Ohio Administrative Code › Title 3342 - Kent State University › Chapter 3342-7 - Policies on Treasurer and University Funds › Section 3342-7-09 - University policy regarding issuance of debt

Current through all regulations passed and filed through July 1, 2024
(A) Policy statement. This policy provides a
			 framework for implementing the university's debt strategy. This policy should
			 be reviewed periodically and adjusted to satisfy the university's policy
			 objectives. This policy establishes the university's criteria for issuing debt,
			 and the factors to consider when evaluating the long-term capital structure of
			 the university. These factors include the amount of fixed and variable interest
			 rate exposure in the debt portfolio, the amortization of debt, the university's
			 debt capacity, the amount of taxable and tax-exempt debt, and the criteria for
			 refinancing existing debt. This policy will help the university lower its cost
			 of capital, manage its debt risk, and optimize its debt capacity. The board of
			 trustees shall oversee the university's debt issuance strategy in consultation
			 with the senior vice president for finance and administration.
(B) Criteria for issuing debt. The priority
			 of a certain project, the expected use of a facility, and the likelihood that a
			 combination of philanthropy, existing designated reserves and future budget
			 allocations can fund a portion of the cost of a project are significant factors
			 in determining whether debt is the appropriate financing vehicle for a project.
			 Revenue producing assets such as research facilities and residence halls are
			 prime candidates for debt financing due to their ability to help service the
			 debt. In addition, academic projects that allow the university to meet its
			 strategic objectives are often debt financed. Lastly, the cost of core utility
			 and parking improvements are typically debt financed to match the cost to the
			 useful life of the improvement.
(C)
			 Fixed versus variable rate debt. Historical trends indicate that variable rate
			 debt provides the lowest cost of capital, but variable rate debt would
			 introduce operating budget volatility from rising interest rates. Endowment
			 assets, interest rate caps and swaps, and rate stabilization funds all can help
			 to manage variable rate exposure. The university should consider historical
			 interest rates when considering fixed versus variable rate exposure. The
			 specific amount of variable rate exposure would depend on market conditions and
			 the type of facility to be financed. Before issuing variable rate bonds, the
			 university should determine the assumed variable rate for budget purposes, and
			 its plans to address positive and negative variances from the assumed
			 rate.
(D) Retirement of principal.
			 Bonds issued by the university may mature in annual or periodic installments,
			 either as serial bonds or as term bonds with mandatory redemption requirements.
			 A bullet bond structure is one in which all of the principal of the entire bond
			 issue matures on one date. Bullet maturities provide operating flexibility.
			 However, bullet maturities require the financial discipline to charge the
			 current budget for principal amortization that will not occur for several
			 decades. The budget impact of bullet maturities should be determined prior to
			 issuance. To offset the long-term refinancing risk of bullet maturities, the
			 university should not structure all its bonds as bullet maturities and should
			 structure other bonds as serial or term bonds with periodic amortization of
			 principal. Serial, term or bullet bonds may be structured with optional call
			 features that permit them to be retired prior to maturity by early redemption.
			  The university's administration has the opportunity to serve
			 as a "central bank" charging debt service for a particular project to the
			 appropriate budget, and recycling the principal portion of the repayment to
			 fund a different project. While this approach introduces some record keeping
			 complexity, the university will issue bonds less frequently, reducing its risks
			 related to market timing, and transaction costs.
(E) Credit rating debt capacity and operating
			 capacity to service debt. The university should understand the potential impact
			 of any increased debt on its credit rating and the cost of bond insurance
			 before issuing new debt. The university's decision to issue additional debt
			 should be primarily focused on the strategic importance of the new facility and
			 not solely on the potential impact of a change in credit ratings or increase in
			 bond insurance premium. The university should continue to monitor the financial
			 performance of peer institutions because the university's credit ratings are a
			 combination of absolute and relative performance versus peers. In addition to
			 credit rating considerations, the university will need to analyze its ability
			 to service any additional debt without adversely impacting operating
			 budgets.
(F) Taxable versus
			 tax-exempt debt. The university may need to issue taxable debt in the future,
			 depending on the use of the facility. For example, if the use of a facility
			 includes a significant portion of private use or requires flexibility for a
			 future change in use, taxable debt may be preferred. The university should
			 continue to maximize the amount of tax-exempt bonds in the debt portfolio to
			 reduce interest expense.
(G)
			 Refinancing of existing fixed rate debt. The university should monitor the
			 markets for opportunities to refinance existing fixed rate debt for savings.
(1) For the purposes of this policy, "advance
			 refunding" refers to the refinancing of tax-exempt debt with new tax-exempt
			 debt if the optional redemption or maturity date of the refunded bonds are more
			 than ninety days away. An advance refunding can only be accomplished with a
			 taxable structure, at least until the refunded bonds are within ninety days of
			 the optional redemption or maturity date. The university will consider a
			 taxable advance refunding of fixed rate bonds only if present value saving
			 exceed three percent of the par amount to be refunded.
(2) For the purposes of this policy, "current
			 refunding" refers to the refinancing of tax-exempt debt within ninety days of
			 the optional redemption or maturity date. If fixed rate bonds are eligible for
			 a current refunding, the university should refinance the debt if present value
			 savings are greater than one percent of par. Alternatively, the university
			 could refinance the fixed rate bonds with variable rate bonds within ninety
			 days of the optional redemption or maturity date if the university wanted to
			 adjust the mixture of fixed and variable rate bonds in the debt
			 portfolio.