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Debt Management

Chapter 3080
Updated July 7, 2015

Table of Contents

.010 Purpose

.020 Objectives

.030 Debt Financed Capital Project Prioritization

.040 Credit Rating Considerations

.050 Financial Ratios and Analysis

.060 Relationship with Credit Rating Agencies

.070 Debt Management

.080 Compliance

.090 Continuing Disclosure

.100 Questions


.010 Purpose

This document serves to articulate Kansas State University's philosophy regarding debt and to establish a framework to help guide decisions regarding the use and management of debt.  As the University establishes institutional priorities through its strategic planning process, including its campus master planning, the University will consider utilizing an appropriate mix of financing and funding sources, including State funding, private gifts, internal reserves and external debt.  The following guidelines provide the framework by which decisions will be made regarding the issuance of debt to finance particular capital improvements.

.020 Objectives

The following is intended to provide guidelines enabling Kansas State University to:

  1. Strategically use the University's credit to fund mission-critical projects.
  2. Manage the University's credit to maintain the highest acceptable credit rating that will permit the University to continue to issue debt at favorable rates.
  3. Use of key financial ratios provides management with feedback and assurances that the University is not exceeding its desired use of credit capacity.
  4. Optimize the debt portfolio as a whole.
  5. Ensure that the University is complying with applicable State and Federal laws.

This document is intended to incorporate and supplement the Kansas Board of Regent's Capital Financing Policy.

.030 Debt Financed Capital Project Prioritization

Recognizing that financial resources are not sufficient to fund all capital projects, debt must be managed strategically, while continuing to explore alternate sources of funding for projects.  External support, philanthropy, and direct State funding are critical to the University’s facilities investment plan. Generally, the University will utilize external debt financing, and/or the University’s reserves/cash balances for projects critical to the attainment of its strategic goals and for projects with identified revenue streams for the repayment of debt service. 

Each capital project is analyzed at its inception to ensure that capital is used in the most effective manner and in the best interests of the University. Every project considered for financing must have a defined, supportable plan of costs, including incremental operating expense and revenue, approved by management.  As part of this initial institutional review, the University also will assess, based on the project’s business plan, the sufficiency of revenues to support any internal or external borrowings.  The University may require a University department or college to segregate unrestricted funds for the purpose of debt service. 

Kansas State University designates the Assistant Vice President of Financial Services as the Bond Compliance Officer who is responsible for coordinating and overseeing the management of all University debt. The debt management committee, chaired by the bond compliance officer, will assist in making the determinations noted above and will meet on a regular basis to review anticipated projects and their impact on the University debt portfolio.  The debt management committee includes the following members:

Vice President Administration and Finance
Assistant Vice President – Division of Financial Services
Assistant Vice President – Division of Budget Planning
Financial Officer – Division of Facilities
Faculty Representative – Appointed with background in business, finance or related field

.040 Credit Rating Considerations

Maintaining a high credit rating will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting its strategic objectives. While the University’s decision to issue additional debt will be primarily focused on the strategic importance of the new capital improvement(s) the potential impact of a change in credit rating will also be reviewed. The University recognizes that external economic, natural, or other events may from time to time affect the creditworthiness of its debt.  Nevertheless, the University is committed to ensuring that actions within its control are prudent.

.050 Financial Ratios and Analysis

In order to maintain an understanding of the University’s standing in comparison to other like institutions, analysis using standard ratios and benchmarks must be made comparing the University to others in its peer group. This analysis can be used as an ongoing tool in determining trends, weaknesses and target strengths relating to the debt portfolio and health of the institution.

On an annual basis, the University will compile and prepare the debt capacity plan which includes the following ratios that provide information about the University’s 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) published by Prager, Sealy & Co, LLC; KPMG, LLP and Attain, LLC.

The Kansas Board of Regents Capital Financing Policy identifies three ratios that must be a part of the University’s debt capacity plan. 

  1. Viability Ratio.  Measures the availability of expendable net assets to cover debt. 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.
  2. Debt Burden Ratio is a percentage and represents the annual principal (excluding refunded principal) and interest on all debt divided by total operating expenditures.  The guideline for this ratio is to be no greater than 7.0%.
  3. Average Debt Coverage Ratio 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 principal and interest on new debt shall be based on the plan of financing for proposed projects.
  4. In addition the University will calculate and monitor the following ratios:
  5. 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.
  6. Return on Net Assets Ratio. Determines whether the University is financially better, or worse, than in previous years by measuring total economic return.
  7. 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.
  8. Comprehensive Financial Index (CFI).  The CFI is a combination of four core ratios (Viability, Primary Reserve, Return on Net Asset, and Net Operating Revenue).  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.

.060 Relationship with Credit Rating Agencies

Maintaining an ongoing positive relationship with rating agencies is essential to the University credit rating. The Division of Financial Services is primarily responsible for maintaining a relationship with Moody’s Investors Services and Standard & Poor’s Financial Services. This allows the rating agencies to have comprehensive knowledge of the University mission, operation, new challenges and initiatives. Financial Services staff will work with external financial advisors to prepare rating presentations for the rating agencies in order to provide updates of the University’s initiatives and operations.

