University of Connecticut Bond Issues

Section 10a-109 of the Connecticut General Statutes empowers the University to issue General Obligation Bonds secured by the State's Debt Service Commitment (sometimes referred to as "Debt Service Commitment Bonds" or "DSC Bonds"). These Bonds are issued pursuant to the General Obligation Master Indenture of Trust, dated as of November 1, 1995, between the University of Connecticut, as Issuer, and Fleet National Bank of Connecticut as Trustee (now U.S. Bank N.A.). The University’s Board of Trustees on November 10, 1995 and the State Bond Commission approved the Master Indenture of Trust on December 21, 1995. UConn's Board of Trustees and the Governor approve the subsequent Supplemental Indentures for each bond issue. The University and Office of the State Treasurer, working in conjunction, manage the Debt Service Commitment Bond sale process. University General Obligation Debt Service Commitment Bonds issues to date are summarized below:

NOTE:
1. TIC is the true interest cost reflecting the interest rate for the time value of money across an entire bond issue.
2. The DSC 2002A bonds provided $994,688.03 directly to the Office of the State Treasurer.
3. The DSC 2003 bonds face amount of $96,210,000 together with an additional $3,790,000.00 of original issue premium, totaled $100,000,000 available for Projects.
4. The DSC 2004A New Money and DSC 2004A Refunding Bonds were issued under a single Official Statement.

The nine series of UCONN General Obligation DSC bonds issued to fund Projects total $912,482,146.50 in face value and provided $912,000,000 for UCONN 2000 project spending. (Excluding the $216,950,000.00 UCONN General Obligation DSC Refunding Bonds Series 2004A issued to refund $223,160,000 of prior bonds.) The remaining balance, together with accrued interest and net original issue premium, funded the costs of issuance.

On January 22, 2003 the University issued $97,845,000 face amount of the University of Connecticut Debt Service Commitment Bonds 2004 Series A, at a very favorable true interest cost of 3.76%, the lowest in the history of the program, with a 10.5 Years Average Life and with very favorable call redemption terms of 2014 @ Par. Selected maturities on and after January 15, 2013 carried MBIA bond insurance.

To date, fifty projects totaling $912 million have been authorized to receive General Obligation Debt Service Commitment bond proceed funding, as follows:

On July 1, 2004, $100,000,000 of authorizations representing the last $50,000,000 of Phase II and the initial $50,000,000 of Phase III will be effective. The former will complete the $962,000,000 of Phase I and Phase II authorizations under the original UCONN2000 Act.

As of April 23, 2004 the General Obligation Debt Service Commitment Bond Proceeds Construction Account remaining balance available to pay for Projects was approximately $46 million.

Recently, $15.2 million in debt service savings was provided by UCONN to taxpayers. On January 29, 2004 the University closed on the $216,950,000.00 par amount of UCONN GO DSC 2004-A REFUNDING portion of the combined bonds. Institutions garnered most of the bonds. Proceeds pre-refunded $223,160,000 of the portions of the 1996, 1997, 1998, 2000, 2001, and 2002 UCONN2000 General Obligation Debt Service Commitment Bonds. Debt Service Savings amounted to $15,215,582.84 million on a gross cash debt service savings basis, or $10,117,718.77 on a net present value basis (4.53% savings of refunded bonds), spread across fiscal years 2004 to 2020. These are real dollar savings for Connecticut taxpayers.

The University’s financial statements reflect the UCONN 2000 programs. The General Obligation and Special Obligation bonds and other debt are shown as liabilities on the University’s financial statements. The financed UCONN 2000 projects and any unspent debt proceeds are shown as assets. The State’s Debt Service Commitment to pay for the University’s General Obligation Bonds is also shown as an asset on the University’s financial statements.

The proceeds of the sale by the University of any Bonds are part of the Trust Estate established under the General Obligation Master Indenture of Trust with the Trustee Bank as security for bondholders. Consequently the Trustee Bank holds all of the bond proceeds, with this exception: the State Treasurer’s Office may hold and invest the University’s General Obligation Bonds Debt Service Commitment funded Costs of Issuance account. The Special Obligation Master Indenture has similar Trust Estate provisions and the Trustee Bank holds all the Special Obligation bond proceeds received at issuance including the costs of issuance account.

