Analyzing University and College Financial Statements

Analysis of the Financial Condition of
Boston College
Howard Bunsis
Professor of Accounting, Eastern Michigan University
Chair: AAUP Collective Bargaining Congress
March 2012
Executive Summary
• Boston College is in excellent financial condition
• This conclusion is supported by:
Strong reserves
Manageable debt
Revenues exceeding expenses
Strong cash flows
Very high bond rating
• There has been a larger increase in the number and dollars
devoted to administration than to faculty and instructional
• If there are cuts to be made, they should first be made to
administration. If that cannot happen, then reserves should
be utilized. There is no need to make any cuts to the core
academic mission.
• Analysis of Financial Performance
– Basic ratios
– Bond ratings
• Revenues: Where is the money coming from?
Tuition, grants, contracts, feds, state, endowment
• Expenses: Are they devoting sufficient resources
to the core academic mission? Focus on the
number and salaries of administrators
• Other metrics: Class size, tuition increases. Are
students paying more and getting less?
Main Data Sources
• Audited financial statements.
• Budgets. This is a loaded word. The key fact is this:
– Audited financial statements report what happened.
– Budgets predict what will happen.
• IRS 990: Publicly available only through 6/30/2010
• Timing:
– Audited financial statements are available for the year ended May of
– The budget for the current year (2011-12) is already done; the
budget has just been approved for the 2012-13 academic year.
– The 990 is due 4 ½ months after the fiscal year end; an automatic 3month extension is typically utilized, giving the administration until
1/15/2012. Any further extension beyond 1/15/2012 requires
special circumstances. By now, the 990 for the year ended 5/30/11
has been filed.
– The administration claims that the 990 has not been filed yet; that is
likely not the case
Other Data Sources
• Office of Institutional Research. This office houses data
on enrollment, number of faculty, administrators,
tuition, degrees conferred, and graduation rates
• IPEDS (Integrated Postsecondary Education Data
System) for detailed revenue and expense analysis
• AAUP Salary Surveys
• Common Data Set for class size and other employee
• EADA (Equity in Athletic Data Analysis) for athletic
• USA Today for athletic revenues
• Moody’s and S&P bond rating
Statement of Net Assets Summary
• The percentage of net assets (assets minus liabilities) is high
• This percentage declined in 2009 due to the decline in the value of the endowment
Statement of Net Assets Graphically
Asset Composition
• Investments are mostly the endowment, and are the dominant asset
• BC has over $2 billion in investments
• The large decline in investments (endowment) from 2008 to 2009 is clear.
The endowment has recovered from the prior loss. We will see how
endowment income covers some expenses
• The growth in capital assets is due to new buildings
2011 Asset Composition
Total Assets =
$3.5 Billion
Investment Composition:
Source: Notes to Audited Financial Statements
• Most private universities provide more detail than above
• There are typically more categories, and the equities category is
broken down
• There is also a reporting of “alternative investments,” which is
not reported by BC
Investment Composition by Level
• Level 1 are stocks and mutual funds. Level 2 has a published net asset
value. Level 3 investments (most risky; think Madoff) do not have an
observable market
• The largest investments were in level 3 assets in 2009; that has now
• Overall, this demonstrates that the administration is playing high finance,
and feels good about its financial situation
Endowments of Peer Institutions
BC Endowment is
$1.7 billion
Liability Composition
• There are annual increases in debt in 2009 and 2011.
• In November of 2010 (in 2011 above), BC issued $195 million of debt to
retire old debt, build a new academic building, and fund project costs
• We will soon examine if this is too much debt:
• Can they make the principle and interest payments?
• Is the debt large relative to reserves?
Net Asset Composition
• As we will see, not all of the unrestricted net assets are available as reserves.
• The decline in 2009 is due to stock market losses.
• It is healthy that there are over $2 billion of net assets – we will see how much
in real reserves there are
Unrestricted Net Asset Composition
• In 2011, of the $1.3 billion in unrestricted net assets, $396 million of the
$1.3 billion is for the value of buildings, and is not a true reserve
• There was a large decline in unrestricted reserves in 2009 due to paper
losses on the endowment
• There is still over $900 million of unrestricted reserves at the end of 2011.
