HD80 - A Review of Debt at State Supported Institutions of Higher Education
Virginia’s institutions of higher education have developed unique and independent financial operating models. These institutions also have a widely varying level of fiscal sophistication and financial management. As we have reviewed the debt capacity of various institutions, it is clear that one model, even general in nature, would not provide an effective tool for either the Commonwealth or the individual institutions.
We believe that all institutions should develop and have a debt capacity model to guide their issuance of debt. These models should equally consider both the debt service cost associated with the debt, but more importantly, the effect that debt service can have on mandatory fees and other costs to the students. Historically, Virginia’s approach to reviewing debt issuance in many cases only focuses on the project’s ability to generate sufficient revenue to pay debt service on the bonds or whether debt service costs will remain below a certain percentage of expenses. These approaches both fail to consider the cost to the student if the project becomes part of the comprehensive cost of attendance or tuition and fees.
The Commonwealth needs to evaluate these various debt capacity models to determine the extent institutions are affecting the Commonwealth’s debt capacity and bond rating. Although, the institutions have received exemptions from certain state regulations or laws, their actions continue to have a direct effect on the Commonwealth. The financial market analysts do not separate the actions of the institutions of higher education from the Commonwealth’s overall financial status and bond rating. The use of joint ventures with other organizations also will have an impact on the Commonwealth in the financial markets, if they believe that the Commonwealth will assume a guarantor role in these arrangements.
1. Each institution should develop and use a debt capacity model approved by the institution’s Board of Visitors and compliant with the guidelines of the Secretary of Finance and the State Council of Higher Education.
2. The debt capacity model should include a component, which considers the effect of debt service on the cost of attendance.
3. The General Assembly may wish to have the Debt Capacity Advisory Committee review the institutions’ debt capacity models and periodically report on how the institutions are using them and their results.