Budgeting for Small Schools

Budgeting for Small Schools College Business Management Institute July 2017 Presented by Lisa Marie McCauley, Ed.D, CPA Senior Vice President for Finance Middle States Commission on Higher Education Chief Operating Officer Middle States Association Office lmmccauley@msche.org

What is Budgeting? Part of a planning process Method for allocating resources Not an exact science Based on projections and expectations Based on real and accurate data Must be flexible

Simply put The budgeting process looks toward the future and develops a spending plan consistent with institutional goals.

Budget Myth #1 Budgeting is just about numbers Fact: Planning is essential to the budget process Budget staff must understand the institution as a whole entity and how each unit interrelates Strategic planning increases the level of success

Budget Myth #2 Small schools are easier to manage Fact: Less personnel Less resource flexibility Same report and compliance guidelines

Budget Myth #3 Small schools do not require expert staffs Fact: Requires talented, multidimensional staff Multi-tasking skill essential

Budget Myth #4 The budgeting process ends with the assembly and ratification of a budget document Fact: Budget documents are dynamic Commitments and priorities change Budgeting requires on-going day-to-day management of the resource allocations

Many Types of Budgets Capital Budgets Operating Budgets Restricted Budgets Auxiliary Enterprise Budgets Hospital Operations Budgets Service Center Budgets

Capital Budgets Focuses on Planning for expenditures too large and too irregular to be easily made part of the operational budgeting process such as Major equipment purchases New buildings or major building renovations Technology systems Sustainability projects

Capital Budgeting Like operational budgets, a capital budget is also a planning and control process Projects tracked in a capital budget could bring major changes to an institution s asset or expense structure Projects are typically multi-year, long life initiatives that require special assistance Often requires greater involvement of the governing board in the planning process

Major Purposes of Capital Budgeting Facilitate institutional growth Permit systematic exploration of alternatives Manage balance sheets Maintain healthy ratio between institutional debt and assets

The objective of a capital plan is to integrate uneven capital needs with smooth year-to-year needs Plan should include a prioritized wish list of all known capital needs Plan should include cost and other data needed to forecast financing costs and future financial impact on the operating budget Plan must be flexible enough to adjust as necessary to take advantage of new opportunities

Capital Budget - Priorities

Capital Plan should be built from the Campus Master Plan Campus Master Plan should identify projects and priorities that visibly tie to the academic plans and financial strategies of the institution Campus Master Plan should give a vision of the physical campus in the future

Operating Budgets Focuses on: The control of financial resources The evaluation of financial performance The facilitation of the institutional mission Developed by calculating and ratifying expectation for revenues and expenditures

Budget Cycles Operating budgets are typically based on a one year period of time. Some states prepare biennial operating budgets No real beginning or end the final stage of one operating year is the first stage of the next

Budget Stages Look ahead, set budget goals Submit Request (public) Exchange Information Prioritize & Balance Ratify Implement Evaluate

Look Ahead & Set Budget Goals Examine the institution s fiscal situation Assess external market and future trends Assess internal strengths & weaknesses and trends within the institution Identify budget goals

Exchange Information Work with appropriate units to develop accurate revenue projections Tuition & Fee Revenue Housing Revenues State Appropriations (if applicable) Auxiliary Revenues Identify fixed cost increases Utilities Employee health benefits Salary Increases Service Contracts Liability Insurance Telecommunication Expenses Identify requests for new funding initiatives Should be in support of strategic goals/objectives

Prioritize and Balance Having clear budget goals will help in the prioritization of new resource requests Identify other resources available Fund balance reserves Internal reallocations Balance projected revenues with expenditures

Ratify The proposed budget must be recommended by the President adopted by the governing board/ board of directors or trustees Upon ratification, the budget should be clearly communicated to each operating unit

Implement and Evaluate Implementation of the budget occurs during the period of time covered by the budget Regularly scheduled assessment of revenues and expenditures made are completed and compared with the budget goals Adjustments are made if necessary to maintain the overall integrity of the budget goals

Budget Choices How decentralized will the process be? How much authority will people be given at each level of a decentralized process? How integrated will the budget process be with other management systems? How can the budgeting process be explained? Choices depend heavily on: Public or independent Management style of institution s leadership Openness of participation and communication

Centralized or Decentralized A centralized process allows a smaller group of decision-makers to shape the budget Many decentralized processes become more market driven Most institutions compromise Department may set their own budget but only within strict guidelines Divisions may control revenues

Operating Budget Techniques Roll Over Budget Line Item Incremental Budgeting Zero-based Budgeting Formula-based Budgeting