We will compare these to total expenses next
Definition of Net Asset Categories
Source: Page 5 of 2011 Audited Financial Statements
• Unrestricted – Net assets that are not subject to
donor-imposed stipulations. Unrestricted net assets
may be designated for specific purposes by action of
the Board of Trustees.
• Temporarily Restricted - Net assets whose use is
limited by law or donor-imposed stipulations that will
either expire with the passage of time or be fulfilled or
removed by actions of the University.
• Permanently Restricted - Reflects the historical value
of contributions (and in certain circumstances
investment returns from those contributions), subject
to donor-imposed stipulations, which require the
corpus to be invested in perpetuity to produce income
for general or specific purposes.
More on Unrestricted Net Assets
• The unrestricted category overstates what is
available to the administration, and we
conservatively make an adjustment for this
accounting construct.
• The amount that is invested in plant assets is not
available for the university (the university is not
going to sell the buildings), and this amount is
subtracted when analyzing the net assets of a
private university.
• Reserves are the numerical sum of temporarily
restricted net assets and the portion of
unrestricted net assets unrelated to plant
(buildings that are free of debt)
Total Net
Net Assets
Independent of
Property and
Reserves or
Net Assets
of property
Net Assets
Related to
Primary Reserve Ratio: Reserves vs. Expenses
• The primary reserve ratio is defined as total reserves over total expenses
• A ratio of 210% indicates that BC could cover 25 months of expenses; 2-3
months is considered prudent
• The decline in 2009 is due to paper losses on investments
• If there is a temporary budget problem, reserves should be considered
before any cuts to the core academic mission
• Conclusion: BC has very high reserves
Viability Ratio: Reserves vs. Debt
• The viability ratio is defined as total reserves over interest-bearing debt
• A ratio 175% is very strong, indicating that BC has the reserves to deal with the
long term debt that it has issued.
Revenues and Expenses: Big Picture
• The net income ratio is defined as the change in net assets divided by total revenues
• What is more important is operating income, as non-operating items (mostly paper
gains and losses on investments) have a large effect on the bottom line
• Operating income is just slightly positive every year
Non-Operating Gains and Losses
Discussion of Non-Operating Gains and Losses
• The effect of paper losses on the endowment is
apparent, as there was a huge decline in 2009
(408 million), and a large gain in 2010 and 2011.
• For endowment spending, BC spends 5% of a 12quarter moving average of the endowment.
• The endowment is about 1.5 billion, so 5% of that
is about 75 million. The decline in the
endowment affects spending, but not by large
amounts as prior year spending adjusted by
inflation is also considered.
Investment Returns vs. S&P 500
• The S&P 500 return is more volatile than BC’s return
• BC has less negative and less positive returns than a pure
equity portfolio
Moody’s Ratio Analysis
• Moody’s uses three ratios to judge the financial
condition of public universities. Though BC is
private, the rating system is still very relevant.
• Then a composite score is compiled based on
these 3 ratios:
• Primary Reserve Ratio
– Are there sufficient reserves?
• Viability Ratio
– Is there too much debt?
• Net Income Ratio
– Are revenues and expenses in line with each other?
Moody’s Ratio Definitions
• Primary reserve ratio: Expendable net assets
divided by total operating expenses.
• Viability ratio: Expendable net assets divided
by debt.
• Net Income Ratio: Change in total net assets
divided by total revenues.
• Final Score =
50% * Primary Reserve Ratio +
30% * Viability Ratio +
20% * Net Income Ratio
Moody’s Summary Scores
Boston College Moody’s Scores
• To be in financial trouble, according to Moody’s, an institution must have a
composite score of below 1.75 for two consecutive years
• 5.0 is a perfect score
• 4.7 is a very high rating, and is why BC has such a high bond rating, as we
will see
Other Ratios: Cash Flows
• Cash Flow Margin = Cash flows from operations divided by total revenues
• A ratio of 13.2% is solid, and supports the conclusion that BC is in strong financial
• Moody’s actually has this ratio at 18.3% for 2010, not 16.4% above
Other Ratios: Debt Service
• A debt service coverage ratio of 2.7 also corresponds to a bond rating of Aa,
which is what BC has.
