Debt Capacity Analysis

Annual Report on Current and Forecasted Debt Ratios (FY12- FY17)

I. Purpose

The purpose of the Annual Report on Current and Forecasted Debt Ratios is to evaluate the University of Colorado’s long-term borrowing obligations and its ability to make future debt service payments. Debt ratio analyses can also be used to assess how debt might constrain the University’s future attempts to implement new strategies or programs. A variation of this ratio is used by the credit rating agencies and assesses an institution’s ability to meet future debt service obligations with current unrestricted resources.

Fitch, Standard & Poor’s and Moody’s Investor Services view the university’s moderate debt ratio and deliberative fiscal planning process as evidence of prudent financial practices and effective debt management modeling. As of the most recent debt issue (University Enterprise Revenue Bonds, Series 2012A-1), the university’s credit rating from Fitch, Moody’s is AA+/Aa2, respectively.

The university is subject to statutory limits on its debt under C.R.S. §23-20-129.5(2)(d) that require the university to maintain a debt ratio of 10% or below. Historically, regent policy has been more conservative than these statutory requirements, limiting the ratio to 7%.

An analysis of the university’s and the campuses’ debt ratios is summarized below. The analysis contemplates outstanding long-term obligations of the university and significant internal lines of credit/supplemental credit facilities that have been extended to the campuses for capital projects pending permanent financing through new debt issuance. The analysis includes all projects to be financed through the issuance of external obligations, including those planned for FY13 and those in the Five-Year Capital Plan for the period from FY13 through FY18.

II. Methodology

The debt ratio is calculated by dividing the maximum annual future debt payment, including contingent liabilities for which the university’s committed participation is viewed as a credit enhancement, by the sum of that current fiscal year’s forecasted combined unrestricted current fund expenditures and mandatory transfers.

This analysis relies upon the following data:

  1. The base year, upon which unrestricted current fund expenditures plus mandatory transfers are calculated, is FY13, with forecasts for average annualized growth rates through FY19 provided for each campus by the Office of Budget and Finance; and
  2. The amount financed is as reported by the campuses in their capital plans; and
  3. Only projects on the capital plans for FY13 through FY18, as well as those approved in FY11 but not yet permanently financed, have been included in the debt ratio analysis; and
  4. Maximum annual debt service payments on capital projects are in accordance with financed amounts, first payment dates, interest rates and term assumptions; and
  5. Projects will generate new revenues equal to a minimum of 125% of annual debt service.

III. Assumptions

Forecasting the debt ratios takes into account many variables for which educated guesses are necessary. These variables include the expected interest rates for which debt can be issued as determined by the treasurer, the expected rates of increase in growth of current fund expenditures for each of the campuses as presented by the VP and Chief Financial Officer, the project cost and actual amounts financed, as presented by the campuses.

  1. Based on current municipal rate expectations, the interest rate assumptions used are: 
    • FY13 4.5%
    • FY14 5.0%
    • FY15 5.0%
    • FY16 5.5%
    • FY17 5.5%
    • FY18 5.5% 
  2. Expected annualized growth rates in current fund expenditures for each campus through FY19 are 5.0%.
  3. Amount financed on each project is as listed.

IV. Results

System Overview:

As of May 31st, 2012, the University had approximately $1.29 billion in outstanding debt from directly issued revenue bonds, no COP’s, and approximately $71.4 million in other long-term obligations from contingent liabilities outstanding. With no change to currently outstanding debt structure, total debt service payments for the university in FY13 will be $128.9 million decreasing to $102 million by FY19. The University’s current debt ratio for “existing-only” debt is 6.1% as of the end of FY13. If the University issues no new debt, this ratio will decrease to 3.6% by FY19.

If the University finances only the additional projects, its debt capacity ratio will rise to 5.2% in FY17 and still be able to accommodate an additional $33 million in annual debt service while remaining below 7% debt service capacity. For every $12.5 million financed for 25 years at 6%, the annual debt service payment would be $1 million.

UCB:

In FY13, payments for Boulder’s outstanding long-term obligations will be approximately $78 million and reflect a FY13 debt service capacity ratio of 8.8%. The ratio would decline to 4.6% in FY19 if no additional debt were issued.

If the campus finances only additional projects, its debt capacity ratio will be 7.1% in FY14 and will decrease to 6% by FY19. There would be negligible annual debt service coverage still available while staying below the 7% debt ratio threshold.

UCCS:

In FY13, payments for Colorado Springs’ long-term obligations will be approximately $9.7 million. Colorado Springs’ current debt capacity ratio in FY13 is 7.3%. If no additional debt were issued, the campus debt capacity ratio would decrease to 5.2% by FY19.

If the campus finances only the additional projects, its debt capacity ratio will increase to 8.7% in FY17. The campus will have no debt service capacity available, within the 7% limit in FY17.

UCD:

The combined FY13 long-term obligations payments for UC Denver will be approximately $43.6 million. In FY13, the combined campus’ debt capacity ratio is 4.0%. If no additional debt is issued, the ratio will decline to 2.6% by FY19.

If the campus finances only the additional projects, its debt capacity ratio will decrease to 2.8% in FY19. The campus will have unused debt service payment capacity of $56.8 million in FY19. For every $12.5 million financed for 25 years at 6%, the annual debt service payment would be $1 million.