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500.8 - Debt Capacity

University Group Policy #500.8

I.  Policy Statement

Debt financing, especially tax-exempt debt, provides a low cost source of capital for the Winston-Salem State University (University) to fund capital investments to achieve its mission and strategic objectives. Indeed, as the economic landscape continues to evolve and change, the use of debt will become an increasingly important tool that enables the University to move its strategy forward. In this environment, appropriate financial leverage plays a key role and is considered a long-term component of the University’s balance sheet. Given that the University has limited debt repayment resources, the allocation of and management of debt is a limited resource. The guidelines provided in this document are the framework by which decisions will be made regarding the issuance of debt to finance particular capital improvements.

II.    Guidelines


The University's debt capacity is a limited resource. Only projects that relate to the mission of the University, directly or indirectly, will be considered for debt financing. In general, projects that will be approved are broader in scope than college, or unit-based projects. However, certain mission-critical school-based projects can also receive approval.

State funding and philanthropy are expected to remain major sources of financing for the University's capital projects. In assessing the possible use of debt, all other financing and revenue sources will be considered. State appropriations and bonds, philanthropy, project-generating revenues, research facilities and administration cost reimbursement, expendable reserves, and other sources are expected to finance a portion of the cost of a project. Debt is to be used conservatively and strategically.

Projects financed through a bonding program will have received approval through the NC State Legislature annual non-appropriated capital improvements bill and will have been designated as “special obligation projects" by the North Carolina Board of Governors. Energy conservation measures will have received state agency approval as required.

A project that has a related revenue stream (self-liquidating project) will receive priority consideration. For these projects, the use of debt must be supported by an achievable financial plan that includes servicing the debt, including interest expense, financing related infrastructure and utilities, meeting any new or increased operating costs (including security applications), and providing for appropriate replacement and renovation costs. Energy conservation measures must show that savings will be adequate to service the debt and an annual monitoring costs. Other projects funded by budgetary savings, gifts, and grants will be considered on a case by case basis. Any projects that will require gift financing, or include a gift financing component, must be jointly approved by the Vice Chancellor for University Advancement and the Vice Chancellor for Finance and Administration before approaching any prospective donors about gifts to the project. In all cases, institutional strategy and not donor capacity must drive the decision to build a project.

Maintenance of Credit Rating

Maintaining a high credit rating will permit the University to continue to issue debt and finance capital projects at favorable interest rates while meeting its strategic objectives. While the University's decision to issue additional debt will be primarily focused on the strategic importance of the new capital improvements, the potential impact of a change in credit rating will also be reviewed. The University recognizes that external economic, natural, or other events may from time to time affect the creditworthiness of its debt. Nevertheless, the University is committed to ensuring that actions within its control are prudent. Management will provide the rating agencies with full and timely access to required information. The University currently receives credit ratings from Standard and Poor’s Financial Services and Moody’s Investor Services.

Methods of Sale

The standard methods of sale are competitive, negotiated and private placement. University management will evaluate each method of sale and determine the best type for each bond issue.

Financing Team Professionals

Selection of financing team professionals will be accomplished based on guidance from UNC General Administration, Bond Counsel, Financial Advisor (if needed) and Underwriter pool will be selected using appropriate contractual processes.


Refunding and/or restructuring opportunities will be evaluated on a regular basis. Costs incurred by the refunding activity will be taken into consideration with a target of 3% present value savings. The University will also consider refinancing for other strategic reasons including the elimination of certain limitations, covenants, payment obligations or reserve requirements that reduce flexibility.


The University will comply with federal arbitrage requirements on invested tax-exempt bond proceeds, causing arbitrage rebate calculations to be performed annually and rebate payments to be remitted to the IRS periodically as required. The University currently uses Bingham Arbitrage Rebate Services (third party) to compute any arbitrage liability.

Types of Instruments

Tax-exempt debt - The University recognizes the benefits associated with tax­ exempt debt, and therefore will manage the tax-exempt portfolio to maximize the use of tax-exempt debt subject to changing conditions and changes in tax law.