• These metrics are per Moody’s Report: U.S. Not-for-Profit Private and Public
Higher Education; August 26, 2011
Boston College Bond Ratings
• Aa3 per Moody’s on February 24, 2010
• Aa3 is the 4th highest possible rating out of 23 ratings
• Outlook The stable outlook incorporates the College's
history of operating stability and healthy market
presence. Although the College's balance sheet strength
is somewhat weak for its rating category, we believe
operating consistency and the strong planning and
management focus offset this relative weakness and
expect the College to manage future debt and capital in
line with growth in balance sheet resources and cash
Strengths Per Moody’s Report
Excellent student market position as a Catholic Jesuit institution with
growing enrollment of over 13,600 full-time equivalent students and healthy
selectivity rate of 31% in fall 2010. The University's well regarded academic
reputation and location in Boston bolster student demand, although the
relatively modest yield rate on admitted students of 25% in fall 2010
demonstrates the highly competitive environment in which the College
Highly consistent and favorable operating results. The College's operating
margin has improved in recent years, resulting in a three-year average
operating margin of 6.3% in FY 2010 based on Moody's methodology. A
strong operating cash flow margin of 18.3% in FY 2010 produced debt service
coverage of 3.2 times and would cover projected maximum annual debt
service following the current issuances by 2.4 times.
Growth in financial resources in FY 2010, following declines stemming from
an investment loss in FY 2009 and increase in outstanding debt. Total
financial resources of $1.8 billion in FY 2010 resulted from fundraising
success during the current capital campaign and an investment return of 13.
5% for the year. The College's fully fixed rate debt structure provides stability
and predictability in budgeting, and liquidity is robust with 563 days cash on
hand provided by unrestricted assets that can be accessed within one
Challenges per Moody’s Report
• Higher leverage than similarly-rated peer institutions, with
expendable financial resources cushioning pro-forma debt by 1.5
times in FY 2010 compared to the FY 2009 median for Aa-rated
private colleges and universities of 2.3 times. In addition,
expendable financial resources to operations are lower versus peers
at 1.8 times in FY 2010 versus the Aa-rated median of 2.2 times in
FY 2009.
• Relatively high reliance on tuition and auxiliary revenues (73% of
operating revenues in FY 2010 as calculated by Moody's). Slower
growth in net tuition revenue per student may persist as the
College implemented muted increases in tuition and fees for FY
2010 and FY 2011 while tuition discounting has increased slightly.
• The College has identified a substantial number of strategic capital
projects during a previously completed strategic and facilities
master plan. Based on the College's current forecasts, we expect
the College to prudently phase these efforts in light of the
economic environment and ongoing discussions with the
community regarding specific projects.
Summary of BC Ratios and Bond Ratings
• Based on ratio analysis and bond ratings, it is
clear that BC is in strong financial condition
– Strong reserves
– Manageable debt
– Operating revenues exceed operating expenses every
– Strong cash flows
• The next question is this: Are they spending
their money in the appropriate manner?
• First, we will examine where the money
comes from – revenues.
Revenue Dollar Analysis
Source: Audited Financial Statements and Office of Institutional
Research, Planning, and Assessment (IRPA)
• Total operating revenues increase each year
• This is driven by tuition and fee increases
• We will examine percentage changes, as well as tuition discounting
BC 2011 Revenue Percentage Analysis
Dollar and Revenue Percentage Change Analysis
• The changes in total revenues are driven by tuition changes
• The overall growth is healthy
Tuition Discounting
Source: Audited Financial Statements
• The discount rate is increasing over time, and is highest in 2011.
• There are other forms of aid, such as Pell Grants. This aid is given by
the institution
Federal and State Dollars to Undergrad Students
Source: IPEDS 2010 Data
• BC is a private university
• But there are lots of taxpayer dollars that make their way to BC
Financial Aid Breakdown:
2009-10 per IPEDS
• 1st column is family income level
• 2nd column: Of students who receive Federal aid, what percent are
in each income category. Therefore, 43% of BC students who
receive federal aid have family income greater than $110,001
Expense Dollar Analysis
Source: Audited Financial Statements
Expense Percentage Analysis
Source: Audited Financial Statements
• Instruction is less than 40% of total expenses. We will break down instruction
via IPEDS to show how much of instruction is not related to salary
• General administration is down from 2009, but higher than in 2003
• Academic support also has significant administrative costs (deans)
Expense Percentage Changes
• Instruction is not going up as much as general administration over the
two sup-periods, as well as over the 8-year period
• This is a test of whether the administration is being true to the core
academic mission
• It demonstrates that if cuts are to be made, administration should come
before academics
• We will see if IPEDS data supports these conclusions
IPEDS Categories
• The next several slides reports the definitions
of the different expense categories.
