Ohio Administrative Code
Title 3341 - Bowling Green State University
Chapter 3341-6 - Compliance with Occupational Safety and Health Standards
Section 3341-6-19 - Debt policy
Current through all regulations passed and filed through September 16, 2024
(A) Policy statement and purpose
It is the policy of Bowling Green state university to utilize various forms of debt financing to fund the acquisition and construction of capital assets and to provide for university liquidity and cash flow requirements. The following debt policy sets forth guidelines applicable to issuance of debt, subject in all cases to approval of the university's board of trustees.
(B) Policy
No debt (including all short and long-term obligations, guarantees, and other debt instruments) shall be incurred except as approved by the university's board of trustees. The board shall be advised by the financial affairs/facilities committee on all debt related topics.
Bowling Green state university's debt capacity can be defined as:
In general, the university's debt capacity shall be evaluated and determined by the consideration of the following factors:
The university's legal debt capacity as specified in applicable debt covenants and statutory restrictions shall be the starting point for evaluating the appropriate level of new and total indebtedness.
The university's debt capacity is in part a function of current and pro forma operations. While a target range shall be established, annual debt service (principal and interest payments) as a per centage of the operating budget are expected to vary over time as the university makes judgments about its highest priorities and needed investments.
Credit considerations encompass a broad array of factors that affect how the university is viewed by the financial and capital markets. Many of these factors will be analyzed by the credit rating agencies in the determination of the university's credit rating, which is an important reflection of the university's operating, management and financial strengths, and a significant determinant of both its access to and cost of capital.
Debt capacity is generally measured through ratio analysis. Ratios provide a consistent measure of the debt level carried by an institution in relation to its balance sheet, revenues and expenses.
Ratio analysis provides insight into the debt capacity from two perspectives: by monitoring trends over time and in comparison to benchmarks. It is the intent of the university to maintain a strong financial position that will support a favorable ratio analysis measured against national standards, peer and in-state comparisons, and credit rating agency medians. Some of the key ratios currently utilized for evaluating debt capacity are contained in appendix A to this rule.
The university shall utilize long-term debt financing solely for capital projects. In general, this will include:
The university shall determine the appropriate duration and the specific amortization schedule of a proposed debt issue by evaluating the overall debt portfolio. Considerations shall include the life of the assets being financed, interest rate costs, risk assessment, general market conditions, and the university's future financial plans. If and when bullet or balloon payments are used, the university shall establish and fund reserves over the life of the debt issue to assure that the bullet or balloon maturity payments will not unduly impact any one fiscal year. In cases where the project is intended to generate revenues that will fund the underlying debt, bullet or balloon payment structures shall not be used.
The administration shall periodically review all outstanding debt to determine if refinancing opportunities exist. Refinancing or restructuring of current debt may be used to reduce debt service payments or to change covenants in order to benefit the university's financial or operating position.
The university may use tax exempt and taxable debt as market conditions, tax laws and other considerations allow. For example, the university may utilize taxable debt in certain situations where Federal tax law limits the use of tax-exempt debt for particular projects, such as those where use of the project includes both private and not-for-profit purposes. The university may also consider taxable debt under other circumstances where market conditions, speed and flexibility make it an appropriate alternative.
The university shall consider the use of call options to reduce the university's overall cost of capital and to provide maximum flexibility in its debt portfolio. The use of non-callable debt beyondten years is generally to be avoided because of the potential constraints such an issuance may place upon the university's future financing plans.
The university may consider the use of alternative borrowing strategies such as; subordinated general receipts, project revenue alternatives and privatized options as market conditions and university financing objectives warrant.
The university may structure its overall debt portfolio, using a combination of fixed and variable rate debt, to provide an appropriate and prudent balance between interest rate risk and the cost of capital as well as to integrate asset-liability management.
Variable rate debt is an appropriate tool that the university may use to manage its assets and liabilities. Variable rate debt allows the university greater diversification in its debt portfolio and may reduce its overall interest costs. In addition, variable rate debt typically can be called more readily which would provide greater flexibility to debt management especially when pledge payments toward a project are expected. However, the use of variable rate debt increases interest rate risk as a result of market fluctuations and potential tax law changes.
The amount of variable rate debt maintained by the university can vary depending on market conditions. When financings are being considered in a low interest rate environment, it may be prudent to secure fixed-rate financing. In high interest rate environments, variable rate financings may be preferable because:
Likewise, fixed rate debt provides a different set of advantages for the university. Fixed rate debt ensures a known and set obligation for the university which assists management in planning and budgeting. In low interest rate environments, fixed rate debt can secure significant financings at relatively low costs for extended periods.
Interest rate swaps and other derivative products can be appropriate interest rate management tools that can help the university meet important financial objectives. Properly used, these instruments can increase the university's financial flexibility, provide opportunities for interest rate savings or enhanced investment yields, and help the university manage its balance sheet through better matching of assets and liabilities. Swaps may be integrated into the university's overall debt and investment management guidelines and should not be used for speculation or leverage.
The university may use interest rate swaps and other derivative products if it is reasonably determined that the proposed transaction will:
The university may utilize the following financial products on a current or forward basis, after identifying the objective(s) to be realized and assessing the attendant risks.
The instruments outlined above are only intended to be examples of various interest rate hedging products. They are not intended to be a limitation on other derivative products that the university may consider.
The vice president for finance and administration shall receive approval from the board of trustees prior to entering into any swap or derivative product arrangement related to the university's debt. The financial affairs/facilities committee shall evaluate the recommendation for the use of such products and shall evaluate the appropriateness of the instrument in meeting the university's financial objectives before making a recommendation to the board of trustees for approval.
The university typically relies on the operating budget for payment of debt service on long-term debt. Other sources may include permitted endowment revenue and pledge payments.
Where the university identifies a capital project to be funded through the issuance of long-term debt and funded entirely through operations, such debt shall be included in financial modeling as an operational item sufficient to support debt service.
Where the university identifies a capital project to be funded through the issuance of long-term debt and funded by revenues to be generated by the project, the projected revenues shall flow through the operating budget. In evaluating debt on a new revenue generating project, special attention shall be given to projects that are replacing an existing debt-free revenue generating project that is planned to be decommissioned. The revenue generated on the new project should be evaluated to determine if it can replace revenue generated from the decommissioned facility as well as satisfy the debt service on the new project.
The vice president for finance and administration shall present to the financial affairs/facilities committee of the board of trustees periodically the following information:
Through the 1997 enactment of Senate Bill 6, a standardized method for monitoring the financial health of Ohio's state-assisted college and universities was established. Key ratios monitored by the Ohio board of regents (OBOR) are:
Each ratio is assigned a score of one to five based on predetermined ranges and then weighted, with thirty petibent to the viability ratio, fifty per cent to the primary reserve ratio, and twenty per cent to the net income ratio. The scoring process emphasizes the need for campuses to have strong expendable fund balances, manageable plant debt, and a positive operating balance. The highest possible composite score is five and zero tenths. The minimum acceptable composite score is one and seventy-five hundredths. A score at or below this minimum level for two consecutive years will result in being placed on fiscal watch by OBOR.
In addition to the above ratios, the major rating agencies such as Moody's and Standard')and Poor's track a series of financial indicators. The university will regularly provide a discussion of these indicators and trends.
Date: December 6, 2013
