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December 8, 2016

For savings, Pitt to shift some debt to taxable bonds

Pitt plans to shift some of its debt from tax-exempt bonds to taxable bonds early next year in a move that will save millions of dollars in interest costs and free the University from some of the federal shackles that conflict with its strategic goal of expanding commercial partnerships.

The Board of Trustees, through its budget and executive committees, on Wednesday authorized the University’s chief financial officer and/or treasurer to oversee the issuance and sale of taxable bonds for the purpose of refunding as much as $814 million in outstanding tax-exempt bonds.

Background materials provided to the board committees stated: “By refunding the outstanding bonds with taxable debt, the University is able to reduce the costs of federal tax compliance, and eliminate ongoing ‘nonqualified use’ restrictions applicable to certain University property and facilities. The issuance of taxable bonds will also provide the University with greater financial flexibility and permit the University to cultivate a much larger and more diverse investor base.”

Although Pitt has refinanced bonds before, said Senior Vice Chancellor and CFO Arthur G. Ramicone, this is the first time it will refinance tax-exempt bonds into taxable bonds.

Other institutions, including some Ivy League schools, are taking similar actions, he said. It’s an attractive time to do it because the spread between taxable and tax-exempt interest rates has narrowed, making the tax-exempt bonds less attractive.

Although the board authorized refunding all of the University’s outstanding tax-exempt bonds, Ramicone said his staff’s first foray in early January will refund only a portion — approximately $464 million.

Issuing taxable bonds will open the University to a broader range of investors, including international investors who are unfamiliar with the University, Ramicone noted.

He and his staff plan to spend time over the term break providing information and making themselves available to answer questions from potential investors.

Although the exact amount depends on the market, Ramicone estimated that the University stands to net about $20 million in interest savings by issuing the taxable bonds.

There are other benefits: the tax-exempt bonds require hundreds of hours in staff time to meet government reporting requirements — a portion of which would be saved, Ramicone said.

And there’s a benefit that aligns with Pitt’s strategic initiative to partner for impact. Facilities that are funded using the tax-exempt bonds are subject to “nonqualified use” restrictions that prevent them from being used for commercial purposes.

That means buildings such as Benedum Hall, Chevron Science Center and the biomedical science towers — “all the major ones we’d collaborate in” — currently can’t house collaborations with commercial partners, he explained.

—Kimberly K. Barlow 

Filed under: Feature,Volume 49 Issue 8

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