HD72 - Alternative Methods of Financing Certain Facilities at State-Supported Colleges and Universities Pursuant to HJR 373

  • Published: 1990
  • Author: Joint Subcommittee
  • Enabling Authority: House Joint Resolution 373 (Regular Session, 1989)

Executive Summary:
Authority and Study Objectives

House Joint Resolution No. 373 established a commission to study alternative methods of financing certain facilities at state-supported colleges and universities. The Commission was charged with the responsibility of determining whether changes are needed in the Procurement Act and other laws and policies presently governing the financing of capital projects for higher education. The resolution stated that, despite strong support from the Commonwealth's general fund, the construction and expansion needs of higher education institutions are not being met. The resolution also cited the significant interest among colleges and universities in pursuing cooperative projects with local governments, foundations, and private developers. The Commission's inquiry necessarily focused on the Commonwealth's constitutional debt restrictions and capital outlay and procurement processes, as well as administrative policies and their application to higher education.

Financing Capital Facilities for Higher Education

Background

The demand for additional capital funding for Virginia's colleges and universities stems from a number of factors. The increasing reputations of Virginia's institutions of higher education, together with the growing number of Virginia high school graduates, have clearly affected college applications and enrollments, thus creating a need for expanded facilities. The special preservation and renovation needs of certain institutions may also require additional appropriations. While an aggressive capital outlay program has provided nearly $1 billion for higher education in the past 10 years, certain institutions may require capital outlay funds exceeding the present rate of appropriations.

Constitutional Guidelines

The public debt financing options available to state-supported colleges and universities are authorized by Article X, § 9 of the Virginia Constitution. The Constitution creates four categories of debt, three of which are secured by the Commonwealth's full faith and credit. In recent years, most higher education institutions have typically relied on § 9(c) debt, secured by project revenues and the Commonwealth's full faith and credit, and § 9(d) debt, for which there is no pledge of full faith and credit, to finance capital expansion.

Statutory Guidelines for State Debt

Institutions of higher education may obtain § 9(d) funding through a number of sources. The institutions themselves may issue debt to finance capital projects, subject to gubernatorial consent and legislative appropriations. Payment sources for institutional bonds include revenues from the project and existing facilities, student fees, and other funds. Institutional bonds may also, in some cases, be secured by endowment funds and private gifts.

Institutional bonds may be sold directly on the open market or to the Virginia College Building Authority (VCBA). The VCBA may also issue its own bonds to construct and operate a higher education project which is conveyed to the participating institution upon full payment of the Authority's bonds. Traditionally, the VCBA has provided tax-exempt, secured financing for private institutions; except for certain VCBA equipment lease arrangements, the state-supported institutions have typically relied on other methods to finance capital expansion. While the projects that local industrial development authorities may finance for higher education appear to be quite limited, other bond-issuing entities might serve the capital needs for higher education. The Virginia Public Building Authority is empowered to issue revenue bonds that might be used to benefit higher education; however, it currently possesses a relatively small unused debt capacity to finance the Commonwealth's state-supported colleges and universities.

Statutory And Administrative Procedures

Capital expansion for public higher education is also governed by a plethora of budgetary and statutory procedures, as well as administrative policies, created to ensure prudence in project selection and finance, fairness in the procurement of services, and safety and quality in project design and construction. The pre-planning, planning, and construction phases of the traditional capital outlay process require the input and oversight of a number of agencies; multiple reviews of financial feasibility and project justification are required prior to the issuance of permanent financing to ensure compliance with construction codes, financial procedures, and approved project scope and design.

The Virginia Public Procurement Act also figures quite prominently in the development of capital projects for higher education. College and university officials have expressed concern that compliance with the Act's bidding procedures may hinder or prohibit the development of unique project proposals involving private developers. The Commission's study has confirmed, however, that compliance with competitive processes and review procedures generally ensures quality in project design and construction.

Alternatives and Considerations

The Commission received testimony from several institutions describing a number of potential projects and unique financing proposals. College and university officials relayed concerns regarding the flexibility and efficiency of the administrative procedures governing the capital expansion process. Institutions have also expressed interest in pursuing privatization arrangements and in clarifying procedures for the evaluation and development of exceptional capital project proposals.

Deficiencies in research laboratory and office space plague several institutions. Indirect cost recoveries may well serve as an innovative funding source for this necessary expansion. A large portion of indirect cost recoveries, obtained from research grants and contracts, is currently retained by institutions as an appropriation for the conduct and enhancement of research. Preliminary opinions of bond counsel indicate that these funds might be pledged as debt service or security for § 9(c) debt for research facility projects. Resolution of other legal and policy considerations and the implementation of appropriate control mechanisms would be necessary to ensure the prudent use of such an option.

The Commission also studied the use of a general operating revenue pledge to secure § 9(d) debt issued by the colleges and universities. Broadly defined, "general operating revenues" might include tuition and fees, indirect cost recoveries, general fund appropriations, and other institutional funds. Clarification of budgetary and statutory authority regarding the definition and scope of such a pledge would be necessary to implement this option.

