6.44 – Debt Management
A. Purpose
To provide guidelines for the issuance of debt and management of the college’s debt portfolio.
B. Policy
The college will utilize debt instruments in furtherance of its mission and strategic initiatives where it is deemed in the best interest of the college. The college will use debt instruments for capital projects or asset financing only.
C. Procedures
These procedures are not intended to be exhaustive but rather to establish a framework for guiding decision making regarding the application and management of debt. The college will consider various financing mechanisms, including debt, when planning for capital projects.
If the college seeks to utilize debt financing, the college will, in consultation with a contracted, qualified financial advisor(s) as applicable, select the instrument (e.g., bond, bank loan, line of credit) and method of sale (e.g., competitive, negotiated, private placement, etc.) most beneficial to the college as allowed by law.
General Guidelines
The college has adopted the following general concepts regarding issuance and management of debt:
- Debt will be used only for capital project/asset financing and not for operating purposes;
- The term of the debt instrument(s) used should align with the expected useful life of the project(s) or asset(s);
- The project/asset should be conducive to debt financing;
- Long-term, fixed-rate debt is preferred over short-term and/or variable rate debt. This is so the college’s debt service obligations and interest expenses are known, volatility is reduced, and total cost is well established and may be projected with accuracy over the term of the debt;
- The use of derivative instruments (e.g., interest rate swaps, options and futures contracts) is strictly prohibited;
- Debt service obligations will be incorporated into the annual college budget; and,
- The chancellor and board of trustees shall approve any new debt issuance, refunding of existing debt, defeasance, and any other significant action(s) related to the college’s debt obligations.
Financial Ratios and Analysis
To develop an understanding of the college’s position in consideration of the impact of any new debt issuances, the usage of standard, industry-recognized ratios and benchmarks is an important tool. These ratios may be used at a specific point in time to analyze the estimated impact of a new debt issuance or over a period of time by reviewing trends.
The chief financial officer will, at least annually following completion of the financial statement audit, prepare a report on the college’s debt capacity that includes the following:
- Viability Ratio that measures whether debt resources are strategically managed and whether there are sufficient expendable net assets to cover debt. This is calculated as expendable net assets divided by the sum of total operating and interest expense. The college seeks for this ratio to be at least 1:1, meaning expendable net assets are, at minimum, equivalent to those required to satisfy debt obligations.
- Debt Burden Ratio which represents the college’s dependence on borrowed funds for financing its mission and the relative cost of borrowing to overall expenditures. This is calculated as the current fiscal year’s debt service (principal + interest) divided by total expenditures. The college seeks for this ratio to be no more than 7%, which is, per the National Association of College and University Business Officers (NACUBO), the industry-accepted threshold.
- Debt Service Coverage Ratio that measures adjusted net assets available to cover annual debt service payments. This is calculated as the change in net assets plus depreciation and interest expense divided by the fiscal year’s debt service expenditures. This may be calculated for one year or an average if using data from multiple fiscal years. While no target ratio is specified, the college seeks to maximize this ratio, evidencing sufficient net assets to cover debt service obligations.
Other ratios, particularly those that are components of the Composite Financial Index (CFI) – the Primary Reserve Ratio, Return on Net Assets Ratio, and Net Operating Revenues Ratio – may be monitored as well. The college will also be mindful of any financial ratios required to maintain institutional and/or programmatic accreditation.
Compliance
The college’s debt issuances will comply with all applicable federal and state laws and regulations to ensure the college’s tax-exempt debt status is maintained. The college will also adhere to any debt-related requirements to maintain institutional or programmatic accreditation.
While not exhaustive, such measures include but may not be limited to:
- Any general obligation bond issuance shall be put to a vote of the citizens of the college’s taxing district and require a four-sevenths (4/7) or two-thirds (2/3) vote in favor, depending on the election date in accordance with applicable constitutional and statutory requirements, for the issuance to proceed;
- In accordance with constitutional requirements, the college, as a political subdivision of the State of Missouri, shall comply with the limit that general obligation bonds will not exceed fifteen (15) percent of the assessed valuation of the college’s taxing district;
- Retention of bond counsel for assistance with the issuance process, annual continuing disclosure filings to the Municipal Securities Rulemaking Board (MSRB), arbitrage rebate compliance, and other tasks;
- Coordination with an investment underwriter and advisor for any issuances and for general consultation and situation-specific assistance, such as with evaluating for refunding opportunities, bond defeasances, etc.; and,
- Completing required or voluntary reports requested by various agencies, such as the Missouri Department of Higher Education and Workforce Development (DHEWD).
For each issuance, the college will coordinate with the designated bond trustee, paying agent, fiscal agent, bond purchaser or lender, as applicable, for record-keeping, processing debt service payments, and submitting reimbursement requests. The chief financial officer or designee is primarily responsible for ensuring the college’s debt issuances, reporting, etc. adhere to applicable federal and state regulations.
The requirements of the college’s Tax-Advantaged Financing Compliance Procedure, maintained by the Finance office and available upon request, are incorporated herein for reference.
Financial Advisors and Underwriters
The college may select a firm(s) to serve as financial advisor(s) and/or underwriter(s) for assistance with structuring and/or issuing new debt. When utilizing the services of a financial advisor and/or underwriter, the college:
- Will utilize the RFQ process (see 6.35 – Selection of Professional Services) when selecting a financial advisor(s);
- Reserves the right to select more than one financial advisor or to refrain from selecting a financial advisor;
- Will seek to first retain a qualified financial advisor prior to selecting an underwriter because advisors have a fiduciary duty to act in the best interest of the issuer (the college);
- Where possible, will seek to select an independent financial advisor(s) as opposed to a “broker-dealer” that also provides underwriting services due to the potential for conflicts of interest; and,
- As recommended by the Government Finance Officers Association (GFOA), will require a two (2) year lockout period following the expiration of a financial advising agreement with a firm that also provides underwriting services (“broker-dealer”) until the firm becomes eligible to serve as an underwriter to avoid any potential conflicts of interest.
Credit Rating
Maintaining a regular, positive relationship with rating agencies is important to the college’s credit rating. A healthy credit rating ensures the college preserves the ability to access debt and finance capital projects at favorable interest rates. The college acknowledges that while credit ratings consider factors beyond its control (e.g., macroeconomic, natural factors), the college is committed to ensuring those factors within its control (e.g., reserves, total debt, annual debt service) are appropriately managed.
The chief financial officer or designee is primarily responsible for maintaining a relationship with the credit rating agency(ies), keeping administration apprised of any updates, pending rating reviews, etc.
D. Definitions
Derivatives, as defined by the Government Finance Officers Association, are financial instruments created from or whose value depends upon (is derived from) the value of one or more separate assets or indices of asset values.
E. Authority
This policy and these procedures are maintained under the authority of the chief financial officer.
F. Related Policies
6.35 – Selection of Professional Services
G. Implementation
Policy approved and adopted by the Board of Trustees on 1/10/2024
Purpose, Procedures, Definitions, Authority and Related Policies approved and adopted by the Chancellor’s cabinet on 12/19/2023.
Set for review in fiscal year 2026-2027