HOCKING COLLEGE Fee Pledge Request - $22,000,000 April, I. Project Overview

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1 I. Project Overview Hocking College is seeking approval to issue fixed rate general receipts bonds under the State s Credit Enhancement Program for two-year institutions for the following purposes: Purchase two residence halls from its Foundation for which the College is already responsible for the amount of the debt service through a leasing arrangement Fire alarm system upgrade on main campus Campus-wide information technology infrastructure upgrade Costs related to the issuance of this debt Other capital needs The aggregate not to exceed principal amount of debt to be issued is $22 million as approved by the Board in the authorizing resolution. Should the sale of bonds happen prior to the end of the fiscal year, the amount of debt issued and outstanding for the College as of June 30, 2013, will not exceed the amount of debt issued and outstanding for the College and the Foundation combined as of June 30, Page 1 of 11

2 II. Project Financing and Costs Hocking College requests the authority to pledge student fees in support of the issuance of general receipts bonds in an aggregate amount not to exceed $22 million. Included as an attachment to this application is the Board approved Bond Resolution authorizing the College to issue debt obligations as outlined in this application. Estimated project costs funded through the proposed debt issuance are presented below: $22,000,000 Hocking College General Receipts Bonds, Series 2013 Project Summary Sources of Funds Par Amount of Bonds 21,980,000 Reoffering Premium 0 21,980,000 Uses of Funds Deposit to Current Refunding Fund 19,110,000 Deposit to Project Construction Fund 2,000,000 Original Issue Discount 643,959 Estimated Costs of Issuance 109,900 Underwriter's Discount 109,900 Rounding Amount 6,241 21,980,000 Hocking College estimates that the maximum annual debt service obligation for the proposed long-term bond issuance will be $1,274,913 based on an estimated all-inclusive cost of funds of 3.418% over 25 years. Due to the payoff of other debt owed by the College in FY 2013 and the fact that the College is already responsible for the amount of the debt service on the two residence halls through a lease arrangement with its Foundation, this level of funding is already built into the College s annual unrestricted educational and general and auxiliaries budgets. Page 2 of 11

3 III. Fee Impact This proposed debt issuance will have no direct impact on student tuition and fees. While Hocking College may use unrestricted student fee revenues to support the debt service related to this request, the tuition and fees that are included in the legislatively controlled cap are not expected to increase as a direct result of this action. While this is a general receipts pledge, the debt service on $19.1 million for the purchase of the dorms will be primarily paid for with student housing charges generated by the Residence and Dining Hall Auxiliary. Page 3 of 11

4 IV. Project Description $19.1 Million PURCHASE TWO RESIDENCE HALLS - Hocking College is seeking approval to acquire two residence halls owned by its Foundation, Hocking College Foundation, Inc. The residence halls were financed in 2008 by 30 year Certificates of Participation issued through the Foundation. It is variable rate debt with a letter of credit that expires June 15, Also, approximately $13 million is synthetically fixed (swapped) until July 1, The College leases those properties built on College property for the amount of the annual debt service. A financial analysis shows that more than $1 million may be saved with a general receipts fixed rate issuance, issued under the State s Credit Enhancement Program, over the remaining 25 year life. In addition, with a fixed rate issuance the College reduces its interest rate risk exposure from the current variable rate bonds. $2 Million - FIRE ALARM SYSTEM UPGRADE ON MAIN CAMPUS In addition to the refunding piece described above, Hocking College desires to upgrade its fire alarm system, information technology infrastructure, pay for the costs of debt issuance and address other pressing capital needs. The College has recently received the report of an audit by an engineering firm of all its fire alarm/sprinkler systems in buildings on the main campus. In an effort to replace systems that vendors no longer support, standardize the systems across the campus and add additional security features, the College has placed this as a priority for funding through this issuance. CAMPUS-WIDE INFORMATION TECHNOLOGY INFRASTRUCTURE UPGRADE - In an effort to improve the College s college-wide data infrastructure, the College s Office of Information Technology is requesting an upgrade to the data network. The focus of the upgrade centers around student services, academic labs, faculty offices and administrative computing with a goal of enhancing operations by increasing speed, reliability and security, and positions the upgraded hardware to allow for additional network services in the future. It will also serve to mitigate the risks of hardware end-of-life issues. These changes will improve the College s wireless network, making it possible to upgrade wireless access points for increased speed and capacity. As part of the wireless project, expansion of new wireless offerings will be made available for student learning within the residence halls, exterior locations, and all classroom learning labs. OTHER CAPITAL NEEDS In addition to the priority projects identified above, the College plans to address some deferred maintenance needs, such as roof replacements that are needed. Page 4 of 11

