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An Updated Analysis of the Financial Statements for
Oakland University Fiscal Years 2001-‐2014
Prepared for the Oakland University Chapter of the AAUP By
Rudy Fichtenbaum Professor of Economics 7300 Crestway Rd.
Clayton, OH 45315-‐9758
(937) 620-‐7430
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Introduction
This report provides an update of the analysis of the financial status of Oakland University for fiscal years 2012 through 2014. My previous reports covered fiscal years 2001 through 2011. In most cases, the data in the tables in this report will show the data from 2009-‐2014 (Supporting data for 2001-‐2008 can be found in previous reports). However, all of the graphs in this report will show the data over the entire period from 2001-‐2014. The analysis contained in this report is based on information contained in the audited financial statements and other information that appears in the Annual Financial Reports of the University as well as information from the Integrated Post-‐Secondary Educational Data System (IPEDS) for the aforementioned years.
Most businesses have a goal of earning profit for stockholders. Thus, the financial statements of most businesses are designed to allow stockholders and others concerned with profitability a means to monitor the performance of the business in question.
Universities and other non-‐profit organizations ostensibly have an entirely different purpose. Universities, in particular, are institutions of higher learning established primarily to create and disseminate knowledge. Universities receive a significant portion of their funding from donors and governmental entities. These funds are often given with certain restrictions and conditions. Consequently universities use a system of fund accounting. The primary purpose of fund accounting is to provide trustees, who are legally responsible for running universities, the information to monitor the funds that come into the institution and make sure that they are expended for their intended purpose.
Since the primary purpose of fund accounting systems is to ensure that a university expends funds in the manner they were intended by donors or government entities, it has been difficult for faculty to look at a University’s financial statements and get a true picture of the university’s financial health. In the past, financial statements for universities were broken down into various fund groups. In effect, each fund group had its own financial statements and universities could move money between funds making it difficult to understand whether universities had revenues in excess of expenses or whether expenses exceeded revenues. In 2002, public universities changed their financial statements so that they more closely resemble those in for profit businesses. One might argue that this new reporting format is a reflection of the growing corporatization of universities, which are increasingly being run more and more like for profit enterprises. However, one of the benefits of the new reporting format is that it is now easier for faculty to understand the financial status of their institutions.
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Historically, most universities have had some sort of a faculty budget oversight committee as part of faculty governance institutions. Many of the functions of these budget oversight committees have been taken over by collective bargaining agents at institutions where faculty members have opted to engage in collective bargaining. However, whether an institution has collective bargaining or a traditional budget oversight committee, faculty at most institutions focus on the annual budget of the institution.
Often, looking only at a university’s budget misleads faculty members.
Budgets are normally based only on the current fund and since universities have the ability to transfer money from one fund to another looking at the current fund does not give a true picture of a university’s finances. Figure 1 below shows the structure of university or college funds.
Figure 1. In addition, a budget is just a financial plan. However, institutions have no
legal obligation to spend money in accordance with their budget. For example, a budget may show that money has been allocated for a certain number of faculty positions. However, in any given year a certain number of faculty members leave institutions either to take jobs elsewhere or to retire. Consequently in any given year a certain number of positions that are budgeted are vacant. Therefore what a university budgets for faculty salaries and benefits is not necessarily what they actually spend on salaries and benefits. As a result, some percentage funds for budgeted positions either gets spent elsewhere or accumulates and becomes part of a university’s net assets. Budgets also depend on making projections regarding enrollment and assumptions about raises and the general rate of inflation. Changing
Audited Financial Statements
Current Funds
Unrestricted
Educa4on & General
Auxiliaries
Restricted
Sponsored Programs
Restricted Scholarships
Other Restricted Gi?s
Loan Fund Endowment Fund
Permanent Endowment
Quasi-‐Endowment
Plant Funds
Renewal & Replacement
Plant Expenditures
Agency Funds
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any of these assumptions can drastically alter a budget. Finally, almost all budgets are balanced and this creates the impression that colleges spend every dollar of revenue that they take in. This is far from true for most universities. In general, most universities will have balanced budgets but in most years they will also have revenues that are in excess of expenses.
