RD196 - Annual Report on the Virginia College Building Authority's Financial Statements (Unaudited) for the Year Ending June 30, 2005


Executive Summary:
MANAGEMENT’S DISCUSSION AND ANALYSIS (Unaudited)

This section of the annual financial report of the Virginia College Building Authority (“the Authority”) presents an analysis of the Authority’s financial performance during the fiscal year that ended on June 30, 2005. This information should be considered in conjunction with the information contained in the financial statements, which follow this section.

Authority Activities and Highlights

The Virginia College Building Authority is authorized to issue revenue bonds and notes to finance (1) capital projects of public institutions of higher education under the Pooled Bond Program; (2) capital projects of public institutions of higher education under the 21st Century College and Equipment Programs; and (3) loans to private, non-profit institutions of higher education within the Commonwealth.

Under the Pooled Bond Program, bonds of the Authority are secured by notes of participating institutions of higher education to which the general revenues of the college or university have been pledged. During the year, the Authority issued $216.1 million of bonds under the Program.

The 21st Century Program and the Equipment Program were established in 1996 and 1986, respectively, and provide financing for state-supported institutions of higher education. The 21st Century Program provides funding for capital projects designated by the General Assembly. The Equipment Program provides funding for educational equipment. Bonds for both programs are payable from amounts to be appropriated by the General Assembly, and are issued together as a single 21st Century College and Equipment Programs offering.

The Authority is also authorized to issue conduit revenue bonds and notes to finance educational projects through loans to private, non-profit institutions of higher education within the Commonwealth. Since these financings are not obligations of the Commonwealth, they are not included in these financial statements. However, for informational purposes only, a Schedule of Outstanding Bond Issues for Private Colleges and Universities is included on page 23 of this report.

Overview of the Financial Statements

This discussion and analysis is an introduction to the Authority’s basic financial statements, which are comprised of two components: 1) combined government-wide and fund financial statements and 2) notes to the financial statements. This report also contains other supplementary information in addition to the basic financial statements.

Government-wide Financial Statements

The Statement of Net Assets and the Statement of Activities are two basic financial statements that report information about the Authority as a whole. The data is reported using the accrual basis of accounting, and provides insight as to whether or not the Authority’s total financial position has improved as a result of the current year’s activities.

The Statement of Net Assets presents all of the Authority’s assets and liabilities, with the difference between the two reported as “net assets.” Over time, increases and decreases in net assets measure whether the Authority’s financial position is improving or deteriorating.

The Statement of Activities presents information showing how the Authority’s net assets changed during the most recent fiscal year. All changes in net assets are reported as soon as the underlying events giving rise to the change occur, regardless of the timing of related cash flows. Therefore, revenues and expenses are reported in these statements for some items that will only result in cash flows in future fiscal periods (e.g. receipt or payments on long-term debt obligations).

Both statements report Governmental activities. The financial information in this section is related to Authority programs backed by appropriations from the Commonwealth and by note obligations from institutions of higher education. This includes the Authority’s 21st Century College and Equipment Programs and Pooled Bond Program.

Fund Financial Statements

The fund financial statements provide detailed information about the major individual funds. A fund is a fiscal and accounting entity with a self-balancing set of accounts that the Authority uses to keep track of specific sources of funding and spending for a particular purpose.

All of the Authority’s activity is reported in Governmental Funds Financial Statements. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, the governmental funds financial statements focus on near-term inflows and outflows of spendable resources. This approach is known as using the flow of current financial resources measurement focus and the modified accrual basis of accounting. These statements provide a detailed short-term view of the Authority’s finances that assists in determining whether there will be adequate financial resources available to meet the current needs of the Authority.

Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term impact of the government’s near-term financing decisions. Both the governmental fund balance sheet and the governmental fund statement of revenues, expenditures and changes in fund balances provide a reconciliation to facilitate this comparison between governmental funds and the governmental activities. These reconciliations are presented in the adjustment column in each of the financial statements.

Notes to the Financial Statements

The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and the fund financial statements.

Government-wide Financial Analysis of the Authority

The primary purpose of the Authority is to provide a vehicle for financing capital and equipment needs for state supported institutions of higher education. The Department of the Treasury provides staff support for the Authority. Consequently, the only operating costs are those attributable to its financing programs, which are paid from bond proceeds. The Authority owns no capital assets.

