ASSESSING JOHNSON COUNTY COMMUNITY COLLEGE S FISCAL HEALTH USING FINANCIAL RATIOS

Transcription

1 ASSESSING JOHNSON COUNTY COMMUNITY COLLEGE S FISCAL HEALTH USING FINANCIAL RATIOS Mission: JCCC inspires learning to transform lives and strengthen communities. Presentation to the JCCC Board of Trustees Management Committee January 4, 2017

2 How Ratios Can Be Used & What Ratios Can Tell Us As an aid to better understand college s financial statements To highlight institutional financial trends To assist with institutional strategic planning: Do the ratios support institutional advancement of the mission How the institution is using its resources Areas of institutional strength Potential areas for improvement 3/21/2017 2

3 Ratio Analysis in Higher Education Accreditation Higher Learning Commission - Annual Institutional Data Update; 3 ratios and composite score to assess financial stewardship/resource management United States Department of Education Financial Responsibility Ratios private nonprofit & for-profit colleges and universities; 3 ratios and composite score to assess financial responsibility and Title IV program participation 3/21/2017 3

4 Linking the Ratios to Questions Are resources adequate and flexible enough to support the mission? Primary Reserve Ratio Do operating results indicate that the institution is living within available resources? Net Operating Revenues Ratio Do asset performance and management support the strategic direction? Return on Net Assets Ratio Are debt resources managed strategically to advance the mission? Viability Ratio 3/21/2017 4

5 Primary Reserve Ratio Expendable Net Assets / Total Expenses Measures financial strength of the institution. Ideal > 0.40 JCCC /21/2017 5

6 What does this mean? At FY16 level the college could cover approximately 9 months of expenses if all revenue sources ended The college had an increase in net position for three consecutive years and anticipates a third as we go into the second half of 2017 The college resources are adequate and flexible enough to support the mission. 3/21/2017 6

7 Net Operating Revenue Ratio Change in Unrestricted Net Assets / total Unrestricted Revenues Indicates the institution's financial performance as a result of the year's activity Ideal = 0.02 to 0.04 JCCC (0.047) (0.022) /21/2017 7

8 What does this mean? The positive net income (contribution to reserves) experienced by the college during FY16 cause this ratio to continue to increase Indicator that the college is not dependent on its reserves to cover operating expenses, or that it is living within its means Indicator that now is a good time for the college to consider mission critical investments It is important to know the reasons for the surplus or deficit and to target long-term objectives 3/21/2017 8

9 Return on Net Assets Ratio Change in Total Net Assets / Beginning Total Net Assets Determines whether the institution is financially better off than in previous years by measuring total economic return Ideal = to JCCC (0.010) (0.020) (0.030) (0.035) (0.050) /21/2017 9

10 What does this mean? The college has remained in the ideal range for two consecutive years Ideal range of 3% to 4% reflects a rate of return target that is independent of fluctuations in the economy (inflation, Consumer Price Index or Higher Education Price Index) Ratio shows the college continues to not rely on reserves FY16 ratio shows a measure of the growth in total wealth of the college over last year 3/21/

11 Viability Ratio Expendable Net Assets / Long-Term Debt Indicates availability of expendable net assets to cover debt should the institution have to settle its obligations Ideal > = 1.00 JCCC /21/

12 What does this mean? The college viability ratio decreased slightly in FY 16 due to additional indebtedness incurred With a viability ratio of 3.75, the college has more than three times the expendable net assets needed to repay all its long term debt This ratio is expected to decline in FY18 as the college plans to incur indebtedness in support of its facilities master plan Reminder: The level that is right for the institution is institution specific 3/21/

13 Composite Financial Indicator (CFI) Combination of the four core ratios into a single score of institutional financial health Each of the four core ratios are weighted Primary reserve ratio 35 percent Viability ratio 35 percent Return on net assets ratio 20 percent Net operating revenue ratio 10 percent Weighting of ratios allows weakness of one ratio to be offset by the strength of another Ideal CFI is 3.00 or greater 3/21/

14 Composite Financial Indicator (CFI) Combination of the four core ratios into a single score of institutional financial health Ideal > 3.00 JCCC /21/

15 What does this mean? The college continues to be in ideal range for good fiscal health in FY16 at 5.95 Increase primarily due to positive return on net assets and net operating revenue ratios A decline in CFI score in Fiscal 2018 reflects the impact of the Viability ratio as additional debt is incurred to support strategic investments consistent with the Facilities Master Plan 3/21/

16 Viability Ratio Expendable Net Assets / Long-Term Debt Indicates availability of expendable net assets to cover debt should the institution have to settle its obligations. Ideal > = 1.00 JCCC /21/

17 Composite Financial Indicator (CFI) Combination of the four core ratios into a single score of institutional financial health Ideal > 3.00 JCCC Projected /21/

18 Relationship to Strategic Plan Goal 4 CFI Range Strategy 7.5 to 10 Deploy resources to achieve robust mission 6.5 to 7.5 Allow experimentation with new initiatives 4.5 to 6.5 Focus resources to compete in future state 2.5 to 4.5 Direct resources to allow transformation 1 to 2.5 Re-engineer the institution -1 to 1 Consider substantive programmatic adjustments -2 to -1 Assess debt and Department of Education compliance and remediation -3 to -2 Consider structured programs to conserve cash -4 to -3 Consider whether financial exigency is appropriate Adapted from Strategic Financial Analysis for Higher Education p.87 3/21/

19 Questions? 3/21/