The presentation is designed at a very high level with three sections:

Transcription

1 . The presentation is designed at a very high level with three sections: Section 1: Board policy framework Control and compliance environment Section 2: Operating budget Allocation framework Section 3: Capital investment program

2 The Board s primary role is to set fiscal policy and carry out responsibilities defined in state statute, law or board policy. In general, Board policy is constructed so to focus the Board s attention on the big picture and the future, while ensuring that proper policies, procedures and systems are place to ensure fiscal integrity. State Statute generally delegated to the Board all powers necessary to govern the state colleges and universities and all related property to administer the system. (MSA 136F. 06) Of course, by separate acts, the legislature can take back to itself any of those powers, and occasionally has. Capping tuition in law, 60/120 credit requirement, stopped ATC closing. Statute goes on to say that the Board s powers shall include, but are not limited to,( with paraphrasing) set tuition and fees, enter into contracts and other agreements, and adopt suitable polices for the institutions it governs. This section of the statute goes on to say To the extent practicable in protecting statewide interests, the board shall provide autonomy to the campuses while holding them accountable for their decisions.

3 State statute has reserved some powers to the legislature including: appointment of trustees, institutional missions, establishment of new permanent sites, final approval of all labor contracts, sale of general obligation bonds, Rev Fund total indebtedness, Administrator personnel plan design and salary schedule. Board policy in turn has sorted those powers between those it reserves to itself and those it delegates in turn to the chancellor. Board Policy 1A. 2 Subpart B. Finance and Facilities Committee. The finance and facilities committee of the board shall consist of no fewer than five and no more than seven members to be appointed by the chair annually. The finance and facilities committee is charged with oversight of all systemwide fiscal, facility and technology matters, matters related to system pension plans, and oversight of system/ foundation relations and development. This includes biennial budget development, tuition, allocation formula, capital budget requests, and annual gifts and grants reports. You will note that Finance and Administration Board policy statements are uniformly constructed to establish: a Policy statement, related authorities, responsibilities and accountability /reporting Chapters 5,6 and 7 went through a substantial re-structuring in The rewrites aligned Board policy with national higher education standards, add policy where gaps identified and reorganized procedures accordingly. Since then, policies have been reviewed in accordance with the Board s 5 year review policy. You will also see links to Chancellor s procedures related to the policy.

4 Generally board policy concerning finance and administration is contained in policy chapters 5,6 and 7. The issues rising to Board approval have changed some since the time of the merger. Most of the movement has been out of policy into procedure. For example; $1M contract approval changed to $3M, C/U master Plan approvals delegated SO you can see from the list, the Board approves substantial items of policy long term financial policy issues ( reserves, bond sales, Retirement program admin, Biennial budget request) major revenue and expense items (annual budgets, tuition rates, revenue fund room and board rates, contracts over $3M) long term asset alterations (Acquisitions/dispositions) and mutli-year planning documents.( capital budget, technology master plan) These actions are prescribed in Board policy chapters 5,6 and 7. For some scaling From

5 # of $3M contracts approved by the Board - 12 or apprx 4/year # of land sales 5 or 1-2/year # of acquisitions ( policy to board where more that!% of C/U annual revenue) 5 or 1-2/year Bond sales generally every other year

6 The Board has delegated general authority to the chancellor in Board policy 1A3. Part 4. Delegation. The chancellor is delegated full authority and responsibility consistent with the duties of chief executive officer to take actions required for the system to function appropriately in accordance with board policy, system procedures, guidelines, and applicable federal and state law, including but not limited to: Following any board action required by board policy, signing and execution of all legal and financial documents on behalf of the board, including contracts, agreements, instruments relating to real and personal property transactions, and other legal papers; Delegating parts of the chancellor s authority to employees under the chancellor s direct supervision; and Appointment of personnel, development and enforcement of personnel programs, discipline and termination, and signing collective bargaining agreements following board approval. This delegation is conditioned upon ongoing compliance with applicable statutes and law, board policies, system procedures, guidelines, and other applicable state and federal regulations and policies. The delegation expires upon termination of the chancellor s employment or as otherwise determined by the board. That general delegation is modified by Board policy to grant or limit authority as shown above. The chancellor then delegates some authority to the presidents

7 who in turn delegate some authority to their staff. All delegations occur according to policy and procedure and are done in writing.

