What Faculty Need to Know About University Finances

1. What Faculty Need to Know About University Finances By Rudy Fichtenbaum Professor of Economics and Chief Negotiator for AAUP-WSU

2. Budgets • Budgets are planning documents • They lay out proposals for spending • Most Budgets only consider Current Funds • Education & General • Auxiliaries • Restricted Funds

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. Financial Statements • Show: • Revenues and Expenses • Assets and Liabilities • Inflows and Outflows of Cash

9. Audited Financial Statements

10. 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

11. 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

12. 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.

13. 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.

14. 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

15. 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

16. 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

17. Net Assets • Net Assets are the difference between Assets and Liabilities • Net Assets = Assets – Liabilities

18. Net Assets • There are three classes of net assets: • Unrestricted • Restricted (Expendable and Non-Expendable) • Investment in capital net of debt

19. 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.

20. 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.

21. 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

22. 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

23. 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

24. 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

25. 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

26. Operating Expenses • Other Operating Expenses • Auxiliary Enterprises • Depreciation

27. 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

28. Non-Operating Revenues & Expenses • State appropriations • Gifts and Contributions • Investment Income • Interest on Capital Asset Related Debt • Other non-operating revenues (expenses)

29. 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.

30. Budgeted Tuition and Fees v. Actual Tuition and Fees

31. State Appropriation v. State Support

32. 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.

33. Change in Net Assets

34. 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”

35. Net income v. Change in Net Assets

36. 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.

37. 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

38. 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

39. Operating Cash Flow

40. 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

41. Evaluating Ratios

42. Senate Bill 6 Ratios for BGSU

43. Senate Bill 6 Scores for Ohio Institutions

44. 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.

45. 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.

46. 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.

47. Deficit in Professorial Faculty