The Art and Science of Multi-Year Planning

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1 The Art and Science of Multi-Year Planning Bethany Pugh Managing Director PFM Financial Advisors LLC Kevin Kuhar Senior Solutions Consultant PFM Solutions LLC 1/31

2 4/13/2018 Bethany Pugh Managing Director, PFM Financial Advisors LLC Leader of PFM Ohio 20 Years Industry Experience Extensive Ohio Higher Education Financial Planing and Debt Transaction Management Experience Advisor to Cleveland State University, Kent State University and University of Akron, among others Founding Member of Ohio Chapter of Women in Public Finance Board Member of Notre Dame College Kevin Kuhar Senior Solutions Consultant, PFM Solutions LLC Works with Higher Education Institutions to develop and implement purpose-built multi-year planning solutions Has been involved with more than 30 Higher Education implementations using the Whitebirch Platform 2/31

3 Agenda Building a multi-year projection Baseline Sensitivity Analysis Case Study Cleveland State Univeristy 3/31

4 An optimal multi-year financial planning tool will help you create an easy to undertand planning framework that allows you to proactively plan while egageing stakeholders in the process. 4/31

5 Scenario: Operating Margin - By Scenario Enrollment Projection Impact Analysis A multi-year financial projection is a forecast of your institutions s balance sheet and income statement over a defined period of time (normally around 10 years) based on a specific set of assumptions. The projections do not need to be done for each individual account, but should be at a sufficient level of detail to facilitate planning and decision making around the following questions: Operating position: Can we generate sufficient revenues annually to meet all expenditures and not incur deficits? Structural position: Are we structurally balanced such that recurring revenues meet recurring expenses, or is our balance predicated on actions that have a short-term benefit? Strategic Goals: Will we have the financial resources to deliver desired services over time and respond to changing needs and preferences? (in millions) $20 $10 $0 $-10 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 Time Assets - By Scenario Time: FY2016 Scenario: Enrollment Projection Impact Analysis 44,129,886 57,277, , ,499,356 FY2023 FY2024 FY2025 FY2026 FY2027 Your annual audit, annual budget and multi-year financial projection provides a good picture of your past, present, and future financial position. 2,882, ,222, /31

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7 What is the Baseline Projection? We recommend starting with a baseline projection showing what your financial story will be absent significant changes. For revenues, this means you wouldn t assume changes in pricing, spending policy, large fee increases, or gift campaigns. For expenditures, you wouldn t assume new hiring or layoffs or wage increases that are out-of-line with recent results. Your baseline projection is like the diagnosis your doctor gives you after a physical. It reflects your current condition, given the major underlying factors. Then the treatment recommends corrective action in response to the diagnosis. Your baseline projection is usually driven by large revenues and expenditures, such as net tuition revenue and compensation. Within your planning tool, you can show how changes to these lines drive your overall performance. Financial Health - Baseline $400,000,000-4% $300,000,000-6% $200,000,000-8% $100,000,000-10% Percent $0-12% $-100,000,000-14% $-200,000,000 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY % Data Operating Revenue Change in Net Assets Net Operating Revenue 7/31

8 What Do I Need to Build the Projection? Here are the basic building blocks you ll need to develop your projections: Historical revenues and expenditures: Usually you would start with 3-5 years of historical information to provide a starting point for calculating growth trends. It s okay if you don t have immaculate, detailed, consistently organized and electronically formatted data. Start with what you have and what you know. Debt service schedule for bonds, leases, etc. Non cash adjustments for depreciation, amortization, etc. Policies: Do you have policies that restrict the annual growth of rate increases or how the money can be used? Do you have revenues or expenditures that are automatically indexed to something else (e.g. CPI)? Percent Change in Operations (%) - By Scenario Scenario: 5% 4% 3% 2% 1% Enrollment Projection Impact Analysis Data FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 Time Change in Operating Revenue (%) Change in Operating Expense (%) 8/31

9 What drives my projection? Your growth assumptions are the backbone of the baseline projection. For revenues and expenditures, you ll calculate growth rates that project how they will change over time. You can start with the simple mathematical calculation (what was the average annual growth rate for X over the past 3-5 years?) and then apply management insight. For lines with fixed schedules (e.g. debt service, existing depreciation), you will be able to enter those known values. Factor out one-time spikes or plunges: You may have non-recurring events that skew your averages (large gifts, asset sales, debt issuances, and capital spending). Factor in programs that are limited in duration: Do you have a campaign that expires during your projection period? Will you have a temporary change in staffing levels? Account for major changes in service delivery that make the early years in a period less relevant You ll apply the growth rates to a fixed starting point and project them through whatever period is most helpful. 9/31