Construction Bridge Loans – Due to timing, the need to begin a project and receipt bond proceeds does not always coincide. Therefore, there may be a need for temporary financing (normally a note payable) until the bond proceeds are received. The University will solicit bids from financial institutions and will accept the bid that offers the lowest costs (interest, fees, etc.) that also provides the most flexibility in repayment.

Maturity and Debt Service

The useful life of the capital project financed will be taken into consideration when determining the length of financing. No capital project will be financed for more than 120% of its useful life. Call features should be structured to provide the highest degree of flexibility relative to cost. Structure of debt service will take into consideration existing debt and future capital plans. In addition, the University's amortization of debt service may be spread along the full yield curve depending on market conditions.

Disclosures and Compliance

Annually, the University will review compliance with covenants and requirements under outstanding bond indentures. The University will continue to meet its ongoing disclosure requirements in accordance with SEC rule 15c2-12. The University will submit financial reports, statistical data, and any other material events as required under outstanding bond indentures. The University will comply with arbitrage requirements on invested bond funds. The University will comply with Internal Revenue Service rules related to private use and use of proceeds on tax-exempt debt.

Use of Benchmarks and Debt Ratios

The Current Operations and Capital Improvements Appropriations Act of 2015, which was signed into law on September 18, 2015 added a new Article 5 to Chapter 116D of the General Statutes of North Carolina (the “Act”), requiring the University to provide to the UNC Board of Governors with an annual report on its current and anticipated debt levels. The Act expressly requires the University to report on two ratios – debt to obligated resources and a five-year payout ratio. The UNC Board of Governors has also required the University to provide two supplementary ratios to measure the University’s debt burden – expendable resources to debt and debt service to operating expenses. In setting its target, the University considered a number of quantitative and qualitative factors, including comparisons to its designated peer institutions, its strategic initiatives, its historical results, its average age of plant and its recent and projected growth.

The debt to obligated resources compares outstanding debt to the funds legally available to service its debt. This provides a general indication of the University’s ability to repay debt from wealth that can be accessed over time. This ratio is tied to the statutory framework for University debt. The target ratio for the University is 2.0 with a ceiling of 3.0.

The five-year payout measures the percentage of University debt to be retired within the subsequent five year period. This ratio indicates how rapidly the University’s debt is amortizing and how much additional debt capacity may be created in the near term. The target ratio for the University is 15% with a floor of 10.0%.

The debt service to operations measures debt service burden as a percentage of University total operating expenses. This ratio indicates the University’s operating flexibility to finance existing requirements and new initiatives. Expenses are used rather than revenues because expenses tend to be more stable year-over-year. The target ratio for the University is 6.5%.

The expendable resources to debt measures the number of times the University’s liquid and expendable net assets covers its aggregate debt. This ratio provides a general indication of the University’s ability to repay debt from wealth that can be accessed over time. The target ratio for the University is 0.25.

III.    Roles and Responsibilities


North Carolina General Statutes Chapter J 160 Article 3 authorize the Board of Governors of the University of North Carolina (the Board) to issue special obligation bonds for improvements to the facilities of the University of North Carolina System.

Prior to a bond issue, the Board designates the capital improvements financed as “special obligation bond projects'' and the University's Board of Trustees approves the issuance of special obligation bonds for those projects.

The State Energy Conservation Finance Act. Article 8 of Chapter 142 of the North Carolina General Statutes authorizes the Board to solicit and through G.S. 143-64.J 7A. finance guaranteed energy conservation measures. These financing agreements must have the approval of the Office of State Budget and Management, the State Treasurer, and Counsel of State prior to closing.

IV.     Applicability

This policy is applicable to the issuance of debt to finance particular capital improvements.

Responsible Division: Vice Chancellor for Finance & Administration

Authority: Board of Trustees


  • Adopted December 9, 2016