To get a true picture of a university’s finances one must look at the actual
financial statements, which present the actual revenues and expenses of a university. Evaluating a university’s finances by looking at its budget would be the equivalent of evaluating the performance of a for-‐profit company by looking at its business plan.
In a for-‐profit business, revenues come into the business through the sale of
goods and services. In the process of producing goods and services firms incur costs. The difference between revenues and costs represents the firm’s profit or loss. This profit or loss is one of the primary indicators of how the firm is performing. Universities, as non-‐profit organizations, take in revenue in the form of tuition dollars, donations and governmental support. In the process of carrying out the mission of their institution, universities also incur expenses. The difference between the revenues and expenses is known as the change in net assets (change in net position). If a university’s revenue exceeds its expenses there is an increase in net assets. Conversely, if the expenses exceed the revenues there is a decrease in net assets. Increases or decreases in net assets are one of the prime indicators of how a university is performing financially.
Financial data is reported either as a stock (a level) or flow (a change). A
stock is a snapshot taken at a particular point in time. For example, the amount of money in your savings account is a stock. Flows are measurements that tell us about changes overtime, as we move from one level to another. Flows always have a time dimension. For example, income is a flow because it is measures the number of dollars we receive per year.
Universities have three main financial statements. First there is a balance
sheet or a statement of net assets (statement of net position). Balance sheets have three main components: assets, liabilities and net assets. Assets are things of value owned by a university. Liabilities are claims against a university and net assets are the difference between assets and liabilities. Net assets represent the wealth of the institution. All of the items on a balance sheet deal with stock concepts and represent a snapshot of the university at a point in time. Thus, the first part of this report will provide an analysis of the University’s balance sheet.
The second major financial statement is the statement of revenues, expenses
and changes in net assets (changes in net position). Another name for this statement would be an income statement. This financial statement shows how a university’s finances are changing over a period of time, namely a fiscal year that normally runs from July 1 to June 30 of the following year. This statement deals with flows and measures how a university’s revenues and expenses are changing over time. Fiscal
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years are always associated with the calendar year in which the fiscal year ends. So for example, from July 1, 2013 to June 30, 2014 is known as fiscal year 2014.
There is a relationship between stocks and flows or between the balance
sheet and income statement. For example, if revenues are greater than expenses then there will be an increase in net assets. This means that if you take the net assets at the beginning of a year on the balance sheet and add the change in net assets from the statement of revenues, expenses and changes in net assets you will get the net assets at the end of the year which are shown on the balance sheet. The second part of this report will provide and analysis of the University’s statement of revenues, expenses and changes in net assets. The following equation shows the relationship between the two statements: The change in net assets = revenue – expenses = change in assets – change in liabilities.
In 2011 GASB 63 introduced the term net position and change in net position, which has now taken the place of net assets and change in net assets. The difference is relatively minor and like many institutions, the Oakland University did not adopt GASB 63 until 2013. In this report, we will use the two terms interchangeably. The net position is the difference between (assets + deferred outflows of resources) minus (liabilities + deferred inflows of resources). Deferred outflows are consumption of net assets by a college that is applicable to a future reporting period. Deferred inflows are acquisition so of net assets applicable to a future reporting period.
Deferred outflows and inflows generally involve the use of derivatives. A
derivative is a financial instrument that derives is value from some underlying asset. Anytime a financial asset is created there is always an offsetting liability. The most common derivative used in higher education is something known as an interest rate swap. This is an agreement where two parties one with a loan that has a variable rate of interest and the other with a loan that has a fixed rate of interest agree to a series of payments that allow them to swap interest payments. So the person with a variable rate loan agrees to make a series of fixed interest payments and the person with the fixed rate loan agrees to make a series of variable rate interest payments.
