We increasingly have been assisting clients with both the development and ongoing refinement of long-term capital planning strategies, including the adoption (and regular review of) an institutional debt policy that provides a comprehensive framework governing the issuance, allocation and repayment of debt based on institution specific objectives. We have found that a debt policy which is based upon the institution's mission can be a powerful tool to focus scarce resources on strategic initiatives. It has gained credibility as a credit strength with the bond rating agencies. Especially if an institution is reevaluating its initiatives, developing strategies and deciding how to finance projects with (perpetually) limited resources, we have found that comprehensive reviews of project planning and financing and internal resource/external debt management may be extremely helpful. Prager & Co.'s higher education professionals provide ongoing advice, support and recommendations in this area, generally unavailable from other firms.
Debt Policy Components
Excerpt from our book, Ratio Analysis In Higher Education
In order to ensure that debt is utilized most effectively to advance institutional mission and strategic objectives, it is recommend that the institution adopt a formal debt policy.
This policy should reflect the university's unique needs and strategic objectives. Therefore, there is no model debt policy that should be followed by every college. However, in drafting a debt policy, the following guidelines should be considered:
- Include a section regarding debt philosophy. This section should explain to the analyst why the debt policy is being created, and how it will be used to govern the incurrence of debt to achieve strategic objectives. It provides a framework for management and the trustees to interpret the components of the policy.
- The university should select the few key ratios it will monitor. These financial ratios should include targets in order to indicate the financial bounds under which the institution expects to operate.
- Generally, no more than four or six ratios are used, since the policy is designed to represent the overall health of the institution in order to make strategic decisions. Including too many ratios will obscure the "big picture." Ratios to be considered might include the core ratios identified in this book, or other ratios the institution finds useful from a management perspective. Additionally, there should be a discussion regarding the mix of fixed and variable rate debt.
- A policy regarding the prioritization of capital projects is usually included, and this process should receive input from the lower levels of the institution. Guidelines should be broad enough to permit management flexibility; however, the policy should prioritize projects that (a) are mission-related, and (b) have a related revenue stream for repayment.
- The policy should explicitly acknowledge its role in providing trustee oversight of all transactions that impact the credit profile of the institution, and should require regular review and reporting to the trustees. Other items of specific concern or importance to the governance of the institution would be included as well.
- The policy should contemplate the use of derivative products and establish a policy regarding their consideration.
- The policy should state that the institution will interact with the rating agencies and strive to attain the highest acceptable credit rating. The institution should not specify the attainment of a specific rating as part of the policy.