This Finance Policy shall expire unless readopted or amended prior to the 30th day of June, 2013.
These financial policies are intended to cultivate a culture of success and awareness of the vital need for prudent, informed and sound judgment in managing the financial and physical resources of this System. These policies are designed to create, preserve, and enhance the academic, physical and capital environment that supports the System and its universities and agencies. Protecting and growing the vital assets of this System will provide academic experiences and physical environments that enrich the lives of students, faculty and staff and the nation, state and communities we serve.
These policies are broken into a set of goals and four categories that provide general advice, counsel, and direction on the philosophy and expectations of the Board of Governors concerning budgeting, debt financing, reserves, and System Office policies. This Finance Policy is authorized by Article XII of the Bylaws.
The purpose of this section is to summarize the general fiscal and budgetary goals of the Board of Governors for the development and operation of the System, institutions and agencies.
- Foster an environment in which there is a commitment to fiscal accountability and oversight at all levels of the System;
- Increase awareness and understanding of the financial aspects of the Board's mission, vision and values and the strategic goals and objectives (“Stretch Goals”) it has established to attain such purposes;
- Supply resources that enable staff to better manage resources and implement state-of-the-art business practices;
- Support technology transfer, innovation and entrepreneurial activities; and
- Continually improve the efficiency of the universities and agencies
A. Each institution will use the annual budget process as a means of addressing and meeting the mission, vision and values of the Board of Governors and the current “Stretch Goals” of the institution.
B. Each institution is responsible for managing expenditures within available revenues. On a quarterly basis, income reports will be provided to the Board of Governors Finance Committee and Chancellor detailing the financial condition of the institutions. If changes in revenues or expenditures occur which have the potential to negatively impact the ability of an institution to manage expenditures within available revenues, the Board of Governors Finance Committee will be provided a plan of action for correcting the deficiency.
C. Where appropriate, the results of periodic reviews of institutional programs will be integrated in budget resource allocations.
D. Where appropriate, the institutions will integrate performance measurements and productivity indicators in the budget.
E. To encourage effective financial management, Education and General Revenues in excess of expenditures will be rolled forward at year end to the institution generating the surplus.
F. Proceeds from the sale of real estate assets held by the institutions shall be held in reserves until such time as the institution designates an appropriate use for such proceeds in the institution’s annual budget. Appropriate uses of such proceeds include, but are not limited to, re-investment in other real estate or capital assets, investment in the physical infrastructure of the campus, or investment in the enhancement of the academic programs offered by the institution. Only in extraordinary circumstances shall use of proceeds from the sale of real estate assets be allowed for purposes of funding annual operating costs not related to the long-term investments described herein.
G. Each campus shall maintain budget policies that provide specific guidance on developing, implementing, and revising the annual budget. Such manuals do not require Board approval, but should ensure that the strategic goals and objectives of the Board, Chancellor and Presidents are effectively integrated into each year’s budget.
The purpose of this section is to establish guidelines for the prudent use and management of debt for the CSUS, including the recognition of the System’s consolidated revenue pledge.
Debt financing allows the Colorado State University System to finance the cost of capital improvements for its component institutions over a period of time typically related to the useful life of the asset. This is a financially prudent practice for certain types of capital investments when executed within appropriate loan covenant limitations and at favorable interest rates.
Debt financing may also be beneficial where the System invests in capital assets which further the mission of its institutions and provide revenue or cost savings which are greater than the cost of borrowing. Because debt capacity is limited, it is imperative that borrowings are for projects that directly support the vision, mission, and values of the CSUS and its strategic goals and objectives.
Decisions regarding the appropriate use of debt should be balanced to ensure the System’s financial health – as well as the financial health of its component institutions - while also considering the effects of current decisions on future costs of capital and operating budgets. Adherence to the following policies will ensure that risks associated with debt issuance are effectively managed.
- When issuing debt, the System will seek the lowest-cost source of funding available commensurate with the most favorable financial terms, conditions, and risks that are consistent with the System’s capital structure and financing requirements.
- External borrowings will be coordinated to the extent practical so that multiple project needs can be accomplished in a single borrowing, thereby reducing issuance costs.
- The System will consider credit enhancement, such as bond insurance or letters of credit, when it is cost beneficial to do so and/or results in more favorable loan covenants.