Roll Over Operating Budget Practice of taking prior year budget, rolling forward Advantages Predictable Generally not controversial Disadvantages Does not allow for environmental changes Does not reward or penalize performance No incentive tends to encourage stagnation

Line Item Operating Budget Allocates funds to specific expenditure lines Advantages Expenditures are easy to control Seamless annual rollover Easy to understand and administer Disadvantages One dimensional Narrow focus

Incremental Budgeting Focuses primarily on increases and decreases rather than on the budget base Advantages Simple, easy to apply and understand Flexible Minimizes conflict Disadvantages Assumes base budget is effectively distributed Narrow focused Politically-driven over analytical assessment-driven

Zero Based Operating Budgeting Starting from Scratch Advantages New programs stand equal chance of funding Management articulates initiatives Encourages greater understanding of the institution Disadvantages Time consuming Managers spend time reselling star programs Does not recognize continuing commitments

Formula Budgeting Estimates resource requirements through the relationships between program demand and program cost Advantages Reduce conflict Predictable Can be simple Focus on outcomes More effective on state-wide or systemwide budgets Disadvantages Can be Complex Difficult to modify once in place One-size doesn t always fit all Some outcomes are difficult to measure

Budget Techniques Many institutions will select a combination or hybrid of these or other budget techniques An institution may roll-over salaries and other fixed costs but implement zero-based budgeting for discretionary expenditures An institution may use a roll-over technique with incremental budgeting for new needs

Regardless of the budget technique selected Forecasting and modeling should be used to guide budget recommendations Clear guidelines and schedules should be used to communicate the budget process

Modeling / Forecasting Information collected through forecasting models is critical to the budget development process Projections are developed throughout the year (12-15 months) prior to the start of the fiscal period and adjusted as data gets finalized

Forecasting Analysis Includes: Enrollments based on changes in admission policies, recruitment efforts, program offerings, availability of financial aid, market competition, etc. Revenues from tuition, housing, athletics, investment income, gifts, grants, state appropriations, auxiliary services, etc. Fixed and unavoidable expense increases (or decreases) such as utilities, insurance, benefits, library materials, CPI on cost of goods and services, salaries, etc.

Forecasting Analysis Includes: Impact of mandated programs or other compliance issues Analysis of current financial strength Ability to absorb budget reduction Ability to reallocate for new priorities Market issues Tuition rates of other institutions Local and state economy

Computer-based Modeling Efficient / easy to manipulate Easy to forecast out several years Link several models together Build from basic assumptions that are easily changed for what if scenarios Off-the-shelf applications Microsoft Excel / Access

Example Budget Scenarios Preliminary Draft #2 - FYxx Resource Allocation Summary FASB Budget FASB Budget FASB Budget FASB Budget FASB Budget FASB Budget Tuition @ 3.9 Tuition @ 3.9 Tuition @ 3.9 Tuition @ 3.9 Projected Actual R&B-Varies R&B-Varies R&B-Varies R&B-Varies Source Fyxx Fyxx Fyxx Fyxx FYx1 FYx2 Tuition & Fees $60,272,515 $60,272,515 $60,272,515 $60,272,515 $59,004,935 $55,904,358 Federal & State Grants 1,035,000 1,035,000 1,035,000 1,035,000 1,034,924 1,556,514 Private Gifts & Grants 838,000 838,000 838,000 838,000 837,817 762,245 Endowment Income 2,540,000 2,540,000 2,540,000 2,540,000 2,539,229 2,596,199 Other Sources 384,000 384,000 384,000 384,000 383,825 165,339 Temporary Restricted**** 800,000 800,000 800,000 800,000 800,000 860,719 Sub-Total $65,869,515 $65,869,515 $65,869,515 $65,869,515 $64,600,730 $61,845,374 Auxiliary Enterprises 12,897,682 12,897,682 12,897,682 12,897,682 12,498,639 10,954,070 Total Revenues $78,767,197 $78,767,197 $78,767,197 $78,767,197 $77,099,369 $72,799,444 Total Expenditures** Instruction - - - - 12,093,655 11,637,471 Public Services - - - - 1,110,128 1,050,596 Academic Support - - - - 3,850,606 4,110,566 Student Services - - - - 5,399,032 5,532,747 Institutional Support - - - - 6,038,422 6,110,974 Staff benefits - - - - 8,907,827 7,879,940 Operation Plant - - - - 8,291,673 8,126,045 Scholarships - - - - 22,160,951 20,950,375 Auxiliary Enterprises - - - - 6,420,038 6,630,092 Designated SP/Plant - - - - 1,679,662 (861,983) Debt Service - - - - 1,666,179 1,571,923 Adjusted Expenditures $ 81,654,318 $ 80,722,900 $ 79,946,718 $ 79,170,536 $ 77,618,173 $ 72,738,746 Net Income $ (2,887,121) $ (1,955,703) $ (1,179,521) $ (403,339) $ (518,804) $ 60,698 5% Exp Increase 4% Exp Increase 3% Exp Increase 2% Exp Increase

