Financial Resources Strategies Implementation Team

Transcription

1 Financial Resources Strategies Implementation Team March 6, 2014 (updated May 29 with possible intersections with other committees) Ken Kline, Senior Director, Budget Office (Committee Chair) Natasha Dempsey, Senior Budget Analyst, Budget Office Eric Gentry, V.P., University Advancement Kristian Johnson, Student Russell Kerdolff, Comptroller, Comptroller s Office Rick Kolbe, Dean, College of Business Karen Zerhusen Kruer, Executive Director, NKU Foundation Inc. Thomas Lambert, Assistant Professor, Public Administration James McGuffee, Chair, Computer Science Bill Thompson, Director, Research, Grants & Contracts Resource Members Sue Hodges Moore, V.P., Institutional Effectiveness Vicki Natale, Executive Director, Planning and Performance Page 1

2 Financial Resources Strategies Implementation Team INTRODUCTION The Financial Resources Strategies Implementation Team was formed to identify strategies for financing the Strategic Plan. Team members were asked to provide an assessment of the current financial condition of the institution, establish priorities for maximizing the university s resources, and identify approaches to support the following strategies in NKU strategic plan: a) Increase gifts and grants b) Create a culture of philanthropy and stewardship among alumni, faculty, staff, and students c) Strongly advocate for adequate state support for operations and capital needs d) Engage in entrepreneurial activities that generate additional revenue e) Develop an "all-funds" approach to budgeting and ensure budget processes align resources with strategic goals f) Steward resources wisely and efficiently to achieve goals g) Increase private funds for need-based student financial aid CURRENT ASSESSMENT Through the most recent economic downturn, NKU has demonstrated positive operating results despite challenging financial circumstances. Moody s Investor Service s annual report stated the outlook for Northern Kentucky University's A1 underlying rating is stable, reflecting our expectation of a return to solid student demand and good operating performance which should generate sufficient cash flow to cover debt service, as well as healthy balance sheet growth that provides good coverage of debt." While recent results have been positive, NKU will continue to face financial challenges with State funding. Medicaid, the justice system, and other necessary government expenditures continue to consume a larger share of the Commonwealth s budget leaving less money for higher education. The Commonwealth is also addressing its unfunded pension obligation, which is requiring significant State resources as well as leading to higher contribution requirements for NKU. At this time, the possibility for new revenue streams necessary to materially expand the State budget is uncertain in Kentucky. NKU currently relies on net tuition and fees and state appropriations as its major source of revenue (70% of its revenue base). The remainder of NKU s revenues come from other nonoperating (13%), auxiliary enterprises (6%), grants and contracts (4%), sales and services of other activities (5%), and the NKUF (2%). Moody s has cited the need for diversification of NKU s revenue base to reduce future reliance on tuition and state appropriations. NKU spends 64% of its money on salaries and benefits, 19% on operating expense, 11% on depreciation and interest, and 6% on financial aid. Salary and benefits and operating expenses per FTE student are less than NKU s benchmarks and the other Kentucky Comprehensive universities. Page 2

3 Financial Resources Strategies Implementation Team Over the past 10 years, NKU has brought in $7-14 million annually in new grant and contract awards. Federal and federal flow-thru funds have historically been NKU s most significant portion of external funds for programming and research. This will likely continue despite ongoing national budget issues. As a historically teaching institution the largest portion of grant funding at NKU has in the past been programmatic funding for areas such as instruction and public service (rather than research). Support for those programs (student support services, STEM, etc.) is essential to ongoing activities. NKU Foundation (NKUF) The Northern Kentucky University Foundation receives deposits and provides financial management services related to the expenditure and investment of gifts for the exclusive benefit of NKU. Total NKUF assets exceeded $100M for the first time in its history on December 31, 2013, and the endowment pool assets were $90M at that time (approximately 98% of the endowment pool is either permanently or temporarily restricted). In terms of investments, the NKUF has historically been a high performing foundation. June 30, 2013 NACUBO-COMMONFUND survey results show NKUF 1yr. (13.8%), 3yr. (11.2%), and 5yr. (5.8%) out-performance, exceeding the performance of endowments of all sizes. The 10yr. (7.5%) exceeded endowments of $500M in size. Over the years, NKUF has supported students, faculty and programs through operating, scholarships and capital assistance. For the past five year period, total spending in support of NKU is as follows: as of June 30, 2013 $4.5M; as of June 30, 2012 $4.4M; as of June 30, 2011 $4.3M (plus $6M capital); as of June 30, 2010 $5M; and as of June 30, 2009 $3.4M (plus $4.4M capital). Page 3