- All debt-financed projects must have an identified revenue stream and must be supported by an achievable plan of finance that includes servicing the debt and meeting any new or increased operating costs.
- The cost of debt-financed capital acquisitions should be charged to the future users of the capital asset over the period the debt is outstanding and the asset's useful life (as legally permitted) The System may, however, issue debt for shorter than the asset’s useful life.
- All debt payments will be provided for in the annual operating budget.
- Given the oftentimes strategic and financial value of variable rate debt, limited issuance is permitted if market conditions are appropriate, a variable rate debt management plan is in place, and such issuance furthers the System’s strategic goals.
- The financing mode, term, and financing instrument must be appropriate for the project(s) financed. Given the System’s credit consolidation efforts, the master revenue bond resolution is intended to be the primary debt issuance vehicle, however, certificates of participation, commercial paper, and separately secured bonds may be issued if the Board deems such issuance to be in the System’s best interest.
- The use of capitalized interest will only be considered for projects whose identified funding stream will not be able to immediately generate sufficient revenues to repay debt. In those instances, interest will not be capitalized for a period in excess of the construction period plus three months.
- The System’s "debt capacity" will be determined from time to time, giving consideration to bond rating agency input and related industry guidelines, with the goal of maintaining the then current credit ratings from each rating agency.
- The System shall evaluate, on a case by case basis, whether to utilize the Colorado Higher Education Intercept Program (or any successor programs) to provide credit enhancement to the System’s transaction.
- The System will consider refinancing outstanding debt only when savings for the refinancing, measured on a net present value basis, are positive, or when the refinancing accomplishes other strategic objectives including budgetary relief or reducing or eliminating future risks.
- The System’s cash flow procedures will be managed to ensure the timely payment of debt service.
- Compliance with debt reporting and financial covenants will be closely monitored and adhered to by the Chief Financial Officer with validation by external auditors.
The Chief Financial Officer will have responsibility for any debt financing and will coordinate the actions of other departments, with the Office of General Counsel having responsibility for all legal actions relating to any debt financing, including reviewing all documents and legal opinions, and determining the role of external legal counsel.
The department responsible for a given project will provide the Chief Financial Officer the following information:
- Project cost and funds, other than debt, available to pay a portion of the cost;
- Project time schedule;
- Estimated revenues and expenses, and the basis for these projections;
- A statement of the significance of the project to the institution’s mission; and
- Other information, as requested.
The Chief Financial Officer is responsible for the following:
- Determining whether the requirement for an achievable financial plan has been met for each project;
- Obtaining any approvals, including from CCHE and the State Legislature, that may be necessary for proposed projects;
- Preparing a Program Plan for approval by the President of the institution, the Board and CCHE, as necessary:
- Overseeing the development of bond disclosure documents for bond offerings: and
- Insuring that required Continuing Disclosure Obligations of the System are met on a timely basis.
The Board, if it so determines, will approve the Program Plan(s) for the construction project(s) to be financed and the Financing Plan for the bond offering at a meeting prior to the printing of the preliminary official statement.
Procedures and Approvals for Refinancings
- The Chief Financial Officer will review any refinancing plan presented by the System’s underwriting team and/or its financial advisor and the assumptions upon which the plan is based, and determine whether it is in the best interests of the System;
- The Chief Financial Officer will work with departments affected by the refinancing to determine the best method for allocating savings.
Procedures and Approvals for All Financings
- The Chief Financial Officer will assure that any issuance of debt is structured cost effectively and in the best interest of the System, taking into consideration the Debt Management Policy;
- The Office of General Counsel will assure that all legal opinions, bond documents, disclosure documents and any other required legal materials are satisfactory;
- The Chief Financial Officer , in consultation with the Office of General Counsel, will assure that all materials necessary for the Board to complete its review of the financing are provided to the Board in a timely manner; and
- The Board, upon a positive recommendation of the Finance Committee, will approve the bond purchase agreement and other financing documents.
Updates and Revisions
The System’s Chief Financial Officer shall review this Debt Management Policy at least annually and recommend any changes necessary to ensure that it continues to meet System objectives. The policy should also be reviewed as soon as practicable in the event of the significant changes in/of financial personnel or following any material changes to the System’s credit rating.