8 You will note that the delegation architecture cascades with authorities narrowing as policy and procedure move from the Board to the chancellor to presidents. Presidents are authorized to delegate some of their authorities to their employees so long as the principle of not deleting ALL powers is upheld. The Board has a policy and the chancellor has a procedure in place for assigning full presidential powers to an acting president in the event of a presidential leave of absence. (Policy 4.2 part 2) My office has procedures in place to monitor compliance with the above authorities.

9 The control Environment at MnSCU is very layered. The Board, the chancellor and the presidents all have oversight and monitoring methods. The Audit committee annual approves an audit workplan which lays out the audit strategy for the upcoming year. Board policy 1D1 office of Internal Auditing contains authority and responsibility for the Internal Auditor. Board policy 5.10 Reserves and year end balances articulates the Board s expectation for cash reserve maintenance by the system office and the C/U. Annual Audit committee discussion of the financial statements has conveyed the Board s interest in improvements in UNA and the Composite Financial Index (CFI). The CFI is established in procedure Financial Health and Compliance Indicators as a reportable measure. The index weights two income statement performance measures (primary reserve and operating margin) and two balance sheet measures ( viability and return on net assets) and generates a normalized expression of C/U s financial condition.

10 The index is reported to the Higher learning Commission and subject to added oversight if it falls below their threshold level. (most colleges add the foundations # when calculating the CFI for the HLC) MnSCU was an early adapter of this methodology and had a hand in its design at the commission level. We have used it for financial planning, monitoring and oversight for 8 years and find it a useful tool for long term financial health and performance planning. (non-audited 4-5 years)- 8 years systemwide (7- audited) Similarly, the facilities condition index is an expression of deferred maintenance as a % of asset value. $7.2B =.12%) The Board has been supportive of a 10 year plan for deferred maintenance/facility renewal which has as its goal reduction by 50 % of current deferred maintenance accruals. We manage Cap investment and facility master plans with a goal of impacting these numbers on a per campus basis.

11 Board policy requires the system office to report to the BOT on the financial wellbeing of the system and each college and university. The system office oversees the financial health of the system and its institutions through monitoring, reporting and certification requirements. In a system of 31 institutions, significant levels of responsibility rest with our presidents. These responsibilities include administrative, financial, and budget management. The Board, chancellor and Finance division have a series of assurance/monitoring/red flag processes to monitor activities; Annual financial statements presented to the Board Trends and highlights meetings - Accountability dashboard - review Workplan and work product of internal Audit Board Operating budget review process- Accounting watch list procedures reviewed by VC, VC with annual chancellor s approved/reviewed by the VC and Chancellor VC level reporting

12 Facilities reviews - VC/AVC review Financial Health Indicators: These replaced our earlier Exception reporting process with more robust analytics - CFO s must certify quarterly that they are in compliance with board-approved financial measurements. Financial concerns that cannot be resolved are brought to the attention of the board though exception reporting. Short Term Financial Health Indicators include: 1. Repair and replacement spending of at least $1 per square foot. 2. The absence of bank overdrafts 3. Monthly MnSCU to SWIFT reconciliation 4. Monthly Bank Reconciliations Longer Term Financial Health Risk Factors Include: 1. Negative accrual based net operating revenue 2. Low accrual primary reserve levels 3. Low CFI scores ======================================== Concludes the presentation concerning the control environment: Starts in Statute Board policy shapes overall environment Chancellor administers Board, chancellor VC and presidents all have assurance practices.

13 These next few slides focus on MnSCU s operating budget. The primary factors influencing revenues: 1) The state economic outlook sets the budget parameters for the state: Is the state facing a surplus or deficit? 2) Public support for higher ed: Is public higher education a budget priority? How does it compare to other priorities (K-12, health care, etc.)? 3) The tuition rate structure determines how much tuition revenue is generated; rate changes can also impact enrollment. 4) Enrollment has become increasingly important as state funding falls and reliance on tuition increases. Changes in enrollment can have a significant impact on tuition revenues and enrollment projections take on increased importance. 5) The availability of financial aid can also have a significant impact on enrollment.