Example Enrollment Scenarios Enrollment and Fees Analysis -------------------------------------------------------------FY20xx Estimates--------------------------------------------------- FY20xx --------------- Enrollment Assumptions Estimated Worst -2% Worst -1% Worst -.5% Projected Best +.5% Best +1% Best +2% Undergraduate 1997 1,936 1,956 1,966 1,976 1,986 1,996 2,016 Graduate 65 60 60 61 61 61 62 62 Total Enrollment 2062 1,996 2,017 2,027 2,037 2,047 2,058 2,078 Change in Enrollment (Students) Undergraduate 0 (61) (41) (31) (21) (11) (1) 19 Graduate 0 (5) (5) (4) (4) (4) (3) (3) Total Enrollment 0 (66) (45) (35) (25) (15) (4) 16 Tuition Assumptions @ 4.75% Increase over $24,680 Rate Undergraduate 25,852.30 50,062,461.90 50,573,303.35 50,828,724.08 51,084,144.80 51,339,565.52 51,594,986.25 52,105,827.70 Graduate 30,859.35 1,844,771.94 1,863,596.15 1,873,008.25 1,882,420.35 1,891,832.45 1,913,588.29 1,920,068.76 $ 51,907,233.85 $ 52,436,899.50 $ 52,701,732.32 $ 52,966,565.15 $ 53,231,397.98 $ 53,508,574.54 $ 54,025,896.45 Combined Tuition and Fees @ 4.75% $ 51,907,233.85 $ 52,436,899.50 $ 52,701,732.32 $ 52,966,565.15 $ 53,231,397.98 $ 53,508,574.54 $ 54,025,896.45 SUMMARY of Rate Increases -------------------------------------------------------------FY20xx Estimates--------------------------------------------------- --------------- Worst -2% Worst -1% Worst -.5% Projected Best +.5% Best +1% Best +2% 4.75% $ 51,907,234 $ 52,436,899 $ 52,701,732 $ 52,966,565 $ 53,231,398 $ 53,508,575 $ 54,025,896 FY 20xx Projected Year End $47,700,000 Change from FY20xy 4.75% $4,207,233.85 $4,736,899.50 $5,001,732.32 $5,266,565.15 $5,531,397.98 $5,808,574.54 $6,325,896.45

Example Tuition/ Room / Board Scenarios Tuition -- Room and Board Proj Fyxx Max Occ Occ FY20x0 FY20x1 FY20x2 FY20x3 FY20x4 FY20x5 FY20x6 FY20x7 Rooms Hall1 371 371 Single 5,804 5,528 5,264 5,050 4,850 4,850 4,700 4,560 Double 4,807 4,578 4,360 4,180 3,980 3,980 3,860 3,750 Hall 2 273 273 Single 5,804 5,528 5,264 5,050 4,850 4,850 4,700 4,560 Double 4,808 4,578 4,360 4,180 3,980 3,980 3,860 3,750 Hall 3 43 43 Single 5,792 5,516 4,872 4,674 4,850 4,850 4,700 4,560 Double 5,044 4,804 4,576 4,390 3,980 3,980 3,860 3,750 Apt 1 68 68 6,218 5,922 5,640 5,408 5,150 5,150 4,900 4,670 Apt 2 125 125 6,218 5,922 5,640 5,408 5,150 5,150 4,900 4,670 Apt 3 - basic 14 14 5,490 5,229 4,980 4,778 4,550 4,550 4,330 4,120 Hall 4 12 12 4,807 4,578 4,360 4,180 - - - - Apt 5 - New 162 162 6,278 5,922 - - - - - - *** Average Annual Increase 1068 1068 5.00% 5.00% 4.90% 4.30% 0.00% 3.84% 3.70% 5.05% Tuition $ 26,645 $ 25,645 24,680 23,450 22,280 21,220 20,110 19,060 Average Annual Increase 3.90% 3.90% 5.25% 5.25% 5.00% 5.52% 5.51% 5.01% Board Plans Unlimited Meal Plan $ 5,524 $ 5,260 5,010 4,750 4,610 4,610 4,390 4,180 5.00% 5.00% 5.47% 3.04% 0.00% 5.01% 5.02% 5.03%