10 Reviewing Your Baseline Projection The baseline projections will help you discuss your institution's goals within the context of its financial resources. Is there a deficit? Is it a one-time problem or something structural? How are the drivers of our financial performance changing? Are they in balance? Is our operating margin growing or shrinking? Do we want to change where we re spending our limited resources? Can we increase rates at the current pace? If not, where will the additional revenue come from? The baseline projections should also help you identify specific areas for corrective action, allowing you to go beyond anecdotal evidence and invest your time and energy where it will make a difference. 10/31

11 From Diagnosis to Treatment Once you have a baseline projection and discuss the related challenges and opportunities, you can move to the next step developing initiatives to change the projection. Guiding questions: Given this baseline assessment and our goals, what kinds of initiatives should we pursue, and what is the likely financial impact of those initiatives? Your goal is to develop a menu of options, with as many quantified as possible, that represent a wellrounded approach to achieving and maintaining balance. Approaches would typically involve some (or all) of the following: Management and productivity initiatives Cost recovery (fees and service charges) Workforce strategy Program prioritization Alternative revenue sources Debt restructuring 11/31

12 Student Revenue Drivers Integrated Financial Statements Operating Metrics Scenario: Table: Enrollment Projection Impact Analysis Statement of Activities Total Gross Tuition Student Revenue Drivers FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY202 Statement of Activities Operating Revenue Net Tuition & Fees 197,075, ,313, ,655, ,103, ,660, ,329, ,113,59 Auxiliary Revenue 40,315,281 41,384,530 42,483,052 43,611,669 44,771,227 45,962,596 47,186,67 Endowment Income 29,760,565 31,237,382 32,368,232 33,154,223 33,930,813 34,709,107 35,495,08 Gifts 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488,56 Grants and Contracts 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,00 Other Revenue 6,223,875 6,361,648 6,503,520 6,649,612 6,800,050 6,954,963 7,114,48 Total Operating Revenue 297,548, ,470, ,183, ,692, ,336, ,129, ,083,40 Operating Expense Compensation 177,180, ,070, ,099, ,270, ,587, ,055, ,677,92 Non-personnel expense 80,872,409 83,920,817 87,088,677 90,154,335 93,330,083 96,619, ,028,10 Depreciation 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313,00 Interest 8,055,500 7,549,950 7,044,400 6,538,850 6,033,300 5,527,750 5,022,20 Scholarship Expense 1,289,508 1,315,299 1,341,605 1,368,437 1,395,805 1,423,722 1,452,19 Amortization 409, , , , ,000 94,000 59,00 Total Operating Expense 290,119, ,477, ,113, ,849, ,787, ,033, ,552,43 Operating Surplus (Deficit) 7,428,989 6,993,061 6,070,825 4,842,729 3,548,613 2,096, ,97 Non Operating 48,914,623 49,882,066 50,818,947 51,744,190 52,677,788 53,620,807 54,573,70 Change in Net Assets 56,343,612 56,875,128 56,889,772 56,586,920 56,226,401 55,717,018 55,104,68 Report generated Fri Apr 13, :22:17 EDT by PFM Whitebirch Scenario: Enrollment Projection Impact Analysis $400,000,000 $200,000,000 $0 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 Time Data Graduate T&F Online T&F Undergraduate T&F Financial Metrics Operating Margin Scenario: Enrollment Projection Impact Analysis FY2024 FY2025 FY2026 FY2027 Save Cancel Data $15 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY202 Graduate Student Count $10 Online Conversion Factor Tuition Rate Growth Discount Rate Student Count % 2% 2% 2% 2% 2% 2 15% 15% 15% 15% 15% 15% 15 6,000 6,000 6,000 6,000 6,000 6,000 6,00 (in millions) $5 $0 $-5 Conversion Factor Tuition Rate Growth Discount % 1% 1% 1% 1% 1% 1 10% 10% 10% 10% 10% 10% 10 $-10 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY /31

13 Headcount Metrics & Outputs Salary Expense Scenario: $200,000,000 Enrollment Projection Impact Analysis $150,000,000 $100,000,000 $50,000,000 $0 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY2027 Time Data Salary Growth Rates Student salaries Staff salaries Faculty salaries Scenario: Enrollment Projection Impact Analysis Operating Margin $15 $10 (in millions) $5 $0 $-5 $-10 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 FY /31