The third financial statement is the statement of cash flows. Universities use
a system of accrual accounting, which means they book revenues when they earn them and book expenses when they are incurred. However, recognizing revenue is not always the same as collecting cash. For example, a university may send a bill to a student for tuition but not immediately collect the money that is owed. This shows up on a university’s balance sheet as an increase in accounts receivable and is booked on the statement of revenues, expenses and changes in net assets, as revenue. While the university shows an increase in revenue, it does not actually have more cash. Hence the role of the cash flow statement is to show the inflows and outflows of cash. The third section of this report will provide an analysis of the University’s cash flow statement.
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In providing an analysis of each of these financial statements it is important to look at trends such as the increase or decrease in net assets. In addition, this report will also calculate certain ratios, which are indicators of financial performance. There are a number of different types of ratios that can be used to evaluate the performance of colleges and universities. There are revenue and expense ratios, liquidity ratios, solvency ratios, activity ratios and margin ratios. These ratios can be used to look at the historical performance of the institution. In addition, these ratios can also be used to compare one institution to another institution, or to certain standards that have been established in the field of higher education. However, caution should be exercised when comparing one institution to another because of differences in reporting.
The purpose of this report is to help educate faculty of Oakland University about the financial status of their University. The information provided in this report is provided solely for educational purposes. Every effort has been made to ensure that the information in this report is accurate. Any errors or misstatements are purely unintentional and the author accepts no responsibilities for any damage that may result.
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The Balance Sheet A balance sheet (statement of financial position or statement of net assets) is a
snapshot of the university or college’s financial position on the last day of the fiscal year. Generally fiscal years begin on July 1 and end on June 30 and when a fiscal year is referred to, the number refers to the calendar year in which a particular fiscal year ends. A balance sheet has two sides and represents a balance between assets on the left side and liabilities and changes in net assets on the right side. The equation that summaries a balance sheet is Assets = Liabilities + Net Assets. The basic structure of the balance sheet is illustrated in Figure 2 below.
Figure 2.
Assets An asset is something that an institution owns that is expected to provide a benefit
in the future. Assets can be divided into two classes: real assets such as classrooms, laboratories, computers, library books and journals etc., and financial assets such as cash that can be used to make student loans and finance current operations, and investments in financial instruments such as endowments, which can be used to generate income to defray certain expenses or be liquidated during a period of a financial crisis. Assets increase as resources are obtained and decrease as assets are disposed of or used up.
A university or college’s assets can be divided into current and non-current assets. Current assets consist of assets that will be converted to cash or used up during the course of a year. The major items that comprise current assets are cash and cash equivalents, short-term investments, accounts receivable, notes receivable and inventories.
Assets Liabili4es & Net Assets
Net Assets
Long-‐Term Debt
Accounts Payable
Property, Plant & Equipment
Accounts Recivable
Cash & cash equivalents
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Cash and cash equivalents consist of physical cash, checking accounts and short-term investments such as certificates of deposit, government securities and money market mutual funds. Accounts receivable represent are amounts that are owed to a college or university for services provided (e.g. tuition, room and board) and are generally reported net of allowances for doubtful accounts, which are amounts the college or university expects that it is unlikely to collect. Notes receivable are amounts owed by other entities such as grants or loans receivable i.e., money that is owed to the university or college by granting agencies or for loans. Inventories at colleges and universities generally consist of publications and general merchandise.
Non-current assets consist of accounts receivable, notes receivable, long-term
investments, endowment investments and capital assets, all assets that will not be converted to cash or used up during the current year. Capital assets are recorded at historical cost (the amount you paid for the item, or the amount it cost to build the capital asset), measured net of accumulated depreciation. Depreciation is a way of allocating the cost of fixed assets over the useful life of those assets. It is an expense and therefore it reduces the net assets of a college. Whether this diminution of net assets represents a real decline in the wealth of an institution is questionable. For private companies, depreciation represents the allocation of the cost of purchasing plant and equipment. However, at universities and colleges, a significant portion of buildings and equipment are paid for by governmental appropriations or private gifts. Thus, universities and colleges have a source of funding for purchasing fixed assets that is not available to for profit businesses. Depreciation is an expense that appears on the income statement, but unlike most other expenses, it does not represent an outflow of cash from the college or university.