14 On the expense side, the primary cost driver is compensation, accounting for 66% of MnSCU s all-funds expenditures. Compensation costs are determined by negotiated contracts with our faculty and statewide bargaining units (MAPE, MMA & AFSCME). While we negotiate directly with our three faculty units, the state negotiates the contracts for the statewide bargaining units. The state also negotiates the benefit package of state employees, including MnSCU faculty and staff. Thus, a significant portion of our compensation expenses are not directly controlled by MnSCU. Enrollment changes can also drive costs up or down. MnSCU s ability to anticipate and respond to changes in enrollment is critical to our ability to manage revenue and costs. The cost of maintaining and developing enterprise wide systems, such as ISRS, is a significant cost driver. Economies of scale and efficiencies can be gained through enterprise wide applications, but there are challenges in meeting the needs of all institutions with enterprise systems. Currently, we budget $19.7 million in state funding for enterprise technologies.

15 With 31 institutions, 54 campuses and an estimated 27 square ft in building, the cost of operating, maintaining and preserving our physical plant is an important cost driver. Current board policy calls for $1 square foot investment each year In repair and replacement spending. Colleges and universities spent $1.22/ft in 2011.

16 The 2012 numbers are preliminary pending completion of the financial statements Total 2012 preliminary Revenue of $1.879B Net tuition and financial aid accounted for almost half of revenues in FY 12. As tuition and financial aid revenue grow increasingly important as a revenue source, it is critical to understand and anticipate enrollment trends. Tuition revenue net of financial aid at $539M financial aid applied of $314M equals total gross tuition revenue of $853M Fully 37% of tuition revenue is derived from state and federal financial aid programs. ($354 is the financial aid applied to the students accounts including tuition, fees, room and board - - additional $35 million paid directly to students)

17 Total revenues have increased 27 percent over the past eight years. Most of the increase has appeared on the gross tuition line. Financial aid revenue has grown by approximately $208 million from $146 million to $354 million from FY 2004 levels. In FY 2004, financial aid accounted for 27 percent of gross tuition. By 2012, financial aid accounted for 37 percent of gross tuition. Other revenue includes auxiliary income ( sales, room and board) change Tuition $463M $539M 1.16% Financial aid $208M $314M 1.51% Total $671M $853M 1.27%

18 Salaries represent $915M and 50% of total expenditures in 2012 Benefits include FICA, health insurance, dental and other insurance, retirement, and tuition waiver. In 2012, benefits accounted for 16% of all expenditures ($288M) Purchased Services examples include technology maintenance and support services, major software purchases, equipment rental, advertising, printing, travel reimbursement, utilities Supplies include non-capitalized equipment (lower cost equipment), software, lab supplies, other supplies and materials. Utilities could be in either Supplies or Purchased services. Our annual energy costs are approx $32M, predominately for electricity. The components as a percent of total have remained stable over the past 10 years.

19 Total expenses have risen 33 percent over the past ten years, with the components rising proportionally. Note: Other includes financial aid paid to students, repair and replacement, depreciation.

20 Total Revenue has declined 2.9% from 2010 to 2012 Total Expenses have declined 2.7%. Gross margin remained flat at % A positive gross margin is the single most powerful means for a C/U to improve its CFI, or protect it from downward forces on the balance sheet; most typically cased by year to year capex changes. Important to put the margin in perspective: 1 payroll cycle $46M 1% change down in enrollment $8M 10% unallottment $5.5M 1% increase in payroll $12m

21 Note: This is all funds- total operating and nonoperating revenue and expenses. Does not include the capital appropriation revenue or the other misc below the lines- donated assets, etc.

