Business Procedures Manual

Essential business procedural components for University System of Georgia institutions.

25.3 Capital Liability Structure

(Last Modified on May 14, 2015)

When utilizing the PPV program, USG institutions should ensure that all of the following parameters are agreed to by the cooperative organizations before entering into any rental agreements:

  1. Bonds issued by the cooperative organization should be at fixed rates with level debt service. Level debt service refers to a debt service schedule where the combined annual principal and interest amounts remain relatively constant over the life of the debt. Variable rate debt should be limited to situations where it can be demonstrated that risk is mitigated adequately to offset the potential volatility of market fluctuations. Any use of variable rate debt must be approved by the Vice Chancellor of Fiscal Affairs.

  2. Since revenue bonds are the underlying funding source for construction and acquisition of all PPV projects, specific income-producing revenue streams must be available to repay capital liabilities and related project costs. Therefore, effective upon issuance of this BPM section:

    • All projects must be self-liquidating, with dedicated revenue streams (including non-mandatory transfers if identified in the pro-forma as a portion of project funding) sufficient to cover annual lease payments, including amounts necessary to fund a repair and replacement reserve and operating expenses.
    • Pledges cannot be considered a revenue stream and institutions shall not enter into agreements with pledges as the revenue source.
    • Effective with adoption of Board Policy 9.8.3 on Capital Liability Capacity and Affordability, state appropriations and tuition funds shall not be used as revenue sources to make rental payments for any new PPV projects without the express written consent of the Chancellor and Vice Chancellor of Fiscal Affairs. Indirect cost recoveries and other revenue sources may be considered if the fund source supports the project’s use. For example, indirect cost recoveries may be used as a revenue stream to pay for an academic research building, but not as a source of funds for a student center.
    • If any funds remain in the CO’s project construction fund at completion of the project, they must be used directly to enhance the project or be applied to retire existing debt. Funds cannot be used to acquire additional assets that were not in the scope of the original project. If additional assets are deemed to be in scope and acquired as part of the project, they assets must be reported on the financial records of the institution, not on the financial records of the CO or its affiliate.

COs should monitor markets continuously for opportunities to refinance existing debt for savings. Four percent (4%) present value savings should be considered the floor for refinancing outstanding fixed rate debt. COs with synthetically fixed interest rates should monitor swap termination costs and interest rates for opportunities continuously to convert variable rate borrowings to long-term, fixed rate debt.

In accordance with Section 9.8.5 of the BOR Policy Manual, if a CO refinances or otherwise alters the terms of the underlying bond debt that reduces principal and interest payments on the debt, “USG institutions shall ensure that they achieve a corresponding reduction in the associated capital lease payments equal to at least fifty (50) percent of the cooperative organization’s savings.” The minimum of 50% will be calculated on the gross cash flow savings at closing, net of issuance costs. The rental agreement must be renegotiated to reflect this savings and USG institutions may not renew any rental agreements that have not been renegotiated to reflect the savings. While refinancing will change lease payments, the term length of the original lease should not be extended. Generally, the length of the lease term should correspond to the life of the asset.

BOR policy states that “an institution may benefit students through reducing the current mandatory and/or special fees used to support the particular PPV facility, through eliminating a planned future fee increase, through improving services offered associated with the PPV facility, or through fully funding institutional PPV reserves.” The Vice Chancellor of Fiscal Affairs must be notified in writing of any planned refinancing. Further, savings accruing to institutions must be documented and uses for those savings identified.

All rating agency reviews, including refinancings and annual reviews, must be coordinated with the Office of Fiscal Affairs.

COs may receive annual fees incorporated into the rental payment structure to cover expenses; however, those annual fees must be limited. Fees must be reasonable and only for services provided. Fees only may be charged based on amounts included in proforma financial statements as approved by the Vice Chancellor of Fiscal Affairs.

Projects should be developed so that net income from operations is sufficient to cover lease payments as well as generate sufficient project reserves. Project revenues, as reflected in the approved proforma, which may include income generated outside of the project, should support a minimum 1.05 project coverage ratio averaged over the life of the project. Exceptions may apply to State and Federal funded projects, as well as refinancing transactions. An adequate coverage margin is essential to fund the required project reserves outlined below.

Considerations for project proforma financial statements include:

  • Proformas must be developed based on achievable projections. For fee-based projects, revenues should be based on the Carl Vinson Institute of Government enrollment projections or other source approved by the Vice Chancellor for Fiscal Affairs. For other projects, such as housing, paid occupancy projections should not exceed 90%, unless accompanied by information that fully supports a higher paid occupancy rate projection.
  • Projects should be managed pursuant to project proformas. Expenditures must be managed actively to ensure that costs of operations do not exceed actual revenue growth.
  • Project proformas should include an overall project proforma, an institution proforma, and a CO proforma.
  • Proformas for all PPV projects must include revenue and expense projections, along with fund source detail. Proformas must be approved by the Vice Chancellor of Fiscal Affairs and submitted to the Integrated Review Team for approval (as outlined in Section 25.4) prior to proceeding to financing.
  • The final proformas associated with the financing, which should be consistent with proforma(s) submitted to the Integrated Review Team, shall require signatures of the institution’s chief business officer and chief financial officer of the cooperative organization.
  • In cooperation with USG system office, original financing proformas should be amended when refinancing occurs or when it is determined, based on project cash flow reports, that the original financing proforma no longer reflects current financial trends.
  • The lease term should never be greater than expected useful life of asset being financed.
  • Leases should be structured as direct financing leases, not sales type leases.
  • The BOR anticipates that any funds remaining in reserve accounts with the bond trustee will be gifted to the institution at bond maturity or the end of the lease term, whichever is less.
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