MEETING OF THE FINANCE COMMITTEE
OF THE BOARD OF TRUSTEES
HOUSTON COMMUNITY COLLEGE SYSTEM
February 15, 2006
Minutes
The Board of Trustees of the Houston Community College System held a Meeting of the
Finance Committee on Wednesday, February 15, 2006, at the System Administration
Building, Seminar Room A, Second Floor, 3100 Main, Houston, Texas.
BOARD MEMBERS PRESENT
Richard Schechter – Committee Chair
Jay K. Aiyer
Bruce A. Austin
Yolanda N. Flores
Diane O. Guzman
James Murphy
Christopher Oliver
Dr. Michael P Williams
ADMINISTRATION
Bruce H. Leslie, Chancellor
Doretha Eason, Deputy to the Chancellor
Irene Porcarello, Vice Chancellor, Student Success
Jose Villarreal, Vice Chancellor, Economic Development
Gloria Walker, Vice Chancellor, Finance & Administration
Margaret Ford, President, Northeast College
Fena Garza, President, Southeast College
Zachary Hodges, President, Northwest College
Willie Williams, Associate Vice Chancellor, Human Resources
Carole Keeney Harrington, Interim Associate Vice Chancellor, Communications
Miles LeBlanc, General Counsel
OTHERS PRESENT
Jarvis Hollingsworth, System Counsel, Bracewell & Giuliani
Suewan Johnson, Bond Counsel, Vincent and Elkins
Mark Nitcholas, Financial Advisory, RBC Capital
David Wilcox, President, Faculty Senate
Other administrators, citizens, and representatives of the news media
CALL TO ORDER
Mr. Schechter called the meeting to order at 4:05 p.m. and declared the Committee convened
to consider matters pertaining to the Houston Community College System as listed on the
duly posted Meeting Notice.
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Finance Committee – February 15, 2006 – Page 2
DISCUSS STATUS OF 2004 CIP AND OTHER ASSOCIATED PROJECTS
Mr. Schechter explained that the purpose of the meeting was to discuss the status of 2004 CIP
and associated projects with financial strategies. Mr. Schechter stated that he wanted to make
certain everyone had the same definition of the challenge in financing the CIP prior to
discussing the appropriate action.
Mr. Schechter distributed three charts with 2006/2007 budget demand beyond the CIP. The
charts show: (1) annual cost to complete all projects listed on CIP in terms of dollars (2) cost
of operating new buildings, and (3) the shortfall in each fiscal year. He noted that the
numbers were based on discussion with Gloria Walker. The Board reviewed the charts to
define the exact amount of the shortfall. A worksheet was provided so that the Board could
review the current anticipated cost.
Dr. Williams arrived at 4:30 p.m.
The Board reviewed the projects to include any alterations to estimated costs for 2006/2007
budget as follows:
Public Safety Institute
Central Campus Plant
Northline Mall
Hayes Rd
Additional Debt Service on CIP
Salary Increases
IT Increases
Early College (not including Central) Budget Shortfall
Operating New Facilities
-
$1.3 million
$1.0 million
$2.7 million
$2.6 million
$2.2 million
$3.6 million
$2.0 million
0 (HISD will cover up to $750,000)
$6.0 million
$2.9 million (Hayes Rd and PSI)
TOTAL DEMANDS FOR 2006-07 -
$24.5 Million
Trustee Austin arrived at 4:40 p.m.
The additional budget cost pressure for 2006-07 is estimated to be $24.5 million. The Board
noted that a budget demand increase of approximately $3.6 million is built in as a go forth for
2007-2008; therefore, the budget demand for 2007 is $28 million, for 2008 is $29 million and
then stabilizes thereafter.
Mr. Schechter opened the floor for the Board to provide other revenue opportunities outside
of tax and tuition increases to offset the estimated shortfall. Mr. Murphy recommended
setting a high, medium and low level to determine if new students will be attracted or will
current students be shifted to the new buildings.