5 V. Financial Ratio Analysis Through the 1997 enactment of Senate Bill 6 (SB6), the 122 nd General Assembly established a standardized method for monitoring the financial health of Ohio s state-assisted colleges and universities. Subsequently, the administrative rules used to guide the implementation of SB6 identified three financial ratios to evaluate an institution s fiscal health. The rules also established threshold factors for ranges of ratios, and created a weighted score of the threshold factors, termed the composite score, which provides a summary statistic to evaluate an institution s financial stability. The ratios and composite score are described in greater detail below, including how Hocking College performed when these measures are applied to its FY2009, FY 2010, FY 2011, and FY 2012 audited financial statements the most up-to-date financial data available. *NOTE: The FY 2012 data shown in the last column of each chart below reflect the ratios and composite score adjusted for the new debt position the College is anticipating as of June 30, 2013, all other things being equal. It takes into account this proposed issuance, the approximately $500,000 in energy-savings bonds issued in FY 2013 through Ohio Air Quality and that all other debt of the College ($2.775 million as of June 30, 2012) will be paid off in FY $2.5 million of that payoff will be through capital appropriations received in May to pay off BANs on its Logan Energy Institute. All other things are considered equal to that of FY 2012 which already includes the expenditure of funds equivalent to the debt service on the proposed issuance. It is important to note that the College is already paying an amount equal to the debt service on the Foundation s debt of $19.5 million (as of June 30, 2012) through lease payments for use of the residence halls; therefore the refinancing has very little impact on the primary reserve and net income SB6 ratios. 1. Viability Ratio The viability ratio is defined as expendable net assets divided by plant debt. This ratio is a measure of an institution s ability to retire its long-term debt using available current resources. A viability ratio in excess of 100% indicates that the institution has expendable fund balances in excess of its plant debt. Pursuant to this analysis, a viability ratio of 60% or greater is considered good, while a ratio below 30% might be a cause for concern. Hocking College s viability ratios for FY 2009, FY 2010, FY 2011, and FY 2012 are as follows: FY2009 FY 2010 FY 2011 FY 2012 FY 2012* 170.1% 152.5% 216.1% 250.3% 30.9% Page 5 of 11

6 With the implementation of Governmental Accounting Standards Statement No. 61, effective with the fiscal year ending June 30, 2013, the Foundation s debt will be reflected in the College s SB6 scores whether the project is refinanced or not. In accordance to the lease agreement with the Foundation, the College is solely responsible for the amount of the debt on the residence halls as required by bond covenants. The new accounting reporting standards will require that the operation of the Foundation and Hocking College be blended in the College s year-end financial statements (as opposed to the current discrete presentation) if the debt remains on the books of the Foundation. Rating agencies have always considered the existing Foundation debt as Hocking College debt. In addition, Hocking College s accrediting body has always considered this to be Hocking College. 2. Primary Reserve Ratio The primary reserve ratio is defined as expendable net assets divided by total operating expenses. This ratio is one measure of an institution s ability to continue operating at current levels without future revenues. Pursuant to the SB6 analysis, a ratio of 10% or greater is considered good, while a ratio below 5% would be a cause for concern. Hocking College s primary reserve ratios for FY2009, FY 2010, FY 2011, and FY 2012 are as follows: FY2009 FY 2010 FY 2011 FY 2012 FY 2012* 18.4% 13.0% 10.2% 11.5% 11.5% 3. Net Income Ratio The net income ratio represents the change in total net assets divided by total revenues. This ratio is an important measure of an institution s financial status in terms of current year operations. A negative net income ratio results when an institution s current year expenses exceed its current year revenues. A positive net income ratio indicates that the institution experienced a net increase in current year fund balances. Hocking College s net income ratios for FY 2009, FY 2010, FY 2011, and FY 2012 are as follows: FY2009 FY 2010 FY 2011 FY 2012 FY 2012* 6.5% 1.9% 0.4% 0.0% 0.0% Page 6 of 11

7 4. Composite Score The ratios are translated into a single composite score by assigning individual scores to ranges of ratios, weighting the individual scores, and summing the weighted scores. The primary reserve score is weighted more heavily than is the viability ratio, which in turn is weighted more heavily than the net income ratio. This scoring process effectively emphasizes the need for campuses to have strong expendable fund balances, manageable plant debt, and a positive operating balance. The minimum acceptable composite score is any score above Institutions with composite scores at or below this level merit special monitoring, and would be placed on fiscal watch if the ratio analysis yielded a composite score at or below this level for two consecutive years. The highest possible score is a 5.0. Hocking College s composite scores have been above the minimum threshold: FY2009 FY 2010 FY 2011 FY 2012 FY 2012* Page 7 of 11

