12. CAPITAL FINANCING
Policy Objective/Purpose. This policy provides a framework within which decisions surrounding capital financing are made by the Board in exercising its fiduciary responsibilities and by each Chief Executive Officer in administering the affairs of the university, including responsibility for determining whether to use debt to finance particular capital projects and the ongoing management of debt.
i. Debt Obligations Issued by or on Behalf of the Board. Pursuant to legislative authority, including specific appropriation provisos in conjunction with K.S.A. 74-8901, et seq., the Board is authorized to issue or seek issuance of debt obligations on behalf of the state universities. The Board may issue debt obligations directly or by using the services of the Kansas Development Finance Authority.
ii. Revenue Bonds Issued on Behalf of Affiliated Corporations. At the time of Board approval of the project plan for a project to be built on state property and financed with revenue bonds issued on behalf of endowment associations, foundations, other affiliated corporations, or the Wichita State University Board of Trustees, the state university having possession of the property shall obtain approval from the Board for the proposed bond financing.
b. Types of Debt
For purposes of this policy, the term “debt obligation” includes bonds, notes, debentures, interim certificates, grant and revenue anticipation notes, interest in a lease, lease certificate of participation or other evidences of indebtedness, whether or not the interest on which is subject to federal income taxation. Any capital project financing proposal involving derivative instruments shall require additional review by the Board’s Fiscal Affairs and Audit Committee prior to Board approval of the project. Such additional review may include a presentation by Kansas Development Finance Authority staff to explain the rationale for using derivatives and an independent assessment of the feasibility of the proposal.
c. Use of Debt
Debt obligations cannot be used to fund university employee compensation or other non-capital expenses.
d. Period of Debt
Period of debt cannot exceed planned useful life of the asset being financed and must be for a reasonable term in relation to the amount financed.
e. Pledge of Available Revenue
If the state university for which the debt obligations for a project are issued, in consultation with the Kansas Development Finance Authority, determines that the debt obligations will be more marketable with a pledge of generally available unencumbered funds of the university, or a credit enhancement in the form of a supplemental pledge or assurance of revenues other than those generated by the facility for which the debt obligations are to be issued, the desire to utilize such a pledge or assurance shall be reported to the Board at the time of the request for approval of the capital improvement, and language permitting the pledge of other available revenues for debt service purposes shall be included in the legislative proviso authorizing issuance of the debt obligations. Any debt obligations issued by the Board directly pursuant to K.S.A. 76-6a13 et seq. shall be subject to the pledge of revenue restrictions set forth in K.S.A. 76-6a15. This paragraph shall apply to projects submitted to the Board for approval after October 1, 2009. In the case of debt obligations issued with a pledge of generally available unencumbered funds, each financing is expected to be supported by a project financial plan identifying revenues sufficient to fulfill annual debt service requirements.
f. Refunding Bonds
Refunding bonds may be issued in an aggregate principal amount not to exceed the amount necessary to refund outstanding bonds that were issued on behalf of the university, plus costs. If one or more of the following conditions is met, refunding bonds may be issued without further approval of the Board:
i. Issuance of refunding bonds will achieve a present value savings of not less than 3% of the principal amount of the outstanding bonds to be refunded and final maturity of the bonds shall not be significantly extended beyond the original final maturity of the refunded bonds;
ii. Issuance of refunding bonds will restructure debt service requirements on the outstanding bonds in a way that is fiscally or administratively advantageous to the university as recommended and upon request, explained by Kansas Development Finance Authority or bond counsel for the proposed transaction (this option may be used only after the university has presented to the Fiscal Affairs and Audit Committee information regarding the prudence of exercising it under the specific circumstances and the Committee has approved the issuance); or
iii. Issuance of Refunding Bonds will eliminate burdensome or unduly constraining covenants contained in legal documentation authorizing the issuance of the outstanding bonds, as recommended and upon request, explained by Kansas Development Finance Authority or bond counsel for the proposed transaction (this option may be used only after the university has presented to the Fiscal Affairs and Audit Committee information regarding the prudence of exercising it under the specific circumstances and the Committee has approved the issuance).
