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Board of Trustees Financial Workshop

Board of Trustees Financial Workshop. December 2, 2013. Page 1. introduction. UNCW Guiding Principles. Page 2.

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Board of Trustees Financial Workshop

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  1. Board of TrusteesFinancial Workshop December 2, 2013

  2. Page 1 introduction

  3. UNCW Guiding Principles Page 2 We are committed to the university’s financial integrity by providing quality, efficient service to the students, faculty and staff. Our mission is to record, report and safeguard the fiscal assets of the university. Maintaining an effective system of internal controls and compliance mechanisms is accomplished through comprehensive policies, procedures, campus-wide training and supporting a knowledgeable and skilled staff.

  4. UNCW Environmental Scan/Overview Page 3 • Strengths & Opportunities • Diverse & growing revenue sources • Distance Ed • Auxiliaries • MARBIONC • Healthy liquidity • Membership in UNC system & history of state support • Well-managed and growing endowment • Strong controls & planning processes • Solid student demand & enrollment trends • Commitment to innovation • Exceptional compliance record & unqualified audit opinions • Weaknesses & Challenges • Continuous need to grow revenues • Endowment • Federal contracts & grants • Relatively high level of debt • Dependence on state funding • Legislative mandates • Tuition sensitivity • Financial aid resources • Aging plant (~11 years) & potential future capital/maintenance needs

  5. Agenda Page 4 Financials Budgeting Funding • Credit Rating Agencies & Debt Management • Higher Education Financial Statements • Budget Process • Enrollment Growth Funding • Appropriations, Tuition & Student Fees

  6. Page 5 Financials Budgeting Funding Credit rating Agencies and Debt Management

  7. Rating Process Page 6 • Most rating agencies follow standard criteria and are required to provide this information publicly. • Criteria is required to be transparent so that an experienced analyst could come within a category of the rating. • Many will also share financial ratios and other qualitative information with prospective rated institutions. • The ratios are updated each year. • Moody’s issues ratios with a higher degree of rating specificity (by specific rating) than S&P (which prepares ratios by rating category) • Different rating agencies do not always assign the same ratings to the same institutions. • Ratings are generally assigned to securities rather than institutions, especially for public universities. • Moody’s publishes a quantitative scorecard to increase the transparency of the methodology. • S&P is less formulaic but still focuses on the same factors and uses similar ratios. • However, each rating agency may place different weights on the factors and ratings are not always the same.

  8. Moody’s Higher Education Scorecard Page 7 • Areas of Emphasis • Demand or Market Position • enrollment, selectivity, student quality, yield, competitive position, student charges, and geographic diversity • Management • governing structure, ability to respond to change, strategic plans, debt policies, and budgeting practices • Finance • revenue diversity, operating performance, financial resources (largely through unrestricted net position, endowment spending policies, operational liquidity, and coverage of variable rate debt from liquidity) • Debt • annual debt burden, maximum debt burden, debt structure, repayment method

  9. Top Causes of Rating Changes Page 8 • Upgrade Drivers • Steady improvement in demand, increasing selectivity, matriculation rates, student quality & geographic diversity • Ability to raise tuition & fees • Consistently strong financial performance • New schools or programs • Major, transformational gifts • Long history of operating surpluses • Clear ability to manage with surprises & maintain strategic plans and budgets • Downgrade Drivers • Sharp increase in debt • Operating deficits • High endowment spending levels (>8%) • Significant debt structure risks • Management concerns • Declines in net tuition revenue or sense that tuition revenue growth is impaired • Steep reduction in applicants or new freshmen • Drop in expendable resources or unrestricted net position compared with operating expenses or debt • Sharp drop-off in state appropriations - not offset by reduced operating expenses or revenue increases in other areas • Limited cash/liquidity compared with accounts payable & near-term debt payments • Fewer than 700 students & accreditation issues • New debt with no visible source of payment

  10. Page 9 S&P 2013 COPsRating Rationale Strengths • Solid debt service coverage (DSC) • Strong housing system demand and occupancy • Managerial/financial commitment to student housing • Favorable overall student demand trends • Operating support from State of North Carolina Challenges • Below average financial resources in terms of net position relative to operating expenses and outstanding debt • Above-average total debt burden • Relatively small endowment Factors that could make the rating go Up/Down • Up: Continued strong student & housing demand trends; improved financial resources; increasing housing system DSC • Down: Reduced state support; Additional debt inconsistent with financial resource growth or revenues; decreasing housing system DSC