22 This slide starts a series of slides that many of you have seen before. I will move through them quickly but wanted to include them for they tell a powerful story about how this system has managed itself over the past five-ten years. Total state support per FYE has fallen 45% since 2000 in inflation adjusted dollars. Disinvestment in Mn higher educations has been deeper than all but 8 other states over this period. In response, colleges and universities implemented strategies to reduce spending, including: The increased productivity of our faculty and staff Wage freeze Cuts in administrative costs More efficient use of space Tuition has had to increase to offset some of the decline in the state s investment in higher education. 13

23 This slide illustrates credit hours taught per instructional faculty The productivity of our faculty has improved significantly up over 12% (Note: we do not have the information to update this slide. Info provided by Craig S.) 14

24 Over past 12 years, real cost (inflation adjusted) of educating a MnSCU student is down 10%. Slide 15 is General Fund (Cash) and slide 17 is all funds (audited financial statements). Note: This slide shows the expenditures per FYE student based on general fund expenditures 15

25 Over the past decade, the per student revenue from tuition and state appropriation has remained fairly constant when adjusted for inflation. In other words, FYE enrollment levels have increased 22%, tuition rates have gone up and state support has declined = total spending levels per FYE remained flat. Contrary to the popular press, tuition increases have not fueled runaway spending. They have enabled: flat to declining per FYE spending and continued access to growing demand all in the presence of sharply declining state support. Note: this is only state appropriation and tuition (cash), and does not include all revenue sources.

26 The last slide looked at total state and tuition revenues this slide shows total expenses across all funds, so it includes auxiliary and revenue funds most notably.. When total expenses are adjusted for inflation, you see a decline in per FYE spending of 12% over the past ten years. Note: Slide 15 is General Fund (Cash) and slide 17 is all funds (audited financial statements). Also, the expenditures in FY were adjusted to allow for comparison over time. In FY 2010, changes were made to the way costs of goods sold were handled in the financial statements.

27 The operating budget environment for our C/U has been stable over the short term. Our presidents and campus leaders have shown great leadership and student care in balancing budgets these past ten years. But we are also subject to some strong long term pressures and long term risk. Enrollment demographic trends, college readiness, geographic distribution Tuition and Revenue Student ability to pay, family and individual debt loads, dispersion of current tuition rates, competitive pricing pressure Financial Aid Revenue Federal program growth rates, state budget support for state program, growing student dependency Gifts and Fundraising commitment to expansion, capacity building, State Support Long run state budget outlook Wage and Benefit Costs national and regional competitive markets, employee retirement trends

28 The chancellor anticipates some attention on the system s long term financing strategy as part of the work on the Strategic Framework. These and other questions will form the basis for that work.

29 The next six slides provide an overview to the allocation framework and the methodology used to allocate state-appropriated operating dollars throughout the system. I was asked as a part of this presentation to spend some time with the allocation Framework. I understand the subject arose at the Board s Sept retreat and interest in learning more about it expressed. We use the name ALLOCATION FRAMEWORK to refer to the staff designed and Board approved method for allocation of state support. ==========Review Slide =========== The current allocation framework provides the flexibility to fund priority initiatives and systemwide services, while at the same time providing significant levels base funding to our colleges and universities through a data-driven allocation model.

30 In 2013, the Board was allocated $545M by the legislature. These State funding were distributed in three ways: 1) $467M - the funding that goes directly to colleges and universities as priority funds or as base allocations; 2) $ 43M - the funding that is used to support systemwide services such as enterprise technology, debt service, system audit program, leadership transition, PALS and repair and replacement 3) $ 33M - The funding that is used to support the system office which is currently provided through a specific line-item appropriation from the legislature. The model was developed in ;partial implementation began in 2002 and full implementation in In FY2000, 40% of total revenue ran through the model (62% of Gen Fund revenue). In FY2013, as a result of the decline in state support, only 26% of total revenue runs through the model (36% of gen fund revenue). 20

31 Efforts were made in the past five years to move as much of the state support as possible into the base allocation and out of special initiatives. The base allocations are the most flexible funds distributed through the model.

