What Faculty Need to Know About University Finances

Report
What Faculty Need to Know About
University Finances
By
Rudy Fichtenbaum
Professor of Economics and Chief Negotiator for AAUP-WSU
Budgets
 Budgets are planning documents
 They lay out proposals for spending
 Most Budgets only consider Current Funds
 Education & General
 Auxiliaries
 Restricted Funds
Budgets
 Budgets can be misleading
 For example:
 A university or college budget is based on budgeted positions
not filled positions.
 Budgeted positions may be vacant.
 Institutions plan for a certain number of vacancies generating
vacancy credits.
 Budgets generally do not specify how these vacancy credits
will be allocated.
Budgets
 Budgets can be misleading
 Universities and colleges budget money for utilities, snow
removal and other weather dependent expenditures
 It is not uncommon to budget for these expenditures assuming
the worst case scenario
 Over a period of time this generates a surplus of funds without
specifying how these funds will be allocated.
Budgets
 Budgets can be misleading
 Universities and colleges may budget certain levels of planned
expenditures in auxiliary operations knowing that actual
expenditures will exceed budgeted expenditures.
Budgets
 Budgets can be misleading
 Budgets estimate revenues based on enrollment assumptions.
 It is not uncommon to be very conservative in making
enrollment projections.
 When actual enrollments exceed projected enrollments the
university or college generates a surplus of funds without
specifying how these funds will be allocated.
Budgets
 Budgets generally deal only with current funds and often only
with educational and general funds of the university or
college.
 Universities and colleges routinely transfer funds from
Educational and General into Auxiliaries and from Current
funds into Plant Funds.
 These transfers do not show up in the budget and yet the
represent decisions about the allocation of resources at the
institution.
 Budgets are almost always balanced since they are plans.
 Budgets are important documents but only in the context of
comparing them to actual revenues and expenditures.
Financial Statements
 Show:
 Revenues and Expenses
 Assets and Liabilities
 Inflows and Outflows of Cash
Audited Financial Statements
Audited Financial Statements
Current
Funds
Unrestricted
Education &
General
Auxiliaries
Loan Fund
Restricted
Sponsored
Programs
Restricted
Scholarships
Endowment
Fund
Plant Funds
Permanent
Endowment
Renewal &
Replacement
QuasiEndowment
Unexpended
Plant Funds
Retirement of
Indebtedness
Investment in
Plant
Other
Restricted Gifts
9
Agency
Funds
Budgets v. Financial Statements
 Budgets include only the Current Fund and often times only




Unrestricted Current Funds or a subset of Unrestricted
Current Funds known as Educational and General Funds.
Universities can transfer money from one fund to another.
Some transfers are mandatory such as transfers for payment
of debts
Most transfers are non-mandatory
Financial statements include all of the funds
Financial Statements
 There are three basic financial statements
 Statement of Assets, Liabilities and Net Assets
 Statement of Revenues, Expenses and Changes in Net Assets
 Statement of Cash Flows
University and College Financial Statements at
Public Institutions
 Financial statements are preceded by a narrative discussion
call the Management’s Discussion and Analysis (MDA)
 The MDA is supposed to provide a readable analysis of the
institution’s financial position.
University and College Financial Statements at
Public Institutions
 The MDA provides:
 A discussion of this year’s results in comparison to prior year’s
results.
 An analysis of positive and negative trends
 MDAs contain supplemental tables and a number of graphs
and charts to help explain the financial position of the
institution.
Balance Sheets
 Private Businesses have Balance Sheets
 Balance Sheets look at the wealth
 Wealth is a stock
 Assets = Liabilities + Equity
 Example
 Value of your house = Value of your mortgage + Equity
 “Non-Profits v. For Profit
 Non-Profits have a Statement of Net Assets
 Assets = Liabilities + Net Assets
Assets
 Assets are things that a university owns that will provide a
benefit in the future.
 Real or Tangible Assets