.070 Debt Management

The Division of Financial Services will maintain a listing of current and anticipated future debt (external and internal) and a schedule of debt service payment on each debt issuance.  The division 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.

.080 Compliance

It is crucial that the University remains in compliance with all applicable state laws and regulations, and that when applicable requirements needed to ensure that a bond issuance will retain its tax-exempt status are adhered to. The Division of Financial Services, with the assistance of the Kansas Finance Development Authority, will annually complete a questionnaire for each bond issue that addresses many of the of tax exempt bond issuance concerns.  Additionally, debt service ratio requirements associated with each bond issuance, and updates of pertinent financial information that was provided at the time of issuance will be prepared and submitted to the Kansas Development Finance Authority as part of its external continuing disclosure compliance efforts.

.090 Continuing Disclosure 

When the University requests the Kansas Development Finance Authority (KDFA) to issue and sell bonds, notes or other obligations payable from a pledge by the University of general or specific revenues, an Official Statement is typically prepared to provide disclosure information to buyers of the Bonds.  The Official Statement contains information regarding the University and the Bonds, typically including (1) an Appendix A titled “The University” and (2) an Appendix B containing the University’s annual financial report (AFR).  The University Appendices, in particular, provide the majority of the disclosure information regarding financial and other information relating to the University.

In connection with each Official Statement, the President of the University or his/her designee provides a certification stating that the information contained in the Official Statement, as of the date of such Official Statement, does not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements contained in the Official Statement, in light of the circumstances under which they were made, not misleading.  The University also includes in such certification a statement that there has been no material adverse change in the financial position and affairs of the University from the date of the Official Statement to the date of issuance of the Bonds which was not disclosed in or contemplated by the Official Statement.

Information in the University Appendices, including the AFR, is filed annually for public market access as part of the University’s continuing disclosure undertakings with respect to outstanding Bonds. Additionally, information of the type included in the Official Statement, including the University Appendices and the AFR, is from time to time provided by the University to other municipal market participants, including rating agencies. 

In order to ensure compliance with the University’s disclosure obligations under federal securities laws and to provide such certification for future Bonds, these policies and procedures for reviewing and updating the University Appendices (collectively, the “Disclosure Policy”) are adopted.    The President or his/her designee may, as may be necessary, review the Disclosure Policy and provide updates.  By adopting this Disclosure Policy and by requiring staff to adhere to this Disclosure Policy, procedures to comply with the University’s disclosure obligations under federal securities law and to provide a reasonable basis for the certification described above are hereby formalized.

KEY PARTICIPANTS

  1. Office of Administration and Finance.  The Unit of Administration and Finance oversees the financial operations of the University and is charged with preparing the University Appendices.  The Vice President for Administration and Finance (VPAF) administers the Unit of Administration and Finance and serves as a member of the President’s cabinet, along with the Provost and Senior Vice President, the Vice President for Research, the Vice President for Student Life and Dean of Students, the Vice President for Communications and Marketing, the Vice President for Human Capital Services, the Director of Intercollegiate Athletics, the Chief of Staff and Director of Community Relations, the Director of Governmental Relations, the President of the Kansas State University Foundation, and the President of the Alumni Association.  The President's Cabinet meets regularly each month and discusses information material to the finances and operations of the University.
  2. Primary Offices.  In order to ensure compliance with the Disclosure Policy, the VPAF or his/her designee will collect, review and coordinate information regarding the operations of the University for inclusion in the University Appendices from each of the following offices within the University: (1) Division of Financial Services, (2) Budget Office, (3) Admissions Office, (4) Office of the Provost, (5) Office of General Counsel, (6) Office of Student Life, (7) Office of Research, and (8) Office of Planning and Analysis. 
  3. Coordination with the Related Entities.  To further facilitate compliance with the procedures set forth in this Disclosure Policy, the VPAF or his/her designee will collect, review and coordinate information regarding certain entities related to the University for inclusion in the University Appendices from each of the following related entities: (1) Kansas State University Foundation and (2) K-State Athletics, Inc.
  4. Disclosure Team.  To further ensure compliance with the procedures set forth in this Disclosure Policy, the President will appoint a Disclosure Team which will have general oversight of the entire disclosure process.

a. Composition of the Disclosure Team:  The membership of the Disclosure Team shall consist, at a minimum, of the VPAF, the Assistant Vice President of Financial Services, and the General Counsel.

b.   The duties of the Disclosure Team shall include:

(1)     maintaining appropriate records of compliance with the Disclosure Policy and decisions made with respect to issues which have been raised;

(2)     periodically checking to determine that the Disclosure Policy is being followed;

(3)     evaluating the effectiveness of the procedures contained in the Disclosure Policy and making recommendations to the President as to whether revisions or modifications to the process are appropriate;

(4)     review of all data and “significant” items referred to the Disclosure Team;

(5)     serving as the final level of review of the University Appendices before the University Appendices are provided to the President for review and approval for use in connection with new issues of Bonds or annual continuing disclosure filings; and

(6)     working in cooperation with the KDFA to identify and prepare all material financial and other information in preparation for the sale of Bonds and in order to respond to requests for information by rating agencies, regulators and other municipal market participants.

c.    The VPAF or his/her designee will retain the records of any Disclosure Team meetings and actions in accordance with the University’s record retention policy. 