4 IMPLEMENTATION STRATEGIES A. Diversify and increase the revenue base, placing greatest emphasis on flexible unrestricted resources Implementation Strategies Engage in one or more comprehensive undergraduate tuition pricing studies and assess whether strategic initiatives are positively impacting enrollment, retention and tuition rates. Study optimal graduate tuition rates based on finances and program mission. Aggressively pursue the development of a rational, state funding model for higher education in Kentucky. Develop and implement a framework to support, encourage, and evaluate entrepreneurial activity that generates additional revenue for NKU including: Identify all university hard assets and evaluate their effectiveness and potential as revenue generators Lead Sponsor A Enrollment Management Assoc. Provost for Research, Graduate Studies and Regional Stewardship President Provost Collaborators Timeline Fuel the Flame Budget Office, Admissions, Student Financial Aid, Bursar, Deans, Student Account Services, Tuition Committee, CPE Deans, Graduate Program Directors, Comptroller, IR, Budget Office Government & Community Relations, Budget Office, CPE, Provost, IR, NKUF Exec. Team, Research Foundation, Comptroller s Office, Asset Managers, Faculty, Staff Priority Matrix b 1 Easy Impl. / High b 3 Difficult c 3 Difficult d, 5.3.b 3 Difficult Resources ++ Needed $$$ ES, SRS $$ ES $ N/A AI Page 4

5 B. Increase the amount of funds made available through private fundraising Implementation Strategies Through collaboration with colleges, departments, and units, develop university-wide fundraising priorities that are in alignment with NKU s strategic plan; including need based student financial aid. Assess fundraising capacity through benchmarking and other analysis. Make investments as necessary to reach goals. Explore approaches to build a culture of philanthropy at NKU. Create an effective participatory model for development that includes training for faculty and staff. Plan and implement an aggressive fundraising campaign focused on capacity building and meeting fundraising priorities. Reassess and develop university naming guidelines and endowment minimums in coordination with fundraising priorities. Lead Sponsor University Advancement University Advancement University Advancement University Advancement University Advancement University Advancement Collaborators Timeline Fuel the Flame President, a, Provost, VP s, 1.5.c, Deans, NKUF 5.2.b President, NKUF Faculty Senate, Staff Congress, Student Affairs Provost, Deans, Dept. Chairs Executive Team, Deans NKUF, Board of Regents, Provost, Deans a, 5.3.b Priority Matrix 3 Difficult 1 Easy b 3 Difficult a, 1.5.c, 5.2.b a, 1.5.c, 5.2.b a, 1.5.c, 5.2.b 1 Easy 3 Difficult 2 - Easy Impl. / Low Resources Needed N/A N/A $$ $$ $$$$ N/A ++ Page 5

6 C. Improve financial decision making through increased financial training, better financial information, and improved budget and financial systems Implementation Strategies Implement a financial allocation model that allows both direct and indirect revenues and costs to be tracked and reported by program / course / unit. Develop a standard pro forma statement that includes all direct and indirect revenues and expenses for all revenue units, auxiliary units, and colleges. Develop a new all funds budget development process and implement a new budget system that supports the new process. Train faculty and staff for improved financial decision making to ensure that the impact of revenues and costs are considered. Develop for the training a standard university decision tree on how to make sound financial decisions. Through the training, promote a culture of transparency, individual empowerment and initiative, and approachability. Identify real costs for all decisions and disseminate as appropriate. Lead Sponsor Finance & Administration President Training & Development Collaborators Timeline Fuel the Flame Provost, a, College Deans, 5.3.b Office of the Comptroller, Budget Office, IT, VP s Budget Office, Provost, budget managers, Comptroller, IT, NKUF Budget Office, Office of the Comptroller, NKUF, RGC, HR Priority Matrix 3 Difficult a 3 Difficult b 3 - Difficult President Exec. Team b 1 - Easy Resources ++ Needed $$$ $$$ $$ HOD N/A Page 6

7 Reduce costs per student and/or increase revenue per student through innovative practices Implementation Strategies Create an investment pool for new initiatives that have significant revenue potentials and low cost structures, which will be realized within defined time horizons. Lead Sponsor President Collaborators Timeline Fuel the Flame Executive d., Team, Budget 5.3.b Office, Associate Provost for Administration Priority Matrix 1 Easy Impl. / High Resources Needed $$$$ AI ++ Create investment and incentive programs that allow faculty and staff to experiment with innovative, cost effective instructional methodologies and operational activities that are then assessed from a university cost reduction perspective. President Executive Team, Budget Office, Associate Provost for Administration b. 1 Easy Impl. / High $$$$ AI Page 7

