The development of financial strategies to fund capital projects for Texas community colleges

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Texas Tech University

Recent national studies on higher education have brought attention to the problem of deteriorating campus facilities. Faced with limited local funding and stringent state appropriations, a number of community colleges nationwide will be forced to make significant budget reductions. Continued deferred maintenance may be a necessary consideration by many of these colleges. At some point, the physical facilities will deteriorate to the critical stage, resulting in a substantial loss of public investments. These losses could be avoided by the timely expenditure of proportionately less money on preventive maintenance projects. Various theoretical models have been developed to determine the cost of eliminating the backlog of deferred maintenance and the cost of maintaining the campuses in the future. The problem is obtaining the required money allocated to these projects because other essential higher education needs will compete for the same constricted funds.

A proposed solution to the problem of securing the needed money for maintenance projects is the development of a long-range financial plan which uses a combination of debt issuances and high yielding investments to fund capital projects for Texas community colleges. The goal will be to generate the maximum amount of net interest income possible by using the institution's ability to sell bonds that are exempt from federal income tax. The issuances of debt should take maximum advantage of the small governance exception of the Federal 1986 Tax Reform Act. The investments of college funds should be managed to take full advantage of market conditions and the interest yield curve (relationship of interest rates to time).

The major purposes of the study were to: (1) survey current financial activities of Texas community college chief financial officers, (2) analyze existing laws on debt issuance and investment of public funds, (3) suggest several financial strategies to generate additional interest income, and (4) demonstrate how colleges can accumulate money to finance capital projects.

A survey of the forty-nine Texas community college chief financial officers (CFOs) was conducted to provide a database of current financial activities. The database resulting from the survey described the financial activities that have been employed at the community colleges. It appears that since most of the CFOs have not been utilizing the financial opportunities available to them, they may be unaware of the opportunities to consider the financial strategies suggested in this study for purposes of funding capital projects.

The survey also provided personal data about the chief financial officers at each college and their perception of others' attitudes toward financial innovativeness. Chief financial officers perceived themselves and their presidents as being the most in favor of financial innovativeness; in addition, they perceived state laws and auditors as being the greatest restraint to innovation, followed by faculty members and the general public.

The laws on debt issuance and investment of public funds were analyzed to determine the amount of legal arbitrage available for Texas community colleges. Then several financial strategies were developed to maximize net interest income by investing the bond proceeds for longer periods of time. Long-range financial planning techniques were used to demonstrate how a college could use the financial strategies developed in this study to accumulate funds to finance capital projects on a continuous basis.

Community colleges - Finance, Community college financial officers -- Texas, Community colleges -- Texas, Community colleges - Buildings - Maintenance