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Kentucky Universities Ask Lawmakers for Bonding Authority

BRADENTON, Fla. — Faced with decreased state funding, Kentucky’s public universities are asking the state for permission to issue their own bonds secured by specific fees to fulfill pent-up capital needs.

Gov. Steve Beshear and a bipartisan group of legislative leaders back the plan, which would authorize the universities to issue $363.3 million of bonds in coming months if authorized by the General Assembly, which is in session through March 26.

“Kentucky law requires the General Assembly to authorize all bonds and to appropriate bond funds used to construct capital projects,” said John Hicks,
deputy state budget director.

In the past, universities have issued their own bonds with legislative approval, typically calling it “general receipts” debt, secured by a pledge of most unrestricted revenue, including state appropriations.

Much of the debt sold to fund large capital needs is financed by direct debt-service appropriations from state tax revenues, and is sold through the state of Kentucky’s Asset-Liability Commission or the State Property and Buildings Commission.

Both of those financing methods tap state funds. Issuing through state agencies also requires that the debt be reported in Kentucky’s financial audits.

A proposal last year to authorize $408 million of bonds to be issued by the institutions and secured by specific, existing university fees was not authorized by lawmakers out of apparent concern that it could affect the state’s credit ratings.

With Kentucky funding support for universities cut by 15% over the last six years, the state’s eight universities this year proposed the first “in a series of collaborative initiatives to maintain momentum at Kentucky post-secondary education institutions during these difficult financial times,” the university presidents said in a joint letter to the governor and General Assembly.

The proposal would allow six universities to move forward with 11 self-funded projects.

“These facilities will greatly stimulate Kentucky’s economy, while requiring zero state funds for their construction,” they said. “This significant investment in Kentucky’s future will be funded with housing and-or dining revenue or other established revenue streams.”

Beshear, who supports the program along with Sen. President Robert Stivers, R-Manchester, and House Speaker Greg Stumbo, D-Prestonsburg, said a bill will be filed soon seeking legislative authorization for the sale of $363.3 million of bonds for the 11 projects.

The “bonds will meet the growing needs of our universities with no impact on the general fund, as they will be paid for through existing revenue streams such as student fees and athletic revenues,” Beshear said. “At a time when we are pushing our students to pursue higher education, it’s imperative that they have adequate classrooms, housing and facilities, and the issuance of these bonds will accelerate those projects to meet those needs quickly.”

Stivers said the concept has been well- received by the Senate Majority Caucus.

The 11 projects supported by the bond financing will have a combined total estimated economic impact of nearly $623 million and support 5,110 jobs, according to the proposal submitted by the universities.

The proposal also includes specific details about each project, and the economic impact and jobs that will be created by each one.

Several projects will address outdated or inadequate student housing while others will improve existing classroom spaces and sports facilities.

The University of Kentucky, the state’s flagship four-year institution, plans to issue the most debt — $250 million — for three projects. For the first time, UK will use revenues from athletics to help pay for construction of an academic building.

Athletic revenues and private fund raising will pay for $65 million of a $100 million, 263,000-square-foot Academic Science Building, according to UK president Eli Capilouto.

“In offering support for us to self-finance facilities that will help dramatically improve and transform our campuses, Gov. Beshear and our legislative leaders are voicing their faith in Kentucky’s future,” Capilouto said. “For the University of Kentucky, authorization to self-finance three facilities on our campus will improve our ability to educate tomorrow’s leaders today.”

The university system also plans a $65 million renovation project supported by donor pledges at the Gatton College of Business and Economics. Some $40 million of debt will be issued to bridge payment of private pledges over time.

Some $110 million of bond proceeds will be spent renovating and expanding the UK’s Commonwealth Stadium where the Southeastern Conference football team plays. The stadium, built in 1973, will get new seating and other improvements.

The state-issued and self-financed bonds of the University of Kentucky have underlying ratings of Aa3 from Moody’s Investors Service and AA-minus from Standard & Poor’s. Both agencies have stable outlooks on UK’s debt.

The remaining $113.3 million of bonds, if authorized by the Kentucky General Assembly, will be issued by Morehead State University, Murray State University, Northern Kentucky University, the University of Louisville and Western Kentucky University.

Moody’s placed a damper on the entire higher education sector Wednesday, broadening its negative outlook to include market-leading diversified colleges and universities, which typically have a diverse revenue stream.

Moody’s, which has placed a negative outlook on the majority of the sector since 2009, rates about 515 colleges and universities. About 150 of those institutions are considered market-leading, research-driven, public and private universities.

“The new sector-wide negative outlook reflects mounting pressure on all key university revenue sources, requiring bolder actions by university leaders to reduce costs and increase operating efficiency,” Moody’s analyst Eva Bogaty said in an industry outlook report this week.

With weak economic growth and reduced federal spending, Bogaty said “even market-leading universities with diversified revenues are facing diminished prospects for revenue growth.”

Though universities have cut costs in response to the economy since the financial crisis and recession, they only recently began examining the cost structure of their traditional business model, she said.

Factors that contribute to Moody’s negative outlook include price sensitivity suppressing tuition revenue growth and strain on all non-tuition revenue sources, rising student loan burden and defaults, and growing public scrutiny increasing the risk of more regulation and accreditation sanctions.

While post-secondary education remains a valuable long-term investment “the sector will need to adjust to the prospect of prolonged muted revenue growth,” Bogaty said in her report. “Strong governance and management leadership will be needed by most universities as they navigate through this period of intensified change and challenge.”

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