What Faculty Need to Know About University Finances

ByRudy FichtenbaumProfessor of Economics and Chief Negotiator for AAUP-WSUWhat Faculty Need to Know About University FinancesBudgetsBudgets are planning documentsThey lay out proposals for spendingMost Budgets only consider Current FundsEducation & GeneralAuxiliariesRestricted Funds

2BudgetsBudgets can be misleadingFor 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.3BudgetsBudgets can be misleadingUniversities and colleges budget money for utilities, snow removal and other weather dependent expendituresIt is not uncommon to budget for these expenditures assuming the worst case scenarioOver a period of time this generates a surplus of funds without specifying how these funds will be allocated.4BudgetsBudgets can be misleadingUniversities and colleges may budget certain levels of planned expenditures in auxiliary operations knowing that actual expenditures will exceed budgeted expenditures.5BudgetsBudgets can be misleadingBudgets 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.

6BudgetsBudgets 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.

7Financial StatementsShow:Revenues and ExpensesAssets and LiabilitiesInflows and Outflows of Cash

8Audited Financial Statements9Budgets v. Financial StatementsBudgets 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 debtsMost transfers are non-mandatoryFinancial statements include all of the funds10Financial StatementsThere are three basic financial statementsStatement of Assets, Liabilities and Net AssetsStatement of Revenues, Expenses and Changes in Net AssetsStatement of Cash FlowsUniversity and College Financial Statements at Public InstitutionsFinancial statements are preceded by a narrative discussion call the Managements Discussion and Analysis (MDA)

The MDA is supposed to provide a readable analysis of the institutions financial position.

12University and College Financial Statements at Public InstitutionsThe MDA provides:A discussion of this years results in comparison to prior years results.An analysis of positive and negative trendsMDAs contain supplemental tables and a number of graphs and charts to help explain the financial position of the institution.13Balance SheetsPrivate Businesses have Balance Sheets

Balance Sheets look at the wealthWealth is a stockAssets = Liabilities + EquityExampleValue of your house = Value of your mortgage + EquityNon-Profits v. For ProfitNon-Profits have a Statement of Net AssetsAssets = Liabilities + Net Assets

14AssetsAssets are things that a university owns that will provide a benefit in the future.Real or Tangible AssetsBuildings, 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 yearNon-Current assets are long term assets such as buildings and equipment

15LiabilitiesLiabilities are claims on an institutions resourcesAccounts 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 liabilities16Net AssetsNet Assets are the difference between Assets and Liabilities

Net Assets = Assets Liabilities

Net AssetsThere are three classes of net assets:UnrestrictedRestricted (Expendable and Non-Expendable)Investment in capital net of debt18Quasi-endowmentsQuasi-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.19Capital AssetsCapital 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.20What to Look for in the Statement of Net AssetsGrowth of endowments and quasi-endowmentsGrowth of unrestricted net assetsInvestment in capital assetsViability ratio=expendable net assets/long-term debtPrimary reserve ratio=expendable net assets/expenses

21Statement of Revenues, Expenses and Changes in Net AssetsNet non-operating revenues & expenses before capital appropriations & capital gifts and grantsChanges in net assets

Depreciation22Operating RevenuesTuitionGovernmental Grants and ContractsFederalState and LocalNon-Government Gifts and ContractsSales and ServicesAuxiliary Enterprise Sales and ServicesOther RevenueOperating RevenuesSome schools show tuition, scholarships and fellowships and then net tuition.This takes into account tuition discountingTuition 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 studentSales of Auxiliary Enterprises are also net of scholarships and fellowships

24Operating ExpensesEducational and GeneralInstructionSeparately Budgeted ResearchPublic ServiceAcademic SupportInstitutional SupportStudent ServicesOperation and Maintenance of PlantScholarships and FellowshipsOperating ExpensesOther Operating ExpensesAuxiliary EnterprisesDepreciationOperating LossesThe 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 revenuesNon-Operating Revenues & ExpensesState appropriationsGifts and ContributionsInvestment IncomeInterest on Capital Asset Related DebtOther non-operating revenues (expenses)Budget v. Financial StatementBudgeted 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 revenueIt appears that the Budget underestimates state appropriations.

Budgeted Tuition and Fees v. Actual Tuition and FeesState Appropriation v. State SupportBudget v. Financial StatementsEvery year the Budget is BalancedIn 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 initiativesBetween 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 AssetsChange in Net Assets v. Net IncomeChange 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 changesNet income v. Change in Net AssetsDepreciation Depreciation is a non-cash expenseDepreciation for BGSU is about $21 millionBudgets are in essence plans for cash flowing in and cash flowing outOperating Cash flow is cash flow from operating activities + cash flow from non-capital financing activities interest payments.

Measures of Net IncomeNet income = operating revenues + non-operating revenues & expenses expensesChange in net assets = net income + capital appropriations + capital grants and giftsCash FlowIt is important to remember that depreciation is a non-cash expense.One measure of cash flow is net income + depreciationA second, more comprehensive measure of cash flow is cash flows from operating activities + cash flows from non-capital financing activities interest payments38Operating Cash FlowEvaluating RatiosComposite 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 RatiosRatio Scores 0 1 2 3 4 5Viability Ratio < 0 0 to .29 .30 to .59 .6 to .99 1.0 to 2.5 > 2.5 or N/APrimary Reserve Ratio < -.1 -.1 to .049 .05 to .099 .10 to .249 .25 to .49 .5 or greaterNet Income Ratio < -.05 -.05 to 0 0 to .009 .01 to .029 .03 to .049 .05 or greaterSenate Bill 6 Ratios for BGSUSenate Bill 6 Scores for Ohio InstitutionsSummary MeasuresComposite scores for overall financial health based on indicators developed for the Ohio Board of Regents show that BGSU is in good financial condition.Although BGSUs composite score has come down, composite scores for other schools in Ohio have also come down. BGSUs composite scores using Senate Bill 6 criteria are in line with composite scores at other institutions.44Summary MeasuresMoodys 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.Moodys 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 MeasuresOhio 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