Mr. Austin noted that the assumption is based on whether the Trustees begin to monitor the
effectiveness of the programs. He noted that there are some fiscal options and coordinated
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Finance Committee – February 15, 2006 – Page 3
savings through non-duplicated expenses such as having the colleges work together whether
duplicating the same function at each college. He based comments on what other community
colleges are doing. Mr. Austin noted that there are sixteen various industry clusters identified
by the national government association. The other issues are tuition and fee increases that
come by actually establishing targets for increase in students and monitoring of those targets.
Mr. Oliver questioned whether increase in students and monitoring the target will really
reduce the shortfall.
Dr. Leslie mentioned the naming rights are potential opportunities to bring additional
revenues which can be tied into the capital campaign; however, questions remain whether the
dollars go back to paying for the building and its operations or whether they go to the
endowment for scholarships. The concept has been approved by the Board.
Mr. Oliver noted that there are some difficult decisions that will have to be decided: whether
to borrow the money, eliminate some things, or a combination of both.
Mr. Schechter stated that he wants to make certain that everyone is aware of the number and
all agree.
Mrs. Flores stated that she reviewed the workforce programs in accordance with the
Coordinating Board and there seems to be a number of programs that need to be phased out.
She asked if an analysis of the workforce program has been completed. Dr. Leslie stated that
Dr. Cook has completed the analysis and Administration is currently working with the
Presidents on programs that should be phased out as well as programs that should be added.
He noted that some departments have been consolidated.
Dr. Leslie informed the Board of a study that reviewed the enrollment variable in-district and
out-of-district tied to the growth of out-of-district rate. The study shows that there are steady
growths in enrollment for in-district; the loss occurs with out-of-district. Therefore, the
problem is that we are loosing enrollment in out-of-district.
Dr. Williams asked why the information is not provided to the Board in a tangible format.
Dr. Leslie stated he would provide the information to the Board.
Trustee Flores left at 5:17 p.m.
Dr. Williams noted that it is the responsibility of Administration to provide numbers that the
Board can accept with options for discussion. The Board should not be responsible for
determining how to raise the money but should ultimately decide whether to accept the
options presented by Administration. Dr. Williams stated that in order to grow enrollment, a
massive investment in recruitment and retention must be made. He stated that a decision has
to be made to either to go out to bond again, raise taxes, raise tuitions and fees, try to borrow
money in the market, or a combination of these options. The burden has to be shared across
the Board.
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Finance Committee – February 15, 2006 – Page 4
Trustee Aiyer noted that we were trying to get understanding of the figure amount.
Trustee Schechter asked whether the information provided by Administration is the
recommendation for solving the shortfall.
Mr. Austin noted that we must first resolve the representation made with the public in terms
of the bond issues in 2004.
Mr. Schechter noted that the only representation on the ballot issue was that no more than
$150 million dollars would be spent.
Dr. Williams stated that ethically campaigns have been made in the communities to support
the bond for certain reasons; therefore, representations were made to the communities.
Mr. Austin stated that he was simply trying to separate the issues because all of the issues of
new projects were not projects anticipated other than exceptional situation such as Northline
which had a $600,000 yearly lease. He recommends that bond issues are addressed first and
then other additional projects should be reviewed separately. Dr. Williams noted that the
primary concern should be the bond. Mr. Aiyer noted that his concern is that we are in the
process of closing on some of the projects. Dr. Williams agreed and stated that maybe some
of the projects may need to be placed on hold. Mr. Austin suggested a logical progression
approach be taken first relating to CIP put before the voters. Dr. Williams stated the focus
should be on what it takes to complete projects approved under the CIP; how do we cover the
$83 million shortfall.
Mr. Schechter stated that the consensus from the meeting is that the $8.2 million will satisfy
the remaining outstanding bond.
Gloria Walker informed that the information provides an analysis and recommendations. She
noted that the presentation does not include the annual operations because she wanted to
separate the annual operations from the funding of the CIP. She noted that funding for annual
operations will be revisited during the budget development phase in March.
