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 July 1, 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
(1)
									Debt
			 administration and oversight
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.
(2)
									Principles governing use of debt Unless otherwise
			 determined by the board of trustees:
(a)
										The university may incur long-term debt to acquire and
			 construct capital assets.
(b)
										Debt shall not be used to finance current
			 operations.
(c)
										Debt shall not be incurred unless projected debt
			 service requirements (principal and interest payments) and operating costs
			 associated with any new capital improvements financed by the debt can be
			 accommodated within the university's operating budget.
(d)
										The university
			 shall seek to maintain a long term credit rating in the A category or
			 higher.
(e)
										The university shall seek to maintain a debt portfolio
			 that balances interest rate risk and the long-term cost of capital given market
			 conditions and overall university financing objectives.
(f)
										The university
			 shall maintain debt capacity ratios in excess of the minimum acceptable
			 composite score as outlined by the state of Ohio (see appendix A to this rule)
			 and seek to achieve its credit rating, cost of capital and long-term viability
			 objectives.
(g)
										The university's debt portfolio shall be evaluated in
			 the context of all ofits assets and liabilities. Diversification within the
			 debt portfolio may be used to balance risk and liquidity.
(h)
										Capital and
			 operating leases are financing tools that may be utilized, where appropriate,
			 to help achieve the university's objectives concerning the use of debt.
			 Consideration shall be given to the accounting impact of lease
			 financing.
(3)
									Debt capacity
Bowling Green state university's debt
				capacity can be defined as:
(a)
										A level of outstanding debt at which the university can
			 maintain its high credit ratings and a low cost of borrowing.
(b)
										A practical level
			 of annual debt service payments that the university can comfortably cover from
			 predictable sources of repayment.
In general, the university's debt
				capacity shall be evaluated and determined by the consideration of the
				following factors:
(i)
											Legal authorizations and limitations
(ii)
											Current and pro
			 forma financial operating performance
(iii)
											Credit
			 considerations, including the university's credit rating(s)
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.
(4)
									Projects that may be considered for debt
			 financing
The university shall utilize long-term
				debt financing solely for capital projects. In general, this will
				include:
(a)
										Capital projects where it is unlikely that sufficient
			 donor funding for the project will be secured.
(b)
										Capital projects
			 where all or the majority of the project is to be funded through gifts and
			 contributions: however, the timing of payment of those gifts and pledges may
			 extend beyond the construction period.
(c)
										Capital projects
			 which are projected to generate sufficient cash flow to cover operating
			 expenses and contribute in full or substantially in-full to the costs of debt
			 service.
(5)
									Other considerations regarding the use of debt
(a)
										Term of
			 debt
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.
(b)
										Refinancing and restructuring of debt
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.
(c)
										Use of tax-exempt
			 versus taxable debt
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.
(d)
										Use of call
			 options
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.
(e)
										Use of
			 alternative borrowing strategies
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.
(6)
									Acceptable
			 approaches for debt structure
(a)
										Mix of fixed and variable rate debt
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:
(i)
											variable rate debt is generally lower in rate than
			 fixed rate debt; and
(ii)
											variable rates can be expected to decrease as interest
			 rate levels decrease.
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.
(b)
										Interest rate
			 swaps and other derivative products
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.
(c)
										Rationale for utilizing interest rate swaps and other
			 derivative products
The university may use interest rate
				swaps and other derivative products if it is reasonably determined that the
				proposed transaction will:
(i)
											Optimize capital structure, including the schedule of
			 debt service payments and/or fixed vs. variable rate
			 allocations.
(ii)
											Achieve appropriate asset/liability
			 match.
(iii)
											Reduce risk, including:
(a)
												Interest rate
			 risk
(b)
												Tax risk
(c)
												Liquidity renewal
			 risk
(iv)
											Provide greater financial flexibility.
(v)
											Generate interest
			 rate savings.
(vi)
											Enhance investment yields.
(vii)
											Manage exposure
			 to changing markets in advance of anticipated debt issuances (through the use
			 of anticipatory hedging instruments).
(d)
										Permitted
			 instruments
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.
(i)
											Interest rate
			 swaps, including fixed, floating and/or basis swaps.
(ii)
											Interest rate
			 caps/floors/collars.
(iii)
											Options, including swaptions, caps, floors, collars,
			 and/or cancellation or index based features.
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.
(e)
										
			 Authorization
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.
(7)
									Payment of debt
			 service
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.
(8)
									Reporting
			 requirements
The vice president for finance and
				administration shall present to the financial affairs/facilities committee of
				the board of trustees periodically the following information:
(a)
										An overall review
			 of the university debt portfolio, balance sheet and debt issuance
			 plans.
(b)
										A comprehensive schedule of long-term debt issues and
			 underlying structure of debt.
(c)
										A schedule of
			 each issuance that has an associated derivative product and review of its
			 purpose in line with university objectives. The schedule shall include, but not
			 be limited to, information on the counterparty risk, termination risk, basis
			 risk, and liquidity and remarketing risk.
(9)
									Debt policy
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:
(a)
										Viability ratio:
			 expendable net assets divided by total debt. This ratio is a measure of an
			 institution's ability to retire its long-term debt using available current
			 resources. A viability ratio in excess of one hundred per cent indicates that
			 the institution has expendable fund balances in excess of its plant debt. A
			 viability ratio above sixty per cent is considered good, while a ratio below
			 thirty per cent may be a cause for concern.
(b)
										Primary reserve
			 ratio: expendable net assets divided by total operating expenses. This ratio is
			 a measure of an institution's ability to continue operating at current levels
			 without future revenues. A primary reserve ratio of ten per cent or greater is
			 considered good, while a ratio below five per cent may be a cause for
			 concern.
(c)
										Net income ratio: change in total assets divided by
			 total revenues. This ratio measures an institution's financial status in terms
			 of current year operations. A negative net income ratio results when an
			 institution's current year expenses exceed its current year revenues. A
			 positive ratio indicates the institution experienced a net increase in current
			 year fund balances.
(d)
										Composite score: weighted summary statistic of the
			 above three ratios.
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