UNC System has plans for an internal bank, but the N.C. Treasury has doubts

The UNC System Office has plans to establish an “internal bank” in which it would provide loans for certain capital projects to its 17 institutions. This would allow system schools to seek loans from the UNC System internal bank rather than borrowing money from private lenders.

But the treasurer of North Carolina said he and his office have questions and concerns around the legality, necessity and accountability of creating an internal bank.

“The questions of why are still outstanding and unanswered,” Dale Folwell, North Carolina’s state treasurer, said.

Josh Ellis, associate vice president for Media Relations for the UNC System, said in an email that the internal bank would increase timely and flexible access to capital while lowering the cost of borrowing. 

“Campuses would be able to lock in interest rates for the term of the loan and benefit from greater flexibility for smaller, short-term capital projects and bond refinancing,” Ellis said. 

Ellis also said the internal bank would augment existing institutional bond programs for long-term debt, and that projects supported by the internal bank would be subject to the same applicable legislative and board approval processes.

On Dec. 16, 2019, Pete Brunstetter, then-interim chief operating officer of the UNC System, and Clinton Carter, then-chief financial officer of the UNC System, met with staff from the Department of the State Treasurer to provide an overview of their plans for the internal bank. Folwell said his team posed a variety of questions about the purpose and functionality of the bank — most of which were left unanswered, with the understanding that additional details would be provided later. 

Folwell said that neither he nor anyone from his office endorsed the internal bank proposal described at the meeting. 

Nearly a year later, Folwell said his same questions remain. He said his primary concerns are related to the statutory authority of creating an internal bank, as well as transparency and consistency.

Folwell sent a four-page letter to UNC System President Peter Hans on Aug. 31, reiterating his office’s “significant concerns” about the establishment of a UNC System internal bank, after learning that the UNC System was moving forward with its plans. 

His office has still received no response to the letter, Folwell said.

How will an internal bank work?

Carter spoke about the internal bank proposal on Jan. 16 at the UNC Board of Governors Committee on Budget and Finance meeting. According to the meeting documents, the UNC System has sought various avenues to lower the borrowing costs for each of its constituent institutions and increase the efficiency of the process as they secure debt financing for various capital projects on their campuses — and the internal bank could do this. 

The UNC System internal bank would loan money to its constituent institutions for various capital projects, including energy-saving projects, equipment and technology leasing, construction bridge loans and other short-term, small projects. 

Additional details were shared on July 22 at the UNC Board of Governors Committee on Budget and Finance meeting, as Carter updated the group about progress that had been made on creating the internal bank.

Carter said the UNC System set up UNC Funding Corp., a nonprofit entity formed for the purpose of providing loans to the UNC System’s constituent institutions, which is a a subsidiary of the UNC Foundation. UNC Funding received proposals from two private banks, and after reviewing them, proposed to negotiate final terms with PNC Bank, according to the meeting documents.

Based on information available in the meeting documents, the proposed loan with PNC Bank is a $50 million fixed-term loan with an added $50 million accordion feature, meaning that the total loan could be extended to up to $100 million, if desired. Once the loan agreement is finalized with PNC Bank, the money will be re-loaned out to constituent institutions for certain capital projects.

At the meeting, Carter said the internal bank is envisioned as a way to leverage the collective buying power of the UNC System Office — its "perceived credit rating." He said that for over a decade, universities have had to borrow money on their own terms, and on starkly different terms. For example, UNC-Chapel Hill, which has a higher credit rating, can obtain loans at lower rates than Elizabeth City State and some other institutions.  

Yunzhi Hu, an assistant professor of finance at the Kenan-Flagler Business School, said he sees how the internal bank could be advantageous for system schools with lower credit ratings. 

“The objective of the UNC System is to get all the 17 universities steadily developing and improving,” Hu said. “And some of them, some of the weak ones, can suffer because they don't have a well-established reputation yet, don’t have a very good rating yet, and for them borrowing is very costly.”

The internal loans can “effectively reduce the overall institutional borrowing cost, decrease time required to access funds and provide predictable interest rates,” according to the UNC System’s assessment of the project stated in the meeting documents.

“This is what I believe to be a cutting-edge concept that I think we're pleased to lead,” James Holmes Jr., budget and finance committee chairperson, said at the July meeting. “I think everybody will find this to be an exciting way to leverage the economies of scale created in the system.” 

According to meeting documents, the internal bank concept has been used effectively by other multi-campus and large private universities such as the University of Virginia, The Ohio State University and Vanderbilt University.

“I think it’s a nice pilot experiment,” Hu said. “It's gonna be interesting to see. It's a small bank — it’s really, really small. My conjecture is that it's going to do well. Whenever things are small, it's always easier to manage, monitor and make sure things are in control.”

Concerns

After learning about the updated plans for the internal bank Carter presented in July, Folwell sent his letter to Hans and listed over a dozen questions. In the letter, Folwell also requested the opportunity to speak about the internal bank at the UNC Board of Governors September meeting.

While Folwell was not given the chance to speak at the meeting, he said he understood why part of the meeting’s agenda was not allocated to discussing the internal bank due to necessity of COVID-19 matters.

If he had the opportunity to address the BOG, Folwell said he would have cautioned them about “chasing solutions in search of a problem.” Folwell said he sees no issues in the current borrowing system. 

Folwell said he is also critical of the possibility of the internal bank being used by the UNC System to generate a profit. He said the UNC System is not starved for capital as the North Carolina Department of State Treasurer just issued $400 million in voter-approved Connect NC Bonds, with over half being allocated to the UNC System. The amount received is an estimate of what the projects on the UNC System’s capital improvements list will cost. 

“I think the system office needs to continue to put the best interests of the students, their families and these campuses ahead of everything else, and for there to be a foundation created to make a profit off the difference in these interest rates doesn't feel like it's a model a state with one of the few AAA bond ratings in the United States should be following,” Folwell said.

Looking ahead

Folwell emphasized the need for more details about the internal bank and its implementation, since the implications of the “sizable and untested proposal” could be far-reaching. 

“We're not in the business of no,” Folwell said. “We're in the business of know, even though those words sound exactly alike. And this especially applies to this transaction.”

Folwell said his stance on the internal bank is not necessarily a "no," but he cannot support it right now because details are lacking. Folwell said he expects the UNC System to respond to his office’s questions. But he is unsure what will happen since the two figures leading the idea — Clinton and Brunstetter — have now left the UNC System.

Ellis said he could not provide a timeline for when the internal bank will launch. He said that since the new leadership team began in August, the primary focus has been on COVID-19-related matters, but the intended benefit and goals for the internal bank remain unchanged.

“The UNC System has been continuing our due diligence efforts on the internal bank program while developing the proper oversight, reporting requirements, and credit policies for when the program is launched,” Ellis said in the email.

university@dailytarheel.com