Buildings, journals, computers, etc.
 Financial Assets
 Money, stocks, bonds, student loans
 Current assets are assets that can be used to meet liabilities
expected to arise in the current year
 Non-Current assets are long term assets such as buildings and
equipment
Liabilities
 Liabilities are claims on an institutions resources
 Accounts payable, Bonds and Mortgages payable
 Current liabilities are liabilities which are due within
the current year.
 Non-Current liabilities are due in future years.
 Debt is one of the most important non-current
liabilities
Net Assets
 Net Assets are the difference between Assets and
Liabilities
 Net Assets = Assets – Liabilities
Net Assets
 There are three classes of net assets:
 Unrestricted
 Restricted (Expendable and Non-Expendable)
 Investment in capital net of debt
Quasi-endowments
 Quasi-endowments are classified as either restricted or
unrestricted based on whether the resources used to
create the quasi-endowment were restricted or
unrestricted.
 Quasi-endowments are funds set aside by Trustees to
act like an endowment. The Trustees control these
funds and can reallocate them unlike a true
endowment.
Capital Assets
 Capital assets such as buildings and major expenditures for
infrastructure are classified as non-current assets and are
depreciated.
 The Investment in capital is reported as net of accumulated
depreciation.
What to Look for in the Statement of Net Assets
 Growth of endowments and quasi-endowments
 Growth of unrestricted net assets
 Investment in capital assets
Viability ratio=expendable net assets/long-term debt
 Primary reserve ratio=expendable net assets/expenses
Statement of Revenues, Expenses and Changes
in Net Assets
 Net non-operating revenues & expenses before
capital appropriations & capital gifts and grants
 Changes in net assets
 Depreciation
Operating Revenues
 Tuition
 Governmental Grants and Contracts
 Federal
 State and Local
 Non-Government Gifts and Contracts
 Sales and Services
 Auxiliary Enterprise Sales and Services
 Other Revenue
Operating Revenues
 Some schools show tuition, scholarships and fellowships and
then net tuition.
 This takes into account tuition discounting
 Tuition and fee revenues must be reduced by scholarship and fellowship
amounts.
 The exception to this rule is when a scholarship or fellowship results in a
direct cash payment to a student
 Sales of Auxiliary Enterprises are also net of scholarships and
fellowships
Operating Expenses
 Educational and General