8 D. Take advantage of opportunities to achieve cost savings and greater efficiencies Implementation Strategies Explore or examine ways to contain / lower personnel costs or increase productivity through: an early retirement program for faculty / staff with a centralized process to govern replacements. improved communication and implementation of the phased faculty retirement program. an assessment of the levels of management and average span of control for managers set a target percentage overall increase in average span of control. expanded use of student employees and/or part-time staff that work less than 20 hours a week. Promote collaboration on efficiency and resource sharing through an annual summit on cost savings and efficiencies with administrative staff across campus. Establish a committee to collect / review cost savings suggestions, propose policy changes / process improvements and methods to develop effective educational programs for their implementation and dissemination. Consider including a compliance officer on the committee to provide expertise on policy enforcement. Implement a university-wide process improvement methodology such as Six Sigma and train all staff and administrators in the methodology. Form a process improvement committee that must approve all major new processes on campus before they are implemented. Lead Sponsor Senior Director, HR Institutional Effectiveness Institutional Effectiveness Institutional Effectiveness Collaborators Timeline Fuel the Flame Priority Matrix Exec. Team, b 1 Easy Impl. HR, Budget / High Office, President, Campus Budget Managers Campus Administrative Staff President, Executive Team President, Executive Team b 1 Easy Impl. / High b 1 Easy Impl. / High b 3 Difficult Resources ++ Needed N/A HOD $ HOD N/A $$$ HOD Page 8

9 E. Evaluate service offerings for mission centrality, quality, and necessity Implementation Strategies Create an inventory of services offered to both internally and externally and consider if we should continue to offer these services and whether we are maximizing revenues from these services. Lead Sponsor President Collaborators Timeline Fuel the Flame Priority Matrix Exec. Team, b 3- Difficult Service Owners Resources Needed $$ ++ Benchmark all programs and services to evaluate the university s level of investment. President Executive Team, All Managers b 3- Difficult $$ Page 9

10 F. Increase research grants and contracts in support of the strategic plan Implementation Strategies Continuing to attract new faculty who have experience and interest in pursuing grant funds. Lead Sponsor Provost Collaborators Timeline Fuel the Flame Priority Matrix Deans, Chairs, a 1- Easy Impl. / Faculty High Resources Needed $$ ++ Providing clear encouragement and support internally for faculty to pursue funding; explore possible release time and recognition for grant submissions during promotion and tenure. Strategically identify existing or potential areas of NKU strength in which to pursue significant grant funding. Provost Deans, Chairs a 1- Easy Impl. / High Provost Deans, Chairs, Faculty a 1- Easy Impl. / High $$ N/A Page 10

11 APPENDIX A Current Financial Condition of NKU Submitted by: Russell Kerdolff, Comptroller, Comptroller s Office Moody s Review of University s Financial Position Moody's Investors Service s annual review of the University s credit rating provides an independent summary of the University s current financial position and future prospects. They review the University s strengths, challenges, market position/competitive strategy, operating performance and balance sheet position, governance and management, legal security, debt structure and other credit specific considerations that impact the University s financial position and associated credit rating. In their November 2013 credit rating report Moody s assigned an A1 rating for NKU s bonds based on the University s established market position in a large metropolitan area, sound financial resource cushion to debt (for A1 rated schools), and healthy liquidity. The rating also reflects NKU s moderate debt profile, including the bonds issued for the Rec Center Expansion and Northern Terrace, limited fund raising, and the need to manage expenses in light of limitations on tuition increases and weakened support from the Commonwealth. The strengths cited by Moody s include: Established market position as a regional public university in the Greater-Cincinnati metro area driven by program draw and affordable pricing relative to competition. Past moderate enrollment growth tempered by recent declines in enrollment. History of positive operating performance, particularly in FY11 and FY12. Solid financial resources and liquidity for NKU s rating level (A1). The challenges cited by Moody s include: The Commonwealth is currently grappling with its pension funding and higher contribution requirements which may result in a reduction in state funding for operations. As a result, NKU s reliance on net student tuition and fees for operating revenue continues to grow. NKU needs to diversify its revenue base to reduce reliance on tuition. Softer operating margins in FY2013 highlight NKU s need to tightly manage costs in light of state limitations on tuition rate increases and to maintain moderate tuition levels within its highly competitive market area. NKU will be challenged to meet its enrollment targets given the increased competition and a slight decline in HS graduates in the state of Kentucky and Ohio. Rating could drop if we have any protracted decline in enrollment or deterioration of operating performance. Additional borrowing without offsetting financial improvements could impact the rating. Page 11