Prior to June 1998, all University General Obligation Debt Service Commitment Bond proceeds were deposited with the Office of the State Treasurer and treated like State bond proceeds, including payments made to vendors through the Office of the State Comptroller. Subsequently, the Office of the Attorney General opined that the University, and not the State, issues UCONN 2000 bonds. Accordingly, upon advice of bond counsel and in conformity with the Master Indenture of Trust, Debt Service Commitment Bond construction fund proceeds were deposited to the Trustee Bank and disbursed as directed by the University pursuant to the Indenture. Per the State’s preference, the University General Obligation Debt Service Commitment Bond proceeds for costs of issuance are still treated like State bond proceeds and deposited with the Office of the State Treasurer, and disbursed through the Office of the State Comptroller.

The Indentures of Trust provide that the University is authorized and directed to order each disbursement from the Construction Account held by the Trustee upon a certification filed with the Trustee bank, and in the case of the Debt Service Commitment bonds, also the State Treasurer. The Indentures provide that such certification shall be signed by an Authorized Officer of the University and include certain disbursement information. Once the Authorized Officer certification filings are made, the University can directly disburse payments.

UCONN 2000 also authorizes the University to issue Special Obligation Revenue bonds. Unlike the University’s General Obligation Debt Service Commitment Bonds that are paid from the State's General Fund, debt on the Special Obligation Bonds is paid from certain Pledged Revenues of the University as defined in the particular bond series indenture.

A Special Capital Reserve Fund may be established for University Special Obligation bond issues only if the Board of Trustees determines that the Special Obligation bond issue is self-sufficient as defined in the Act. The self-sufficiency finding by the University must be submitted to and confirmed as not unreasonable or arbitrary by the State Treasurer prior to issuance of the bonds. Once approved, the Special Capital Reserve Fund is funded at issuance by the University to meet the minimum capital reserve requirement. However, subject to notification by the University on or before December 1, annually, if this amount falls below the required minimum capital reserve, there is deemed to be appropriated from the state General Fund sums necessary to restore each such Special Capital Reserve Fund to the required minimum capital reserve.

Student Fee Revenue Bonds have been issued pursuant to the Special Obligation Indenture of Trust, dated as of January 1, 1997, between the University as Issuer and U.S. Bank N.A. as successor to State Street Bank & Trust as Trustee ("the Special Obligation Master Indenture"). The Board of Trustees approved the Master Indenture on November 8, 1996.

NOTE:
1. TIC is the true interest cost reflecting the interest rate for the time value of money across an entire bond issue. The University Special Obligation Bonds are generally issued for an approximate 30-year final maturity, compared to a 20-year final maturity for the General Obligation DSC Bonds; hence the TIC may appear relatively higher for Special Obligation Bonds.
2. The Series 2000-A bonds were refunded on Feb. 27, 2002.

• On February 4, 1998, the University issued $33,560,000 of University of Connecticut Student Fee Revenue Bonds 1998 Series A ("SFR 1998-A Bonds") with a final maturity of November 15, 2027. The Special Obligation First Supplemental Indenture was also dated January 1, 1997 and authorized the issuance of bonds up to a principal amount not to exceed $30,000,000 for construction of the South Campus Residence and Dining Hall, plus amounts necessary to fund a Special Capital Reserve Fund ("SCRF") and provide for costs of issuance. The University managed the issuance and sale of these bonds and realized a favorable true interest cost over the term. Debt service for these bonds is paid from the student Infrastructure Maintenance Fee instituted in 1997 and other Pledged Revenues as further defined in the Indenture of Trust. Such Pledged Revenues also help support future operation and maintenance costs for facilities built or expanded through UCONN 2000.
• On June 1, 2000, the University issued $89,570,000 of the University of Connecticut Student Fee Revenue Bonds 2000 Series A ("SFR 2000-A") pursuant to the Special Obligation Master Indenture, and the Special Obligation Student Fee Revenue Bonds Second Supplemental Indenture dated as of May 1, 2000. Bond proceeds funded $87,000,000 of construction for the Hilltop Dormitory, Hilltop Student Rental Apartments, and Parking Garage South and also provided for capitalized interest and costs of issuance. The $89,570,000 SFR 2000 Bonds were defeased in substance on February 27, 2002, as further described below, and are no longer reflected as outstanding debt on the University's financial statements.
• On February 14, 2002, the University issued $75,430,000 of the University of Connecticut Student Fee Revenue Bonds 2002 Series A pursuant to the Special Obligation Master Indenture and the Special Obligation Student Fee Revenue Bonds Fourth Supplemental Indenture, dated as of November 16, 2001. Bond proceeds funded $72,180,000 of construction for the Alumni Quadrant Renovations, Shippee/Buckley Renovations, East Campus North Renovations, Towers Renovations (including Greek Housing), and North Campus Renovations (including North Campus Student Suites and Apartments).
• On February 27, 2002, the University issued $96,130,000 of the University of Connecticut Student Fee Revenue Bonds 2002 Refunding Series A pursuant to the Special Obligation Master Indenture and the Special Obligation Student Fee Revenue Bonds Third Supplemental Indenture, dated as of February 1, 2002. Bond proceeds were used to take advantage of favorable market conditions to advance refund and defease in substance all of the $89,570,000 of Student Fee Revenue Bonds 2000 Series A bonds outstanding. Proceeds were deposited with the Trustee bank in an irrevocable escrow fund sufficient to satisfy future debt service and call premiums on the prior issue.