Table 1 shows assets and deferred outflows for the University from 2009-
2014 and Figure 3 shows assets and deferred outflows from 2001-2014.
$-‐ $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 $900,000
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Figure 3 Total Assets & Deferred Ou7lows
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Table 1
Assets and Deferred Outflows Thousands of $
For year ending June 30 2009 2010 2011 2012 2013 2014 ASSETS CURRENT ASSETS: Cash and cash equivalents $34,483 $73,033 $32,718 $37,106 $56,815 $28,509 Restricted cash and cash equivalents $104,818 $29,117 Accounts receivable, net $9,298 $9,161 $9,878 $23,547 $9,802 $20,911 Appropriation receivable $9,537 $9,216 $9,229 $7,845 $8,175 $8,300 Pledges receivable $2,412 $2,452 $2,437 $2,998 $3,138 $2,933 Inventories $312 $512 $856 $1,074 $696 $914 Deposits and prepaid expenses $545 $674 $764 $739 $1,134 $1,148 Student loans receivable, net $244 $257 $279 $353 $326 $383 Total current assets $56,831 $95,305 $56,162 $73,661 $184,906 $92,216 NONCURRENT ASSETS: Endowment investments $40,539 $46,764 $56,877 $55,485 $61,432 $80,565 Other long-‐term investments $75,743 $87,827 $132,726 $119,982 $104,705 $134,876 Accounts receivable, net $12,902 $11,663 $10,144 $8,578 $7,126 $6,386 Student loans receivable, net $1,735 $1,621 $1,491 $1,337 $1,411 $1,467 Capital assets, net $242,441 $245,638 $271,045 $312,019 $352,058 $450,643 Other assets $1,844 $2,162 $1,947 $1,878 $1,099 $495 Total non-‐current assets $375,204 $395,675 $474,229 $499,280 $527,831 $674,433 Total assets $432,035 $490,979 $530,390 $572,940 $712,737 $766,649 Deferred Outflow or resources $-‐ $7,122 $5,633 $11,699 $12,763 $12,463 Total Assets & Deferred Outflows $432,035 $498,102 $536,024 $584,640 $725,500 $779,112
Figure 3 shows that the total assets and deferred outflows of the University
increased sharply from 2001 to 2002. Between 2002 and 2009 total assets and deferred outflows increased from $336.2 million to $432 million, an average annual rate of 3.6%. Starting in 2009, total assets and deferred outflows began growing more rapidly and by 2014 reached $779.1 million growing at an average annual rate of 12.5%.
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Current assets tend to be somewhat volatile because of movements in cash
and cash equivalents. Part of an investment strategy may involve moving assets in and out of cash. When this happens assets are shifted between current and non-‐current assets. Cash holdings of the University generally grew between 2001 and 2008, excluding restricted cash and cash equivalents. In 2004, the University reclassified restricted cash and cash equivalents moving them from current to non-‐current assets and restating their 2003 holdings. It is likely that restricted cash and cash equivalents should have been in non-‐current assets all along and so the increase in current assets in 2002 was probably a fluke due to misclassification of restricted cash and cash equivalents. In 2008, there was a decline in cash and cash equivalents and they remained at about $34 million in 2009. In 2010, there was a sharp increase in cash holdings to $73 million. In the follow year, cash holdings declined to $32.7 million and then increased to $37.1 million in 2012. In 2013, cash and cash equivalents jumped to $56.8 million and then declined to $28.5 million in 2014. The University also had substantial restricted cash and cash equivalents in 2013 and these declined in 2014. Generally restricted cash and cash equivalents are associated with holding cash obtained from the sale of bonds to be used in construction. Without the movement in cash and cash equivalents current assets would have been fairly stable over the period from 2006 through 2014.