Ms. Walker informed the Board that several scenarios were reviewed with Mark Nitcholas,
Financial Advisory to solve the $83 million shortfall and provided a PowerPoint presentation
detailing the following:
Purpose of the Study – given certain parameters, what is the impact of funding the gap
between the original funding of the Capital Improvement Program (CIP) and the current cost
to complete the CIP?
Questions to be Addressed - (1) If HCC realizes less than 1% growth in its taxable value and
student revenue, how much of an increase in tax rate will be needed to fund the CIP
completion? (2) If HCC has no tax increase or growth in student fee revenues, what level of
increase in the taxable value would be needed to fund the CIP completion? (3) If HCC has no
tax increase or growth in its taxable value, what level of increase in student fee revenue would
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Finance Committee – February 15, 2006 – Page 5
be needed to fund the CIP completion? and (4) If HCC has no tax increase, what equal level
of increase in taxable value and student fee revenue would be needed to fund the CIP
completion?
Assumptions made in the Analysis - (1) current level of pledged revenues (after paying
revenue bond debt service) and other student revenues flow to general fund for operations (2)
current level of M&O Tax Revenue (after paying existing and planned 2006 lease revenue
bonds and maintenance tax notes) flow to the General Fund for operations (3) current budget
level and proportion of budget determined by excess student fees and M&O taxes are held at
2006 level, and (4) deferred maintenance will be capitalized in CIP funding bond issue and
annual budgeted amounts will be utilized over the next four years for debt service on M&O
debt
Mr. Aiyer asked if these scenarios were applicable to everything. Ms. Walker noted that this
applies only to the CIP and two buildings at Central.
Ms. Walker elaborated on the following scenarios to fund CIP completion:
Scenario 1: (Capitalization of deferred maintenance of $20 million; less than 1% growth in
taxable value and student revenue; level of increase in M&O tax rate to fund CIP
completion):
Growth in taxable value of 0.75%
Growth in student fee revenue of 0.75%
Increase in M&O tax in August 2006 of $0.00225
This scenario assumes utilizing $6 million to cover the $103 million debt which is the $20
million added to the $83 million shortfall; would need another $1.8 million which equals $2
per household.
Scenario 1A: (Funding financing with HISD contribution and capitalization of deferred
maintenance; less than 1% growth in taxable value and student revenue; level of increase in
M&O tax rate to fund CIP completion):
Growth in taxable value of 0.75%
Growth in student fee revenue of 0.75%
Increase in M&O tax in August 2009 of $0.0016
This scenario assumes funding with HISD financing the $4 million to complete the Drennan
building, which will decrease shortfall to $78 million; would decrease debt service to $1 and
no M&O tax increase until 2009.
Scenario 1B: (Funding financing less San Jacinto and Pinemont with capitalization of
deferred maintenance; less than 1% growth in taxable value and student revenue; level of
increase in M&O tax rate to fund CIP completion):
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Finance Committee – February 15, 2006 – Page 6
Growth in taxable value of 0.75%
Growth in student fee revenue of 0.75%
No Increase in M&O tax in August 2009
This scenario assumes postponing construction on San Jacinto and Pinemont projects which
decrease the cost by $30 million and would require no increase in taxes; other increase cost
would be maintaining San Jacinto.
Scenario 1C: (Funding financing without HISD with capitalization of deferred maintenance;
less than 1% growth in taxable value and student revenue; level of increase in M&O tax rate
to fund CIP completion):
Growth in taxable value of 0.75%
Growth in student fee revenue of 0.75%
Increase in M&O tax in August 2009 of $0.00200
This scenario assumes no financing from HISD; slightly decreasing the maintenance tax note
in 2009.
Scenario 2: (No tax rate increase and no growth in student fee; needed growth in taxable to
fund CIP completion)
Growth in taxable value (2006-2007) of 11.00%
No Growth in student fee revenues
No increase in M&O tax in August 2006
This scenario assumes that valuations would need to grow by 11% (approximately $9 billion)
in order to cover debt.