Instruction
Separately Budgeted Research
Public Service
Academic Support
Institutional Support
Student Services
Operation and Maintenance of Plant
Scholarships and Fellowships
Operating Expenses
 Other Operating Expenses
 Auxiliary Enterprises
 Depreciation
Operating Losses
 The difference between operating revenues and operating
expenses equals operating losses.
 Every public university or college will show operating losses
because the category of state appropriations are not part of
operating revenues
Non-Operating Revenues & Expenses
 State appropriations
 Gifts and Contributions
 Investment Income
 Interest on Capital Asset Related Debt
 Other non-operating revenues (expenses)
Budget v. Financial Statement
 Budgeted Tuition Revenue is gross revenue meaning that it
includes allowances for scholarships & fellowships.
 Student Tuition and Fees in the Statement of Revenue,
Expenses and Changes in Net Assets is net revenue meaning
that it excludes allowances for scholarships and fellowships.
 The Budget underestimates tuition revenue
 It appears that the Budget underestimates state
appropriations.
Budgeted Tuition and Fees v. Actual Tuition
and Fees
Gross Tuition from Financial Statements v
Budgeted Tuition
$250,000
thousands of $
$200,000
Gross Tuition
from Financial
Satements
$150,000
$100,000
Tuition from
Budget
$50,000
$2004
2005
2006
2007
2008
State Appropriation v. State Support
thousands of $
State Appropropriations v. State Support
$90,000
$80,000
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$-
State Appropriation
from Financial
Statement
State Support in the
Budget
2004
2005
2006
2007
2008
Budget v. Financial Statements
 Every year the Budget is Balanced
 In some cases when estimated expenses are greater than
estimated revenues there are savings targets or reallocations
used to bring planned expenses in line with planned revenue.
 Budgets often contain “strategic initiatives”
 Between 2004 and 2008 BGSU allocated nearly $3 million for strategic
initiatives.
 Since Financial Statements include all revenues and expenses
they often show that actual revenues were greater than
expenses. The broadest measure of the difference between
revenues and expenditures in the change in net assets.
Change in Net Assets
Change in Net Assets
$30,000
$25,000
thousands of $
$20,000
$15,000
$10,000
$5,000
$2004
$(5,000)
$(10,000)
2005
2006
2007
2008
Change in Net Assets v. Net Income
 Change in Net Assets includes funds for capital expenditures
and it also includes depreciation.
 Looking at Net Income without revenue for capital
expenditures is “income before other changes”
Net income v. Change in Net Assets
Net Income v Changes in Net Assets
$30,000
$25,000
Thousands of $
$20,000
$15,000
Income before
Other Changes
$10,000
$5,000
$$(5,000)
$(10,000)
2004
2005
2006
2007
2008
Change in Net
Assets
Depreciation
 Depreciation is a non-cash expense
 Depreciation for BGSU is about $21 million
 Budgets are in essence plans for cash flowing in and cash
flowing out
 Operating Cash flow is cash flow from operating activities +
cash flow from non-capital financing activities – interest
payments.
Measures of Net Income
 Net income = operating revenues + non-operating revenues
& expenses – expenses
 Change in net assets = net income + capital appropriations
+ capital grants and gifts
Cash Flow
 It is important to remember that depreciation is a non-cash
expense.
 One measure of “cash flow” is net income + depreciation
 A second, more comprehensive measure of “cash flow” is cash
flows from operating activities + cash flows from non-capital
financing activities – interest payments
Operating Cash Flow
Operating Cash Flow
$25,000
thousands of $
$20,000
$15,000
$10,000
$5,000
$2004
2005
2006
2007
2008
Evaluating Ratios
 Composite Scores
 Expendable Net Assets / Long Term Debt =30%
 Expendable Net Assets / Operating Expenses =50%
 Change in Net Assets / Total Revenues = 20%
 Fiscal Watch = Composite score of less than 1.75 for two
consecutive years
Evaluating Ratios
Ratio Scores
0
1
2
3
4
5
Viability
Ratio
<0
0 to .29
.30 to .59
.6 to .99
1.0 to 2.5
> 2.5 or
N/A
Primary
Reserve
Ratio
< -.1
-.1 to .049
.05 to .099
.10 to .249
.25 to .49
.5 or
greater
-.05 to 0
0 to .009
.01 to .029
.03 to .049
.05 or
greater
Net Income < -.05
Ratio
Senate Bill 6 Ratios for BGSU
Senate Bill 6 Composite Scores
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2003
2004
2005
2006
2007
2008
2009e
2010e
Senate Bill 6 Scores for Ohio Institutions
Composite Scores for Ohio Institutions
5
4.5
4
3.5
3
2007
2008
2.5
2
1.5
1
0.5
0
AKRN
BGSU
CINC
CLEV
KENT
MIAM OHSU OHUN SHAW TLDO WSUN YNGS
Summary Measures
 Composite scores for overall financial health based on indicators
developed for the Ohio Board of Regents show that BGSU is in
good financial condition.
 Although BGSU’s composite score has come down, composite
scores for other schools in Ohio have also come down.
 BGSU’s composite scores using Senate Bill 6 criteria are in line
with composite scores at other institutions.
Summary Measures
 Moody’s rating system is Aaa, Aa, A, Baa, Ba, B, Caa, Ca and C.
The ratings from Aa to Ca by Moody's may be modified by the
addition of a 1, 2 or 3 to show relative standing within the
category where the highest within the rating is 1 and the lowest is
3.
 Baa is the minimum for investment grade bonds.
 Moody’s last rated BGSU in 2008 as A2 with a stable outlook. The
A2 rating means that debt issued by BGSU is considered high
quality.
Summary Measures
 Ohio State University has the same composite score and received
an Aa2 rating.
 Wright State has an A2 rating and we are getting a 5% raise this
year and 5% next year.
 University of Toledo has an A2 rating and they received a 3% raise
this year and 3% next year and successfully fought off attempts to
furlough faculty with their “pigs and the trough” campaign.
 Kent State University has an A1 rating and their faculty are getting
a 3% raise and a bonus between $2,500 and $2,800.
Deficit in Professorial Faculty
Relative Deficit in Professorial Faculty
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%

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