12 Moody s stated the outlook for Northern Kentucky University's A1 underlying rating is stable, reflecting our expectation of a return to solid student demand and good operating performance which should generate sufficient cash flow to cover debt service, as well as healthy balance sheet growth that provides good coverage of debt. Operating Revenues/Sources (Figure 1, Table 1): Net Tuition and Fees (49%) Student tuition and fees have grown from 35% of NKU s total revenues in FY03 to 49% in FY13. This growth primarily driven by tuition rate increases and a growth in graduate level programs and out-of-state/metro enrollment. Resident undergraduate enrollment and associated tuition revenue has declined in recent years. State Appropriations (21%) - State appropriations have declined from 38% in FY03 to 21% in FY13. Our inflation adjusted state general fund appropriation per FTE declined from $3,839 in FY03 to $2,931 in FY13. We receive the lowest funding per student of any of the other comprehensive universities in the state based on FTE and degrees awarded. Our state appropriation per FTE is also less than our Moody s peer group and our national benchmarks. Nonoperating revenue (13%) The major revenue source in this category is federal and state financial aid programs. After significant increases in Pell revenue in FY10 and FY11, Pell declined in FY12 ($17.9 M) and again in FY13 ($17.5M) due to more stringent eligibility requirements. Pell revenue was up slightly in FY14 through Dec NKU Foundation Inc. Support (2%) - The NKU Foundation, Inc. manages private gifts made in support of NKU. Over 95% of private gifts made have a restricted purpose (such as scholarships, professorships and university programs). The Foundation currently provides approx. $4 million per year to support these purposes. Other revenues combined (15%) Grant revenues, excluding federal earmarks, have averaged $8.333 million from FY09-FY13. This excludes capital earmarks, which averaged $1.5M for the same period). We received no federal earmark funding in FY13 or FY14 YTD. Revenues from self-supporting auxiliaries (housing, food service, parking, bookstore) represent 6% of revenues. Operating Expenses/Uses (Figure 2, Table 2): Salary and benefits (64%) Salary and benefits expenses per FTE are less than our benchmarks and the other Ky. Comprehensive universities. Required KERS contributions have increased significantly in recent years, with another $4.7 million increase in FY15. Financial Aid (6%) Institutionally funded aid increased for fall 2013, in part due to new freshmen scholarship programs. The institutionally funded tuition and fee discount, including the metro and Indiana rate discounts, was approximately 20% for fall The University also funds $1.6 million each year in faculty, staff and dependent tuition waivers. Page 12

13 Operating expenses (19%) NKU s operating expenses per FTE are less than benchmarks and the other Ky. Comprehensive universities. This is due, in part, to the University s cost containment efforts. Depreciation/Interest (11%) Depreciation and interest expenses have increased from 8% of the University s operating expenses in FY03 to 11% in FY13 as a result of the dramatic growth in campus facilities. The campus was transformed with the addition of Griffin Hall, The Bank of Kentucky Center, the James C. and Rachel M. Votruba Student Union, a soccer complex, parking facilities and numerous campus beautification projects. Sources/Uses - Capital for New Facilities/Renovations, Technology/Equip. (Figure 3, Table 3): The University funded the majority of the capital assets constructed/acquired during the ten-year period from FY04 FY13 with NKU issued debt (36%) or institutional funds (25%). During this period NKU also received state capital appropriations for the Bank of Ky. Center ($54 million) and Griffin Hall ($35.5). In addition, NKU received federal, state and local governmental capital grants totaling $18 million and private capital gifts totaling $19 million. Generating sufficient funds to properly maintain and/or expand the University s facilities and technology capacity will continue to be a challenge. The University continues to pursue state funding for academic buildings, such as the Health Innovations Center. However, the University has had to rely on other funding sources, such as student fees and private gifts, to construct/expand other critical facilities, such as the Student Union and the Albright Health Center expansion. The University needs to pursue all available avenues, including public/private partnerships, to meet its capital renewal and replacement needs in the future. As a 501(c)3 nonprofit organization, the NKU Foundation has the ability to serve as a partner for capital projects. NKU s bond capacity is limited and must be allocated based on the University s strategic goals. The NKU Foundation has the ability to facilitate Industrial Building Revenue Bonds to assist with capital projects. Page 13