The Commission also explored the use of various privatization arrangements in higher education capital expansion. Lease-purchase arrangements might be developed within the privatization concept, allowing a private developer to own, construct, and lease a capital project to an institution. In assessing the appropriateness of these arrangements for higher education financing, the Commission also reviewed administrative policies regarding long-term lease arrangements and the possible delegation of certain project reviews to qualified institutions, localities, or private developers.

Finally, the Commission explored the development of a special state review process or manual to provide guidance and assistance to institutions considering unique financing proposals. Other alternatives reviewed by the Commission included the increased issuance of taxable debt and state general obligation bonds, Expanded use of market study analysis in project development and greater emphasis on a long-term higher education capital development plan were also explored.

Recommendations

The development of appropriate, effective alternative methods of financing higher education capital projects involves consideration of a variety of constitutional, statutory, and administrative requirements. The Commission recognizes that the evaluation of innovative financing practices, or simply the clarification of existing procedures, is necessarily guided by several interests shared by the Commonwealth and its state-supported colleges and universities: prudent funding of viable projects, fairness and efficiency in the procurement of services, and continued excellence in higher education.

The Commission makes the following recommendations:

RECOMMENDATION 1:

That state-supported colleges and universities be authorized to pledge general university operating revenues, which may include tuition and fees, indirect cost recoveries, and other funds, to provide debt service and security for § 9(d) bonds, subject to guidelines to be developed by the Secretary of Finance.

A pledge of general university operating revenues may allow institutions to obtain more favorable credit ratings in financing projects that are not considered "revenue producing." The Commission has considered a number of proposed parameters to govern such a pledge and recommends that the Secretary of Finance promulgate guidelines for the appropriate use of a general operating revenue pledge.

RECOMMENDATION 2:

That state-supported colleges and universities be permitted to lease state property to university-related foundations or private entities, subject to legislative approval and guidelines to be promulgated by the Secretary of Finance and the Department of General Services; that such proposed lease and project use must be for a purpose consistent with the educational and general mission, auxiliary enterprise, and sponsored program activities of the institution or such other purposes as the General Assembly may authorize; that the term of any such lease agreement be based upon, among other things, the useful life of the project and shall not exceed fifty years; (however, any agreement may be extended upon the written recommendation of the Department of General Services and gubernatorial approval); and that capital outlay process reviews and approvals may be waived, amended, or adjusted by the Governor for these transactions, after approval of the project preplanning study.

To facilitate the private development of state property, the Commission recommends that higher education institutions be permitted to least state property to private entities or university-related foundations without first offering the land to other state entities pursuant to the state surplus property statute. Because compliance with the Commonwealth's traditional and sometimes lengthy capital outlay review process may discourage private development, the Commission has concluded that, upon legislative approval and a showing that the proposed transaction is consistent with the institution's mission and related programs, capital outlay review requirements may be waived, amended, or adjusted by the Governor for these transactions, after approval of the project preplanning study. Guidelines developed by the Department of General Services (DGS) and the Secretary of Finance would ensure the appropriate implementation of this recommendation.

RECOMMENDATION 3:

That the Secretary of Finance create a resource guide for the development of alternative financing proposals by colleges and universities.

The Commission has received testimony from a number of institutions regarding a perceived lack of specific policies and guidelines for the development of unique capital project financings. Clarification of the capital outlay review procedures will promote consistency in the application of these policies and requirements as well as creativity in the development of higher education project proposals.

RECOMMENDATION 4:

That the Department of General Services articulate guidelines governing the waiver of Department of General Services/Division of Engineering and Buildings Directive 1,§ IV 2G, regarding a five-year lease term for agreements between state institutions and other entities.

A number of institutions have indicated a need for clarification of the DGS directive limiting leases to five-year terms. Private parties are often dissuaded from negotiating lease arrangements without some assurance that a longer lease term is available. Although the five-year term directive may be waived, no clear criteria exist to guide the institutions in the development of long-term lease arrangements.

RECOMMENDATION 5:

That a state-supported college or university be permitted to retain the unexpended general fund balance from a completed capital project, subject to certification by the Department of General Services that the project has been completed in accordance with project plans, and that such funds be deposited in a special account for use by the institution for other projects upon appropriation.

Allowing institutions to benefit from prudent project financings will increase flexibility in financing future capital projects that may require additional funds. To encourage scrutiny, efficiency, and quality in project planning, development, and construction, this Commission recommends that institutions of higher education be permitted to retain cost savings realized from completed capital projects.

RECOMMENDATION 6:

That the State Council of Higher Education for Virginia review and consider revising space planning guidelines for research space and assist the Secretary of Education in the development of a policy addressing the appropriate mix of general and nongeneral fund support for the construction and renovation of research space at institutions of higher education.

Funding for higher education research space facilities has been derived from a variety of general and nongeneral funds. No consistent funding policy has been applied to projects of this nature. The lack of comprehensive space planning guidelines for research and medical research space makes it difficult to assess the need for these projects.

Research space should receive an appropriate measure of general fund support in recognition of the contribution of research to instruction and the Commonwealth as a whole. Each institution should, however, be expected to contribute nongeneral funds for the construction or renovation of research facilities. The State Council of Higher Education should continue to revise space planning guidelines for research space and develop guidelines for medical research space to identify and address actual space deficiencies.