Example- Reduction Scenarios Budgetary Review and Enrollment Scenarios Scenarios: 4 Students approximately $100 K gross, $80K net --->> therefore 5 students = $100K (1 student = $20,000) FY2010 A B C D E F Version 10-2-09 5 students 10 students 15 students 20 students 25 students 30 students Item Description $300,000 $ 100,000 $ 200,000 $ 300,000 $ 400,000 $ 500,000 $ 600,000 Strategic Planning: 1.1.4 Internet 2 30,000 2.2.2 PT Faculty 5,000 3.7.4 Alumni Markets 2,000 3.11.2 Special Event Coord 40,000 3.15.1 Summer Programing 5,000 4.3.4 Facility Reorganization 15,000 1.2.1 Senior Faculty Review 3,000 Subtotal Expenditure Cost Reduction 100,000 100,000 4.1.1 Revised Merit Compensation 64,400 100,000 Subtotal Expenditure Cost Reduction 200,000 200,000 3.7.2 Website Redesign 100,000 100,000 25,000 Subtotal Expenditure Cost Reduction 300,000 300,000 4.1.4 Environmental Programs 10,000 5.2.5 HC Third World Staff 20,000 6.1.2 PR/ Bahamas Admission Programs 20,000 8205 Departmental Travel Expenses 25,000 Subtotal Expenditure Cost Reduction 400,000 400,000 2.2.1 Additional Faculty Hires 100,000 Subtotal Expenditure Cost Reduction 500,000 500,000

Example Tuition & Fees

Strategic Planning A University s vision and mission set the foundation for the strategic plan Strategic plan defines the long-term (5-10 year) direction for the institution Aligns the institution to produce outcomes and contribute to state or system-wide goals and objectives Strategic Plan is a living document

Who Maintains the Strategic Plan? A strategic plan must have broad-based input from all campus constituent groups: Faculty Staff Students Administration Governing Board Community

Implementing a Strategic Plan Unit plans identify how each operating unit within the institution will contribute to the goals and objectives defined in the strategic plan Unit plans focus on short-term (1-year) initiatives Unit plans should include: Mission/vision or statement of purpose Goals Specific objectives and initiatives to be achieved Measurable assessment criteria for each objective

Assessment Assessment at the unit plan level should facilitate continuous improvements to be implemented within the unit and provide basis for changes to the unit plan Unit assessment results should flow up to assist with the assessment of progress of strategic objectives included in the institution s strategic plan

How Does the Plan Affect the Budget? Institutional assessment results can help identify priority budget areas for the upcoming fiscal period Funding can be clearly justified for initiatives and processes that will enable the institution to progress toward the strategic goals

Example Strategic Plan Budget Linkage

Use Assessment Results to Implement Changes Develop / Update Plan Strategic Plan 1. Mission 2. Goals 3. Objectives 4. Performance Indicators Measure and Assess Performance Indicators Use Plan to guide decisions and budget priorities

Setting a Budget Timeline Effective planning & budgeting requires orchestrated input and collaboration at all levels of the institution Developing and communicating the timeline for all steps within the process is critical for successful implementation

Accounting and Standards A key characteristic of an operating budget as a management system is its strong tie to the institution s accounting system Financial Accounting Standards Board (FASB) Governmental Accounting Standards Board (GASB) Created in 1984 to establish generally accepted accounting principles for state and local governments and their component units (including universities)

Financial Reporting Provides information About sources and uses of financial resources About how it finances its activities and meets its cash requirements Necessary to determine whether its financial positions improves or deteriorates as a result of the year s operations

Financial Reporting Provides Information To determine whether current-year revenues are sufficient to pay for current-year services To demonstrates whether resources are obtained and used in accordance with the entity s legally adopted budget and demonstrating compliance with other financial-related, legal or contractual requirements To assist users in assessing the service efforts, costs, and accomplishments of the governmental entity

Dashboard Reporting Determine what needs to be measured Identify key performance indicators Partner with IT / IR and Finance Create a prototype Test functionality Get feedback Determine update frequency Display the right amount of data

Dashboard Decisions Audience Timeframe Level of drill down Clickable links Sortable / filters Targets Data Sources Dashboard look and feel

Dashboard Suggestions Summary Financials State Reporting Financials Academic Success Board Summary Operational Data

Financial Ratio Analysis Current Ratio Accounts Receivable Ratio Long Term Debt Leverage Ratio Composite Financial Index (CFI) 4 components

Current Ratio Current assets/ Current liabilities 2.00 1.75 1.30 1.70 1.49 1.47 1.50 1.11 1.25 1.00 0.75 0.50 2008 2009 2010 2011 2011 - Adjusted