Use of Derivative Products
In connection with the use of any derivative product, the Board of Governors must, by affirmative resolution, authorize the use of a swap, option, or other derivative financial product. Such use is limited exclusively to reduce the amount or duration of interest rate risk or result in an expected lower cost of borrowing when used in combination with the issuance of Bonds, expected issuance of bonds, or to enhance the relationship between the System’s liabilities, assets and its investments or risk profile.
Derivatives may be used only for the following purposes:
- To prudently mitigate variable rate exposure on outstanding or proposed debt.
- To achieve significant savings as compared to other products available in the bond market, or to do so with a more acceptable risk profile.
- To achieve more flexibility in meeting overall financial objectives than can be achieved in conventional markets.
- To prudently manage the System’s asset/liability matching objectives.
Derivative financial products shall not be employed solely as investment instruments or for the purpose of speculation. In addition, the System shall not use a derivative for which there is (a) insufficient market liquidity for its transfer or termination at market, or (b) insufficient price transparency to allow realistic valuation of its market value on an ongoing basis.
Evaluation of Risk
Consideration of the potential economic benefits of using any derivative financial product shall include at a minimum each of the following types of risk, as applicable:
- Accounting Risk: the risk that the transaction creates any unanticipated accounting presentation issues on financial statements.
- Basis Risk: the risk that the payments that the System receives from the counterparty are insufficient to completely offset the debt service payments on the underlying bonds.
- Counterparty Risk: the risk that the counterparty is not able or willing to meet its obligations under the agreement.
- Legal Risk: the possibility that the transaction is not expressly authorized by law.
- Liquidity/Remarketing Risk: the risk that the System cannot secure a cost-effective renewal of a letter or line of credit or suffers a failed action or remarketing with respect to its underlying variable-rate bonds.
- Tax Risk: the risk that future tax law changes - through a reduction or elimination of the tax exemption for municipal securities - lead to an increase in the ratio of tax-exempt to taxable yields.
- Termination/Market Valuation Risk: the risk of either (a) the reversion of the transaction to its original status, possibly undermining the System’s strategy for entering the transaction, or (b) the liability for a large payment if termination occurs during adverse market conditions.
- Rating Agency Risk: the risk that the proposed transaction may not be consistent with then-current rating agency criteria or guidelines.
Methods of Soliciting and Procuring Derivatives
In general, the System should procure derivative products through a competitive process. Negotiated bids may however be appropriate in situations including but not limited to the following:
- If the System makes a determination that due to the size or complexity of a particular transaction, a negotiated bid would result in the most favorable pricing.
- If a derivative embedded within a bond issue is proposed and the financing structure meets the System savings target.
- To enable diversification and manage the System’s exposure with counterparties.
- If the System determines that doing so will promote its interests by encouraging and rewarding innovation and best financial practices.
In all of the above negotiated situations, the System should use a swap advisor to assist in the price negotiations.
Regardless of the method of procurement, the System shall determine by whatever means is deemed appropriate that the terms and conditions of any derivative entered into reflects a fair market value of such derivative as of the date of its execution.
Form and Content of Derivatives
To the extent possible, the derivatives entered into by the System shall contain the terms and conditions set forth in the International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, including any schedules and confirmation. The schedule should be modified to reflect specific legal requirements and business terms desired by the System.
Qualified counterparties shall demonstrate a record of successfully executing transactions similar in nature to the transaction contemplated by the System. Whenever possible, the System shall use its best efforts to work with qualified counterparties that have, or are guaranteed by a guarantor that has, a long-term senior unsecured credit rating of at least “Aa3” or “AA-” by two of the nationally recognized rating agencies and does not have a rating lower than “A1” or “A+” by any nationally recognized rating agency.
Downgrade Trigger - Subsequent to entering into the agreement, if the rating of the counterparty or guarantor shall fall below the minimum credit thresholds established above, the swap documents will provide that the System shall (a) require the posting of additional collateral or reduce the threshold for posting of collateral from previous levels, and/or (b) have the ability to terminate the agreement at the market.
Events of default of counterparty shall include the following:
- Failure to make payments when due;
- Declaration of bankruptcy;
- Breach of representations and warranties;
- Failure to comply with downgrade provisions; and
- Failure to comply with any other provisions of the agreement after a specified notice period.
