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May 2017 August 20175
KICA Seeking Community Input on New Debt Policy
KICA operates under a Policy Governance Model , which is critical for a community that has a constantly rotating , volunteer board . Policy Governance is intended to provide the board , staff , and community clear understanding of who does what , along with philosophical continuity from one board to the next . Any board can change a policy , but it can ’ t ignore an existing policy . With effective policies in place , all stakeholders should know what to expect , unless a policy is changed . Thus , to change direction , a majority of board members must vote to rescind the existing policy .
Over the last few months , the Finance Committee and the Board of Directors have discussed the creation of a Debt Policy . As the association currently doesn ' t have such a policy , the board wants to formalize its debt philosophy so the community will know what to expect if the association ever considers borrowing to fund expenditures . After several iterations , a conceptual policy was approved by the board as presented below ( along with a brief explanation of financial terms , as well as some of the beliefs and assumptions that were considered during policy development ). However , before final adoption , community input is being sought on the substance of the policy , and can be shared by emailing board @ kica . us by Sept . 16 . A report on feedback will be shared at the regularly scheduled Sept . 11 board meeting .
Debt Policy KICA ’ s debt policy will comply with the following principles :
• KICA may use debt for four main purposes : ( i ) to fund seasonal cash flow needs ; ( ii ) to fund projects that KICA fully insures against natural disasters ; ( iii ) to fund projects that cannot be insured against natural disasters : ( iv ) uninsured cleanup and major repairs and replacements following a natural disaster .
• Type ( i ) loans must be repaid within one year ; type ( ii ) loans must be repaid in equal installments over the shorter of the useful life of the project or 15 years ; type ( iii ) and type ( iv ) loans must be repaid in equal installments over no more than five years
• Before drawing down any type ( ii ), ( iii ) and ( iv ) loans , the COO must provide the board a schedule which includes the source of funds for repayment , showing that sufficient funds will be available from this source to repay the loans as required by the repayment schedule .
• Type ( i ) loans may be executed without notifying the members , but any type ( ii ), ( iii ), or ( iv ) loan will require an advance communication to all members , including the purpose , the amount , the funding source , the key terms , the primary sources of funds for repayment , and the repayment schedule .
• With the exception of unplanned borrowings for type ( iv ) loans , the maximum outstanding total debt will not exceed the prior year ’ s revenue derived from Annual Assessments .
Explanations of Financial Terms and Concepts Type ( i ) loans are to cover needs related to seasonal spending and income patterns . This type of need could occur because most revenue comes all at once when annual dues are paid , while many expenses are spread evenly through the year , and others may come in large , sometimes unpredictable chunks at different points during the year .
KICA can obtain cost effective insurance for some assets , like buildings , but cannot for other assets , like beach boardwalks or docks at Rhett ' s Bluff . If we borrow money to pay for uninsurable assets ( type iii loans ), it is important to repay these loans relatively quickly , to limit the risk of having to borrow to replace the asset while the original loan remains outstanding . Repayment for loans for insurable assets ( type ii loans ) can be stretched longer . This is because the cost of storm damage would be covered by insurance , thus we would never have the situation where the debt exceeded the value of the asset .
If a major storm does serious damage to KICA ’ s uninsured assets ( roads , bike paths , docks , boardwalks , etc .) we need to be able to borrow money to replace the assets - type ( iv ) loans . The amount of these loans should not be limited , as we need to have flexibility to replace whatever is damaged . However , these loans must be repaid relatively quickly , as another storm could damage these assets . The goal of these loans is to spread the cost of a storm over a few years , if the board decides this is better than an assessment to cover the damage all in one year .
Beliefs and Assumptions The debt principles are geared to provide KICA with the tools to fund its operations and projects , while maintaining sufficient borrowing capacity to fund uninsured storm damage , and provide reasonable borrowing limitations and accountability to members .
KICA has a $ 2.5 million line of credit to provide liquidity if needed , though it has never been advanced .
The board ’ s borrowing authority is limited only by the policies of organizations that would consider making loans to KICA . This limitation is generally a function of excess cash generated by KICA after collecting current revenues and covering current costs . Based on 2017 annual cash flows , KICA ’ s current borrowing capacity is probably less than $ 5 million .
KICA can increase its borrowing capacity without a member vote by increasing
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