Accounts Receivable Ratio Net Student Accounts Receivable/Net Tuition 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 5.4% 4.1% 3.6% 3.1% 3.1% 3.0% 2.9% 3.4% 2004 2005 2006 2007 2008 2009 2010 2011

Long-term Debt (in thousands) 50,000 39,534 38,124 40,000 32,087 31,813 31,244 30,017 28,732 30,000 20,000 10,000 0 2005 2006 2007 2008 2009 2010 2011

Leverage Ratio Unrestricted and Temporarily Restricted Net Assets/Long-term Debt 5.00 4.00 3.00 2.40 2.00 1.90 2.00 2.25 2.55 2.09 2.18 2.00 1.00 2004 2005 2006 2007 2008 2009 2010 2011 Industry threshold is not less than 2:1

Example Financial Ratios

Composite Financial Index (CFI) Combination of financial ratios used to assess the financial health of an institution. Financial ratios: Primary reserve Viability Return on net assets Net income (Net operating revenues)

CFI Worksheet COMPOSITE FINANCIAL INDEX (CFI) WORKSHEET WITH COMPUTATION TABLES FOR THREE YEARS # RATIOS COMPUTATION TABLES Year One Year Two Year Three 1 PRIMARY RESERVE add unrestricted net assets add temporarily restricted net assets subtract property, plant, equipment (net of depreciation) add long-term debt numerator = total expendable net assets 0 A 0 A 0 A denominator = total expenses B B B RATIO = #DIV/0! A/B #DIV/0! A/B #DIV/0! A/B 2 NET INCOME USING AN OPERATING INDICATOR add unrestricted operating revenue subtract unrestricted operating expenses numerator = operating income 0 A 0 A 0 A add total unrestricted revenues and gains add net assets released from restriction denominator = total unrestricted operating income 0 B 0 B 0 B RATIO = #DIV/0! A/B #DIV/0! A/B #DIV/0! A/B 3 NET INCOME USING Δ IN UNRESTRICTED ASSETS numerator = change in unrestricted net assets A A A add total unrestricted revenues and gains add net assets released from restriction add unrestricted investment return less spending rate denominator = total unrestricted income 0 B 0 B 0 B RATIO = #DIV/0! A/B #DIV/0! A/B #DIV/0! A/B 4 RETURN ON NET ASSETS numerator = change in net assets A A A denominator = total net assets (beginning of year) B B B RATIO = #DIV/0! A/B #DIV/0! A/B #DIV/0! A/B 5 VIABILITY add unrestricted net assets add temporarily restricted net assets subtract property, plant, and equipment (net of depreciation) add long-term debt numerator = expendable net assets 0 A 0 A 0 A denominator = long-term debt B B B RATIO = #DIV/0! A/B #DIV/0! A/B #DIV/0! A/B

Composite Financial Index Primary Reserve 10.00 8.00 6.00 4.00 2.00 Return on Net Assets 0.00 Net Income Viability Moderate Financial Strength Financially Strong Year 2 Year 1

Composite Financial Index Five Year Average Primary Reserve 10.00 8.00 6.00 4.00 2.00 Return on Net Assets 0.00 Net Income Viability Moderate Financial Strength Maximum Institution

Composite Financial Index 14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 Average Threshold Maximum College

Composite Financial Index (CFI) Primary reserve Expendable net assets / total expenses Results show how long an institution could function without additional net assets from operations 50% ratio = 6 months of expenses Benchmark => 40% Historical information shows if the institution increased net worth in proportion to rate of growth

Composite Financial Index (CFI) Viability Expendable net assets / Total debt Results indicate an institution s ability to borrow 1:1 ratio indicates an institution could settle it s obligations, if forced. Includes all debt incurred for plant purposes

Composite Financial Index (CFI) Return on net assets Change in net assets / Beginning net assets Better viewed over long periods of time Significantly impacted by investment activity and nonrecurring gains Institutions should develop a real rate of return target (recommended 3-4%) over a long period of time

Composite Financial Index (CFI) Net income (Net operating revenues) Change in URNA from operations / Unrestricted revenues Impacts the other ratios by adding or reducing to net assets Recommended ratio at least 2-4% over extended period of time (5-10 years) Institutional goals should incorporate expected growth in total expenses (including depreciation)

Questions and Further Discussion

Resources College and University Budgeting: An Introduction for Faculty and Academic Administrators, 3 rd edition, Larry Goldstein, NACUBO, 2005 ISBN 1-56972-031-2 The Small College Guide to Financial Health: Beating the Odds, Michael K. Townsley, Ph.D., NACUBO, 2002 ISBN 1-56972-023-1