An event of default by the counterparty shall lead to termination of the agreement with the System being the affected party for purposes of calculating any termination payment owed to the System.
Provisions for Collateralization
The System will determine the need for collateral posting, the acceptable forms and valuation of collateral, as well as specific triggers, and thresholds by ratings, on a transaction by transaction basis and will detail those provisions in a Credit Support Annex to the ISDA Master, if deemed appropriate.
The System shall consider including a provision that permits it to terminate the agreement at the market value of the agreement at any time. In general, the counterparty shall not have the right to optionally terminate an agreement.
Prior to execution of an agreement, the System will consult with its external auditors to confirm the appropriate accounting treatment for the product being considered. The System shall reflect such financial products in its financial statements in accordance with generally accepted accounting principles.
Monitoring and Reporting
The System shall prepare a report to the Board at least annually, which shall include the following information:
- A summary of key terms of the agreements, including notional amounts, interest rates, maturity, and method of procurement.
- The mark to market value of each agreement.
- The full name, description, and credit ratings of each counterparty or the applicable guarantor and, if applicable, a listing of the Acceptable Collateral provided by any counterparty or guarantor as required by this Policy.
- The amounts that were required to be paid and received and any amounts that were actually paid and received.
- Listing of any credit enhancement, liquidity facility, or reserves and accounting of all costs and expenses associated with the credit enhancement, liquidity facility or reserves.
- The aggregate marked to market value for each counterparty and relative exposure compared to other counterparties.
- Discussion of other risks associated with each transaction.
Updates and Revisions
The System’s Chief Financial Officer shall review this Derivatives Policy at least annually and recommend any changes necessary to ensure that it continues to meet the System’s objectives. The policy should also be reviewed as soon as practicable in the event of the turnover of key management or following any material changes to the System’s credit rating.
- Use of resources from reserves should be strategically budgeted during the annual campus budgeting process. The Chancellor and Board will approve such requests. All reserve commitments (present and future years) should be clearly documented and should be evaluated and tracked to ensure expenditure of funds in accordance with their requested use. Reserves that have been allocated to a College, Department, or entity and not expended in a timely manner shall revert to reserves. The Chancellor shall have discretion to determine which fund accounts to draw from for the needs of the campuses.
- Use of resources from reserves for capital construction, controlled maintenance, and auxiliaries should be made in accordance with the strategic objectives and needs of each campus as identified by the Chancellor and Board.
- Adequate contingency reserves should be maintained to help the System deal with unanticipated events.
- Minimum reserve amounts should be maintained to ensure an institution maintains a positive fund balance (especially after compensated absence liabilities are taken into account) and to ensure that healthy institutional/system levelfinancial credit ratios are maintained as determined by the Chancellor and Board. Reserve amounts should support maintaining current credit ratings for the System.
- Annually, the Chancellor will report the type and amount of expenditures to the Board to ensure transparency and accountability in reserve financial transactions.
Proceeds from the sale of real estate assets owned by the Board for the benefit of the institutions shall be held in an institution's reserves or such funds as directed by the Real Estate Investment Fund Policy, until such time as the institution designates an appropriate use for such proceeds in accordance with that policy. Only in extraordinary circumstances, and with the Board's prior approval, shall the use of proceeds from the sale of real estate assets be allowed for purposes of funding annual operating costs not related to the long-term investments described herein.
The Real Estate Investment Fund Policy would be added as the last category in the Finance Policy:
REAL ESTATE INVESTMENT FUND POLICY
The purpose of this section is to provide guidelines for the prudent and most beneficial use and management of the proceeds from the sale or commercial lease of CSUS real estate assets in order to serve current and future needs.
SALE OF REAL PROPERTY
CSUS has acquired real property through land grants from the federal government, private land donations, and by direct purchase. As a result, the proceeds from the sale of CSUS real property may be restricted by the terms of a contract or gift, or by statute, depending upon how CSUS acquired title to such property. In particular, the use of any proceeds from the sale of land granted by the federal government is constrained.