14 Figure 1 Sources of operating funds FY13 State appropriations 21% Auxiliary enterprises 6% Grants & contracts 4% FY13 operating sources Other nonoperating 13% Foundation operating sources 2% Sales & services/other 5% Tuition, net 49% Table 1 Sources of operating funds trend FY03 FY13 (millions) FY03 FY06 FY09 FY13 Tuition, net % % % % Sales & services/other 4.9 4% 8.9 6% % % Grants & contracts 5.8 5% 8.6 5% 8.0 4% 8.5 4% Auxiliary enterprises 4.2 4% 6.3 4% % % State appropriations % % % % Other nonoperating revenues % % % % Foundation operating support 3.1 2% 3.5 2% 4.9 2% 4.6 2% % % % % Page 14

15 Figure 2 Operating Expenses FY13 FY13 operating uses - all funds Salaries & benefits 64% Student aid 6% Depreciation & interest 11% Operating 19% Table 2 Operating Expenses FY03, etc. (millions) FY03 FY06 FY09 FY13 Salaries & benefits % % % % Student aid % % % % Depreciation & interest 9.5 8% % % % Operating % % % % % % % % Page 15

16 Figure 3 - Sources of Capital Funding Sources of capital, FY04 - FY13 NKU debt proceeds 36% Capital Gifts (via NKUF) 6% Capital grants 5% Capital appropriations 28% Institutional funding 25% Table 3 Sources of Capital Funding 5 yr total 5 yr % 7 yr total 7 yr % 10 yr total 10 yr % Capital appropriations 35, % 89, % 89, % Capital grants 16, % 17, % 17, % NKU debt proceeds 18, % 94, % 118, % Capital gifts (via NKUF) 9, % 13, % 18, % Institutional funding 52, % 64, % 81, % 131, , ,615 Page 16

17 APPENDIX B Current Financial Condition of the NKU Foundation, Inc. Submitted by: Karen Zerhusen Kruer, Executive Director, NKU Foundation, Inc. The Northern Kentucky University Foundation was incorporated in the Commonwealth of Kentucky in 1970, with the mission to receive and manage private gifts for the advancement and benefit of NKU. The Internal Revenue Service has granted it 501(c) 3 tax-exempt status, and it has been recognized by NKU as the primary and preferred entity to receive for deposit and provide financial management services related to the expenditure and investment of gifts for the exclusive benefit of NKU. NKUF has an annual operating budget of $615,000. Revenue sources include an administrative fee on the endowment pool, a gift fee on non-endowed gifts, a fee on nongift deposits, which total 96% of revenue sources. Other sources of support include interest income on short-term cash investments, in-kind office space and other in-kind services from NKU. Expenses for salaries and fringe benefits comprise 86% of the annual operating budget. NKUF is governed by its Articles of Incorporation, Bylaws and a Board of Directors made up of 33 community volunteers, President Geoffrey Mearns, VP of Advancement Eric Gentry, Regent Dennis Repenning and Regent Nathan Smith. The full Board meets semi-annually, and conducts its work between full Board meetings through its Executive, Investment, Audit, Finance, Governance, Membership, Development, Advocacy and Real Estate Committees. NKUF Consolidated Financial Statements for the year ended June 30, 2013, show total assets of $96.7M, which included an investments valuation of $84M. Of those investments, $80M are restricted as to purpose by the donor. Unaudited financial statements as of December 31, 2013 show that NKUF exceeded $100M in total assets for the first time in its history. NKUF participates in the NACUBO-COMMONFUND Study of Endowments. June 30, 2013 results show NKUF 1yr. (13.8%) 3yr. (11.2%) 5yr. (5.8%) out-performance, exceeding the performance of endowments of all sizes. The 10yr. (7.5%) exceeded endowments of $500M in size. Total spending in support of NKU as of June 30, 2013: $4.5M, as of June 30, 2012: $4.4M, as of June 30, 2011: $4.3M (plus $6M capital), as of June 30, 2010: $5M, as of June 30, 2009: $3.4M (plus $4.4M capital) Gifts and bequests as of December 31, 2013 were $1.3M. Contributions receivable continue to decrease as collections of pledges outpace new gift commitments. Receivables as of January 31, 2014 are $3.3M. Page 17