14 Sensitivity Analysis Beyond the baseline, there may be a series of other variations of your assumptions to conisder. What if there are changes to the economic environment? You will need the ability to consider "what-if" scenarios, such as an optimistic or pessimistic scenario. Using a set of coherent assumptions, these scenarios allow you to perform sensitivity analyses and "stress test" your baseline projections. Example: Optimistic Scenario In an expansion phase of the business cycle, your revenues will likely grow at a higher rate, but your compensation demand will be higher, resulting in increased across-the-board wage increases. Inflationary increases continue to drive your operating expenditures, but your higher investment returns and giving may help offset some of these increases. Example: Pessimistic Scenario Alternatively, in a recession, your revenues are likely slowing down since they are mostly sensitive to the broader economic conditions. You might have a difficult time meeting enrollment targets, and donations and investment returns might suffer. At the same time, your operating expenditures might slow down with inflation growing at a slower rate, but you might have certain fixed costs that are unaffected. In addition, a low interest-rate-environment during a recession may present favorable borrowing conditions to help fund key initiatives on campus. 14/31

15 Scenarios Financial Reports Scenario: Table: Enrollment Projection Impact Analysis Statement of Activities Initiative Link: Save Cancel New Residence Hall - Capital Asset Impact Enrollment Projection Impact Analysis New Academic Program Research Program Expansion Baseline Capital Projects and Initiative Impacts Initiative Link Init. 01. New Residence Hall Init. 01. New Residence Hall Depreciation Purchases Years FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 F 30 10,000,000 25,000,000 15,000, FS for Projects - Statement of Activities FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 FY2023 FY2024 FY2025 FY2026 Statement of Activities Operating Revenue Net Tuition & Fees 197,075, ,313, ,655, ,103, ,660, ,329, ,113, ,015, ,038, ,185, Auxiliary Revenue 40,315,281 41,384,530 42,483,052 43,611,669 44,771,227 45,962,596 47,186,671 48,444,371 49,736,645 51,064, Endowment Income 29,760,565 31,237,382 32,368,232 33,154,223 33,930,813 34,709,107 35,495,084 36,289,206 37,091,668 37,902, Gifts 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488,564 15,488, Grants and Contracts 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8,685,000 8 Other Revenue 6,223,875 6,361,648 6,503,520 6,649,612 6,800,050 6,954,963 7,114,483 7,278,749 7,447,902 7,622,086 7 Total Operating Revenue 297,548, ,470, ,183, ,692, ,336, ,129, ,083, ,201, ,487, ,947, Operating Expense Compensation 177,180, ,070, ,099, ,270, ,587, ,055, ,677, ,459, ,405, ,519, Non-personnel expense 80,872,409 83,920,817 87,088,677 90,154,335 93,330,083 96,619, ,028, ,558, ,216, ,006, Depreciation 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313,000 22,313, Interest 8,055,500 7,549,950 7,044,400 6,538,850 6,033,300 5,527,750 5,022,200 4,516,650 4,011,100 3,505,550 3 Scholarship Expense 1,289,508 1,315,299 1,341,605 1,368,437 1,395,805 1,423,722 1,452,196 1,481,240 1,510,865 1,541,082 1 Amortization 409, , , , ,000 94,000 59,000 47,000 31,000 31,000 Total Operating Expense 290,119, ,477, ,113, ,849, ,787, ,033, ,552, ,376, ,488, ,917, Operating Surplus (Deficit) 7,428,989 6,993,061 6,070,825 4,842,729 3,548,613 2,096, ,971 (1,175,353) (3,000,445) (4,969,272) (7, Non Operating Investment Return 37,884,623 38,852,066 39,788,947 40,714,190 41,647,788 42,590,807 43,543,709 44,506,626 45,479,671 46,462, Non Operating Gifts 11,030,000 11,030,000 11,030,000 11,030,000 11,030,000 11,030,000 11,030,000 11,030,000 11,030,000 11,030, Other Non Operating Revenue Gain (Loss) Total Non Operating 48,914,623 49,882,066 50,818,947 51,744,190 52,677,788 53,620,807 54,573,709 55,536,626 56,509,671 57,492, Change in Net Assets 56,343,612 56,875,128 56,889,772 56,586,920 56,226,401 55,717,018 55,104,680 54,361,273 53,509,227 52,523, Report generated Fri Apr 13, :31:53 EDT by PFM Whitebirch 1/1

