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Capital Financing Policy

Policy
Purpose: 

To ensure the appropriate mix of funding sources is utilized and to provide guidance on the strategic use of debt.

Applies to: 

All Units of the University and all of its affiliated corporations that are considered Component Units as defined by GASB Statement No. 39 (if uncertain see Note 1 of the Annual Financial Report)

Campus: 
Lawrence
Edwards
Parsons
Juniper Gardens
Yoder
Medical Center, Kansas City
Wichita
Salina
Topeka
Policy Statement: 

Purpose

To fulfill its mission, the University of Kansas will need to make ongoing strategic capital investments in academic, student life, and other plant facilities using an appropriate mix of funding sources including state appropriations, private gifts, Board of Regents/University bonds, research grants, leases, and internal resources. Debt, especially tax-exempt debt, provides a low cost source of capital with which the university can fund capital investments to achieve its mission and strategic plans.

The purpose of the Capital Financing Policy is to ensure the appropriate mix of funding sources is utilized and to provide guidance on the strategic use of debt. Debt is a valuable source of capital project financing but should be limited to projects that relate to the mission and strategic objectives of the University. The amount of debt incurred has an impact on the financial health of the University and its credit rating.

This policy is intended to incorporate and supplement the Kansas Board of Regents Capital Financing policy (II.D.12). This policy applies to all units of the University and all of its affiliated corporations that are considered Component Units as defined by GASB Statement No. 39 (if uncertain see Note 1 of the Annual Financial Report).

The Objectives listed below, combined with management judgment, provide the framework by which decisions will be made regarding the use and management of debt, including internal borrowing from the University’s reserves/idle funds. The debt policy and objectives are subject to re-evaluation over time.

Objectives

Identify projects eligible for debt financing. Using debt to fund mission-critical projects will ensure that debt capacity is optimally used to fulfill the university’s mission. Projects related to the core mission will be prioritized for debt financing; projects with associated revenues will receive priority consideration as well.

Maintain the University’s favorable access to capital. Management will utilize and issue debt in order to ensure timely access to capital.

Manage and maintain the highest acceptable credit rating. Maintenance of this credit rating will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meetings its strategic objectives. The University will limit its overall debt to a level that will maintain an acceptable credit with the bond rating agencies; however, the attainment or maintenance of a specific rating is not the objective of this policy. It is understood that higher credit ratings provide market access at lower interest rates but also limit the amount of debt that may be issued.

Prudent management of cash and cash equivalents. Prudent management is required to preserve the University’s financial viability. Internal loans will be managed so they do not compromise the operational liquidity of the University.

Capital Project Prioritization

For the foreseeable future, University funding and philanthropy are expected to be major sources of financing for the University’s plant investments. In assessing the possible use of debt, all other financing and revenue sources will be considered. State appropriation, philanthropy, project-generated revenues, research facilities and administrative (F&A) cost reimbursement, expendable reserves, and other sources are expected to finance a portion of the cost of the project. Debt is to be used strategically.

Management will allocate the use of debt financing within the University to include the prioritization of debt resources among all uses, including plant and equipment financing, academic projects, and projects with University-wide impact.

Every project considered for financing must have a defined, supportable plan of costs, including incremental operating expense and revenue, approved by management.

All capital construction projects that will be funded with University debt must be reviewed and approved by the Capital Projects Council (CPC) no later than January for inclusion in the annual Capital Improvements Request/Five Year Plan that is due to the Board of Regents on April 1 each year.

Financial Ratios and Analysis

The University will establish guidelines for overall debt using a select number of financial ratios. These ratios will be derived from the financial statements (the consolidated Annual Financial Report on a University-wide basis and on a campus specific basis, and interim quarterly financial statements when available), and should be consistent with some of the measures used by the marketplace. The ratios will guide capital planning and ensure central oversight of University-wide leverage levels. They will be calculated and reported when new financial statements are available and will be revised to reflect any changes in accounting standards.

The University also will prepare consolidated revenue reports on a quarterly basis using the format in bond disclosure documents.

The University will report on five ratios that provide information about the University’s (including KU Endowment) overall financial health. The definitions for these ratios can be found in Strategic Financial Analysis for Higher Education: Identifying, Measuring and Reporting Financial Risks (Seventh Edition).

The following five strategic financial ratios, when considered together and over time, will help to provide a clear, high level, assessment of the overall financial health of the University and its individual campuses. These ratios will be projected over a five year time frame for planning purposes.

