612  Debt Management

Approved by Board of Trustees
Effective Date: June 5, 2017
Responsible Division: Business and Finance
Responsible Office:  Business and Finance
Responsible Officer:  Associate Vice President, Business and Finance

I. Purpose

This policy provides written guidance about the amount and type of debt issued by governments, the issuance process, and the management of the debt portfolio. A properly developed debt management policy:

A.  Identifies policy goals and demonstrates a commitment to long-term financial planning;

B.  Improves the quality of decisions; and

C.  Provides justification for the structure of debt issuance.

Adherence to a debt management policy signals to rating agencies and the capital markets that the University is well-managed and should meet its obligations in a timely manner.

Debt levels and their related annual costs are important long-term obligations that must be managed within available resources. An effective debt management policy provides guidelines for Middle Tennessee State University (MTSU or University) and the Board of Trustees (Board) to manage its debt programs in line with those resources.

II. Introduction

A.  The Board adopts the following policies concerning debt management.

B.  Pursuant to T.C.A. § 49-3-1205(11), whenever the Board takes action under Chapters 4, 7-9, and 12 of Title 49 to borrow money for any purpose, the Board must first seek the approval of the Tennessee State School Bond Authority (Authority), created in 1965 under the Tennessee State School Bond Authority Act, T.C.A. § 49-3-1201 et seq. through the Tennessee Board of Regents (TBR). The Authority is a corporate governmental agency and instrumentality of the State of Tennessee, whose purpose is to finance capital projects for public institutions of higher education located in Tennessee by issuing its bonds and notes.TBR has entered into a Second Program Financing Agreement (Agreement) as of November 1, 1997, with the Authority for the financing of projects for public institutions.

C.  At this time, the Board chooses to borrow only through the Authority; however, with the approval of the Authority, the Board reserves the right to utilize other borrowing methods, should special circumstances arise.

D.  The Authority has financed a variety of higher education projects including, but not limited to, dormitories, athletic facilities, parking facilities, student activities/recreation centers, research laboratories, and major equipment purchases. These projects could be contrasted with capital projects for basic academic needs such as classrooms and libraries that are funded from the proceeds of the State’s general obligation bonds issued by the State Funding Board and for which the public institutions are not obligated to pay the debt service.

III. Goals and Objectives

A.  The Board is establishing this policy as a tool to ensure that financial resources are adequate to meet the University’s long-term debt program and financial planning.

B.  In addition, the policy helps to ensure that financings undertaken by the Board satisfy certain clear objective standards designed to protect the Board’s financial resources and to meet its long-term capital needs.

1.  The goals of this policy are:

a.  To document responsibility for the oversight and management of debt related transactions;

b.  To define the criteria for the issuance of debt;

c.  To define the types of debt approved for use within the constraints established by the General Assembly;

d.  To define the appropriate uses of debt; and

e.  To minimize the cost of debt.

2.  The objectives of this policy are:

a.  To establish clear criteria and promote prudent financial management for the issuance of all debt obligations;

b.  To identify legal and administrative limitations on the issuance of debt;

c.  To ensure the legal use of the Board’s direct debt issuance authority;

d.  To maintain appropriate resources and funding capacity for present and future capital needs;

e.  To evaluate debt issuance options;

f.  To promote cooperation and coordination with other stakeholders in the financing and delivery of services;

g.  To manage interest rate exposure and other risks; and

h.  To comply with Federal Regulations and Generally Accepted Accounting Principles (GAAP).

IV. Debt Management

A.  Purpose and Use of Debt Issuance

1.  Debt may be used to finance projects identified by the University and approved by the Board. Projects are identified and included in the University’s approved capital plan that is submitted annually to the Tennessee Higher Education Commission (Commission). After consideration by the Commission, these projects are incorporated into the State of Tennessee annual budget (as disclosed projects). From time to time, mission critical projects not considered as part of the annual process will be brought to the Commission by the Board for intra-year financing.

2.  Debt may be used to finance project costs which include all direct capital costs and indirect capital costs of projects, including, but not limited to, costs of construction and acquisition, costs of issuance of debt, funded interest on debt, and amounts to fund or replenish reserves, if and to the extent approved by the Authority. In compliance with Article II, Section 24 of the Tennessee Constitution, no budgeted operational expenditures (including internal employee labor) shall be reimbursed with debt proceeds, unless such debt is retired/repaid within the fiscal year of issuance.

B.  Debt Capacity Assessment

1.  The debt capacity of the TBR is partially reliant on the debt capacity of each institution under its jurisdiction. Due to this reliance, this policy requires the assessment of the debt capacity on a project-by-project basis as each project is considered. Debt capacity of each project is based on debt service coverage, which measures the actual margin of protection for annual debt service payments from the annual pledged revenue. The pledged revenue plus the pledge of Legislative Appropriations must meet a two (2) times coverage test for the project to be approved for debt funding. In other words, total unrestricted revenues of the University must be at least two hundred percent (200%) of the annual debt service.