32 This slide illustrates how state funds are distributed through the allocation framework. The allocation is approved by the Board as a part of the annual operating budget approval each spring. 8% - of the funding is allocated to systemwide set asides to fund services such as enterprise technology and the system audit program that are provided across the system; (FY2013 = $43M) 3% - is allocated to colleges and universities as priority funds for programs such as access and opportunity. Priority funding can be determined by the board or the legislature through the budget process. ( 15.6M) 83%- The majority of the funding is allocated to the colleges and universities as base allocation. ($450M) The allocation framework determines funding levels based on each school s instructional cost, enrollment, and other factors. The allocation framework determines each school s funding levels based on these factors, but each college and university is given a great deal of

33 discretion over how these funds are spent. That is, funds allocated through the administrative and student support module do not have to be spent on administrative and student support. The proportions allocated through each portion of the framework has been fairly constant over the past ten years with the exception of a 2% drop in the facilities portion and a corresponding 2% increase in Administrative and Student Services. Finally, funding for the system office is provided by a line item appropriation from the legislature, current funding levels are at $33 million per year.

34 One important component of the allocation framework is the instructional cost study. You can find the cost study on our web site. This annual analysis looks at the cost of instruction at the program or CIP-level. The costs are fully allocated costs, that is they include both direct and indirect costs for each C/U applied at the program level. Using data from the instructional cost study, state funding is distributed to colleges and universities based on their program mix, their enrollment and the cost of delivering their educational programs. The allocation model takes into account the different costs of programs. It recognizes that some programs, such as ground transportation, are expensive to provide, while others, such as anthropology, are relatively inexpensive. In addition, the model takes into account the fact that the cost of delivering the same program can differ between institutions. To do this, the model calculates the average cost of delivering a program throughout the system and calculates a 10 percent band around that average

35 (10 percent above the average and 10 percent below the average). Colleges and universities are funded based on whether they fall within the bands. Institutions operating the below the band are brought up to the low band funding level; those operating above the band are brought down to the high band funding level. C/U are completely free to spend more than 110%, they simply have to make it up somewhere else in their program mix in order to break even in the AF.

36 While the model is complex, it allows us to recognize the diversity of programs offered and costs of offering programs throughout the system. It is worth noting that we have watched and measured the effects and trends in college/university spending as a result of the Framework. We have a staff group that serves as a Technical Advisory Group and annually studies elements/dynamics where concerns have emerged. We have also been very sensitive to concerns raised about access to technical education. We find that the framework has driving very minor re-distribution +/-1% between the college/university sectors over the past ten years. This is attributed both to enrollment improvements system wide and aggressive and competitive cost management by the colleges/universities. The framework was designed to accommodate different program spending levels and we find that it continues to do so.

37 It is worth noting however, that the Framework can only distribute what the state provides us, and that has declined over $100M since the methodology was first approved.

38 Chancellor Rosenstone launched a discussion about the Framework early in his first year. The discussion with the Leadership Council reviewed the system s revenue environment, examined revenue and cost allocation methods, looked at existing cost sharing principles and devoted substantial leadership time to the current Framework s strengths and opportunities. The questions on the slide represent the core questions that emerged from the discussion. The Board will most certainly be brought into our work on this issue in the months ahead. The chancellor has asked us to set it aside while the Board s Strategic work groups proceed. I would expect more committee time on this matter in winter 2013/spring ===================================================

39 Concludes the presentation on the operating budget and the allocation framework: Introduced primary revenue and expense drivers Provided overview of 2012 revenue and expenses Introduced the allocation framework

40 Our final section concerns capital improvement financing. Some would say that one of the principle motivations for the merger law 20 years ago was a legislative desire to rationalize and control the capital budget process on behalf of the three predecessor systems. We have succeeded in doing that. MnSCU has a very mature capital planning process which begins with: C/U master facility plans Bi-annual capital project evaluation Board guidelines tied to the Strategic plan Successful on budget, on schedule construction execution Strong legislative support process credibility and execution credibility We have established pathways for GO and RF support. We have had very little investment from outside sources through gifts, or other vehicles.

