Community College Finance:
Maintaining Liquidity

A report from Moody's Investors Service stresses that as community colleges experience enrollment surges during this down economy, many will issue bonds as a means of raising the capital needed to provide the new construction, renovation, and technological infrastructure projects needed to meet the growing demand. As community colleges start taking on more debt to fund capital projects, it is going to be critical for business officers to ensure that they can maintain liquidity.

We asked Cynthia Gilliam, the vice chancellor of administration and finance for the Lone Star College System and a past president of the Texas Association of Community College Business Officers, for advice on financial planning.

Long-Range Financial Planning

Gilliam notes that the Lone Star College System is unique in that the system is in a very strong financial position (and has just received an AAA rating from S&P), but also remarks that this didn't happen by accident or by luck. It is the outcome of a long history of solid debt planning. "The key for us has been to have our financial advisers extremely involved in our debt planning from the get-go," Gilliam comments. "We use them to assist us in strategy. How are we going to issue this debt -- revenue bonds, another election and do we have enough to do that, should we use reserves? We have our financial advisers assisting us with these questions at every step."

Gilliam recommends:

  • Make sure your financial advisers are almost a daily part of your discussion of cash management
  • Perform a detailed analysis of cash demand (what are your cash needs? what will you need to invest? What items such as payroll or construction projects must you have cash available for?)
  • Engage in long-range financial planning -- for example, 5-year planning
  • Keep your direct debt low

Talking With Your Board

It is important to bring your board members the right information to engage them in the right discussion, without overburdening them or involving them in the granular details of your operating budget. Gilliam recommends including in your verbal report at the board meeting an "as of today" summary that includes:

  • How much of your budget the institution should have collected for tuition and fees at this time of year, and where your tuition revenues stand as of today
  • The same for tax revenues
  • The same for total spending
  • What percentage your fund balance revenues should be at by the end of the year, as compared to what you budgeted for

"Don't mention any of the line items," Gilliam suggests, "unless there's an anomaly in the comparison of this year to last year spending."

"Be able to talk with your board members about the importance of a reserve, a fund balance...without jargon. You have to put in plain English. Quite frankly, it can be difficult to find a bean counter who can also talk. But you have to be able to explain your long-range financial plan in a way that everyone can understand."
Cynthia Gilliam, Lone Star College System

Finally, leverage your relationships with board members in your financial planning. Look for ways to take advantage of the expertise your board has in corporate and investment financing, again without overburdening them. For example, if one of your board members is a bond attorney and knowledgeable about debt management, invite him to participate in your bond rating presentations as a board representative. "The rating agencies will be impressed that a board member not only attends, but contributes to the presentation."

"Find ways for board members to tell the story of your financial plan to the community."
Cynthia Gilliam, Lone Star College System

Gilliam notes that conversations of this kind between board members and rotary clubs or chambers of commerce help to improve the relationship between community and college, and provide a venue for board members to receive feedback directly from the community. "And board members can usually incorporate these communications easily into their daily/weekly schedules."

Keep Direct Debt Low

In a climate of decreasing state revenues, it is all the more difficult yet critical to keep direct debt low. Gilliam recommends working closely with your financial advisers to build into your debt schedule the ability to have more capacity for issuing bonds at a later date; this could mean, for instance, getting your direct debt paid down at least 50% over the next 10 years.

"You need your financial adviser involved every step of the way.  The FA should be able to tell you what the impact to your credit rating will be at certain levels of debt. We use the credit rating as the major indicator of how we are managing our debt. Make it a priority to keep your credit rating at the highest possible level."
Cynthia Gilliam, Lone Star College System

Gilliam also suggests taking a look at the rate of change in the growth of your tax base in the last five years; that will help you make projections when working on your debt schedule. "However, always use very conservative numbers in the schedule," she advises. This could allow you to:

  • Pay off debt early with extra tax collections
  • Issue more debt if needed without raising the tax rate

When deciding how much debt you can carry, focus first on the impact the debt will have on the tax rate, and how much your community will support. Determine at what point your tax rate will go up, and then determine how to structure the debt payoffs so that you still meet the 50% payoff schedule.

Getting Community Support for Bonds

To build buy-in for bonds or discussions of tax rate, you have to build strong relationships with your community by involving them from the start in your master planning process.

During your next master planning cycle, have community representation on the selection committee for what projects will be added, before approaching the public with a general bond election. "By heading up that committee with community stakeholders," Gilliam notes, "we had almost a 3 to 1 approval when it went out to an election. We had 10 hospitals take out full page ads in local newspapers to support the bond. This was because we were adding medical programs for nurses, EMT." The Lone Star College System had done the work to understand the needs of its community and had involved them from the start, so that when push came to shove, community members were more willing to pay, recognizing that they would be paying to have some of their own critical needs met (such as the need for more health professionals.)

The only way that kind of partnership will work is if your college leaders are trusted by the community.

"The only way you can garner that trust is with complete transparency. Make sure your report cards to your community are not a show and tell dog-and-pony show. Talk clearly about your strong points and the areas you still need to work on. They need to know that you are telling them everything. That kind of honesty, accountability, and proof of your good stewardship of their money will lead to their support."
Cynthia Gilliam, Lone Star College System