2.  Revolving Credit Facility (RCF) Program is limited to the amount stated in the Program Resolution, as amended, and by the amount allowed in the Credit Agreement.

C.  Federal Tax Status

1.  Tax-Exempt Debt. The Board and TBR will use its best efforts to have projects eligible for financing with tax-exempt debt based on the assumptions that tax-exempt interest rates are lower than taxable rates and that the interest savings outweigh the administrative costs, restrictions on use of financed projects, and investment constraints.

2.  Taxable Debt. The Board and TBR will agree to financing of projects with taxable debt when projects are not eligible to be financed with tax-exempt debt or when the administrative costs, restrictions on use of financed projects, and investment constraints outweigh the benefit of tax-exempt rates.

D.  Legal Limitations on the Use of Debt

1.  Pursuant to T.C.A. § 49-3-1207(d)(4), limitations on the purpose to which the proceeds of sale of bonds/notes or loans may be applied are contained in the resolution(s) authorizing the bonds/notes or loans (revolving credit facility).

2.  No debt may be issued for a period longer than the useful life of the capital project it is funding. 

V. Types of Debt

A.  Pursuant to T.C.A. § 49-3-1207, the Authority is authorized from time to time to issue its negotiable bonds and notes.

B.  The Vice President for Business and Finance, or designee, will work with TBR and the Authority concerning the type of debt used to fund the University’s projects.

C.  The Board will request funding through short term debt, as needed, to fund projects during their construction phase and to fund projects with an average useful life of ten (10) years or less.

VI. Debt Management Structure

The Board, when requesting financing for a project, shall request the Authority, through TBR, to structure the funding:

A.  Term. All capital projects financed through the issuance of debt will be financed for a period not to exceed the useful life of the projects, but in no event will the term exceed thirty (30) years.

B.  Financed (Capitalized) Interest

1.  Certain projects may require the use of capitalized interest from the issuance date until the University has beneficial use or occupancy of the financed project.

2.  Interest may be financed (capitalized) through a period permitted by federal law and the Authority’s Second Program General Bond Resolution, if it is determined that doing so is beneficial.

C.  Debt Service

1.  Debt issuance shall be planned to achieve relatively net level debt service. The Board shall not use bullet or balloon maturities, absent sinking fund requirements, except in those instances where these maturities serve to make existing overall debt service level or to match a specific income stream.

2.  No request shall be made to the Authority for debt to be structured with deferred repayment of principal, unless such structure is specifically approved by affirmative vote of the members of the Board and TBR.

VII. Refunding Outstanding Debt

A.  At least semiannually, Authority staff, with assistance from the Authority’s Financial Advisor, analyzes outstanding bond issues for refunding opportunities, whether for economic, tax-status, or project reasons.

B.  Consideration is to be given to anticipated costs and administrative implementation and management.

C.  The Board shall report to the Authority a need for refunding when:

1.  The refunding of the debt is necessary due to a change in the use of a project that would require a change to the tax status of the debt.

2.  The project is to be sold or no longer in service while still in its amortization period.

3.  Restrictive covenants prevent the issuance of other debt or create other restrictions on the financial management of the project and revenue producing activities.

D.  The Board will request the refunding term to be no longer than the term of the originally issued debt. 

VIII. Reserve Funds

A.  Debt Service Reserve Fund

1.  The Authority’s Second Program General Bond Resolution establishes a Debt Service Reserve Fund to be set up for each bond that is issued.

2.  If future Authority bond resolutions do not require such a reserve fund, this provision is not required.

B.  Interest Rate Reserve Fund

1.  The Authority establishes an interest reserve fund for the RCF Program for each project. The interest reserve fund provides security for interest due on the loans between billings.

2.  The Board will pay on a monthly basis based on the amount of loans issued.

3.  When a project is either repaid or taken to bonds, the amount invested in the reserve fund will be credited back to the University.

IX. Risk Assessment

A.  The Assistant Vice President for Campus Planning, subject to approval of the Vice President for Business and Finance, will evaluate each transaction to assess the types and amounts of risk associated with that transaction, considering all available means to mitigate those risks.

B.  The Assistant Vice President for Campus Planning, subject to approval of the Vice President for Business and Finance, will evaluate all proposed transactions for consistency with the objectives and constraints defined in this policy.

C.  The following risks will be assessed before issuing debt:

1.  Change in Public/Private Use. The change in the public/private use of a project that is funded by tax-exempt funds could potentially cause a debt issue to become taxable.

2.  Default Risk. The risk that revenues for debt service payments are not all received by the due date.

3.  Liquidity Risk. For variable rate debt, the risk of having to pay a higher rate to the Authority for the liquidity provider in the event of a failed remarketing.

