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Business Officer Magazine
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Evaluating Risks, Relationships

Sessions in this track presented the latest on endowment management, liquidity targets, debt policies, and risk assessment.

Managing Debt

"Just as having brakes allows cars to go faster, best practices allow institutions to strategically move ahead at a rapid pace when necessary," said Mary Peloquin-Dodd, managing director at Standard & Poor's (S&P). She, along with Louis Mayer, vice president for financial affairs and treasurer at Saint Joseph's University, Philadelphia, and Timothy Slottow, executive vice president and chief financial officer for the University of Michigan, conducted a panel discussion on the strategic management of debt by colleges and universities.

The financial crisis in 2008 prompted many institutions to undertake steps to ensure that the risks associated with their debt were being adequately addressed. At the University of Michigan, management was already dealing with problems arising from declining state appropriations, rapidly increasing health-care and energy costs, and high demand for new capital projects. As a result, the university already had a number of policies and processes in place to assess its long- and short-term financial position. 

Until 2010, Saint Joseph's University had never undergone a rating of its bonds. Its debt portfolio was heavily weighted in variable rate demand bonds that could significantly impact liquidity in the event of large puts. To minimize this risk, the university restructured its debt, reducing its put risk from 84 percent to 16 percent. It also implemented
a number of new policies and procedures that provided data necessary for making strategic decisions around the use of its resources.

As the recession progressed, both institutions became more disciplined in their monitoring and controls around endowment asset allocation, endowment spending, liquidity, budget monitoring, and identifying funding sources for capital projects prior to groundbreaking. From a rating perspective, S&P looked at the institutions' spending policies, budgeting and forecasting tools and processes, risk management framework, and contingency planning, among others, to determine the appropriate rating.  Focusing on these areas allowed the institutions to develop a solid foundation for resource allocation which will position them to weather any future economic downturns.

Relationship Management

Coming out of the debt crisis, many institutions are focusing on their banking relationships. However, evaluating banking relationships can be complicated because ratings, personnel, and business focus at banks can quickly change, explained Roger Goodman, partner at the Yuba Group, in a session titled "Managing Banking Relationships Strategically."

Emory University's Kim Pate, assistant vice president for cash and debt management, described the four main components of the Atlanta-based university's bank relationship management strategy: diversification, credit-worthiness and quality; constant monitoring and dialogue; products and service level; and new idea generation. For example, Pate's office creates a biweekly counterparty exposure snapshot that lists all existing banking relationships as well as banking institutions where there might be a future relationship. The snapshot includes data on credit default swap spreads; write-downs since June 30, 2007; put contract volumes; drawdowns in common stock; and more.

The University of California, Oakland, is keeping its senior managing underwriter pool fresh, explained Sandra Kim, executive director for capital markets finance in the office of the president. The university started a process for request for proposals in 2010 and it plans to conduct future RFP processes every two to three years. To further mitigate risk, it monitors exposure, performance, and ratings of each of its four commercial paper dealers and spreads the responsibilities of its commercial banking among five different banks.

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