8 VI. Ratio Analysis for Participation in Credit Enhancement Program In conjunction with this fee pledge request, Hocking College has submitted a request to participate in the Credit Enhancement Program. As required in OAC: an eligible institution s proposal must meet the following ratio analysis: Annual Debt Service Ratio: The projected amount of State Share of Instruction (SSI) payments must exceed the maximum annual debt charges by a ratio of (at least) 2.5 to 1 Estimated Debt Ratio for Remaining State Operating Support: The projected State Share of Instruction (SSI) payments remaining to be distributed in the fiscal year must exceed the debt charges remaining to be paid in the fiscal year by a ratio of (at least) 1.25 to 1. Debt Ratio Calculations FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 GRF SSI Payments $16,096,388 $14,271,761 $13,626,365 $14,039,112 $14,055,348 Bond Issue Higher Debt Service for all Credit Enhancement Debt (Occurs in FY 2015) $ 1,274,913 $ 1,274,913 $ 1,274,913 $ 1,274,913 $ 1,274,913 Annual Debt Service Ratio (includes all Credit Enhancement bond issues) Estimated Debt Ratio for remaining State Operating Support SSI Annual $ 14,055,348 all Credit Enhancement Debt 6 month of SSI/highest Jan debt service Estimated monthly $ 1,171, months of SSI/Highest July debt service Debt Service Highest January Payment $ 324,356 Annual Debt Ratio (All Credit Enhancement Debt) Year of SSI/highest FY debt service Highest July Payment $ 1,270,313 Highest FY Payment $ 1,274,913 Page 8 of 11

9 VII. Financial Outlook and Bond Rating According to its FY 2012 audited financial report, Hocking College s financial position reports total assets of $62,783,142 and liabilities of $14,756,004. Net assets, which represent the value of the College s assets after liabilities are deducted, remained at $48.0 million in FY According to FY 2012 audited financial reports, Hocking College is one of three two-year institutions to experience an increase in its Senate Bill 6 (SB6) ratios for FY 2012, based on preliminary data, the College attributes that to its ability to react quickly to external factors, including reductions in SSI, no capital bill in the last biennial period and enrollment declines from its recession peak. Since April of 2010 the College has instituted two across the board reductions in force and two program/operation specific reductions in force in order to right-size its workforce which constitutes approximately 75% of its operating budget. The College has begun to budget for increases to a strategic reserve designed to increase its unrestricted expendable net assets. The amount budgeted in FY 2013 was $750,000. The College is expected to end FY 2013 stronger than in recent years. This debt issuance under the State s Credit Enhancement Program is projected to allow for the College to save in excess of $1 million in debt service costs over the next 25 years and reduce its exposure to interest rate risk and other risks inherent with variable rate bonds for which the College is currently obligated to fund the payments. The Foundation s debt has been considered debt associated with the College by rating agencies, its accrediting body and with the advent of Governmental Accounting Standards Statement No. 61, effective with the fiscal year ending June 30, 2013, now the SB6 scores. Because the College is solely responsible for the debt on the residence halls though a lease arrangement required by bond covenants, new accounting reporting standards will require that the operation of the Foundation and of the College be blended in the College s year-end financial statements as opposed to the current discrete presentation. The College is currently not rated by either Moody s Investors Service or Standard & Poor s. The College intends to apply to Moody s Investors Service to request the long-term Bond issue be rated. Page 9 of 11

10 VIII. Institutional Plant Debt This pledge represents a request of $22,000,000 to purchase existing dorms from the Hocking College Foundation and for fire alarms and IT equipment upgrades, through the State of Ohio Credit Enhancement Program for Hocking College. The purpose of the debt issuance is to refinance existing Foundation debt and address critical capital needs on the College s campus. As the state s capital investment in Ohio s campuses has diminished in recent years, the need has grown for campuses to issue local debt. The table on the following page depicts how long-term plant debt at Ohio s public colleges and universities has changed at the statewide level over the past five years. Between FY 2008 and FY 2012, statewide plant debt increased 59.39% or approximately $2.398 billion. A major contributing factor to this growing level of debt is the need for institutions to address critical capital and maintenance needs on campus. While statewide institutional debt increased over the past 5 years, Hocking College s plant debt has decreased by $3.6 million or 56.52% over this same period. Hocking College s debt, inclusive of its Foundation, was at its all time high in recent years at $26.5 million in FY With this debt issuance and taking into account debt payments being made in FY 2013, the total combined debt as of the end of FY 2013 would be approximately $22.5 million. The purchase of the residence halls under the State s Credit Enhancement Program, as previously stated, will result in savings on the all-inclusive cost of debt in excess of $1 million over the 25 years of the issuance. The addition of $2 million more for critical needs including fire alarm system upgrades, IT infrastructure upgrade and other capital needs, (the potential of some roof replacements needed prior to availability of the next capital bill), will have a significant impact on funding of the College s current capital plan. Page 10 of 11