4.  Interest Rate Risk. For variable rate debt, the risk that interest rates will rise, on a sustained basis, above levels that would have been set if the issue had been fixed.

5  Rollover Risk. For variable rate debt, the risk of the inability to obtain a suitable liquidity facility at an acceptable price to replace a facility upon termination or expiration of the contract period.

X. Board Representations

To ensure compliance with the Second Program Financing Agreement, during each budget cycle, the University shall review all outstanding projects financed in whole or part by the Authority and submit a certification approved the Board asserting the following:

A.  The University has full power and authority to undertake or use each project and to comply with all requirements of the Agreement entered into between the TBR and the Authority;

B.  All necessary approvals or authorizations by the State (or any agency, subdivision or sub-entity) with respect to each Project have been or will be obtained;

C.  Construction, acquisition, renovation or improvement by the University (directly or indirectly) with respect to each Project shall be conducted pursuant to State law;

D.  The University will proceed with due diligence towards completion of each Project, and will complete each Project with other funds available to the University if Authority funds are not sufficient to complete the Project;

E.  The University will complete each Project free and clear of all liens and encumbrances;

F.  The University will neither (i) permit any encumbrance which affects the TBR’s ability to honor its commitments under the Agreement nor (ii) assign the Agreement or the TBR’s rights, title or interest in or to any Project;

G.  The University will operate, maintain and keep, or cause the operation, maintenance and functioning of, the Project in good repair and condition, including the provision of and payment for necessary utilities and insurance coverage in accordance with State policy;

H.  The University will comply with all laws, rules, and regulations governing the University and each Project;

I.  The University will permit the Authority or its representatives to enter projects during regular business hours for purpose of inspection; and

J.  The University will take no action, nor will it fail to take any action, which would cause the Authority to violate any tax covenant with respect to any Project; all representations made by the University to the TBR, whether or not contained in the Agreement, as to the use of projects shall at all times be true, complete and correct; and the University will inform the TBR in advance of any actual or potential change in use or ownership of any Project at the time such change is first known to or considered by the University.

XI. Transparency

A.  As a public body, the Board shall comply with the Tennessee Open Meetings Act.

B.  Additionally, the University will assist the Authority in complying with U.S. Securities and Exchange Commission Rule 15c2-12, by providing certain financial information and operating data by specified dates, and to provide notice of certain enumerated events with respect to the bonds, if material.

XII. Professional Services

A.  From time to time, TBR uses its General Counsel for advice on aspects of a debt transaction; no engagement letter is required since General Counsel is an employee of TBR.

B.  Additionally, TBR relies upon advice from the Office of Attorney General and Reporter, with which no engagement letter is required.

XIII. Potential Conflicts of Interest

A.  If TBR or the Board were to hire professionals to assist in a debt transaction, the professionals shall be required to disclose to TBR and the Board existing client and business relationships between and among the professionals to a transaction (including but not limited to financial advisor), as well as the Authority.

B.  This disclosure shall include that information reasonably sufficient to allow the Board to appreciate the significance of the relationships. 

XIV. Debt Administration

A.  Planning for Sale. The Vice President for Business and Finance, or designee, will provide all requisite information to TBR and the Authority to facilitate the compilation of data necessary for the Official Statement related to the bond issuance and bond underwriting.

B.  Post-Sale

1.  TBR and the Board will ascertain that fees and charges are established at levels sufficient to meet the two times debt service coverage when combined with legislative appropriations.

2.  The Vice President for Business and Finance, through TBR, will provide for timely transmission of requisite debt service payments as billed by the Authority.

C.  Continuing Administration

1.  The Board (through University administration) will ascertain that facilities financed with tax exempt debt will be used in a manner such as to not jeopardize the exempt status of the issued debt.

2.  The Board (through University administration) will maintain the financed facilities in a prudent manner establishing maintenance reserves when necessary to preserve the viability of facilities.

XV. Federal Regulatory Compliance and Continuing Disclosure

A.  Arbitrage

1.  The Vice President for Business and Finance, or designee, will work, through TBR, with the Office of State and Local Finance to comply with arbitrage requirements on invested tax-exempt bond funds consistent with representations made in the relevant Tax Certificate.

2.  The University will also retain all records relating to debt transactions for as long as the debt is outstanding, plus three years after the final redemption date of the transaction.

B.  Generally Accepted Accounting Principles (GAAP). The University will comply with the standard accounting practices adopted by the Financial Accounting Standards Board and the Governmental Accounting Standards Board when applicable.

Forms: none.

Revisions: none.

References: T.C.A. §§ 49-3-1201 et seq.; 49-3-1205(11); 49-3-1207(d)(4); Tennessee Open Meetings Act; U.S. Securities and Exchange Commission Rule 15c2-12.