News Column

UO plans own banking operation

June 11, 2014

By Diane Dietz, The Register-Guard, Eugene, Ore.

June 11--When the University of Oregon's new Board of Trustees meets Thursday, it will lay down the foundation for a new bank -- and that's before lunch.

The proposed UO Central Bank will operate as an investment bank, placing some of the university's $200 million-plus operating cash and reserves into overnight lending pools or other interest-earning vehicles. Cash that's not needed right away will go into longer-term and more risky ventures, such as company stock, mortgage-backed securities and commercial mortgage-backed securities, according to university plans.

Student loan-backed securities, however, are not on the list of explicitly approved investments.

The university administration can invest up to $5 million without first alerting the Board of Trustees, according to the proposed policy.

But the board would have advance review of investments of greater sums or the use of more exotic financial tools such as investment hedging instruments or other derivatives, according to the proposal.

The bank's top jobs are to keep enough UO funds available for use, maximize return on investment and minimize the cost of capital -- all within the university's "risk tolerance," the proposal said.

The UO needs its own bank because under the new independent board system, UO cash management activities will no longer be handled by the state university system.

"The thought process can be really University of Oregon-centric. We don't have to think about the good of all seven (Oregon) public universities," said Karen Levear, the UO's new director of treasury operations. "We control our own cash. Our cash will only be used to benefit this university."

The UO Central Bank will be "virtually identical" to the internal bank that Levear was hired to launch for the Oregon University System in 2010.

Levear was a banker at Pinnacle Bank of Oregon, Northwest Corporate Credit Union and First Interstate Bank before OUS hired her to launch its internal bank. The UO hired her in January. Her salary is $145,000, according to university records.

At OUS, Levear performed a "cash concentration" technique that closed as many as 70 public university bank accounts and placed the operating cash and reserves in a single, big account held at the state treasury.

The OUS internal bank set up protocols to invest the lump sum strategically, and it produced $10.9 million in unanticipated returns in its first three years of operation.

"The universities benefited and the students benefited from this internal bank concept," said Penny Burgess, the current interim director of OUS treasury operations. "The pooling of cash and investments across all universities was very successful."

Oregon State University, meanwhile, is taking over the OUS internal bank and is operating it as a shared service for the rest of Oregon's public universities.

The UO Central Bank will differ in a number of ways.

The OUS bank, for instance, gave all the universities some security during times of low cash flow, such as in August and early September before the new school year's tuition began trickling in.

"You could say there was some overdraft protection for one university to the other because it was all pooled together," Burgess said.

The UO Central Bank, meanwhile, is asking the UO board for the authority to borrow short-term if the UO runs temporarily short on cash.

Another difference: The OUS internal bank operated under the excellent AA+ rating of the state treasury. The UO, meanwhile, will have to obtain its own financial rating before it can issue its own bonds.

"It would be hard to achieve the same rating as the state. The state's rating is very, very good," said Levear, adding that it's not unprecedented for a public university to earn a better credit rating than its state. She pointed to the University of Washington as an example.

The UO's ratio of debt-to-operating revenue is higher than usual for schools its size, but that might not hurt the university in the ratings, Levear said.

"That's a single measure of 20 to 50 different measures that a rating agency would look at. There could be compensating factors that are good," she said. "Somebody might say 'Your mortgage payment is high, but you don't have a car payment, so we're perfectly comfortable that your mortgage payment is high.' It's a case-by-case basis."

The proposed UO policy gives the board leeway.

"The board should be able to do what the board wants to do. We did craft this policy with the help of some professional advice and it is designed to put what I would call guardrails around things," Levear said.

In policy and practice, the OUS internal bank steered clear of exotic investments. "None of that was allowed by policy," Burgess said.

The UO Central Bank would have explicit authority to invest in foreign currency, domestic and global equity, global and emerging market securities, real estate, private loans, and private equity and hedge funds, according to the UO proposal.

The OUS internal bank relied on investment managers at the state treasury to pick investments, including individual stocks and other securities. It's unclear what the UO bank will do.

"We haven't decided yet how we might do that -- whether or not we would engage a manager to do it for us. We do intend to engage a an investment consultant to help advise us," Levear said.

The UO Central Bank may opt not to use all the powers granted by policy. For example, the bank would be unlikely to put nearly $5 million into an investment without the board's approval, because that's too large a sum to place in any one investment, according to the principle of diversification, Levear said.

The bank doesn't have immediate plans to dabble in derivatives or hedging, except for a specific currency hedging program to benefit the university's study-abroad program, Levear said.

"In today's environment, I don't see that happening. The economy could change, and that could change things. But we don't have a pressing need for that," she said.

The university says it plans to protect itself financially by keeping a keen eye on risks, including interest rate risk, credit risk and liquidity risk.

The proposal calls for analyzing and "stress testing" cash flow, assets and liabilities to "ensure solvency and provide early warning" of the need for additional cash.

UO TRUSTEES MEET

Long meetings are slated for Thursday and Friday in Great Room 123, Global Scholars Hall, on the UO campus. Meetings begin at 8:30 a.m. See the full agenda at bit.ly/1q11M2v.

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(c)2014 The Register-Guard (Eugene, Ore.)

Visit The Register-Guard (Eugene, Ore.) at www.registerguard.com

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Source: Register-Guard (Eugene, OR)


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