  11. Page 10 Moody’s December University Rating Review 2010 Rating Rationale Strengths • Solid student demand and growing enrollment trends • UNC System membership • Healthy liquidity profile • Solid regional market position / Strong student demand Challenges • High leverage • State funding cuts Factors that could make the rating go Up/Down • Up: Growth in financial resources, improvements in scope of research activities & student market position; cash flow improvement • Down: Reduced state support; Decline in student market position; Weakened Debt Service Coverage

  12. Page 11 Moody’s 2012 Ratings Best

  13. Debt Profile Page 12

  14. Debt AnalysisImproving Trends Page 13 * Moody’s Calculation except FY13.

  15. Page 14 Financials Budgeting Funding Higher Education Financial Statements Source: Adapted from UNC Campus Financials 101, Sept. 12, 2013. Charlie Perusse, StathisPoulos, Rick Niswander and Mary Peloquin-Dodd.

  16. Primary Campus Uses of the Consolidated Financial Statements Page 15 • The consolidated UNCW financial statements are mainly used for: • State of North Carolina Consolidated Financial Reporting • Rating Agencies • Lenders, Bond Trustees • Providing “factoids” • Looking at trends from the 40,000-foot level • Regulatory Disclosures • NC Office of State Controller • NC Office of State Budget Management • NC Office of State Treasurer • NC General Statutes • NC Government • NC Auditor • Internal Revenue Service • NC Department of Revenue • NCAA

  17. Limited Flexibility Page 16 • Unlike many business entities, university dollars are not fungible. • Legal, regulatory & good business practices prevent movement between categories • Revenues, expenses and other sources of funds are tracked for defined purposes • Examples • Donors make gifts that can only be used to fulfill the intent of the donor • Housing receipts should not be used to pay for Administration Assistants in the English Department • State Appropriations cannot be used to pay for housing • Tuition supports student instruction • Parking receipts fund reserves to repave lots and construct decks • Federal or state scholarship funds can only be used for that purpose by law • State R&R funds can only be used for that purpose • Bond proceeds used for intended purpose • Mandatory fees support stated purpose (athletic fee for athletic department) • Summer school revenue for summer school expenses

  18. Limited Flexibility Page 17 • Diverse Set of Business Lines • Profit-motivated components, educational components, research components, community services • Significant legal and operational restrictions on how business is conducted • Debt restrictions • GASB accounting (vestiges and real) • Detailed compliance reporting to multiple state and federal agencies • Multiple approval levels • Special duties to students, parents and donors • Business runs on the cash basis, not accrual basis • Twelve month budget cycle – timing is critical, e.g. spend it or lose it • Unexpended carryover of State Funds limited to 2.5% of operating funds • Cash requirements requisitioned from State Treasurer, not managed locally

  19. Key GASB Higher Ed Accounting Practices Page 18 • Management Discussion & Analysis • Precedes the basic financial statement and is required to include certain information prescribed by GASB, dual column comparison of year over year • Basic Financial Statements – Industry nomenclature and single column • Balance Sheet – Statement of Net Position (formerly Statement of Net Assets) • Assets, Liabilities, & Net Position • Income Statement – Statement of Revenues, Expenses and Changes in Net Position • Revenue, Expenses, Other Changes/Adjustments • Statements of Cash Flows • Cash flows are required to be summarized by operating, investing, capital and related financing, and noncapital financing uses • Discreetly Presented Component Units • Most University affiliated foundations are presented in the financial statements • Notes to Financial Statements • Deposit and investment risks disclosures (credit risk, concentration risk, interest rate risk) including the organization’s policies regarding such risks, are required

  20. Key GASB Higher Ed Accounting Practices(Income Statement) Page 19 UNCW Year Ended June 30, 2012 • Statement of Revenues, Expenses & Changes in Net Position (SRECNP) • Equivalent to the “income statement” for a for-profit entity • Expenses can be presented in either the natural or functional presentation • There are no prescribed expense allocations • Net investment income and realized gains/losses are required to be presented as a single non-operating financial statement account on the statement of activities. • Gifts are recognized when received and eligibility requirements have been met (not when gift is pledged by donor) • No requirement to use restricted funds first

  21. Sources of Revenues Page 20

  22. Top Sources of Revenues Page 21

  23. Research Revenue Page 22 State Passthroughis the amount of non-capital state grants that offset certain educational scholarship awards such as the NC Education Lottery Scholarship Program and UNC Need Based Aid.