Virginia College Building Authority's Net Assets (in millions)

2005
Current assets: $282
Noncurrent assets: $619
Total assets: $901
Current liabilities: $239
Noncurrent liabilities: $1,194
Total liabilities: $1,433
Net assets:
Restricted: $125
Unrestricted: $(657)
Total net assets: $(532)

2004

Current assets: $128
Noncurrent assets: $526
Total assets: $654
Current liabilities: $254
Noncurrent liabilities: $868
Total liabilities: $1,122
Net assets:
Restricted: $(6)
Unrestricted: $(462)
Total net assets: $(468)

The increase of $247 million, or 38%, in total assets is due primarily to new construction bond proceeds totaling $424 million offset by related disbursements totaling $271 million. Also contributing were net new notes receivable from the institutions’ participation in the Pooled Bond program totaling $95 million. Total liabilities increased by $311 million, or 28%. The new bonds issued caused outstanding bonds to increase by $313 million and amounts due to higher education institutions to increase by $23 million. The deferral of the premiums on bonds sold also increased by $21 million. These increases were offset by the decrease in temporary loans payable, as there was no need for the Authority to obtain a loan at the end of fiscal year 2005, though there was an outstanding loan for $52 million last year.

Virginia College Building Authority's Changes in Net Assets (in millions)

2005
Revenues: $128
Expenditures: $192
Decrease in net assets: $(64)
Net assets July 1: $(468)
Net assets June 30: $(532)

2004
Revenues: $111
Expenditures: $215
Decrease in net assets: $(104)
Net assets July 1: $(364)
Net assets June 30: $(468)

The increase in revenues ($17 million, or 15%) is primarily due to higher receipts and payments on bond-related activity combined with increases in interest earnings due to higher invested balances and higher interest rates. The decrease in expenditures ($23 million, or 11%) is primarily due to a net decrease in disbursements to institutions for capital project activity. For both revenues and expenditures, fiscal year 2005 reflects initial payments on new bonds issued and full annual payments for bonds issued in fiscal year 2004.

Financial Analysis of the Authority’s Funds

In the Special Revenue Fund, total assets increased by $150 million, or 139%, in fiscal year 2005. This is primarily attributable to availability of new construction proceeds resulting from three new bond issuances. Liabilities decreased by $1.6 million, or 26%. This is primarily due to higher year-end payables due to the institutions, which fluctuates with construction schedules and reimbursement requests.

Debt Administration
As a financing entity, the whole business of the Authority is debt administration. The Authority issues bonds to finance capital projects approved by the General Assembly of the Commonwealth of Virginia. Depending on the program, certain bonds are secured by obligations of the recipient institutions of higher education; other bonds are secured by amounts to be appropriated by the General Assembly. The table below summarizes bond issuance activity during the year under each program.

Summary of Authority Bond Obligations (in millions)

21st Century Program -Capital
Outstanding, 7/1/04: $311
Issued during year: $262
Retired during year: $(20)
Defeased during year: $(62)
Deferral on debt defeasance: $(4)
Outstanding, 6/30/05: $ 487

21st Century Program - Equipment
Outstanding, 7/1/04: $78
Issued during year: $88
Retired during year: $(46)
Defeased during year: -
Deferral on debt defeasance: -
Outstanding, 6/30/05: $120

Pooled Bond Program
Outstanding, 7/1/04: $537
Issued during year: $216
Retired during year: $(20)
Defeased during year: $(101)
Deferral on debt defeasance: -
Outstanding, 6/30/05: $632

Total
Outstanding, 7/1/04: $926
Issued during year: $566
Retired during year: $(86)
Defeased during year: $(163)
Deferral on debt defeasance: $(4)
Outstanding, 6/30/05: $1,239

The Authority obtains bond ratings from Moody’s Investors Service (Moody’s), Standard and Poor’s Rating Service (S&P) and Fitch Ratings, Inc. (Fitch). The table on the following page summarizes the ratings on outstanding Authority bonds.

Virginia College Building Authority Bond Ratings

21st Century College and Equipment Programs
Moody's: Aa1
S&P: AA+
Fitch: AA+

Pooled Bond Program
Moody's: Aa1
S&P: AA
Fitch: AA+

Since the Authority’s bond programs are either backed by state appropriations (21st Century College and Equipment Programs) or carry the credit support of the State Aid Intercept Provision (Pooled Bond Program), the bond ratings are a direct reflection of the Commonwealth’s triple-A rating from each of the three rating agencies.

Future Impact to Financial Position

On October 19, 2005 the VCBA sold $115.9 million of its Educational Facilities Revenue Bonds, (Public Higher Education Financing Program), Series 2005A. The bonds were sold at a true interest cost of 4.27% and are expected to close on November 3, 2005. The proceeds of the Series 2005A Bonds will be used to purchase institutional notes from eight higher education institutions. The institutions will in turn use the proceeds of the notes to finance a total of twenty-three capital projects. The participating institutions are Christopher Newport University, Old Dominion University, the College of William and Mary, Longwood University, Virginia Polytechnic Institute and State University, Virginia State University, George Mason University, and Virginia Commonwealth University.