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Policies and Procedures

Policy 801 – University Debt

June 15, 2001
Last Updated
July 27, 2011
Responsible University Officer
Director of Treasury and Risk Management Services
Responsible Unit
Treasury and Risk Management Services

Policy Statement

To fulfill its mission, the University of North Carolina at Chapel Hill (“University”) will need to make ongoing strategic capital investments, driving capital decisions that impact the University’s credit. Appropriate financial leverage serves a useful role and should be considered a long-term component of the University’s balance sheet. Just as investments represent an integral component of the University’s assets, debt is viewed to be a continuing component of the University’s liabilities. Debt, especially tax-exempt debt, provides a low cost source of capital with which the University can fund capital investments to achieve its mission and strategic objectives.

The debt objectives listed below, combined with management judgment, provide the framework by which decisions will be made regarding the use and management of debt. The debt policy and objectives are subject to re-evaluation and change over time.


    • Identify projects eligible for debt financing. Using debt to fund mission-critical projects will ensure that debt capacity is optimally used to fulfill the University’s mission. Projects related to the core mission will be prioritized for debt financing; projects with associated revenues will receive priority consideration as well.
    • Maintain the University’s favorable access to capital. Management’s determination of the timing of capital projects will not be compromised by the University’s access to capital sources, including debt. Management will utilize and issue debt in order to ensure timely access to capital.
    • Limit risk of the University’s debt portfolio. The University will manage debt on a portfolio, rather than a transactional or project-specific basis. The University’s continuing objective to achieve the lowest cost of capital will be balanced with the goal of limiting exposure to market shifts.
    • Manage and maintain the highest acceptable credit rating. Maintenance of this credit rating will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting its strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit with the bond rating agencies; however, the attainment or maintenance of a specific rating is not an objective of this policy.

Debt Strategies

For the University to achieve the above objectives, it will adopt debt strategies and procedures relating to both the external and the internal management of debt and interest. These strategies are to be reviewed and reassessed periodically by management.

1. Mission-based Capital Planning

Management will allocate the use of debt financing within the University to include the prioritization of debt resources among all uses, including plant and equipment financing, academic projects, and projects with University-wide impact. Generally, the following guidelines will be used, although they are not intended to be all-inclusive.

    • Only projects that relate to the mission of the University, directly or indirectly, will be considered for debt financing.
    • A project that has a related revenue stream or can create budgetary savings will receive priority consideration. Every project considered for financing must have a defined, supportable plan of costs approved by management.
    • State funding and philanthropy are expected to remain major sources of financing for the University’s plant investments. In assessing the possible use of debt, all other financing and revenue sources will be considered. State appropriations/bonds, philanthropy, project-generating revenues, research facilities and administration cost reimbursement, expendable reserves, and other sources are expected to finance a portion of the cost of a project. Debt is to be used conservatively and strategically.
    • The University will consider other funding opportunities (e.g., joint ventures, real estate development, etc.) when appropriate and advantageous to the University. Opportunities and financing sources will be evaluated within the context of the Debt Policy.
    • Federal research projects will receive priority consideration for external debt financing due to partial reimbursement of operating expenses (including the interest component of applicable debt service) of research facilities.

2. Core Ratios

The University will establish guidelines for overall debt using a select number of financial ratios. These ratios will be derived from the financial statements, and should be consistent with some of the measures used by the marketplace. The rations will guide capital planning and ensure central oversight of University-wide leverage levels. They will be calculated and reported annually, in addition to when new debt is issued, and will be revised to reflect any changes in accounting standards.

    • The first ratio is the Expendable Resources to Debt Ratio. This is a balance sheet measure that determines the number of times debt is covered by unrestricted and expendable net assets of the University.

The formula for this ratio is:


The Expendable Resources to Debt Ratio indicates one of the key determinants of near to medium term financial health by measuring the availability of intermediate-term funds to cover debt should the University be required to repay all its outstanding obligations. Although numerous balance sheet measures exist, this ratio is the most appropriate and utilized by the marketplace and credit analysts to evaluate leverage versus funds that could be expended by the University.

The target ratio is established to maintain the University’s comparative debt coverage level among peer institutions and provide sufficient buffer against possible declines in coverage from decreases in quasi endowment and temporary investment pool balances. The ratio is also a key determinant of the University’s credit rating. The guideline for this ratio is to be no less than 1.5 times coverage.

1 Excludes EPA.

    • The second ratio is the Statement of Activities Ratio. This is an income statement measure that determines the percentage of debt to operations.

The formula for this ratio is:


This ratio measures the University’s ability to repay debt service associated with all outstanding debt and the impact on the overall budget. The target for this ratio is intended to maintain the University’s long-term operating flexibility to fund new initiatives.

The measure is based on aggregate expenses as opposed to revenues because expenses typically are more stable and better reflect the operating size of the University. Management recognizes that a growing expense base would make this ratio appear more attractive. The guideline for this ratio is not to be greater than 4.0%. If more than 4.0% of the University’s annual budget were committed to debt service expense, flexibility to devote resources to fund other objectives could be reduced.

3. Financial Instruments

Under the guidance of the Division of Finance and Administration (F&A), the University will pool debt, and, in doing so, manage debt on a portfolio basis to minimize cost and manage volatility. This seeks to provide the University with access to appropriate financing sources, including debt and liability management strategies based on borrowing and portfolio management needs. Some of the financial instruments used in this strategy follow:

    • Tax Exempt Debt

The University recognizes the benefits associated with tax-exempt debt, and therefore will manage the tax-exempt portfolio to maximize the portion of tax-exempt debt outstanding under the Debt Policy.

    • Commercial Paper

The University recognizes that a commercial paper (CP) program can provide low-cost working capital and provide bridge financing for projects; however, as with other debt structures, the level of CP outstanding impacts the University’s overall debt capacity.