• Instruction contains more than faculty
salaries, as we will see
• The main administrative category is
institutional support
• Academic support contains most of the
academic administration, as well as other
student-oriented costs.
Definition of Instruction Expense Per IPEDS
• A functional expense category that includes expenses of the colleges,
schools, departments, and other instructional divisions of the institution
and expenses for departmental research and public service that are not
separately budgeted. Includes general academic instruction,
occupational and vocational instruction, community education,
preparatory and adult basic education, and regular, special, and
extension sessions. Also includes expenses for both credit and non-credit
• Excludes expenses for academic administration where the primary
function is administration (e.g., academic deans).
• Information technology expenses related to instructional activities if the
institution separately budgets and expenses information technology
resources are included (otherwise these expenses are included in
academic support).
• Institutions include actual or allocated costs for operation and
maintenance of plant, interest, and depreciation.
Definition of Research Expense Per IPEDS
• A functional expense category that includes
expenses for activities specifically organized to
produce research outcomes and
commissioned by an agency either external to
the institution or separately budgeted by an
organizational unit within the institution.
• The category includes institutes and research
centers, and individual and project research.
This function does not include non-research
sponsored programs (e.g., training programs).
Definition of Public Service Expense Per IPEDS
• A functional expense category that includes expenses
for activities established primarily to provide noninstructional services beneficial to individuals and
groups external to the institution.
• Examples are conferences, institutes, general advisory
service, reference bureaus, and similar services
provided to particular sectors of the community.
• This function includes expenses for community
services, cooperative extension services, and public
broadcasting services.
• Also includes information technology expenses related
to the public service activities if the institution
separately budgets and expenses information
technology resources (otherwise these expenses are
included in academic support).
Definition of Academic Support Expense Per IPEDS
• A functional expense category that includes expenses of activities and
services that support the institution's primary missions of instruction,
research, and public service.
• It includes the retention, preservation, and display of educational
materials (for example, libraries, museums, and galleries); organized
activities that provide support services to the academic functions of the
institution (such as a demonstration school associated with a college of
education or veterinary and dental clinics if their primary purpose is to
support the instructional program); media such as audiovisual services;
academic administration (including academic deans but not department
chairpersons); and formally organized and separately budgeted academic
personnel development and course and curriculum development
• Also included are information technology expenses related to academic
support activities; if an institution does not separately budget and
expense information technology resources, the costs associated with the
three primary programs will be applied to this function and the remainder
to institutional support.
• Institutions include actual or allocated costs for operation and
maintenance of plant, interest, and depreciation.
Definition of Student Services Expense Per IPEDS
• A functional expense category that includes expenses for
admissions, registrar activities, and activities whose
primary purpose is to contribute to students emotional and
physical well - being and to their intellectual, cultural, and
social development outside the context of the formal
instructional program.
• Examples include student activities, cultural events, student
newspapers, intramural athletics, student organizations,
supplemental instruction outside the normal
administration, and student records.
• Intercollegiate athletics and student health services may
also be included except when operated as self - supporting
auxiliary enterprises.
• Institutions include actual or allocated costs for operation
and maintenance of plant, interest, and depreciation.
Definition of Institutional Support Expense Per IPEDS
• A functional expense category that includes expenses for
the day-to-day operational support of the institution.
• Includes expenses for general administrative services,
central executive-level activities concerned with
management and long range planning, legal and fiscal
operations, space management, employee personnel and
records, logistical services such as purchasing and printing,
and public relations and development.
• Also includes information technology expenses related to
institutional support activities. If an institution does not
separately budget and expense information technology
resources, the IT costs associated with student services and
operation and maintenance of plant will also be applied to
this function.
