1. The Minnesota State Colleges and Universities system is an Equal Opportunity employer and educator. Chief Financial and Facilities Officers Meeting January 27, 2010 Revenue Fund Overview 2006 General Obligation Bond Financing OLA Audit Update

2. The Minnesota State Colleges and Universities system is an Equal Opportunity employer and educator. Minnesota State Colleges and Universities Secrets of the Revenue Fund Chief Financial and Facilities Officers January 27, 2010

3. Slide 3 What is the Revenue Fund? There are NO secrets! Means of financing capital projects for revenue producing facilities Through the sale of revenue bonds Historically, allowed State Universities to build residence halls and student unions Bonds are a means of getting other people’s money Similar to a bank mortgage

4. Slide 4 What is the Revenue Fund? Collateral = revenue from fees and charges Process to access the Fund: –Similar to MnSCU capital budget (state General Obligation bonds) process Money for new construction, renovation, repair Campus master planning and pre-design Design & construction processes & standards Office of Chancellor oversight Requires operating budget oversight too!

5. Slide 5 Legislative Background Established in 1955 as an independent enterprise fund May include certain revenue producing facilities Predates all systems. Fund created more than 10 years before establishment of the state university system Expanded in 2008 to include colleges Fund has authority to sell MnSCU revenue bonds; academic buildings use state General Obligation bonds

6. Slide 6 Authority Minnesota Statues 136F.90-136F.98 Master Resolution, or Indenture, is the contract between the seller (Board of Trustees) and buyer of bonds Board adopted new Indenture in 2007 Governed bond sales in 2007, 2008, 2009 Indenture must be reaffirmed by the Board at each sale plus a specific sale resolution

7. Slide 7 Capacity & Authority Financial Advisor determines Revenue Fund debt capacity –The amount of debt the Fund can handle –Based on previous year’s financial statements and history of revenue generation –Its like “pre-qualifying” for a loan Capacity calculated in 2009: –$346 million Capacity to be re-calculated once all projects are identified

8. Slide 8 Capacity & Authority Bonding authority is received from the Legislature –Should be based on debt capacity –Current authority is $200 million –Current debt is $185 million –Authority must be increased in 2010 legislative session in order to fund new projects

9. Slide 9 Recent Bond Funded Projects 2002 –Metro State – MCTC Parking ramp addition –MSUM – Student Union HVAC improvements –MSU,M – addition/remodeling Student Union –MSU,M – remodeling Dining Services –SCSU – purchase Stateview Apartments –SCSU – renovation Lawrence Hall –SCSU – Student Union: asbestos abatement, fire protection, roof replacement –SMSU – Student Union: replacement after fire –WSU – purchase Tau Hall

10. Slide 10 Recent Bond Funded Projects 2005 –MSUM – remodeling Dining Services –MSU,M – construct new residence hall –SCSU – construct parking ramp –WSU – purchase Maria Hall 2007 –BSU – renovate residence hall –MSUM – construct wellness center –SMSU – construct residence hall

11. Slide 11 Recent Bond Funded Projects 2008 –WSU – construct residence hall –WSU – construct wellness center 2009 –Century College – rebuild parking lots –MCTC – Student Center addition and renovation –MSU,M – Athletic Fields renovation –Normandale CC – Student Center addition and renovation

12. Slide 12 Oversight and Reporting Office of the Chancellor is responsible for oversight and reporting to the Board of Trustees and other entities: –Legislature –Minnesota Management and Budget –Bond holders –National bond rating agencies (Moody’s, Standard & Poor’s) –U.S. Internal Revenue Service (IRS) Source: Annual Financial Statements

13. Slide 13 Structure Revenue Fund is one fiscal entity from the perspective of the outside world Programs and operations delegated to presidents Discrete campus/program operating budget Policy: debt is project/campus specific

14. Slide 14 Funding Student Fees and user generated revenue –Board of Trustees must approve fees –Students must be consulted prior to submission of fees for approval Other sources of revenue –Rental of space –Conferences, catering –Other user fees, e.g. parking, wellness

15. Slide 15 Funding No tuition or state appropriation (operating revenue) goes into the Fund –Programs must be self-supporting –Institutional funds may go to the fund, e.g. leases Revenue to the Fund must stay in and support the Fund –Fund can “buy” services from the institution, e.g. snow removal, maintenance and repair Other funding sources (GO bonds, public/private $) can be used for projects