  24. Page 23 Page 23 Research RevenueFacilities & Administrative Indirect Costs

  25. UNCW Expenses Page 24

  26. Page 25 UNCW Statement of Revenues, Expenses & Changes in Net Position (Dollars in Thousands)

  27. Page 26 Key GASB Higher Ed Accounting Practices(Balance Sheet) UNCW Year Ended June 30, 2012 • Statement of Net Position: • Equivalent to the “balance sheet” for a for-profit entity • Current and noncurrent classifications are required • Consider notes to the financial statements (i.e. receivables, capital assets, long-term liabilities, etc.) • Assets • Capital Assets • Intangible assets are required to be presented within capital assets • When significant, non-depreciable capital assets are to be presented separately • Federal Perkins Loan amounts due from borrowers are recognized as notes receivables • Liabilities • Amounts payable from restricted assets are generally separately disclosed • Federal portion of Federal Perkins Loans is recognized as a liability • Gifts received before all eligibility requirements have been fully met are recognized as a liability

  28. Key GASB Higher Ed Accounting Practices Page 27 UNCW June 30, 2012 • Statement of Net Position (cont.): • Net Position • Focus on unrestricted net position • Unrestricted net position designated for specific use are not permitted to be presented separately from undesignated unrestricted net position

  29. Page 28 UNCW Statement of Net Position formerly Statement of Net Assets (Dollars in Thousands)

  30. Net Position Page 29

  31. Unrestricted Net Position Defined Page 30 • Net Position that is not subject to externally imposed stipulations • Externally imposed stipulations include stipulations made by: • Root Source of Funds (creditors, grantors, contributors) • Laws or regulations of other governments • Imposed by law through constitutional provisions or enabling legislation • Includes net position that has been internally designated (defined on next slide) • Unrestricted net position is generally derived from (not all inclusive): student tuition and fees, auxiliary enterprises, gifts, interest income, and royalties.

  32. Unrestricted Net Position Considerations Page 31 • Internally Designated Net Position – Defined • The designation is required to be expressed by (1) the institution itself or (2) a body (e.g., a budget or finance committee) or official to which the institution has delegated the authority to assign amounts to be used for specific purposes • The designated funds represent planned actions and not actual commitments • The designation can be subsequently modified or removed • As universities have numerous programs and initiatives to accomplish their missions to educate the public, they tend to have more types of internally designated net position than other organizations to meet the objectives of each program and initiative. Examples include: • Academic programs • Research programs • Institutional advancement • Student housing • Health system • Administration • Capital projects • Athletics programs • Human resources • Information technology • Recreational programs • Libraries • Art programs • Alumni relations • Student relations • Patient relations • Marketing • Trademarks and Patents • Royalties • Fundraising • Legal matters • Accreditation matters • Federal, state and other compliance

  33. Unrestricted Net Position Page 32 • Unrestricted Net Position does not equal “Cash” • Operationally a collection of Semi-Autonomous Business Units • “Each boat floats on its own bottom”

  34. Unrestricted Net PositionMoody’s 2012 Data Page 33 Moody’s Medians Aa3 - 0.48x A1 - 0.42x Aa3 - 0.27x A1 - 0.28x

  35. UNCW Environmental Scan/Overview Page 34 • Strengths & Opportunities • Diverse & growing revenue sources • Distance Ed • Auxiliaries • MARBIONC • Healthy liquidity • Membership in UNC system & history of state support • Well-managed and growing endowment • Strong controls & planning processes • Solid student demand & enrollment trends • Commitment to innovation • Exceptional compliance record & unqualified audit opinions • Weaknesses & Challenges • Continuous need to grow revenues • Endowment • Federal contracts & grants • Relatively high level of debt • Dependence on state funding • Legislative mandates • Tuition sensitivity • Financial aid resources • Aging plant (~11 years) & potential future capital/maintenance needs