  1. Primary Reserve Ratio. Measures financial strength by comparing expendable net assets to total expenses. This ratio provides a snapshot of financial strength and flexibility by indicating how long the University could function using its expendable resources without relying on additional net assets generated by operations. A negative ratio or decreasing trend over time indicates a weakening financial condition.
  2. Return on Net Assets Ratio. Determines whether the University is financially better, or worse, than in previous years by measuring total economic return. A decline in this ratio may be appropriate and even warranted if it reflects a strategy to better fulfill the University’s mission.  On the other hand, an improving trend in this ratio indicates that the University is increasing its net assets and is likely to be able to set aside financial resources to strengthen its future financial flexibility.
  3. Net Operating Revenue Ratio. Indicates whether total operating activities resulted in a surplus or deficit and measures the ability of the University to operate in the short term.
  4. Viability Ratio. Measures the availability of expendable net assets to cover debt should the University need to settle its obligations as of the balance sheet date. As this ratio falls below 1:1, the University’s ability to respond to adverse conditions, to attract capital from external sources, and its flexibility to fund new objectives is diminished. This ratio is regarded as an important indicator of the ability to assume new debt.
  5. Comprehensive Financial Index (CFI). The CFI is a combination of the four core ratios above. The figures are converted to strength factors on a common scale using specific weighing factors then totaled to reach a single CFI score. A score of 1 represents very little financial health, 3 (the threshold value) represents a relatively stronger financial position.

In addition, the Kansas Board of Regents policy identifies three ratios that must be a part of the university’s capital financing policy. These ratios will be forecast in accordance with the KBOR Capital Financing policy.

  1. Viability Ratio is described above. 
  2. Debt Burden Ratio is a tool for measuring debt affordability. This ratio examines the University’s dependence on borrowed funds as a source of financing its mission and the relative cost of borrowing to overall expenditures. It is computed by dividing annual principal (excluding refunded principal) and interest on all debt divided by total operating expenditures. The upper threshold for this ratio is 7.0%.
  3. Average Debt Service Coverage Ratio measures the excess of income over adjusted expenses to cover annual debt service payments. It provides an indication that the University has a net revenue stream available to meet its debt burden should economic conditions change. It is computed by dividing adjusted change in net assets by debt service (excluding refunded principal). 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 threshold for this ratio is not less than 2.0.

Types of Financing Products

Tax Exempt Bond Debt
The University recognizes the benefit associated with tax-exempt debt as well as the compliance burden, and therefor will manage the tax-exempt portfolio to maximize the portion of tax-exempt debt.

Taxable Bond Debt
Taxable debt will be utilized to fund projects that are ineligible for tax-exempt financing or for those projects for which the University wants to preserve maximum operating flexibility.

Direct financing agreements with the KU Endowment Association
The KU Endowment Association has established a Real Estate Investment Program in which it makes available up to $20 million in aggregate for direct financing agreements.

Capital lease purchase agreements
Capital lease purchase agreements may be used to strategically purchase capital construction or moveable equipment.  Capital lease agreements have an impact University financial position and will be reviewed by the Capital Financing Committee prior to execution.

Direct financing agreements with non-KU entities
Direct financing agreements may be used to strategically purchase capital construction or moveable equipment.  Direct financing agreements have an impact University financial position and will be reviewed by the Capital Financing Committee prior to execution.

Operating lease purchase agreements
Lease purchase agreements over $1 million may impact University financial position and will be reviewed by the Capital Financing Committee prior to execution.

Internal Loans
Internal loans of available funds in the University’s and affiliated corporation’s reserves/idle funds can provide an alternate source of funding when external debt is not available or when there is a gap between the receipt of funds such as a gift or grant and the date of acquisition or construction of a project. The life of an internal loan is generally more than one year.

The following guidelines apply:

  1. All requests for internal loans shall be submitted to the Capital Financing Committee (CFC) by the Capital Project Council (CPC). 
  2. Prior to the transfer of internal loan funds, a memorandum of agreement shall be executed by the Provost or Executive Vice Chancellor. The agreement shall identify the debt service fund source, formal repayment schedule, interest rate, and specified term.
  3. The maximum loan term is 10 years.
  4. The rate of Interest to be charged shall be no more than the tax exempt bond rates plus 100 basis points (1.0%). The annual interest rate will be determined March 1 and be effective for the following fiscal year.

Other
The University will consider other funding opportunities (i.e. joint ventures, real estate development, etc.) when appropriate and advantageous to the University.  Opportunities and financing sources will be evaluated within the context of the Capital Financing Policy.