g. Responsibilities of the Board
The Board will consider the impact that each debt issuance will have on a university’s debt burden and its continuing ability to provide strong debt service coverage. The Board will annually review each university’s debt capacity plan prepared and submitted in a format and in accordance with a schedule established by Board staff. The Board may assess a university’s debt affordability and capacity by gathering input from other sources, for example, bond rating service scorecards, prepared and provided annually to the Board by Kansas Development Finance Authority staff. To fulfill its fiduciary responsibilities, it is essential that the Board of Regents understand the outstanding amount of debt obligations of each university. Board staff provides support to the Board in this responsibility by annually issuing a schedule for preparation and submission of the debt capacity plan and any related reports and specifying the content and format of the plan and related reports. Such schedule and format parameters will be prepared in consultation with Council of Business Officers.
In assessing each university’s current debt levels, and when exercising oversight regarding assumption of additional debt by a university, the Board takes into account both the university’s debt affordability and debt capacity. Debt affordability focuses on a university’s ability to service its debt through its operating budget and identified revenue streams and is driven by strength in income and cash flows. Debt capacity focuses on a university’s financial leverage in terms of debt funding as a percentage of the university’s total capital.
h. Responsibilites of the University
i. Each university shall provide the Board with adequate information to allow for reasonable and prudent oversight of the university’s debt portfolio including, but not limited to, annual submission of the completed and updated debt capacity plan. The debt capacity plan, including key financial ratios, is intended to provide the university’s administration and the Board with information necessary to determine whether the university will exceed its debt capacity. The financial ratios described in each university’s debt capacity plan are not intended to track to a specific credit rating, but rather to help the university maintain sound financing for capital needs as they arise. The Board recognizes that rating agencies and other credit analysts use these and other measures in evaluating an issuer’s ability to issue and repay debt. The Board expects at a minimum that each university set a target for debt burden ratio and bond coverage ratio and to continuously project debt capacity into the future. Each university’s target will be used as a guidepost for that university, not a firm boundary.
(1) Debt Burden Ratio is a percentage and represents the principal (excluding refunded principal) and interest on debt divided by total expenditures. The outstanding principal and interest included in each university’s debt capacity plan shall be derived from the university’s annual financial report. The principal and interest on new debt is based on the plan of financing for proposed projects.
(2) Average Debt Service Coverage represents the adjusted change in net assets divided by debt service. The average is calculated using the current fiscal year, two years prior to the current fiscal year and projected figures for the two subsequent fiscal years including requested projects. The outstanding principal and interest included in each university’s debt capacity plan shall be derived from the university’s annual financial report. The principal and interest on new debt shall be based on the plan of financing for proposed projects.
(3) Viability Ratio represents expendable net assets divided by total plant-related debt. The ratio is an indicator of an institution's ability to assume new debt and measures the debt capacity. The viability ratio represents expendable net assets divided by long-term debt. The ratio assists with answering the question: "Are resources, including debt, managed strategically to advance the mission?” The Viability Ratio measures the most basic determinant of clear financial health: the availability of expendable net assets to cover debt should the institution need to settle its obligations as of the balance sheet date.
(4) A university may elect to monitor additional selected ratios (including, but not limited to those suggested by the rating agencies) to provide further information regarding its financial performance and the impact of new debt for a specific project.
ii. Each university shall adopt debt policies and procedures with respect to matters involving: debt issuance; debt management, compliance practices relating to use of tax exempt bond proceeds and bond financed assets; arbitrage and rebate compliance; record retention; refunding; and continuing disclosure obligations and designate a Bond Compliance Officer who is responsible for coordinating and overseeing post-issuance compliance for tax-exempt debt obligations issued on behalf of the university. Each university shall provide both the Board and the Kansas Development Finance Authority with a copy of its current policies and procedures, including the contact information for the Bond Compliance Officer.