Debt Policy

Operations and General Administration

Responsibility: Associate Vice-President, Financial Services
Authorization: Board of Governors
Approval Date: May 1, 2016

Purpose

The purpose of this policy is to provide a framework for the overall capitalization of the University of Saskatchewan (aligning external debt, internal loans, and investments). The policy also establishes the financial measures and procedures that will be used to monitor the financial impact on the university and to ensure the overall level of risk does not exceed acceptable levels.

Principles

This policy is founded on the following guiding principles:

  • Holistic view of capitalization of the university which includes external debt, internal loans and investments
  • Capital debt is a resource that can advance the success and sustainability of the university
  • Capacity to borrow and affordability is determined by the university’s ability to repay obligations
  • Affordability – debt shall not be incurred unless the university is able to service the debt through operating activities recognizing strength of net income and cash flows
  • Debt capacity – debt shall not be incurred unless the university is capable to leverage the debt funding relative to the net assets of the university

Scope of this policy

The scope of this policy shall include all funds within the university’s consolidated financial statements including, for example, all colleges, centres, administrative units, and associated companies of the university.  Associated companies shall not incur debt without first obtaining approval from the Board of Governors of the university.  Individual colleges, centres, and administrative units are not legal entities and are not permitted to borrow funds without the approval of the Board of Governors.

Policy


External Debt

Capital debt is a resource that can advance the success and sustainability of the university.  The strategic use of debt must be aligned with the university’s investment policies to manage the overall cost of capital and limit the exposure to risk.   Accordingly, long-term debt will only be incurred to support capital projects that maintain, enhance or create physical assets.  In the case of amortizing debt it shall be amortized with annual principal repayments.  In the case of non-amortizing debt, the university will voluntarily establish a sinking fund for the repayment of principal owing at, or before, the end of the term.

Sinking funds will be established in accordance with the university’s investment policy.  Investment returns on the sinking fund will be reinvested into the sinking fund balance.  The sinking fund balance shall be considered a reduction of the outstanding balance of long-term debt.
 
Interest rate swap agreements may be used to manage the mix between floating and fixed rates on the university’s debt, in accordance with the policy on derivatives.

Internal Loans

Organizational units are expected to manage unit expenditures within limits specified by their approved operating budget or as specified by other revenue sources for those activities where a budget has not been approved. There may be circumstances where expenditures for capital in a given year exceed the funds available to the organizational unit. A mechanism is required whereby units can finance capital purchases and still operate within authorized expenditure limits.  The university may provide financing via a loan arrangement to a college, centre, administrative unit or subsidiary companies to support capital projects that maintain, enhance or create physical assets with authorization of the Board of Governors.  Internal loans will only be provided for capital projects exceeding $500,000.

Metrics

Metrics are targets established to manage debt and guide decisions related to incurring new debt.  They represent one criteria to be used by the university in addition to other criteria related to the achievement of the university’s mission, evaluation of risk, and the projected returns associated with projects being financed.  Established metrics are based on:

  • the university’s ability to repay the debt obligations
  • assurance that the debt does not burden the operating budget
  • assurance that the university has capacity for debt funding relative to net assets. 

The following metrics have been developed to guide decisions concerning the university’s capacity for additional debt and the affordability to service the debt:


Metric Definition and Formula Threshold
INTEREST COVERAGE RATIO

Excess revenues over expenses + interest expense + amortization


Interest expense

>2.5X
EBT SERVICE COVERAGE RATIO

Excess revenues over expenses + interest expense + amortization


Principal payment + interest expense

>1.25X
UNFUNDED INTEREST AFFORDABILITY

Interest expense funded by operating fund (unfunded interest expense)


Total operating fund expense

<3%
EXPENDABLE RESOURCES TO NET DEBT

Net unrestricted assets + internally restricted assets + employee future benefits liability (expendable resources)


Total debt - sinding fund balances

≥ 1.0X

Responsibilities

Approvals

External Debt

Board of Governors approval is required for all external debt.  Approval must also be obtained from the Lieutenant Governor in Council in accordance with the University of Saskatchewan Act, 1995 before any external debt can be incurred by the university.

Internal Loans

The Provost Committee on Integrated Planning (PCIP) and Board of Governors approval is required for internal loans in excess of $500,000. 

Reporting

The Treasurer shall report at least annually to the Board of Governors on the debt position of the university including established debt metrics and sinking fund value.

Procedures

External Debt

Proposals to obtain external debt must be submitted to the Provost’s Committee on Integrated Planning (PCIP) with a supporting business case.  If approved by PCIP, requests shall be forwarded to the Board of Governors for approval.  Evaluation of proposals shall include consideration of the impact of new debt on the metrics established within this policy and identification of the source of repayment.

Internal Loans

Colleges, centres, administrative units or subsidiary companies may request internal financing for equipment and other capital projects greater than $500,000.  Interest charged on internal loans shall compensate for the opportunity cost of lost investment revenue and rates will be set according to the following:

  • Bank Prime Rate plus 1%
  • Rate adjusted annually at May 1

Proposals to obtain an internal loan must be submitted to Financial Services with a supporting business case which will include a loan repayment plan.  After review by Financial Services, applications will be forwarded to the Board of Governors for approval after receiving approval from PCIP.

(With the approval of this Debt Policy, the following policies were rescinded: Capital Debt, Internal Loan.)

Related Documents

There are no other documents associated with this policy.

Contact Information

Contact Person: Heather Fortosky, Treasurer and Director of Pensions, Finalnial Services
Email: heather.fortosky@usask.ca
Phone: 306-966-6276