In contrast to current assets, non-‐current assets have been increasing. The
three most important components of non-‐current assets are the University’s endowment, other long-‐term investments and the value of its capital assets. Between 2001 through 2004 most of the increases in non-‐current assets were due to increases in the value of capital assets. In contrast, the increases in non-‐current assets between 2005 and 2008 were due primarily to increases in investments.
Investments include cash and cash equivalents, endowment and other long-‐
term investments. Investments for the University rose in 2002 and then dropped by about 7% in 2003. The drop in 2003 was associated with a drop in the stock market, which began in 2000 and continued until about March of 2003. It is important to remember that FY 2003 ended on June 30, 2003 so that the market was declining for most of FY 2003. In 2004 investments rebounded and increased through 2008.
At the end of 2007 the stock market started declining and this decline
continued through all of 2008 and into 2009. The market started increasing July of 2009 so it declined for all of FY 2009. Therefore, it is not surprising that the value of investments declined about 7% in 2009. In a previous update, I noted that increases in the market for the first half of 2010 made it likely that the value of investments would rebound substantially in 2010. Indeed, investments rebounded sharply increasing from $150.8 million in 2009 to $207.6 million in 2010. Investments continued increasing in 2011 reaching $222.3 million.
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In 2012 and 2013, other long-‐term investments declined dropping to $104.7 million in 2013. In 2014, other long –term investments rebounded reaching an all time high of $134.9 million. Figure 4 shows the University’s total investments, including cash and cash equivalents. The rise in 2013 and then the subsequent decline in 2014, was due entirely to changes in cash and cash equivalents. Figure 5 shows investments excluding cash and cash equivalents.
$-‐ $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
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2002
2003
2004
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2006
2007
2008
2009
2010
2011
2012
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Figure 4 Investments
$-‐
$50,000
$100,000
$150,000
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2002
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2004
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2008
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2010
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2012
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Figure 5 Endowment and Other Long-‐Term Investments
Endowment investments Other long-‐term investments
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Table 2 and Figure 6 show the book value of capital assets for the University. Most of the growth in the value of capital assets comes from buildings and improvements and infrastructure. Capital assets are net of accumulated depreciation and are valued at historic costs.
Capital assets increased from 2001 to 2003 and then declined slightly until 2005.
Between 2005 and 2007 capital assets increased and then were flat for all intents and purposes through 2010. Starting in 2010 there was a significant increase in the value of capital assets, which rose from $245.6 million to $450.6 million by the end of 2014.
Table 2 Capital Assets, Net Thousands of $
For year ending June 30 2009 2010 2011 2012 2013 2014 Land $4,325 $4,325 $4,625 $4,625 $4,625 $4,625 Land improvements & infrastructure $44,727 $46,233 $55,912 $57,383 $59,739 $60,268 Buildings $286,332 $291,659 $300,376 $308,802 $377,335 $395,501 Equipment $42,879 $37,791 $36,479 $34,332 $37,528 $40,283 Library acquisitions $25,566 $26,249 $26,595 $26,665 $27,178 $27,603 Construction in progress $15,105 $20,592 $34,616 $74,987 $50,693 $141,229 Total $418,934 $426,850 $458,604 $506,794 $557,099 $669,508 Accumulated depreciation: Land improvements & infrastructure $(16,282) $(18,345) $(20,669) $(23,238) $(25,871) $(28,556) Buildings $(104,477) $(110,837) $(117,266) $(123,906) $(131,503) $(140,100) Equipment $(34,373) $(29,863) $(26,978) $(24,853) $(24,322) $(26,413) Library acquisitions $(21,361) $(22,167) $(22,646) $(22,778) $(23,344) $(23,796) Total accumulated depreciation $(176,493) $(181,212) $(187,559) $(194,775) $(205,041) $(218,865) Total capital assets, net $242,441 $245,638 $271,045 $312,019 $352,058 $450,643
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Figure 7 shows the major capital expenditures undertaken by the University in the years 2001-2014. These figures come from the Cash Flow statements. Over the fourteen-year period, from 2001-2014, the University spent a total of $408.9 million for the purchase of capital assets, with 232.4 million occurring between 2011-2014. The figure also shows the sources of capital funding. Almost none of the funding comes from capital gifts and grants.