11 Institution LONG-TERM PLANT DEBT, FY FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 UNIVERSITIES BOWLING GREEN $80,290,000 $78,255,000 $141,265,000 $132,505,000 $124,760,229 CENTRAL STATE $1,862,693 $1,743,287 $1,617,887 $1,513,758 $1,863,645 CLEVELAND STATE $163,591,508 $207,067,009 $217,893,028 $217,354,270 $215,057,122 KENT STATE $277,532,000 $276,019,000 $296,569,000 $326,014,000 $498,744,000 MUO (b) See UT See UT See UT See UT See UT MIAMI UNIV. $228,484,393 $224,325,090 $213,566,272 $325,614,330 $444,219,472 NEOMED $2,291,713 $1,992,413 $1,676,808 $16,454,983 $42,000,000 OHIO STATE $1,076,097,000 $1,360,245,000 $1,354,259,000 $1,973,883,000 $2,476,984,000 OHIO UNIVERSITY $167,403,027 $192,718,265 $177,027,086 $164,745,879 $206,081,793 SHAWNEE STATE $17,765,000 $17,515,000 $17,015,000 $16,505,000 $15,970,000 UNIV. AKRON $421,931,710 $418,195,077 $424,907,317 $398,884,080 $386,676,812 UNIV. CINCINNATI $1,091,020,000 $1,090,644,000 $1,153,641,000 $1,186,317,000 $1,152,778,000 UNIV. TOLEDO $265,409,000 $252,924,000 $295,561,000 $287,550,000 $330,946,000 WRIGHT STATE $35,624,887 $31,564,022 $37,870,633 $32,690,128 $84,425,012 YOUNGSTOWN STATE $18,603,592 $38,990,037 $62,083,924 $78,656,592 $76,378,683 COMMUNITY COLLEGES BELMONT TECH $0 $0 $0 $0 $0 CINCINNATI STATE $47,455,542 $46,774,109 $46,150,000 $45,085,000 $45,708,276 CLARK STATE $8,175,000 $7,900,000 $7,615,000 $16,845,000 $16,265,000 COLUMBUS STATE $18,255,000 $16,620,000 $14,910,000 $13,690,000 $12,425,000 COTC $3,470,979 $2,394,382 $2,078,251 $1,477,666 $93,910 CUYAHOGA $79,449,916 $178,119,296 $179,599,118 $173,508,483 $166,566,885 EDISON STATE $4,704,730 $4,422,095 $4,126,979 $3,813,992 $3,610,329 HOCKING $6,384,650 $6,089,638 $5,498,634 $3,191,976 $2,775,926 JAMES RHODES $2,914,098 $2,859,527 $2,799,956 $2,740,385 $2,675,815 JEFFERSON $1,422,593 $1,211,968 $957,506 $734,426 $500,817 LAKELAND $3,308,426 $11,096,151 $9,590,647 $17,537,805 $15,271,539 LORAIN $6,529,973 $6,035,000 $5,740,000 $5,440,000 $69,845,000 MARION TECH $0 $0 $0 $0 $0 NORTH CENTRAL $97,879 $51,308 $1,504 $0 $0 NORTHWEST STATE $59,860 $40,300 $40,230 $5,063 $0 OWENS STATE $536,241 $276,495 $6,417,348 $7,477,454 $6,273,615 RIO GRANDE $2,411,421 $2,256,498 $2,114,858 $1,968,337 $0 SINCLAIR $0 $0 $0 $0 $0 SOUTHERN STATE $5,577,394 $5,371,694 $5,080,903 $4,771,667 $19,220,007 STARK STATE $0 $0 $0 $19,443,994 $18,636,250 TERRA STATE $66,409 $0 $0 $0 $0 WASHINGTON STATE $0 $0 $0 $0 $0 ZANE STATE (MATC) $309,075 $654,117 $460,366 $1,095,272 $934,376 STATEWIDE TOTAL $4,039,035,709 $4,484,369,778 $4,688,134,255 $5,477,514,540 $6,437,687,513 Page 11 of 11