  36. Page 35 Financials Budgeting Funding Budget Process

  37. Page 36 Background • UNCW operates on the State of North Carolina biennial budget cycle • The university conducts “budget calls” for eight (8) different budget cycles • Externally managed: • Office of State Budget and Management (OSBM) • UNC General Administration • Internally Managed: • University Budget Office • constant external budget compliance and reporting responsibilities • designed around these external requirements

  38. Background Page 37 External Budget Cycles • Biennial Continuation Budget • Biennial Expansion Budget • Biennial Capital Budget • Supplemental Budget (mid term submission) • Campus Initiative Tuition Increases (CITI) • Mandatory & Non-Mandatory Student Fees • Summer School Rate Increases • Enrollment Projections Internal Budget Cycles • University Annual Allocation Budget • Special Funds Budgets • Faculty and EPA Legislative Salary Increases • SPA Legislative Salary Increases • Facilities & Administration Receipts (Overhead)

  39. Page 38 Background The campus community submits budget requests appropriate for each budget call Multiple processes restrict our ability to link comprehensive allocation decisions to any one program initiative The fragmented nature limits our creativity and collaboration among departments, schools and divisions

  40. Page 39 Unified Budget Process A unified budget process, responsive to university strategic initiatives, promotes our shared values and encourages collaboration and creativity NOTE: None of our external compliance and reporting responsibilities will go away. Align our work to accommodate our internal plans while still meeting all of our external obligations

  41. Page 40 Ready to implement by 7/1/13

  42. Page 41 DEFINITION: “a budget in which the resources and services are identified by programs or function and not by the organizational units involved in performing all or part of the program and/or “functions” No more going through divisions for data

  43. Page 42 Strategic Action Planning Workgroup – Initial Objectives (FY 2015-17) Journey of Learning • Objective 1 – Meet or exceed all institutional goals in the UNC performance funding measures. • Graduation Rates of NCCCS Transfer Students • Degrees Awarded in STEM and Health Disciplines • Undergraduate Students graduating with University Honors • Energy Efficiency • Annual Giving • 6-Year Graduation • Retention • Degree efficiency • Degrees awarded to Pell recipients • Financial integrity index (UNC FIT) • Objective 2 -Ensure that all undergraduates have an applied learning experience (in research/discovery, internships/application, service learning/regional engagement, and/or study abroad/exploration away) that achieves a set of established learning objectives.

  44. Page 43 Strategic Action Planning Workgroup – Initial Objectives (FY 2015-17) Love of Place Objective 3 – Design and develop proposals for advanced health professional degree programs responsive to health industry needs. Objective 4 – Conceptualize, design and fund an industry-linked film production facility consistent with the addition of a graduate program in Film Studies. Power of Ideas and Innovation Objective 5 – Develop and implement the CREST (Millennial Campus) model with initial emphasis on meeting MARBIONC partnership targets. Objective 6 – Enhance the regional entrepreneurial community through the launch of the Center for Innovation and Entrepreneurship and related programs.

  45. Page 44 Financials Budgeting Funding Enrollment Growth Funding Source: Adapted from UNC Enrollment 101 BOG Policy Discussion, Sept. 12, 2013.

  46. Page 45 Page 45 Enrollment = Admissions + Retention • Enrollment increases by: • Bringing in more students; and • Retaining more of the existing students • BOG and UNCW policies regarding Satisfactory Academic Progress affect enrollment.

  47. Page 46 Page 46 Enrollment Trends Since 2009Actual Fundable Headcount – Regular Term

  48. Page 47 Page 47 Enrollment Trends Since 2009Actual Fundable SCHs – Regular Term

  49. Page 48 Page 48 Enrollment Trends Since 2009Actual Fundable SCHs – Distance Education

  50. Page 49 Page 49 Events Leading to Student Credit Hour (SCH) Funding Model • Prior to the SCH Funding Model • Enrollment funding based on percentage change in full-time equivalent (FTE) enrollment • Percentage increase in enrollment applied to budget • 1995 Session • Consider alternative approaches to funding University Enrollment, including SCH funding • Review opportunities for off-campus degree programs and summer school • 1997 Session • Examine funding required for increasing enrollment in distance education instruction

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