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Business Officer Magazine

Sessions Review Risks and Returns of Capital Projects

This bonus coverage of the NACUBO 2010 Annual Meeting centers on two presentations about working capital. One session advised on attractive partnerships for completing construction projects, while the other outlined a tiered approach to managing capital—from the standpoints of risk and return, cost and rewards, and liquidity. For comprehensive coverage of the 2010 annual meeting in San Francisco, see the October issue of Business Officer.

Create Capital Projects With Private-Sector Partners

Working with outsourcing partners to complete capital projects is an attractive option for 501(c)(3) institutions. Such relationships enable universities to finance projects while avoiding any impact to their credit rating. Depending on the terms of an agreement, private entities will bear the responsibility of future maintenance, thereby removing the risk of deferred maintenance. In the session “Enhance Operations and Save Money: Creating Successful Partnerships With the Private Sector,” presenters from KPMG, Meridiam Infrastructure, and Capstone Development Corp. also explained that when using a DBFOM (Design Build Finance Operate Maintain option), many of the other long-term risks related to a capital project fall to the private-sector partner as well.

Success story at SRU. The staff at Slippery Rock University, Slippery Rock, Pennsylvania, used the public-private partnership (P3) model to replace a 2,300-bed dormitory with residential suites. Not only was the construction process very fast compared to state-only construction, but the success of the partnership is evident in the 1,000-student gain in enrollment over a four-year span.

Increased retention rates are due in part to new air-conditioned accommodations, with semiprivate baths instead of hall bathrooms. Such amenities better meet 21st-century student expectations. The P3 capital improvements also facilitated new lifelong learning institutes, which are housing units arranged by academic discipline to reinforce academic programs.

Learn your lessons. The presenters provided some pointers based on the various projects included in the P3 process. Among them were these:

  • Carefully define objectives at the outset.
  • Consider transferring the risk of building and operations to a third party; this can lead to significant value.
  • Work with your private-sector partner to identify best-in-class developers who will compete for a new project, yielding the most innovative design options possible.
  • Realize that the level of experience of the team and the personalities of the contractors chosen by the developer can influence project outcomes.

Rainy-Day Finance

On the topic of “Managing Working Capital Risk and Return,” presenters Joseph Trainor, senior vice president for finance, chief financial officer, and treasurer, University of the Sciences in Philadelphia; and Mark Wetzel, president of Fiduciary Investment Advisors, suggested that to dismiss 2008 to 2010 as an aberration of market performance would be a due-diligence mistake. Risks are real and are here to stay, they noted, and failing to recognize the warning flags can take an unfortunate toll on the day-to-day financing of institution operations.

Trainor and Wetzel walked attendees through a tiered approach to managing working and long-term capital, offering tips for understanding the relationship between risk and returns, cost and rewards, and liquidity within the context of cash cycles, marketplace options, concentration risks, and organizational objectives. In broad strokes, chief financial officers and their staffs should consider the following implementation and operational objectives:

For operating cash

  • Develop a working-capital investment policy.
  • Develop a 12-month rolling cash-flow forecast.
  • Prepare weekly cash flash reports to monitor cycles, spikes, opportunities, and risks.
  • Research and understand the factors affecting risks and returns, considering the effects with and without compensating balances and money market, not-for-profit, and sweep accounts.
  • Evaluate the trade-offs between or among administration, internal control, net yield, liquidity, debt covenants, risk tolerance, collateral, and safety.
  • Integrate working-capital solutions to be consistent with your institutional needs.

For reserve cash

  • Build upon a 12-month cash forecast.
  • Leverage fall and spring receipts with funding needs for summer, capital, and debt service.

For restricted and strategic cash, finance staff would do well to ask these questions:

  • What are the purposes for these funds?
  • Does our investment timeline match utilization needs?
  • Is our investment earnings budget too optimistic?
  • Should equities be part of our investment strategy?
  • What happens if earnings are negative for the fiscal year?
  • What if the corpus is eroded or illiquid when project funding is needed?

At the end of the day, said Trainor and Wetzel, the optimal strategy is to manage your risks and maintain an ongoing evaluation of liquidity needs and return goals.

Business Officer Plus