To date, nine projects have been authorized to receive the University’s Special Obligation Student Fee Revenue bond proceeds funding. Some of these projects were supported by General Obligation or other funding, as follows:

On December 18, 2003 the University entered into a $75,000,000 Governmental Tax-Exempt Lease Purchase Agreement to finance the design and construction of a combined heat and power plant, considered to be part of the UCONN2000 Heating Plant Upgrade project, which is expected to generate substantially all of the needs for electrical power, heating and cooling on the main campus at Storrs. The obligation to pay rent pursuant to the lease is due monthly beginning May 1, 2005 for 240 months in the maximum amount of $471,255, provided that the lessor advances to the University the full $75,000,000 to pay for the cost of the project. The tax-exempt lease was an agreement negotiated by the University’s Business and Administration division, and was not issued pursuant to the governing bond documents such as the Master Indentures of Trust, and consequently was not subject to those requirements and procedures outlined above. For example, the Master Indenture requirements do not apply; there is no Trustee Bank; the lease was not to be offered for sale in the public security markets; and was not rated by Fitch, Moody’s, or S&P. Those agencies, however consider the lease to be debt of the University and weigh it in credit rating decisions.

Credit Ratings

Since the inception of UCONN 2000, the University's bond issues have experienced a favorable credit rating history, including several credit rating upgrades. For example, as of April 15, 2004 Moody’s assigned an “Aa3” rating to both the University’s General Obligation Bonds secured by the State’s Debt Service Commitment and the University’s Special Obligation Student Fee Revenue Bonds. It is a strong vote of confidence in the University that both these ratings are ranked the same as the State’s General Obligation Bond “Aa3” credit rating.

The capital markets have recognized the tangible benefits to the State's economy of meeting the infrastructure and educational goals of the program, as well as the University's success in implementing them. A high quality credit rating not only provides the State and the University with less expensive access to the capital markets but also supports the State's quality reputation among investors. A University milestone occurred in 2002 with the achievement of the high-grade “double A” credit-rating category from Moody's Investors Service for both its General Obligation and Special Obligation bonds.

As of October 1, 2003, the UCONN 2000 General Obligation Debt Service Commitment bonds were rated "AA" by Standard & Poor's; "Aa3" by Moody's Investors Service; and "AA-" by Fitch Investors Service. Also the University's Special Obligation Bonds not secured by SCRF were rated "AA-" by Standard & Poor's and "Aa3" Moody's Investors Service. Fitch Investors Service does not rate the Special Obligation bonds not secured by SCRF. The Special Obligation Bonds Series 1998-A carry a Special Capital Reserve Fund and are rated “AA” by Standard & Poor’s “Aa3” by Moody’s, and “AA-“by Fitch. In addition to the underlying credit ratings, "AAA" rated municipal bond insurance secures certain maturities of several of the above bond issues.