Scenario 3: (No tax rate increase and no growth in taxable value; needed growth in student
fee revenue to fund CIP completion)
No growth in taxable value
Growth in student fee revenue of 13.00%
No increase in M&O tax in August 2006
This scenario assumes that student fee revenues would need to grow by approximately $7
million in order to pay off $82 million CIP debt.
Scenario 4: (No tax rate increase and equal growth in taxable value and student revenue fee;
needed growth in student fee revenue and taxable value to fund CIP completion)
Growth in taxable value of 6.00%
Growth in student revenue fee of 6.00%
No increase in M&O tax in August 2006
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Finance Committee – February 15, 2006 – Page 7
This scenario assumes that a split both ways would be needed in order to cover the CIP debt.
Ms. Walker informed the Board that the financial advisors were asked to review various
instruments that a community college would be eligible to participate.
Funding Mechanism Available to HCC for Financing CIP Gap – (1) revenue bonds with
funding capacity of 100% (2) student fee revenue commercial paper with funding capacity of
100% (3) lease revenue bonds (via Public Facility Corporation) with partial funding capacity
(4) maintenance tax notes with partial funding capacity.
Mr. Nitcholas elaborated on the student fee revenue commercial paper (CP) in which an
amount is authorized but not issued. The CP program provides the following:
•
•
•
•
Short-term borrowing (30-60-90-180 day terms)
Flexible borrowing (issued in amounts as HCC needs funds)
Could be paid off or rolled at maturity
Refinance with long-term bonds (when capacity is full or projects completed)
Mr. Nitcholas noted that the advantages of commercial papers are short-term rates, borrowing
occurs only when needed and the funds do not sit in the bank while HCC pays interest. He
noted that the disadvantages are the annual fees due to liquidity provider which would be less
than the cost of issuance and interest rate risk.
The Board discussed the commercial paper program and posed questions.
Suewan Johnson, Bond Counsel, stated a review must be completed to see if the commercial
paper would become a third lien and how the market would handle the situation since HCC
currently has senior lien and junior lien revenue bonds.
The Board asked if there will be a negative impact relating to the rating agencies.
Ms. Walker noted that the commercial paper program provides additional revenue streams.
Mr. Nitcholas stated that the Financial Advisors would hold an extensive conversation with
the rating agencies to see if there will be a negative effect on the ratings.
Mr. Oliver asked if the commercial paper is the best option.
Ms. Walker stated that the Scenario #1 is the best scenario coupled with a commercial paper
program.
Mr. Schechter asked if the Administration is recommending the option of borrowing an
additional $8.2 million to pay the remaining CIP and figure out the remaining $22.3 million
shortfall because this increases the borrowing debt and decreases funds for students.
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Finance Committee – February 15, 2006 – Page 8
Dr. Williams stated that Mr. Schechter is characterizing the recommendation unfairly;
Administration should be responsible for presenting the options to complete the CIP and the
Board has to determine the value judgment.
Dr. Leslie noted that the Administration was reviewing scenarios relating to the CIP, but the
options were not design as a strategy to deal with the full $25 million.
Mr. Aiyer noted that by making a decision on any of the scenarios will have implications on
everything else. Mr. Austin noted that the process must be prioritized.
Trustee Oliver left at 6:24 p.m.
The Board concluded that Scenario 1B would be the best option, and requested that
Administration provide a schedule of buildings.
Mr. Austin motioned that the Administration provide a scheduling plan referencing the 2004
CIP and a schedule for Scenario 1B should be provided at the March 22, 2006 meeting. Dr.
Williams seconded. Motion was approved 6-0.
The Board concluded that the schedule plan for launching the projects should be discussed at
the Committee of the Whole meeting scheduled for February 16, 2006. A special Finance
Committee meeting to approve the financing of the CIP will be held on March 22, 2006 @
4:00 p.m. and the Regular Board meeting will be held on March 29, 2006 @ 4:00 p.m.
ADJOURNMENT
There being no further business to come before the Committee the meeting adjourned at 6:58
p.m.
Minutes recorded, transcribed, and submitted by:
Sharon Wright, Executive Administrative Assistant, Board Services
Minutes Approved as Submitted: March 29, 2006