$-‐
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$200,000
$300,000
$400,000
$500,000
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Figure 6 Capital Asset, Net
$-‐
$20,000
$40,000
$60,000
$80,000
$100,000
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Figure 7 Purchase of Capital Assets
Funded by the University
State Appropra4ons
Capital Grants & Gi?s
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Between 2001 and 2004 a small portion of capital funding came from state capital appropriations. Between 2005 and 2011, with the exception of a small gift or grant, almost all of the University’s capital spending was funded directly by the University, either by borrowing or through the use of reserves. In 2012 and 2013 there were significant capital grants and gifts and the state also contributed a large portion of the money spent on capital. In 2014, which was the single largest amount spent on capital during the 14 year period ($95.3 million), 100% of the funding came from the University.
Liabilities
Liabilities are claims on an institution’s resources (alternatively, liabilities are present obligations to sacrifice resources or future resources that an institution cannot get out of). Liabilities can also be divided in current and non-‐current liabilities. Current liabilities consist of liabilities that are due within a year. The non-‐current liabilities consist primarily of capitalized lease obligations and long-‐term debt obligations that are due in more than one year. Examples of current liabilities are accounts payable, deferred revenue and the current portion of long-‐term liabilities. Accounts payable represent claims of other businesses or institutions for goods and services. Deferred revenue is revenue, which has been received for services that will be supplied at a future date i.e., in the next fiscal year (such as collective tuition revenue before the term starts). The current portion of long-‐term debt is the amount an institution expects to pay during the current year. Examples of non-‐current liabilities long-‐term debt, which consists of bonds, notes and capital leases as well as compensated absences and post-‐retirement health benefits. Compensated absences are liabilities for vacation and sick leave.
Figure 8 shows the total liabilities and deferred inflows for the University, which are also shown in Table 3. Between 2001 and 2002 the liabilities of the University increased significantly from $76 million to $125 million. From 2002 through 2005 liabilities declined. In 2006, there was a substantial increase in liabilities followed by a smaller increase in 2007, raising total liabilities and deferred inflows to $144.1 million. In 2008 and again in 2009 total liabilities and deferred inflows declined. In 2010, there was a sharp increase in liabilities followed by a more modest increase in 2011. Over the two-‐year period, from 2009-‐2011, liabilities and deferred inflows increased from $140.3 million to $180.5 million, an increase of $40.2 million. From 2011 through 2014 total liabilities and deferred inflows increased from $177 million to $320.3 million.
The current liabilities for Oakland University have fluctuated and did not changed significantly between 2001 and 2009. However, since 2009 current liabilities have been trending upward. In 2009 current liabilities were $30.9 million. Since then they have risen every year and in 2014 reached $68.3 million. Most of the increase is due to changes in accounts payable and accrued expenses and in 2013 and 2014 there was also a significant increase in deferred revenue and student fees.
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Despite the recent increase in current liabilities, most of the movement total liabilities is explained primarily by changes in non-‐current liabilities. Between 2001 and 2002 the long-‐term liabilities of the University nearly doubled, increasing from $50.3 million to $95.9 million, due largely to increased borrowing. Over the next three years the long-‐term liabilities of the University declined. In 2006, again the University increased its debt, which explains the increase in non-‐current liabilities. In 2007, there was a small increase in non-‐current liabilities, which appears to be due largely an increase in deferred revenue.
