets periodically with UVIMCO to review the policy and ask that they assist in stress testing periodically
IV. Liquidity Management
Liquidity Sources and Uses
The Office of the Treasurer manages liquidity to ensure access to sufficient cash during normal and stressed liquidity conditions. The University meets those needs with a combination of internal and external liquidity. The University categorizes liquidity sources as committed or uncommitted. Committed funding represents funding available to the University (e.g., cash and short term investments) as well as external funding sources where the provider has committed to providing funding, regardless of circumstance (e.g., bank lines of credit). Uncommitted funding are sources of liquidity that where the provider is under no commitment to fund (e.g., commercial paper buyers).
The University’s liquidity sources include the following:
• Operating revenues
• Cash and liquid investment balances
• Commercial Paper
• Operating Credit Lines
• Dedicated Credit Lines supporting putable debt
Liquidity is primarily used to satisfy (1) operating expenses, and (2) non-operating, episodic needs. Non-operating needs may include irregular investment or financing needs. Episodic needs may also include unplanned stresses to operating revenues or expenses. Liquidity uses include both operating and funding needs, such as:
• Operating expenses
• Planned debt service
• Unplanned putable debt maturities
Days Cash on Hand
Liquidity accessible within one month divided by daily operating expenses: Target >= 180 days
Day’s cash on hand (“DCH”) is a measure of the University’s contingent liquidity. It measures how many days of operating expense an entity can support with its liquidity. DCH is defined as liquidity accessible within one month divided by daily operating expenses.
DCH is one of the metrics measured by the rating agencies and the University seeks to target a level of DCH that supports operations, in addition to supporting ratings goals.
Daily Liquidity as a Percent of Variable Rate Debt
Cash and liquidity divided by outstanding putable debt: Target >=1.5x
While having putable debt outstanding, the University will maintain sufficient unrestricted liquid investments and/or sources of liquidity satisfactory to the rating agencies for maintaining the highest debt ratings. Unrestricted sources of liquidity may be modified and/or replaced during the life of the putable debt in such ways that are satisfactory to the rating agencies and the University and that are within debt document parameters.
Spendable Cash and Investments / Operating Expense:
The sum of spendable cash and investments divided by annual operating expense: Target >= 2.0x
This ratio is a measure of total university spendable assets, without regard for the liquidity of the assets, divided by annual operating expense. This ratio assesses the financial strength of the University and provides a measure of “gross coverage” for operating expenses. It also seeks to eliminate some items that may skew a net assets coverage ratio (such as pension liabilities).
V. Risk Management
Monitoring and Reporting
The Office of the Treasurer is responsible for managing the daily cash position of the University, performing cash flow forecasting and variance analyses, and working with University units to monitor aggregate institutional liquidity.
The key liquidity reports to University senior management include:
Treasury Report - On a monthly basis, Treasury prepares a report that highlights, among other things, cash and investment holdings as well as liquidity ratios.
Liquidity Scorecard - The University produces a quarterly report that lists the following items:
• sources and uses under normal and stressed environments
• stress tests
• liquidity ratios
Cash Flow Forecast - Annually, the Treasury Department develops a monthly cash flow forecast for the coming year. This report is used to project and manage cash flows throughout the year and support operating cash flow decisions.
The reports listed here may be amended from time to time as needed at the discretion of the EVP/COO.
Liquidity Source Diversification
The University attempts to diversify its various sources of liquidity. Diversification is sought by liquidity type (e.g., cash, bank lines, commercial paper) and by counterparty (e.g., operating bank lines with several counterparties, commercial paper issued by more than one dealer).
Diversification of cash and investments is obtained according to the diversification guidelines in the University’s Working Capital Investment Policy and UVIMCO’s Investment Policy Statement
Triggers are intended to provide warning signs of events that could adversely impact the University’s liquidity. The occurrence of a trigger will be brought to the attention of the EVP/COO and result in the development of a risk mitigation plan, if necessary. Triggers include, but are not limited to:
• material changes in committed or uncommitted liquidity sources
• significant deviation from target cash balance of $100mm
• credit ratings pressure resulting from liquidity ratios
• difficulty remarketing putable debt
• stress on distributions or available distributions from UVIMCO
• stress on capital and bank markets affecting the ability to draw on operating lines or issue CP
• a drop in a counterparty’s ratings
• material changes in the liquidity profile of UVIMCO’s short-term or long-term pools
Reference: Liquidity Management Policy and Authorization to Enter Into Operating Lines of Credit, BOV Minutes dated November 12-13, 2015, pgs. 9914 – 9916, Appendix.