41 Our capital assets are valued on our balance sheet at cost, net of depreciation. The values on our balance sheet do not represent replacement value. As such, the book value is vastly understated. Estimated replacement value of $7.2B MnSCU has stewardship for 27 M Sq Ft of academic, residential and athletic facilities in 54 locations around the state. 22M 5M Academic, Administrative Residential and Athletic The average age of our building stock exceeds 40 years. The universities were largely build before 1970,with buildings that average more than 50 years old. The oldest, WSU, predates statehood and has several original buildings still standing. The technical colleges date as far back as the mid 30s, while the community colleges were largely built between 1960 and 1980.

42 Our current space management data system is tracking 3,000 rooms with credit generating capacity. SU C/TC 585 classrooms; 269 labs 1,277 classrooms; 909 labs Note: Other = college housing projects at Itasca, FDTCC, RRCC and Vermillion.

43 Slide illustrates funding levels, not spending level Over 10 years, from Governor and leg approved GO bonds of apx $1.137B. [or $7,302 per FYE ranging from high of $14,000/FYE at FDTCC to a low of $3,305/FYE at ARTCC] Our requests have had Asset repair and preservation funds as the number one priority since this Board, and all its predecessors recognized that we had a first obligation to care for the facilities that came to us with the merger. Our long term asset reinvestment program relies on : State support for HEAPR $110M/bonding cycle C/U operating budget investments at $1/Foot/Year $42M/biennium at

44 Capital improvement Programs $108M modeled Total planned revenues $260M Uses: Annual renewal investments $180M/biennium Annual Backlog investments $70M/biennium Total uses: $260M Current estimates of deferred maintenance total $750M ($650M GF and $110 RF) Our C/U average $1.20/per square foot in annual repair and replacement spending from operating budget funds. Equated to $26M in 2012 I mentioned FCI earlier today. It is a national benchmark for deferred maintenance backlog and asset reinvestment rates. FCI expresses the repair and replacement deficiencies as a percentage of current replacement value for the assets. Since the public sector does not book Replacement value, standards of use have emerged to enable the FCI to be useful both as an absolute value and more importantly as a trend. MnSCU s FCI has been stable around.12 after ten years of public investment. That is an indication of the size of our physical plant and the annual investment levels required.

45 Over the years, this Board has several times adopted a general capital investment plan: which targets 3% of annual general fund operating budgets as the debt service goal and contemplates $150M/biennium in new CapEx, exclusive of HEAPR. The model is re-run every two years to update enrollment, revenue and cap ex spending assumptions. You will see a new run next spring as a part of the 2014 capital budget plan. The 3% was designed to mirror the State of Mn policy, which has since been modified effectively upward. The above slide illustrates that debt service accounts for a very small share of total spending each year. A few notes about practices:

46 The state charges us 1/3 the debt cost for program improvement funds and -0- for asset renewal funds. So, the above chart is substantially understated. If we looked at this chart for the state, you would see all our HEAPR bonds and 2/3 of the program improvements bonds Within MnSCU, current practice allocates 50% of the 1/3 annual debt service costs to the C/U that received the project and pays the other 50% with funds we withhold from the state allocation. This is Board policy and subject to change. The Board s view is that this practice would introduce some regulation into C/U capital planning and we have seen that effect. Note: Expenditures taken from audited financial statements from 2005 to 2011.

47 We have reviewed the policy and control environment Had a discussion of the operating budget outlook And a brief introduction to the system s physical plant. I hope you are comforted that board policies are well framed, the financial environment is stable, and capital planning is well focused. The goal of the finance leaders across the system is to provide a stable, predictable, environment and sound advice for leadership. In that way, strategic academic and student success plans can be conceived and executed. There are several issues ahead that make this goal of predictability a challenge. ============Review list================== The chancellor and all the members of the LC, presidents and cabinet members are working together to advance the strategic framework in the face of these uncertainties.

48 Thank you Note: Looming Fiscal Cliff if unaltered: Broadly, all education accounts, except for Pell, will be reduced by 8.2 %. In addition to education accounts, institutions that receive federal funds through research grants which are funded in fiscal year 2013 as a continuation of a previous year s award would be reduced by 8.2 % as well. Institutions that receive funds through TRIO, Title III programs, or Title V programs should also plan for reduced funding. The total estimated impact on MnSCU is $6m in 2013 programs, includes $2.5m in federal financial aid support.