In 2008, the University started reporting postemployment benefits as being
separate from other long-‐term liabilities. The liability for post-‐employment benefits has risen each year from $1.4 million in 2008 to $9.4 million in 2014, an average annual increase of 36.7% per year. Non-‐current liabilities decreased by about $0.5 million in 2008 due a decline in deferred revenue.
In 2009, non-‐current liabilities declined by about $1.5 million due to declines
in deferred revenue and long-‐term liabilities, although some of these declines were offset by an increase in liabilities related to postemployment benefits. Between 2009 and 2011, non-‐current liabilities increased due almost entirely to an increase in long-‐term liabilities. The University’s debt declined about $3.4 million but this was partially offset by a $2.2 liability for early retirement. There was also a $1.5 million increase in the liability for post-‐employment benefits.
In 2012 non-‐current liabilities decreased to $134.9 million due to s decline in
long-‐term liabilities. However, in 2103 non-‐current liabilities jumped to $249.8 million due to increased borrowing and then fell slightly to $247.1 million in 2014.
$-‐ $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000
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Figure 8 Total LiabiliRes and Deferred Inflows
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Table 3 Liabilities and Deferred Inflows
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014 LIABILITIES CURRENT LIABILITIES: Accounts payable and accrued expenses $7,365 $10,190 $15,960 $22,729 $21,447 $36,710 Accrued payroll $7,765 $8,015 $9,510 $9,349 $8,748 $7,895 Long-‐term liabilities-‐current portion $3,021 $3,711 $4,535 $4,898 $6,588 $7,462 Deferred revenue and student fees $11,544 $10,251 $9,652 $9,998 $13,711 $14,585 Deposits $1,211 $1,382 $1,352 $1,426 $1,598 $1,676 Total current liabilities $30,906 $33,550 $41,008 $48,401 $52,092 $68,328 NONCURRENT LIABILITIES: Deferred revenue $2,105 $1,363 $804 $596 $381 $115 Long-‐term liabilities $104,360 $134,120 $132,051 $127,730 $241,608 $237,552 Other postemployment benefits $2,995 $3,729 $4,504 $6,177 $7,818 $9,397 Total non-‐current liabilities $109,461 $139,212 $137,359 $134,504 $249,806 $247,063 Total liabilities $140,366 $172,762 $178,367 $182,905 $301,897 $315,391 Deferred inflows of resources $4,259 $2,161 $8,689 $4,314 $4,881 Total Liabilities & Deferred Inflows $140,366 $177,021 $180,528 $191,594 $306,212 $320,273
Table 4 shows the long-‐term liabilities of the University. These long-‐term liabilities consist of both the current and non-‐current portions of long-‐term liabilities. Figure 9 shows the long-‐term debt for the University that accounts for the largest portion of long-‐term liabilities. The debt consists of bonds, notes and capital lease obligations. The debt is slightly smaller than the long-‐term liabilities shown in Table 1 because long-‐term liabilities while including debt also include compensated absences and the Federal portion of the Perkins loan program.
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Clearly, the University increased its debt between 2001 and 2002. From 2002 through 2005 the debt of the University decreased. Then in 2006 the University’s debt increased from $89.1 million to $108.9 million. Between 2006 and 2009 the University again reduced its debt. Then in 2009 the University borrowed $33.6 million increasing its debt to $131.4 million. In 2011, there was a modest decrease in debt and the University ended the fiscal year with $127.9 million in outstanding debt. In 2013, the University received $138.1 million in proceeds from the issuance of new debt. However, the total increase in debt from 2012-‐2013 was $116.1 million, so approximately $22 million was used to refinance previously existing debt. This debt was used primarily to finance construction of Oak View Hall and a new engineering center. Figure 9 shows the debt of the University.
