CAPITAL LEASE OBLIGATIONS AND DEBT
CHAPTER22
CAPITAL LEASE OBLIGATIONS AND DEBT
300.2
1.0OVERVIEW AND DEFINITIONS:
This chapter addresses capital lease obligations owed by the campuses and paid through loans from commercial lenders and issue of Bond Anticipation Notes (BANs) and Systemwide Revenue Bonds (SRB).
CapitalProject Related Financing Activities
Capital project related financing activities normally include (a) the acquisition and disposal of capital assets used in providing services or producing goods, (b) borrowing money for acquiring,constructing, or improving capital assets and repaying the amounts borrowed, including interest,and (c) paying for capital assets purchased from vendors on credit (governed by GASB Statement No. 9,paragraph 23). For the CSU, capital leases are frequently used as a financing mechanism.
Types of Financing
For each funding source related to a construction project, a separate and distinct statesubfund must be established. Examples of funding sources are:
•Bond Anticipation Notes (BANs).An obligation issued by the CSU to provide shortterm financing to the CSU campuses for construction projects. The BANs are purchased by the California State University Institute[1] with proceeds from the Institute’s issuance of short-term commercial paper (CP) notes. The BANs act as collateral for the Institute’s commercial paper and contain terms consistent with the commercial paper.
•Systemwide Revenue Bonds (SRB). Long-term debt issued by the Board of Trustees to fund construction projects.
•Commercial Paper Equipment Financing (CPEF).The CSU tax-exempt commercial paper program,administered through Finance & Treasury and financed via the Institute,providesa lease-financing mechanismto fund campus purchases ofeligible equipment items, including IT equipment, CMS-related projects,consisting of hardware and software program costs and service costs, vehicles, pre-fabricated modular buildings, as well as Group II equipment for nonstate capital projects.. This program, however, is not designed forfinancing the acquisition of real property.
•Outside Financing for Personal Property. Campuses may obtain financing through privatelending institutions. This usually happens when the rates are lower than those offered through CPEF, when campuses prefer fixed-rate financing rather than the variable-rate financing offered through CPEF, or when campuses have insufficient reserves to pay for the equipment in advance of seeking reimbursement through CP proceeds, as required by CPEF.
•Donor Funds. Contributions made by external parties to fund construction projects.
•CSU Vendor Equipment Financing-This program offers campuses another external source of financing through participatingthird-party financial service providers. This program operates under aMaster Enabling Agreement withpre-established contract terms and conditions fully agreed upon by all financial service providers to fulfill tax-exempt lease-financing needs of California State University (CSU) campuses and auxiliary organizations. The program is designed for financing equipmentas well as capital projects relating to energy conservation or infrastructure improvements.
Commercial paper(CP) is issued through the Institute for two purposes:
- Short-term funding of costs of capital outlay projectsduring the construction period, with the intent of retiring CP outstanding with bond proceeds upon successful completion of long-term bond issuance.
- Personal property financing, which originally focused only on the financing of costs associated with Common Management System (CMS) software implementation. Later, the Institute began issuing commercial paper for financing of costs for equipment, as well as CMS. Eventually, CP may be issued to refinance existing equipment.
The Board utilizes the CP Program for capital financing activities through the Institute.To minimize bond issuance costs during varying construction periods, the Board may initially finance capital expenses with proceeds of commercial paper issued by the Institute and secured by BANs. The Board also utilizes commercial paperissued by the Institute to finance certain equipment and software needs of the CSU.
CP secured by BANs are generally refinanced with long-term fixed rate SRB when capacity in the CP program reaches its limit andCP capacity is needed for interim financing of other new projects, or when lower interest rateprovide an environment conducive to less costly issuance of new-money bonds. When this occurs, a portion of the proceeds from the bonds will be used to redeem both outstanding CP and BANs.
2.0FUND SPECIFICS:
The Dormitory Interest and Redemption Fund, state fund 0578, is used by the CO only to record and pay the principal and interest on SRB to the State Controller’s Office where the proceeds are held, as the State Treasurer is the trustee of the SRB proceeds.See Chapter 17 for further discussion of SRB.
Although the CO makes the semi-annual SRB debt service payments, each campus is responsible for maintaining adequate program fee revenue funding, including the collection of debt service from its auxiliary organizations, to finance these payments. One month prior to the scheduled payment due date, the CO will issue a CPO to transfer funds for the payments from the campus programs benefiting from the financing.
Similarly, for the personal property financing through CPEF, each participating campus is responsible for maintaining adequate program fee revenue to fund the debt payments.The money required for these payments is transferred to the Institute quarterly via CPO.
3.0FUND MANAGEMENT AND ACCOUNTING PRACTICES:
3.1CPEquipment Financingand the CSU Vendor Equipment Programs
3.1.1CPEquipment Financing (CPEF) Program
Funding of CPEF is initiated through a CPO by the CSUInstituteto the participating campus. The expenses and the reimbursement of expenses through CP equipment financing arerecorded in the CSU fund that incurred the expenses and which benefits from the use of the equipment.
CPEF can be used in an operating fund or a non-recurring maintenance and repair fund. For example,a campus incurs expenses for its Common Management System (CMS)implementation costs. The CMS implementation is considered a part of campus operations. Therefore, the initial funding and expenses are recorded in CSU fund 485, Operating Fund. Subsequently, the financing of the CMS cost through the commercial paper issuance is also recorded in CSU fund 485 as a capital lease obligation.
