MINUTES KCTCS Board of Regents Finance, Administration, and Technology Committee November 30, 2000 Committee Members Present: Mr. Richard A. Bean, Chair Mr. John R. Banks, Jr., Vice Chair Ms. Cynthia E. Cindy Fiorella Ms. Martha C. Johnson Mr. Mark A. Powell Mr. Donald R. Shuck, Jr. Committee Member Absent: Ms. Lorna D. Littrell CALL TO ORDER Committee Chair Bean called to order the KCTCS Board of Regents Finance, Administration, and Technology Committee meeting at 3:10 p.m. (ET), November 30, 2000, in Room 102 of Northern Kentucky Technical College, Edgewood Campus in Edgewood, Kentucky. ADDITIONS TO THE AGENDA By unanimous consent, two items were added to the agenda the September 2000 Quarterly Financial Report and a Proposed Amendment to the KCTCS Board of Regents Policies Governing Employment. APPROVAL OF MINUTES MOTION: Mr. Powell moved that the Committee approve the minutes of the September 16, 2000, meeting. Ms. Fiorella seconded the motion. RATIFICATION OF PERSONNEL ACTIONS RECOMMENDATION: That the Board of Regents ratify the personnel actions (as listed on pages 121-132 of the Agenda Book) that have occurred since it met September 16, 2000. Candace Gosnell, KCTCS Vice President, presented the employment actions and verified that they meet equal employment opportunity and affirmative action guidelines. MOTION: Ms. Fiorella moved that the Committee approve the recommendation. Ms. Johnson seconded the motion. 85
FINANCIAL REPORT FOR 1999-2000 RECOMMENDATION: That the Board of Regents approve and accept the financial audit results for the 1999-2000 fiscal year. Chair Bean asked Ken Walker, KCTCS Vice President, to introduce the representatives of Deloitte and Touche. Mr. Walker directed the Committee members attention to the 1999-2000 Audit and Annual Financial Report mailed to all KCTCS Board members before the meeting along with correspondence from the auditors. Mr. Walker introduced James C. Carpenter who is a partner at Deloitte and Touche and J. Bernard Backert who is Director of Auditing Services at Deloitte and Touche. Mr. Backert and Mr. Carpenter presented the audit report. Mr. Carpenter thanked the Committee for the opportunity to present the 1999-2000 KCTCS financial audit. The report is an unqualified audit report with no exceptions. In a September 15, 2000, letter included in the audit report, the auditors state: In our opinion, such financial statements present fairly, in all material respects, the financial position of the Kentucky Community and Technical College System as of June 30, 2000, the changes in its fund balances and its current funds revenues, expenditures, and other changes for the year then ended in conformity with accounting principles generally accepted in the United States of America. The auditors did note other matters related to the System s internal control and certain other accounting, administrative, or operating matters. Mr. Backert said that the System s assets (current funds, loan funds, endowment and similar funds, and plant funds) totaled over $502 million at the end of the 1999-2000 fiscal year, June 30, 2000, and represent an increase of over $32 million from the previous fiscal year. Mr. Bean pointed out that the endowment funds listed on the balance sheet are not KCTCS Foundation funds, but are funds that carried over from the old system before the creation of the KCTCS Foundation. Liabilities are less than last year and total approximately $114 million for 1999-2000. Bonds payable account for the majority of the liabilities and are the result of bonds issued to fund facilities construction. Over the past year, the System eliminated almost $7 million of bond debt. Total net equity, comprised of $20 million in current funds, $16 million in endowment funds, and $352 million in plant funds, increased an estimated $33 million for 1999-2000. 86
During 1999-2000, the System s current revenues increased over $15 million (5 percent) from the previous year and totaled $308 million. Most of the current funds revenue came from state funding. Student fees were down from the previous year and totaled $48 million. Ms. Fiorella inquired about why tuition and fees were down $3 million from last year. Mr. Bean explained that enrollment growth and tuition and fee increases approved by the Board early in 2000 for 2000-2001 did not affect the 1999-2000 financial report. Expenditures for Education and General (E&G) expenses increased approximately $21 million (8 percent) to $282 million. The increase in E&G expenditures funded institutional support and instruction. Auxiliary enterprise expenses rose approximately $1.7 million and almost broke even for the year. Mandatory transfers for principal and interest (transfers from current funds to pay debt service on bonds) during 1999-2000 equal approximately 4 percent of the System s total E&G expenditures. The mandatory transfer benchmark maximum for postsecondary education institutions is about 7 percent of total E&G expenditures. Mr. Backert said that adoption of new accounting software earlier in the year resulted in management changing the classification and coding for some expenses. The reclassification of expenses makes comparative analysis by functional categories between 1998-1999 and 1999-2000 unadvisable because the functional category totals would include different expenses for both years; however, a comparative analysis focusing upon the total Education and General Expenditures and the total Auxiliary Enterprises expenditures would be appropriate. Next year functional category comparability between 1999-2000 and 2000-2001 will be reliable. Net income or unrestricted current funds had an excess of revenues over expenditures and mandatory transfers of $3 million. Other transfers from the fund balance to the plant fund for capital projects totaled $7 million and resulted in an estimated $4.2 million net decrease of unrestricted funds. The decrease is not an operating loss because it was the result of moving surplus from one fund to another. In summary, Mr. Backert said it was a good year for the System - the balance sheet is strong, and the System is very healthy. Additionally, Mr. Backert reported that the System s significant accounting policies comply with Generally Accepted Accounting Principles (GAAP). One footnote disclosure deals with a recent accounting pronouncement issued by the Governmental Accounting Standards Board. The pronouncement, GASB Statement 33, deals with how contributions (nonexchange transactions) are received and 87