Commercial paper can provide the University with interim financing for projects before gifts are received or in anticipation of an external bond issue. Project-related CP provides the Central Bank (see Debt Strategies – External and Internal Debt Repayment) with an easily accessible low-cost source of funding to manage its cash balances and provide continuous access to capital to the divisions, regardless of whether an external financing is imminent. Project-related CP will be treated as any other form of debt and subject to the Debt Policy guidelines.

    • Taxable Debt

The University will manage its debt portfolio to minimize its taxable component. Unlike tax-exempt debt, taxable debt will not be considered a perpetual component of the University’s liabilities. Taxable debt will be utilized to fund projects ineligible for tax-exempt financing or for those projects for which the University wants to preserve maximum operating flexibility; however, the University will manage its overall debt portfolio and total financing sources in order to minimize (or eliminate) the need for taxable debt. Periodically and when any new debt is issued, the University will determine its aggregate taxable needs and manage the taxable debt portfolio, if any, based on the aggregate need and desired flexibility.

    • Interest Rate Swaps

The use of swaps will be employed primarily to manage the University’s variable rate exposure. The University will utilize a framework to evaluate potential derivative instruments through evaluation of its variable rate allocation, market and interest rate conditions, and the compensation for undertaking counterparty exposure. In addition, the University will incorporate the cost/benefit of any derivative instrument. Under no circumstances will a derivative transaction be utilized that is not fully understood by the University or that imposes inappropriate risk on the University.

    • Fixed Reverse Variable Allocation

Due to the financing flexibility and typically low interest cost associated with variable rate debt, it is desirable to maintain a portion of the University’s aggregate debt on a floating rate basis. However, variable rate debt also introduces volatility to the University’s debt service obligations. Therefore, the University will balance the mix of variable and fixed rate debt according to a target guideline of up to 50% variable, although the actual percentage for debt outstanding will fluctuate from time-to-time due in part to financing needs, utilization of the commercial paper program, and prevailing market interest rates.

4. External and Internal Debt Repayment

The University will use the following strategies to de-link external and internal debt repayment.

    • Finance and Administration as a Central Bank

Since it is acknowledged that debt will remain a perpetual component of the University’s capitalization and will be managed by the Division of Finance and Administration (F&A), the Office of Assistant Vice Chancellor for Finance and Accounting will structure transactions, provide funds and develop repayment schedules for individual units. In this regard, F&A is viewed as a central bank for financing of projects for and across divisions. The University will pool all debt and act as a central source of funds that borrows from the markets and receives capital funds from other sources and makes funds available to the divisions to achieve their objectives.

As mentioned above, debt will remain a long-term component of the University’s balance sheet and division leaders will seek funding for projects from the central bank subject to the debt policy. Deans and Vice Chancellors are not concerned about the source of funds to finance their projects; they are interested in the access to capital, the project ranking criteria, the impact on the current budget, and the predictability of future payments. Therefore, it is desirable to decouple the source of financing (e.g., prevailing fixed or variable rates, synthetic debt, etc) from the use of funds to finance capital projects to the greatest extent possible. Project financing decisions will be made based on the Mission Based Capital Planning strategy continued in the Debt Policy, and not based on the timing of specific transactions.

    • Single University-wide Interest Rate – Blended Rate

The University will charge a single interest rate for loaned proceeds regardless of use or source. The single University-wide rate will be adjusted periodically based on the University’s blended cost of capital on all external debt.

The blended interest rate will achieve the following objectives:

1. Provide a consistent source of capital to divisions with a predictable and consistent cost of capital. A single interest rate for divisions will make year-to-year budgeting easier for the divisions, since the cost of capital is established at the beginning of the year and is somewhat insulated from changes in market interest rates.

2. Align the interests of the University with the divisions. Since debt will be managed on a portfolio basis under debt policy guidelines, transactions will be structured to benefit the entire University, which will benefit the blended rate charged to all divisions.

3. Timing of borrowing for projects will not impact the rate borne by the division. The University will time and pool debt issuance for multiple projects to achieve the most economic transactions.

The blended interest rate will be influenced by a number of factors:

1. Any savings derived from refinancing of existing debt will lower the blended rate, benefiting all borrowers.

2. For purposes of the University’s variable rate debt, the blended rate will assume a variable rate based on a multi-year moving average of the University’s external short-term borrowing cost.

3. The University may elect to reserve funds collected in order to minimize year-to-year adjustments in the blended rate. The University’s current blended rate is 5.03%.

Reason for Policy

The University’s strategic and capital planning is a long-term process that is continuously reevaluated. The University’s Facilities Profile and 10-Year Capital Plan recognizes the need for additional academic and student life facilities to keep pace with programmatic expansion. To achieve the plan, the University has and will utilize a mix of funding sources including State funds (bonds and appropriations), University bonds, internal reserves, and philanthropy.

To ensure the appropriate mix of funding sources is utilized, the University periodically reviews this debt policy. This policy is continuously used by management as a tool to evaluate the University’s organizational and capital funding structure, the appropriate use of leverage, and internal lending mechanisms. Maintaining the debt policy is a long-term process, occasionally involving the issuance of debt.



Special Situations



  • None

Additional Information

Frequently Asked Questions


Related Data

The source of the following related data is UNC Facilities Planning and Construction:

Capital Improvement Process
Flowchart: Internal Capital Improvement Process
New Project Funding Forms

Funding Plan Review Process and Other Considerations

Flowchart: External Capital Improvement Process


University Debt Policy Treasury Services 919-843-7803 919-962-4140
Facilities Planning and Construction Capital Program Controller 919-843-2630 919-962-9103


July 27, 2011: Taxable Debt section updated.
April 19, 2010
January 1, 2006