Another example are the deferred costs of a boiler replacement. This is considered part of the campus non-recurring maintenance and repair program and therefore the initial funding and expenses are recorded in CSU Fund 486, Academic Maintenance & Repair, using object code 619001 (607XXX object codes are not allowed for CPEF).Subsequently, the financing of the boiler cost through the commercial paper issuance is also recorded in CSU fund 486 as a capital lease obligation.
3.1.2CSU Vendor Equipment Program
The expenses and the reimbursement of expenses through the CSU vendor equipment financing program arerecorded in the CSU fund that incurred the expenses and benefits from the use of the equipment. Transactions related to this program can be recorded in any of the following types of CSU funds: operating, non-recurring maintenance and repair or capital improvement.607XXX object codes are allowed for capital financing expenditures.
3.1.3Recording CPEF and the CSU Vendor Equipment Program Transactions
A capital lease between the campus as lessee and the Institute or outside vendor as lessor acts as security for the debt, with campus lease payments applied toward repayment. Title for equipment will transfer immediately to the campus upon execution of the lease. Therefore, the transactiondoes not violate the California Constitution, Article 16, Section 6,where the CSU operating fund is not permitted to be pledged against debt.Although EO 669 and EO 775 delegated authority to campus presidents to enter into lease agreements for purposes of acquiring personal property and services,auxiliary organizations do not have such authority and thus need the assistance of the campus to facilitate lease-financing.
Below is an illustration of the legal-basis accounting transactions:
With regard to accounting transaction #2 in the table above, the charge to Other Assets is for capitalized interest. For discussion on capitalized interest, refer to Chapter 5-7 of the GAAP Manual.See the link provided in Section 7.0, Resources.
With regard to accounting transaction #4, for the CPEF program, the lease paymentsare due quarterly, on February 1st, May 1st, August 1st, and November 1st.Campuses are required to pay the CSUI one month prior to these dates. For the CSU Vendor Equipment Program, refer to the lease agreement for payment terms.
For further information on the equipment program financing options, see link Financing & Treasury Tax-Exempt Commercial Paper / Equipment Financing Program provided in Section 7.0, Resources.
3.2Donor Funds
Donor funds received from outside parties for construction projects may be deposited in state fund 0948. For externally restricted capital projects specific to Auxiliary Enterprise Funds (also referred to as SRB programs), the following CSU funds should be used : Fund 442 (Extended Education); Fund 453 (Health); Fund 473 (Parking); Fund 533 (Housing) and Fund 536 (Union). For other campus projects funded from restricted donor construction funds, CSU fund 550, Restricted Expendable-Capital Projects, should be used. All capital project expenditures should be recorded in the object code series 607xxx if they are to be capitalized anddonor revenues should be recorded in object code 503412, Nongovernmental Contracts and Grants Capital, which is used for non-financial aid and capital grants from private donors.
4.0REPORTING REQUIREMENTS:
Issuance of annual audited financial statements for both SRB and the Institute.These audited financial statements are issued by the CSU each October.
5.0FUND BALANCE:
No special instruction.
6.0GAAP IMPACT:
Refer to GAAP Manual, Chapter 4.3.5 Capital Lease Obligations, Chapter 5 GAAP Adjustments or Reclassifications that Require Information from The Office of the Chancellor and Chapter 16 SRB Audit Requirements, and the recorded training. See links provided in Section 7.0, Resources.
7.0RESOURCES:
Executive Order 669 – Lease Agreements
Executive Order 775 – Acquisition of Personal Property
Executive Order 994 – Financing and Debt Management
Financing & Treasury Tax-Exempt Commercial Paper / Equipment Financing Program
Recorded Training – Revenue Bonds – Legal Basis Accounting
Recorded Training – Revenue Bonds – GAAP Passdown Schedules and Entries
GAAP Manual:
Chapter 4.3.5- Capital Lease Obligations
Chapter 5 - GAAP Adjustments or Reclassifications that Require Information from The Office of the Chancellor
Chapter 16 - SRB Audit Requirements
REVISION CONTROL
Document Title:CHAPTER 22–CAPITAL LEASE OBLIGATIONS AND DEBT
Contributor:Sheralin Klinthong, Lily Wang, Terri Williams
Reviewer:Sheralin Klinthong, Lily Wang, Terri Williams
CO Owner:Sherry Pickering
Issuance Date:May 20, 2014
Revision and Approval History
Section(s) Revised / Summary of Revisions / Revised By / Reviewed by / Approved by / Revision Date3.1 / Added details on the CSU Vendor Equipment Financing program / Kelly Cox / Lily Wang
Syrus En / R. McNiel / 9/28/16
6.0 and 7.0 / Updated chapter references to Chapters 4.3.5, 5 & 16 / Cinthia
Santamaria / S. Pickering / S. Pickering / 2/26/18
22-1 / California State University| CSU Legal Accounting and ReportingManual
[1]The California State University Institute (Institute) is a nonprofit California corporation that is a discretely presented auxiliary organization of the CSU. The Institute's purpose is to further the mission of the California State University by facilitating centralized financing and investment programs on behalf of the California State University system, principally the commercial paper program of the California State University.