Relationship with Credit Rating Agencies

The University will maintain ongoing communications and interaction with bond rating agencies to inform the agencies about the general credit structure and financial performance of the University in order to attain the highest credit rating possible.

Assignment of Responsibilities

Facilities Planning and Facilities Management

The University Architect and Directors of Design and Construction Management at Lawrence and Facilities at KUMC are responsible for estimating and defining capital project costs and in maintaining a list of projects that are to be considered by the Capital Financing Committee. They also are responsible for developing capital planning documents for the current year and the five-year capital plan that are reviewed and approved by the CPC and submitted to the Kansas Board of Regents by April 1 each year.

Debt Management

The Vice Chancellor/Chief Financial Officer will maintain a schedule of current and forecasted debt (external and internal) and associated payment of principal, interest, and fees. The Vice Chancellor/Cheif Financial Officer is responsible for the administration of all aspects of debt financing, including accounting, reporting, and coordination with financial advisors, underwriters, and bond counsel to issue new debt or refinance existing debt.

Management

A Capital Financing Committee consisting of the following members and any other individual designated by the Chancellor will meet on a regular basis to review the University’s internal and external debt capacity, liquidity measures, and projects requested to be funded in whole or in part with debt.

  • Vice Chancellor & Chief Financial Officer
  • KUL Vice Provost for Finance and Administration
  • KUL Comptroller
  • KUMC Vice Chancellor for Finance
  • KUMC Associate Vice Chancellor of Finance
  • The Chief Financial Officers of the The Chief Financial Officers of the University of Kansas Center for Research, Inc., the University of Kansas Medical Center Research, Inc. and Kansas Athletics, Inc.
  • University Architect

The capital construction projects to be considered must be submitted by the CPC.  Capital lease purchase agreements and Operating lease purchase agreements of $1 million or more must be submitted by Procurement ServicesThe Chief Business and Financial Planning Officer will present the Capital Financing Committee’s recommendations to the Capital Projects Council.

Post Issuance Monitoring and Compliance

Subsequent to each bond closing, the University’s Administration bears the responsibility of ensuring that tax law requirements are complied with throughout the time tax-exempt debt remains outstanding. Because most tax-exempt debt will remain outstanding for many years, it is important to have procedures in place that can be easily understood and implemented over time, even as responsible officers change. Such procedures should include, but not be limited to, record retention, arbitrage tracking, private business use, and continuing disclosure.

The Vice Chancellor & Chief Financial Officer will be the designated Bond Compliance Officer. The Assistant Director, Business and Financial Planning will maintain the procedures for Post Issuance Monitoring and Compliance.

 

Review of Capital Financing Policy

This Capital Financing Policy should be reviewed at least annually by Capital Financing Committee and changed as needed to reflect current conditions and practices. However, it is noted that consistent application of the University’s Capital Financing Policy provides evidence of debt management discipline over the long term. Accordingly, the Policy should be changed only when it no longer reflects the debt philosophy of the University.

Contact: 

Business & Financial Planning
1450 Jayhawk Blvd., 225 Strong Hall
Lawrence, KS 66045
Phone: 785-864-4868
Fax: 785-864-5599

Approved by: 
Chancellor
Approved on: 
Monday, October 6, 2014
Effective on: 
Monday, October 6, 2014
Review Cycle: 
Annual (As Needed)
Keywords: 
debt
Review, Approval & Change History: 

02/21/2017: Fixed broken link to Kansas Board of Regents Policy Manual.

07/01/2016: Updated to remove gendered pronouns.

03/02/2016: Revisions made to the policy: changed title of policy and committee, added CFPs of KUCR, KUMC RI, and KAI, and updated thresholds required under KBOR policy.  Prior to revising the policy, these revisions were approved by the Chancellor. 

04/02/2015: Fixed broken link to Board of Regents Policy Manual.

12/17/2014: Fixed link to Board of Regents Policy Manual.

11/24/2014: Added link to Board of Regents Policy Manual.

10/06/2014: Published in the Policy Library.

10/06/2014: This Debt Policy should be reviewed at least annually by the Debt Management Committee and changed as needed to reflect current conditions and practices. However, it is noted that consistent application of the University’s Debt Policy provides evidence of debt management discipline over the long term. Accordingly, the Policy should be changed only when it no longer reflects the debt philosophy of the University.

Financial Categories: 
Financial Oversight

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