• February 1996: the first issue of the University's General Obligation Bonds secured by the State's Debt Service Commitment carried underlying ratings of "A1" by Moody's Investors Service, "AA-" by Standard & Poor's and "AA-" by Fitch.
• February 1998: the first issue of UCONN 2000 Special Obligation bonds depended upon the State's SCRF credit rating. An underlying "stand alone" credit rating was not available for this nascent program. At the time of issuance, the State SCRF enhancement allowed the bonds to obtain an "AA-" rating from Standard & Poor's, "AA-" from Fitch Investors Service, and "A-1" from Moody's Investors Service. The bonds were subsequently covered by municipal bond insurance and upgraded to an "AAA" at Fitch and Standard & Poor's and "Aaa" at Moody's Investors Service.
• October 1998: Standard & Poor's upgraded the UCONN 2000 General Obligation DSC Bonds and the UCONN SFR 1998-A (SCRF) bonds to "AA" from "AA-".
• March 2000: Moody's upgraded UCONN 2000 General Obligation DSC Bonds to "Aa3" from "A1".
• June 2000: the University achieved a milestone with its first underlying Special Obligation Bond "stand alone" credit rating of "AA-" (S&P), and an "A1" (Moody's).
• February 2001: Moody’s upgraded UCONN 2000 General Obligation DSC Bonds to “Aa2” from “Aa3”. In April 2001, the General Obligation DSC 2001 Series A bonds were sold without any bond insurance security enhancement on any maturity, another successful first-time accomplishment for the UCONN 2000 bond program. Moody’s upgraded UConn’s SFR 1998-A Bonds, which are secured by the State SCRF, at this time to “Aa3” from “A1”.
• January 2002: UConn’s 2000 Special Obligation Bonds (Non-SCRF) were upgraded to "Aa3" from "A1" by Moody's. This graduated UConn's Special Obligation bonds to Moody's "high-grade" bond category and impacted the underlying credit on all outstanding Special Obligation Student Fee Revenue Bonds. (The $33.6 million Special Obligation Student Fee Revenue Bonds Series 1998-A bonds which are secured by the State's SCRF already carried the "Aa3" rating.) This high rating was assigned a stable outlook and represented a positive judgment by the capital markets regarding UConn’s financial strength, real and potential growth as an institution, and management.
• August 2002: Reflecting the outlook changes for the State’s General Obligation Bonds, Moody’s and Standard and Poor’s both moved their outlook from “stable” to “negative” for UConn's General Obligation DSC Bonds while retaining their respective credit rating levels at “Aa2” and “AA”. Fitch took no action. In a sign of confidence in the University’s management and growth potential, Moody’s and Standard & Poor’s kept UConn's Special Obligation Bond ratings levels and stable outlook unchanged.
• March 2003: During tougher economic times the rating agencies confirmed the University’s General Obligation DSC bond ratings as follows: Fitch "AA-"; S&P "AA"; and Moody’s “Aa2". Moody’s also confirmed UConn’s Special Obligation and Foundation bond ratings at "Aa3". Holding the credit ratings was a good sign, in light of Moody’s February 2003 move of the State General Obligation bonds, and consequently the University’s DSC and SCRF security bonds, to Watch list for possible downgrade.
• July 2003: On July 2, 2003, citing State budget problems, Moody’s downgraded the University’s General Obligation DSC bond ratings to "Aa3" from “Aa2" consistent with its action on the State General Obligation bond rating. The good news was that Moody’s also confirmed UConn’s Special Obligation (“non-SCRF) bond ratings at "Aa3". Moody’s also briefly downgraded the University’s 1998 Special Obligation Bonds secured by the State’s SCRF to “A-1” following a general downgrade of any bonds backed by the State’s SCRF, but then upgraded the University’s 1998 Special Obligation Bonds back to “Aa-3” on July 14, 2003.
• January 2004: Importantly, we were successful in confirming the credit ratings for the UCONN General Obligation Debt Service Commitment bonds at a time of State budget deficits and negative press reports. The unenhanced ratings for the UCONN2000 GO DSC 2004 new money and refunding bond issues were as follows: Moody’s Investors Service “Aa3”, Standard & Poor’s “AA” and Fitch IBCA “AA-”. Several maturities also carried “AAA” rated MBIA bond insurance.

Debt Service

The State General Fund pays the debt service on the University’s General Obligation Debt Service Commitment Bonds. The University pays the debt service on the Special Obligation Student Fee Revenue Bonds from its own resources. For all the UCONN 2000 General Obligation Debt Service Commitment securities issued since the program’s inception in 1996 to April 30, 2004 (including the DSC2004 Refunding Bonds but net of refunded debt) debt service totals $906.3 million of principal and $432.9 million of interest (including capital appreciation bonds).