16 Rating Agency and CFI Results Selected Metrics Scenario: Enrollment Projection Impact Analysis Ratios - Moody's FY2016 FY2017 FY2018 FY2019 FY2020 Scenario: Aaa Moody's Scorecard Result Enrollment Projection Impact Analysis Age of plant Annual Change in Operating Revenue 4.42% 1.61% 2.75% 2.91% 2.94% Expendable Resources to Debt Monthly Days Cash on Hand Operating Cash Flow Margin 15.47% 14.25% 14.01% 13.89% 13.85% Operating Revenue 296,613, ,402, ,682, ,691, ,066,203 3 Revenue Diversity (Max Single Contribution) 81.84% 82.39% 82.04% 81.56% 81.07% Spendable Cash & Investments to Operating Expenses Spendable Cash & Investments to Total Debt Total Cash and Investments 750,636, ,349, ,087, ,334,326 1,043,773,095 1,1 Total Debt to Cash Flow Total Rating Aa A Baa S&P Age of plant Available Resources to Annual Operating Expenses % % % % % Available Resources to Total Debt Debt Service Coverage MADS Burden 4.64% 5.52% 6.25% 6.83% 7.13% Net Available for Debt Service 96,259,455 94,615,504 96,444,441 98,789, ,503,624 1 Operating Margin 15.79% 15.68% 16.62% 16.10% 15.69% Total Composite Financial Index Primary Reserve Net Operating Revenue (8.22%) (9.53%) (9.94%) (10.38%) (10.83%) Return on Net Assets 6.81% 6.23% 5.92% 5.59% 5.27% Viability Ratio Ba B Caa FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 Time FY2023 FY2024 FY2025 FY2026 FY2027 Report generated Fri Apr 13, :22:33 EDT by PFM Whitebirch 16/31

17 Financial Reports - Multi-Dimensional Financial and Operating Metrics Scenario: Fund Rollup Dimension: Table: Enrollment Projection Impact Analysis All Statement of Financial Position FY2016 FY2017 FY2018 FY2019 FY2020 FY2021 FY2022 Statement of Financial Position Assets Investments 715,222, ,346, ,961, ,381, ,941, ,658, ,540, ,5 PPE, Net 366,499, ,186, ,873, ,560, ,247, ,934, ,621, ,3 Cash and cash equivalents 57,277, Working Capital Assets 44,129,886 44,129,886 44,129,886 44,129,886 44,129,886 44,129,886 44,129,886 44,1 Other Assets 2,882,110 2,882,110 2,882,110 2,882,110 2,882,110 2,882,110 2,882,110 2,8 Deposits with bond trustee 315, , , , , , ,004 3 Misc Cash - 114,865, ,989, ,815, ,694, ,550, ,226, ,6 Total Assets 1,186,326,320 1,237,725,432 1,289,150,509 1,340,084,682 1,390,210,451 1,439,470,152 1,487,714,920 1,534,8 Liabilities Long term debt 158,305, ,360, ,910, ,955, ,494, ,527, ,055, ,0 Working Capital Liabilities 124,091, ,091, ,091, ,091, ,091, ,091, ,091, ,0 Total Liabilities 282,396, ,452, ,002, ,046, ,585, ,618, ,146, ,1 Net Assets Permanently Restricted 190,942, ,942, ,942, ,942, ,942, ,942, ,942, ,9 Temporarily Restricted 172,513, ,342, ,193, ,703, ,648, ,027, ,852, ,1 Unrestricted 540,473, ,987, ,012, ,391, ,033, ,880, ,773, ,5 Total Net Assets 903,929, ,273,082 1,017,148,209 1,074,037,982 1,130,624,901 1,186,851,302 1,242,568,320 1,297,6 Time: Scenario: 366,499,356 Assets FY2016 Enrollment Projection Impact Analysis 44,129,886 57,277, ,004 Report generated Fri Apr 13, :22:37 EDT by PFM Whitebirch 2,882, ,222,380 17/31

18 Value Proposition Reason No. 1: It s a better way to bridge the gap Many institutions face structural challenges. Revenues suffer due to enrollment, pricing, and aid constraints. Meanwhile expenses rise because of salary demands, health insurance costs, energy costs, etc. One-year budget cycles are not an ideal way to address systemic challenges: Short-term strategies often yield short-term benefits that expire or may even increase your deficit in out years Looking exclusively at the short term horizon limits appreciation and understanding of long term challenges The options for addressing structural imbalance are much better before cash and current-year shortfalls arrive. Multi-year planning allows you to move away from "putting out the next fire" 18/31

19 Value Proposition Reason No. 2: It changes the budget conversation Budget processes are often stressful and tense because scarce resources lead to an us versus them dynamic among department heads, provosts, management, etc. Using a multi-year perspective changes the conversation: You can present the challenges to interested parties from a broader perspective and challenge people to think beyond their departmental boundaries Revenue projections help you determine what you can afford before you begin processes that will set your expenses for several years (e.g. issuing debt, compensation increases) Multi-year planning allows you to talk about which investments are worth making down the road in addition to which reductions you need now 19/31

20 Value Proposition Reason No. 3: It s considered a best practice by industry experts Multi-year financial and capital plans exist where future issues are identified along with possible solutions. Well-documented and realistic assumptions support the plans, and the plans are used for drawing up budgets to support a strong commitment to financial discipline." Standard & Poor's We believe that strategic planning and implementation, institution risk management and strategic financial analysis are inherently linked. In order to meet the mission, the Institution prepares and implements a strategic plan that has a series of action steps to attain the goals." Strategic Financial Analysis for Higher Education Vol 7 20/31

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