accounted. Currently, pledges are not recorded until they are received in cash, that is, contributions are recognized on a cash basis when the cash is received it is recorded. Under GASB Statement 33, all pledges, with the exception of endowment pledges, will be recorded as a receivable at the time of the pledge. Of more significance is GASB Statement 35, Basic Financial Statements and Management s Discussion and Analysis for Public Colleges and Universities. Prior to GASB Statement 35, fixed assets were recorded at their cost and never depreciated. Removal of the fixed asset cost occurred only upon its disposal; however, the new accounting pronouncement requires all state institutions to record depreciation annually on fixed assets. For the System and other state postsecondary education institutions, the pronouncement will result in significant fund balance and net asset balance decreases because it requires one big catch up adjustment. The GASB statement requires that depreciation calculations begin with the building acquisition date or the date the building came on line. While the GASB Statement 35 is required for fiscal year 2002 financial reporting, the System needs to implement the reporting requirements in fiscal year 2001. Early implementation is required because of the added requirement that institutions complete a statement of cash flows, which involves converting June 30, 2001, financial data to the new accounting methods. The requirements of GASB Statement 35 will change the way items are budgeted, accounted, summarized, and presented. In regards to matters related to the KCTCS internal control and certain other accounting, administrative, or operating matters; no material weaknesses were found in the internal control system. The auditors did make some observations about internal control areas that need to be improved. Most of the issues involve the computer information systems and deal with access and security controls: for example, password settings and segregation of payroll processing duties. Some of the internal control issues have been addressed by the System already. Mr. Carpenter complimented the KCTCS staff for their cooperation and assistance. He said that the System has a very good staff and did a great job facilitating the audit. Mr. Walker recognized Sandy Adkins, KCTCS Director of Accounting, who coordinated the audit at the System level. Mr. Bean stated that the Board was equally pleased with the performance of Deloitte and Touche. MOTION: Mr. Powell moved that the Committee approve the recommendation. Ms. Fiorella seconded the motion. 88
SEPTEMBER 2000 QUARTERLY FINANCIAL REPORTS RECOMMENDATION: That the Board approve the KCTCS quarterly financial statements for the quarter ending September 30, 2000. Mr. Bean reported that the quarterly statements were mailed in advance of the meeting to all Board members. He asked Mr. Walker to report on the statements. Mr. Walker said that the System is on track to meet budget projections. While student fees realized to date are behind the projected budgeted amount because students chose to postpone class fee payment for bi-term classes, the second quarter financial report will show an increase in tuition and fees. The System's investment income rate is better than projected and partially attributable to tuition revenue, which earns investment income for the 30 days it is held by the System. In October, the System received approximately one-third of the projected private grants and contracts amount, which will be reflected in the next quarterly report. Earlier this fiscal year, the Fire Commission was transferred to KCTCS. The Commission s fund balance was estimated at $4.3 million; however, the actual fund balance was only about $3.3 million or 76 percent of the projected budgeted amount. Mr. Bean asked whether KCTCS staff was tracking the Commission s expenses and suggested adding the Commission as a line item to the statement of current funds revenues and expenditures. Mr. Walker said that the expenditures are being tracked and since the Commission is part of KCTCS, its financial matters are handled through the System's processes. During the first quarter, approximately 50 percent of the budgeted student financial aid was distributed, and by the end of the third quarter the amount will be close to 100 percent. The System s debt service payments, which are due in the second quarter, will be reflected in the second quarter report. MOTION: Mr. Banks moved that the September 30, 2000, financial report be accepted as presented by Mr. Walker. Mr. Powell seconded the motion. 89
CAPITAL CONSTRUCTION STATUS REPORT, 1998-2002 Mr. Walker presented a status report on the System's capital construction projects. In October, the System hired Eric Schaffer to be the Director of Construction. Mr. Schaffer has experience in both the private and public sectors, and he most recently worked with the Finance and Administration Cabinet. Mr. Walker said that the KCTCS staff is managing 31 capital construction projects. Groundbreaking for the project is the beginning point for construction projects. On a semi-annual basis, the staff plans to provide the Board with a bound document detailing the myriad of capital construction projects assigned or appropriated to KCTCS. Mr. Bean said that this format provided the members with a good update and the document would be a good reference resource for Board members who are asked questions about projects in their communities. Mr. Powell expressed appreciation for the level of detail and the report format. PROPOSED REVISION TO THE KCTCS BOARD OF REGENTS POLICIES GOVERNING EMPLOYMENT President McCall presented a proposed employment policy change that would allow individuals transferred from one branch to another to continue to be governed by personnel policies of their predecessor institutions unless they choose to be covered by KCTCS personnel policies. The community-driven consolidation efforts underway across the state brought this issue to the attention of staff. For example, the current employment policy requires individuals who have employment rights from their predecessor system and who transfer from one branch to another to move to the KCTCS personnel system. The proposed change would allow individuals transferring from one branch to another to maintain their employment rights of predecessor systems, and the change would facilitate community-driven consolidation efforts in the districts. The proposed employment policy change will be an action item on the February 2001 agenda. NEXT MEETING The next Finance, Administration, and Technology Committee meeting is scheduled for the afternoon of February 22, 2001, at Laurel Technical College in London. ADJOURNMENT MOTION: Ms. Johnson moved that the meeting adjourn. Mr. Banks seconded the motion. VOTE: The motion passed unanimously, and the meeting adjourned at 4:00 p.m. (ET). Date Approved by the Finance, Administration, and Technology Committee Richard A. Bean Committee Chair 90