As of April 30, 2004 remaining debt service totals $1,013.9 representing $722.9 of principal and $291.0 million of interest (including capital appreciation bonds).

For the Fiscal Year Ending June 30, 2004 the Debt Service Commitment paid for the University’s General Obligation Bonds amounted to $67.5 million (representing $42.9 million of principal and $24.6 million of interest).

UCONN 2000 Special Obligation Student Fee Revenue securities debt service amounts to $205.1 million of principal and $187.5 million of interest over the course of the maturity spectrum, net of pre-refunded and defeased bonds. As of April 30, 2004 there will be $195.2 million of principal and $156.5 million of interest remaining (including capital appreciation bonds). All other things equal, the Special Obligation bonds incur proportionally more interest expense because they are generally issued for terms of up to thirty years compared to twenty years for the Debt Service Commitment bonds. For the Fiscal Year Ending June 30, 2003 the University paid from its own resources Special Obligation Bond debt service of $13.2 million (representing $3.7 million of principal and $9.5 million of interest).

The investment of Tax-exempt bond proceeds is heavily regulated by the Internal Revenue Service, the relevant Indentures of Trust with bondholders, Connecticut law, and other regulatory mechanisms. In addition to meeting those requirements, the University’s general investment policy is to balance an appropriate risk-return level, heavily weighted towards safety of assets, with estimated cash flow needs and liquidity requirements. The University is also mindful that the rating agencies, bond buyers, and bond insurers often weigh the quality of an issuer’s investment portfolio.

Bond Proceeds form part of the Trust Estate established with the Trustee Bank as security for bondholders. To date, the University has directed the Trustee Bank to invest any Debt Service Commitment construction fund proceeds in the State Treasurer’s Short Term Investment Fund (“STIF”) which is “AAA” rated and offers daily liquidity and historically attractive risk-adjusted yields. The State Treasurer’s Office wishes to hold and invest the University’s General Obligation Bonds Debt Service Commitment funded Costs of Issuance account, a much smaller account.

Similarly, the University has directed the Trustee Bank to invest all the Special Obligation new money bond proceeds in dedicated STIF accounts, with the exception of the 1998 Special Obligation Special Capital Reserve Fund which is invested in longer term "AAA" rated federal agencies’ fixed income Investment Obligations as defined in the Special Obligation Indenture of Trust.

The Special Obligation Student Fee Revenue Refunding Series 2002-A proceeds, other than the costs of issuance and debt service accounts that are invested in STIF, are held by the Trustee Bank in an irrevocable escrow fund, which is invested in U.S. Treasury State and Local Government Securities (“SLGS”) and cash pursuant to the Escrow Agreement.

The Debt Service Commitment bond proceeds investment earnings are retained by the State Treasurer’s Office and do not flow to the University or to the Trustee Bank.

Fiscal Year End June 30, 2003 UCONN 2000 Special Obligation Student Fee Revenue Bonds investment earnings amounted to approximately $0.9 million (cash basis). The Student Fee Revenue Bonds investment earnings are part of the Pledged Revenues and are directly retained by the Trustee Bank to pay debt service on the bonds, and may also be used to flow to other Trustee bond accounts, if necessary, pursuant to the Indenture of Trust.

The investment earnings on the Special Obligation Student Fee Revenue Series 2002-A Refunding Escrow Account flow to the irrevocable escrow and are used by the Trustee Bank to meet debt service payments on the defeased bonds.

Similarly, investment earnings on the General Obligation Debt Service Commitment Series 2004-A Refunding Escrow Account flow to an irrevocable escrow and are used by the Trustee Bank to meet debt service payments on the defeased bonds.

The University anticipates offering a Debt Service Commitment Bond issue earlier than usual during fiscal year 2005 to fund an expected $100 million of UCONN 2000 Projects. The passage of 21st Century UConn allows for $1.3 billion of additional securities backed by the State’s Debt Service Commitment, phasing in during fiscal year 2005.

Additionally, the University could issue Special Obligation Revenue bonds for certain projects that have a financial self-sufficiency capacity, and/or if aggregate pledged revenues are sufficient to meet requirements of the Special Obligation Indenture. Market conditions and other factors might also lead to issuance of either General Obligation or Special Obligation refunding bonds in the future. Finally, the University may enter into other types of tax-exempt debt.