Expenses Per IPEDS: 2002-03 vs. 200910
• There are significant differences in categories per IPEDS and the audited statements
• 2009-10 is the most recent year IPEDS data is available; 2002-03 is the most distant
year that can be compared to 2009-10 based on categorization
• Institutional support is called General Administration in the financial statements; we
will compare the details of that account vs. instruction
$$ and Percentage Changes in IPEDS Categories:
2003 vs. 2010
Percentage Changes in IPEDS Expenses:
2003 to 2010
Instruction Expense Detail Per IPEDS
Institutional Expense Detail Per IPEDS
Percent Changes in Salary Component of IPEDS Expenses:
2002-03 to 2009-10
Conclusions from IPEDS Data
• On a percentage basis, the broad categories have shown a
smaller increase in instruction than the administrative
categories; instruction has gone up the least of all the
categories. Tops is academic support, which has significant
administrative components (deans)
• Within instruction (everyone who teaches), the salary
component is slightly more than ½ of this cost; there is a
large “other” component to instruction and institutional
support. There is a lot of movement within “other.” which
should be explained.
• Institutional support salaries and benefits have gone up
more on a % basis than instructional salaries and benefits
• The salary component of instruction has increased the least
when compared to the other expense categories.
• Conclusion: The BC administration has not been true to
the core academic mission.
Faculty Salaries
Source: AAUP Salary Surveys
College faculty
salaries are
below those
of peer
and BC faculty
have lost
ground versus
their peers
since 2006
Faculty Salaries in Context
• Total instructional salaries and benefits are only 27% of total expenses
• This is very typical of all types of universities
Top 2010 Administrative Compensation
Source: IRS 990
• The football coach currently earns approximately $1.2 million
• This is the 2nd year for a new men’s basketball coach
Top Administrator Compensation: 2009 vs. 2010
Source: IRS 990
• This table excludes two administrators from the prior table, as there
was no data for 2009 in the 990
• There was a large “other” payment to the Athletic Director in 2009
• Payments to former administrators was $2 million in 2008
Top Administrators Salaries from 2009 vs. 2010
Source: Salary only from IRS 990
• This table looks only at the salary component of compensation
• Prior to 2009, the salary information in the 990 was very different
Top Contractors/Consultants Per IRS 990
• After 2008, the top 5 consultants were not required to be reported
• Only the top 5 independent contractors are reported in 2009 and 2010
Other Information in the 990
• Four individuals on the top compensation list
receive an annual membership to a local country
club, and the amount is included in their taxable
• In prior years, payments totaling $300,000 were
made to a 457(f) plan on behalf of the VP of
Human Resources. He was eligible to receive this
benefit on May 31, 2010
• In prior years, payments totaling $735,430 were
made to a 457(f) plan on behalf of the now
former men’s basketball coach. The coach
received this amount when his employment
terminated in April of 2010.
IRS 2010 990: Loans to and From Interested Persons
2010 IRS 990:
Business Transactions Involving Interested Persons
Number of Employees
Source: BC Fact Books
Changes in Number of Employees
Percentage Change in Employees:
2003 to 2011
Total Fall Enrollment
Detail on Undergraduate Enrollment
Detail on Graduate Enrollment
Degrees Conferred
Source: BC Fact Book
Annual Changes in Tuition and CPI
Long-Term Changes in Tuition vs. CPI
Class Size
• Class size data is reported in the Common Data
Set (CDS), which is reported to the US
Department of Education
• Unfortunately, the only CDS on the IRPA
(Institutional Research, Planning, and
Assessment) site is the 2011-12 CDS, and the data
on class size on page 26 has no data.
• Prior year Common Data Sets are not publicly
• These should be made publicly available on the
IRPA website
Athletics Overview
Sources: Equity in Athletics Data Analysis
(EADA of US Dept. of Education)
Athletic Spending in Context
Athletic vs. Academic Salaries (2010-11)
Breakdown of Athletic Expenses
Another Breakdown of Athletic Expenses
Changes In Athletics vs. Other Expenses
• What we cannot tell is how much of athletics is subsidized by the
students in the form of a student fee or a direct General Fund subsidy
• USA Today reports these items for public universities

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