UNIVERSITY APPENDICES ANNUAL UPDATE

Certain information in the University Appendices will be updated, revised and reissued no less frequently than annually at the time the annual continuing disclosure filings are required to be filed for outstanding Bonds.  Such annual continuing disclosure filings are required to include updated financial information and operating data in the University Appendices, as and to the extent set forth in the “Rule 15c2 12” continuing disclosure undertakings executed by the University at the time of issuance of certain outstanding issues of bonds.  This update and filing of the University Appendices are normally expected to coincide with the release of the AFR near the end of the calendar year.
In order to prepare the updates of the University Appendices the following procedures shall be as follows:

  1. The VPAF or his/her designee will contact the Primary Offices and Related Entities, if applicable, to ask them to raise potentially significant events (i) of which they may have become aware since the last update of the University Appendices.  Any of such matters that the members of the particular office believes is significant should be reported to and reviewed by the Disclosure Team.
  2. A draft of the University Appendices updates will be compiled by the VPAF or his/her designee based upon all input received and will be provided to a representative from the Office of General Counsel for review and comment.  The AFR is presented to the Vice President’s Council for review and comment.
  3. The Disclosure Team shall review all data and all “significant” items, and serve as the final level of review of the University Appendices updates before providing it to the President or his/her designee for review. 
  4. Upon approval by the President or his/her designee, the University Appendices update may be used for annual continuing disclosure.

UPDATES OF UNIVERSITY APPENDICES FOR THE ISSUANCE OF BONDS

The information in the University Appendices will be updated, revised and reissued in connection with each issuance and sale of Bonds.  In connection with each issuance and sale of Bonds there is expected to be prepared an Official Statement (including a preliminary official statement and a final official statement, each of which is expected to include the University Appendices).  In order to perform updates for an Official Statement, the procedures described above shall be followed.

In connection with the issuance and sale of Bonds, representations or certifications regarding the information in the University Appendices are made at the time of the pricing and sale of the Bonds and again upon the closing and delivery of the Bonds.  The information in the University Appendices for these purposes is, in the usual course of a transaction, finalized at the time the preliminary official statement is printed and distributed to market participants.  The printing of the preliminary official statement usually occurs one to two weeks prior to pricing and sale of the Bonds.  The closing and delivery of the Bonds usually follows pricing and sale of the Bonds by another one to two weeks.  While it is not anticipated that any changes will be required to be made to the University Appendices prepared at the time of printing the preliminary official statement pursuant to this section, because of the representations and certifications required at the time of pricing and sale and at the time of closing as described above, it is necessary to have a procedure in place to make sure that there have been no material changes in the financial condition and affairs of the University which would warrant a change to the University Appendices.  In order to determine whether there are any material changes that may require an update to the University Appendices, the procedures below will be followed in connection with the following events:  (i) printing of a preliminary official statement, (ii) signing of a purchase contract in a negotiated underwriting or taking of bids for a competitive sale and (iii) pre-closing.

  1. Preceding the occurrence of the above mentioned events, the VPAF or his/her designee will ensure the University Appendices include any material developments. 
  2. The Office of General Counsel will conduct its internal review to determine if there are any material changes to the “Litigation” section contained in the Official Statement. 
  3. If necessary, material developments will be raised to the Disclosure Team.

TRAINING

Annual training shall be conducted regarding disclosure obligations for each of the following or his/her designee:  (i) the VPAF, (ii) the Assistant Vice President of Financial Services, and (iii) the General Counsel.  It is intended that this training shall assist these staff members in identifying significant items that may need to be included in the University Appendices.

GENERAL PRINCIPLES

  1. Everyone involved in the disclosure process is responsible for raising potential disclosure items (matters that might be of sufficient import to affect the information included in the University Appendices) at all times in the process.
  2. Everyone involved in the disclosure process should err on the side of raising issues to the next level of the review chain.
  3. All participants in the process should raise any issue with the Disclosure Team at any time.
  4. The disclosure procedures are a “work in progress” and recommendations for improvement shall be solicited and regularly considered.
  5. The process of revising and updating the University Appendices should not be viewed as a mechanical insertion of more current numbers.  While it is not anticipated that there will be major changes in the form and content of the University Appendices at the time of each update, everyone involved in the process should consider the need for revisions in the form and content of the sections for which they are responsible at the time of each update.

 .100 Questions

Any questions regarding this chapter should be referred to the Division of Financial Services at (785) 532-6210.