ENDOWMENT LAND PERMANENT FUND
CSUS has its origins from land granted by the federal government under the 1862 Morrill Act. There are federal and state statutory restrictions governing the use of the proceeds from the sale of any such land. See, e.g., 7 U.S.C. § 301 et seq.; C.R.S. §§ 23-31-302 & 504. All proceeds from the sale of any land granted by the federal government shall be prudently invested to yield a fair and reasonable rate of return, and shall be maintained by each institution in an Endowment Land Permanent Fund. The principal of that fund shall not be impaired or used for any purpose, unless specifically approved by the Board. Subject to the approval of the Governor, the Board may expend no more than ten (10%) percent of an Endowment Land Permanent Fund for the purchase or exchange of lands for sites or experimental stations.
ENDOWMENT LAND INCOME FUND
The income earned from each institution's Endowment Land Permanent Fund shall be transferred, no less than annually, to an institution's Endowment Land Income Fund. This fund shall be prudently managed to yield a reasonable rate of return. However, the Endowment Land Income Fund, including both principal and interest, may be used from time to time to purchase real property, upon the recommendation of the President of the institution and the approval of the Board. The Endowment Land Income Fund shall not be used for the purchase, erection, preservation, or repair of any building or buildings.
CSU-PUEBLO RESTRICTED ENDOWMENT FUND
Proceeds from the sale of land that was donated to establish Colorado State University-Pueblo (CSU-Pueblo) shall be held in a Restricted Endowment Fund. The Restricted Endowment Fund must be used only for the purposes of higher education, and shall not be impaired or used for any purpose unless specifically approved by the Board. Interest income generated from the Restricted Endowment Fund may be used to support academic programs, facility improvements, and other higher education purposes. Unused interest income shall be reinvested in the Restricted Endowment Fund.
REAL ESTATE INVESTMENT FUND
The net proceeds from the sale or development of unrestricted real property held by the Board for the benefit of an institution shall be deposited into that institution's Real Estate Investment Fund. This fund should be managed by the individual institutions in conjunction with the Real Estate Office to consummate transactions that promote the highest and best use of CSUS land and resources. When determining the “highest and best use,” an institution should consider both the short term and long term impact on an institution's mission and its programs, in addition to a transaction's potential to generate revenue. Appropriate uses of the Real Estate Investment Fund may include, but are not limited to, real estate development, real estate acquisition or real estate investments, investment in capital assets, investment in the physical infrastructure of the campus, or investment in the enhancement of the academic programs offered by the institution. Only in extraordinary circumstances, and with the Board's prior consent, shall the proceeds from the sale of real estate assets be used for purposes of funding annual operating costs not related to the long-term investments described herein.
The proceeds from real estate transactions that are funded by the Real Estate Investment Fund, less customary and reasonable expenses, should be returned to the Real Estate Investment Fund to facilitate additional transactions.
LEASED CSUS PROPERTY
Where appropriate, income generated from the commercial lease of CSUS real property, which is held for the benefit of an institution, may be deposited into that institution's Real Estate Investment Fund. For example, income generated from oil and gas leases or other leases where an institution is not required to incur significant operating or maintenance expenses may be deposited into the Real Estate Investment Fund at the discretion of an institution's President. Each institution should document all commercial leases, the income generated from each lease, and the current use and any restrictions on the use of such income to enable the President to determine how such income should be used in the future.
OVERSIGHT AND REPORTING
The Real Estate Office should prepare quarterly reports to the President and the Board, which should detail CSUS's real estate holdings, a description summarizing the sale or purchase of any real estate, a description of any real estate development transaction, an accounting for commercial lease income, and the status of the Endowment Land Fund, the Endowment Income Land Acquisition Fund, and the Real Estate Investment Fund. CSU-Pueblo, at the discretion of its President, may elect to directly report to the Board regarding such matters.
The Chief Financial Officer for the System and the System Finance Office shall ensure that the Board’s philosophy and expectations are implemented at each institution within the System. The System Office shall operate independently from the institutions in the CSUS.
The System Finance Office shall maintain a set of operating procedures that reflect the unique operating issues of the System office. Such procedures shall not be dependent upon institutional operating procedures at any campus. With formal approval of the Board of Governors, the Office may, however, use the resources of the institutions where appropriate and necessary.
Any financial issue that requires a coordinated and integrated system-wide response, either internally or externally shall be developed and managed by the System Finance Office. Such issues may include, but are not limited to governmental affairs, community outreach, alumni relations, foundation relations, budgeting, fiscal management, and academic affairs.