16. Slide 16 Example – State Funding Construct new Student Center (Union) –Project cost $6 million –Funded by state general obligation bonds (via the “bonding bill”) –Debt to MnSCU = 1/3 = $2 million –Debt to the state = 2/3 = $4 million –$1M debt to System; $1M debt to campus Campus debt over 20 years = $1.5 million Includes principal and interest over life of bond Average annual debt service = $74,000 Paid out of campus operating budget

17. Slide 17 Example – Revenue Fund Construct new Student Center (Union) –Project cost $6 million –Funded by MnSCU Revenue Fund bonds –Approximate cost of sale = $6.6 million “Closing Costs” add about 11%. Includes last year debt service payment and cost of issuance (legal, financial, underwriting, other) –Campus debt over 20 years = $10.2 million Includes all principal and interest over life of bond Average annual debt service = $512,000 Paid out of user fees

18. Slide 18 Next bond sale: timeline Spring 2010 –Identify projects – refine their scope and cost –Continue “Predesign” process –Student and campus community discussion on project scope and funding for fees approval Potential bond sale = $125 million

19. Slide 19 Predesign – Defines the project Scope – What is it? Options studied. Schedule – need for execution will impact on cost and scope. Cost – How much? Evaluate initial cost, ongoing operations and overall debt repayment.

20. Slide 20 Next bond sale: timeline Spring Semester – 2010 –January 15: Student letters citing project support due to OOC –February: Request the legislature to increase debt authority to $325 million (200M + 125M) –March 1: Preliminary business plan (Pro Forma) and 50% pre-design –April 15: Fees, finance plans, formal Student Consultation letters for 2011 Would include fees in 2011, if any, in connection with new projects

21. Slide 21 Next bond sale: timeline Summer – 2010 –Refining Pro Forma and sale parameters –August 15: Final project documents due 100 % Pre-Design Completed Pro Forma Sale parameters agreed upon

22. Slide 22 Next Steps Fall/Winter 2010 –October Board of Trustees 1st Reading of Bond Sale Rating Agencies presentation and visits –Past bond ratings: Aa3 (Moody’s), AA- (S&P) –State bond ratings: AA1 (Moody’s), AAA (S&P) –November/December Board 2nd Reading/Approval of Bond Sale January 2011 Bond sale! Money available for construction Debt service payment due

23. Slide 23 Potential Projects Anoka-Ramsey CC – Wellness Center MSU, Mankato – student residence hall; student union renovation St. Cloud State U – residence hall remodel MSU Moorhead – residence hall Bemidji State U – residence hall remodel St. Paul College – parking ramp Mesabi Range C&TC, Virginia – residence hall Mn State C&TC, Moorhead – Wellness Center Approximately $125 million bond sale

24. Slide 24 Principal players Allan Johnson – Assoc. Vice Chancellor for Facilities Greg Ewig – Director, Real Estate and Facilities Business Support Heather Anderson – Revenue Fund Finance Manager Sally Grans-Korsh – Facilities Planning Bill Breyfogle – Design and Construction Campus student affairs, res life, student union and other local leadership Students!

25. Slide 25 Questions?

26. The Minnesota State Colleges and Universities system is an Equal Opportunity employer and educator. Minnesota State Colleges and Universities OLA Audit – Use of 2006 General Obligation Bond Proceeds Chief Financial and Facilities Officers January 27, 2010

27. Slide 27 OLA Audit Scope: general obligation bond expenditures authorized in 2006 bonding bill through March 2008 Field work: through August 2008 Report: December 2008 Conclusion: “Generally, the Dept of Finance and other entities had adequate internal controls over their use of proceeds from GO bonds.”

28. Slide 28 Findings of Note Dept of Finance (MMB): improve oversight of compliance with statutes –Verify real estate declarations on property –Monitor use of bond funds in state accounting system Inappropriate use of bond funds –Costs that are not capitalizable –Moving costs –Actions not specifically authorized in bonding bill language

29. Slide 29 Findings of Note Use of bond funds for internal project management costs without direct connection to a specific project Leaseback of building purchased with bond funds requires net revenues paid to MMB (to offset state debt service requirements)

30. Slide 30 Follow-up Actions Capitalization of moving expenses (in connection with a bond funded project): –Success! Costs may be allowable depending on circumstances –Beware! Discuss with OOC/Facilities Program Manager Fees are allowable – but must be directly charged to a specific project –Developing a plan for 2010 GO program –Must charge direct hours; indirect and overhead to be determined

31. Slide 31 Follow-up Actions Leasing of bond financed property –Beware! consult with OOC/Real Estate –For specific case in audit, seeking legislative relief. Could be upwards of $1M impact Lesson Learned: Beware!! –GO Bond funds are unlike Gen Fund appropriations, tuition or other revenue.

32. Slide 32 Questions?