KCTCS BOARD OF REGENTS AND FINANCE, TECHNOLOGY, AND HUMAN RESOURCES COMMITTEE MEETINGS September...

KCTCS BOARD OF REGENTS AND

FINANCE, TECHNOLOGY, AND HUMAN RESOURCES COMMITTEE

MEETINGS

September 18-19, 2014

TABLE OF CONTENTS

• Commonwealth Economics

• Capital Projects

• Statutory Requirements

• Bonds 101

• Benefits of a State Issuer

• Credit Profile

• Required Board Resolutions

• Plan of Action

COMMONWEALTH ECONOMICS

• Lexington based consulting firm specializing in:

• Economic Feasibility Studies

• Strategic Governmental Finance

• Governmental Incentives, e.g. Tax Increment Financing

• Traditional Finance and Structuring

• Senior team leadership experience at state and national level in:

• Economics

• Accounting and Quantitative Analysis

• Capital Markets

• Regulatory Issues

COMMONWEALTH ECONOMICS KEY STAFF

• Tom Howard, Managing Director & Partner (primary contact)

• Over 22 years of state government experience in the Office of Financial Management (OFM)

• Former Executive and Deputy Executive Director of OFM

• Municipal Securities Rulemaking Board Member 2008-2011

• KY v Davis, United States Supreme Court (2008)

• Brett Antle, Director & Partner (back-up)

• Former Deputy Executive Director OFM

• Former Administrator of Commonwealth’s statewide accounting systems

• Certified Public Accountant

KY CAPITAL PROJECTS

• All capital projects in excess of $600,000 must be approved by the General Assembly in an enacted budget KRS 45.760 through KRS 45.763.

• House Bill 235, as enacted and vetoed in part, provided for $194,000,000 of KCTCS Agency Fund Projects:

• $145,500,000 of which are bond funded

• Requires 25% matching funds for each project

• Bonds to be repaid through a mandatory fee levied by KCTCS so long as the obligations are outstanding

STATUTORY REQUIREMENTS

• May 2014, the Kentucky State Property and Buildings Commission (SPBC) (Executive Branch) authorized all HB 235 bond funded capital projects, exclusive of certain Road Fund obligations.

• Capital Projects and Bond Oversight Committee (CPBO) (Legislative Branch) must approve all projects just prior to financing pursuant to KRS 45.790.

• All bonds issued in the name of the Commonwealth or a state agency must be approved by the Office of Financial Management (OFM) pursuant to KRS 42.420.

STATUTORY REQUIREMENTS

In addition to budgetary authority for bond funded capital projects, there are other statutory considerations:

• KCTCS does not have specific authority to issue bonds in its own name.

• General Fund and select Agency Fund capital projects are funded under KRS Chapters 56 and 58 through the State Property and Buildings Commission and/or the Kentucky Asset Liability Commission (ALCO).

• KRS 164A.608 provides an intercept of state funds (Agency Fund and General Fund) in the event that a postsecondary institution fails to transmit a debt service payment in a timely manner.

BONDS 101GENERAL

• Projects which have a governmental purpose and meet certain Internal Revenue Code requirements may be issued on a tax-exempt basis.

• Postsecondary education capital projects typically are issued on a tax-exempt basis.

• Issuers of governmental bonds, tax-exempt or taxable, are now regulated by the Securities and Exchange Commission (SEC) and indirectly by the Municipal Securities Rulemaking Board (MSRB).

• The new rules and regulations for municipal bond issuers are quite demanding and require constant monitoring.

BONDS 101SECURITY

• Repayment of capital debt obligations can take on one or more of the forms below:

• Lease appropriation;

• Pledge of an institution’s General Receipts, including both Agency Funds and General Funds;

• Pledge of specific revenues, i.e. tuition and fees, parking, rents etc.

• Bonds secured by such provisions are issued by the postsecondary institution or through a state agency such as SPBC or ALCO, when there is no specific authority.

BONDS 101SPBC BENEFITS

• Large, well recognized, and frequent issuer assists with market acceptance, especially for unknown credits.

• State, through OFM, has a long standing, proven procurement process that already has a finance team in place such that valuable time isn’t lost when a project needs to move forward.

• Finance Team will include:

• KCTCS staff and representatives

• OFM staff

• SPBC Financial Advisor

• SPBC Senior Managing Underwriter

• SPBC Bond Counsel

BONDS 101SPBC BENEFITS

• Opportunity to access an interim construction financing solution at favorable terms, when needed.

• OFM, as staff to SPBC, maintains a centralized database for management and payment of the bonds, as well as, ongoing monitoring for potential refinancing opportunities at later date.

• OFM, as staff to SPBC, provides ongoing disclosure and compliance services for the bonds, which is a significant relief to KCTCS staff.

CREDIT CONSIDERATIONS

• Bonds will need to be rated by at least two of the Nationally Recognized Statistical Rating Organizations (NRSO), most likely:

• Moody’s

• Standard & Poor’s

• As a result of the lease purchase of the Versailles office facility, KCTCS is currently rated Aa2 by Moody’s with a Stable Outlook, even though there are no KCTCS bonds outstanding.

CREDIT PROFILE

• KCTCS has a very strong credit profile:

• Strong cash position

• Positive operating results

• History of strong state support

• No debt

• Pension issues:• Limited Defined Benefit exposure

• Defined Contribution Plan

• Funded OPEB Trust for post-employment health care

REQUIREDBOARD RESOLUTIONS

• KCTCS expression of intent for the projects to move forward.

• KCTCS authorization that the credit hour fee remain in effect until the bonds are retired.

• KCTCS application to SPBC and ALCO to finance the projects on an interim and permanent basis when necessary.

PLAN OF ACTION

• Prepare necessary Board Resolutions for action at the December Board of Regents meeting.

• Prepare project timelines and estimated future cash flow needs.

• Fund initial expenditures with matching funds.

• Work with OFM to develop an interim construction borrowing plan through the state’s ALCO program.

• Work with the Finance Team to develop a trust estate for the future issuance of permanent bonds to redeem the construction loans.

QUESTIONS

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