Table 4 Long-‐term Liabilities
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014 Debt $100,418 $131,361 $127,902 $124,270 $240,393 $234,923 Other Long-‐Term Liabilities $6,962 $6,470 $8,684 $8,359 $7,803 $10,091 Total Long-‐Term Liabilities $107,381 $137,831 $136,586 $132,629 $248,196 $245,014
$-‐ $50,000 $100,000 $150,000 $200,000 $250,000 $300,000
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Figure 9 Total Debt
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Table 5 shows the level of debt and the principal and interest payments associated with that debt. Principal payments can fluctuate dramatically. For example, in 2004 the University made principal payments of $2.7 million and then the following year made principal payments of $34.9 million. There was also a large jump in principal payments in 2008 and again in 2013. In all of these cases, the large increase in principal payments was due to a refinancing of the University’s debt, presumably to take advantage of lower interest rates. This clearly explains the lower interest payments in 2009. In all likelihood, the refinancing in 2005 also probably lowered interest payments below what they would have been, although total interest payments increased. The increase was probably the result of the increased debt taken on by the University in 2006.
In 2010 interest payments declined to $3.5 million and then increased to $4.5
million in 2011. Interest payments were $4.3 million in 2012 and then jumped to $7 million in 2013. This jump was most like related to the refinancing associated with the large principal payment. Interest rate swaps that are terminated can require the payment of a fee and that probably explains the spike in interest payments. In 2014 interest payments were $4.1 million.
Table 5 Debt and Debt Service
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014 Debt $100,418 $131,361 $127,902 $124,270 $240,393 $234,923 Principal Paid on Capital Debt $2,857 $2,952 $3,704 $3,865 $26,157 $4,708 Interest Paid on Capital Debt $5,450 $3,519 $4,583 $4,343 $7,049 $4,068 Total Principal & Interest Paid $8,307 $6,470 $8,287 $8,208 $33,207 $8,776
One way of assessing the impact of increased debt on an institution is to look
at the ratio of debt to total revenue. As long as debt does not rise faster than total revenue then increased levels of debt should not require any reallocation of resources, other things remaining equal. Figure 10 shows the ratio of debt to total revenue. There was an increase in debt to total revenue in 2002 and another in 2013. After the increase in the ratio in 2002 the ratio stabilized, fluctuating up and down until 2013. The ratio did decline in 2014 but it remains to be seen whether it will continue to decline or remain at a permanently higher level.
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Figure 11 shows several key ratios for the years 2001-‐2014. These key ratios are also reported in Table 6. First is the ratio of current assets to current liabilities.
Current assets consist of unrestricted cash and cash equivalents, inventories,
receivables and pledges due within a year, investments that mature within one year and other short-‐term assets. Assets, such as restricted cash and cash equivalents and restricted investments, unrestricted investments that mature in more than one year, receivables and pledges deemed collectable in more than one year and plant and equipment are non-‐current assets.
Current liabilities are all liabilities payable within one year as well as
deferred revenues, which consist primarily of tuition collected in one fiscal year that pay for services offered in a subsequent fiscal year. Liabilities that are not due during the current year are non-‐current liabilities.
Table 6 Asset to Liability Ratios For year ending June 30
2009 2010 2011 2012 2013 2014 Current ratio 1.84 2.84 1.37 1.52 3.55 1.35 Total assets to total liabilities 2.41 1.87 2.12 2.51 1.46 1.92 Long-‐term assets to debt 3.08 2.84 2.97 3.13 2.36 2.43
0.000 0.100 0.200 0.300 0.400 0.500 0.600 0.700 0.800 0.900
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 10 RaRo of Debt to Total Revenue
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Perhaps with the exceptions of 2001, 2010 and 2013 the current ratio for
Oakland University has fluctuated in the normal range which is somewhere between 1.5 and 2.5. The spikes in the current ratios in the aforementioned years were due to temporary increases in cash holdings. Generally these increases have been associated with the issuance of debt. The relatively high ratio in 2010 was due to an increase in cash resulting from the issuance of debt and this was also the case in 2013.
A current ratio of 1.35 implies that the University has current assets to cover
135 percent of its current liabilities. There is no exact target for a current ratio although clearly the number should be greater than one and not much greater than two. It should be noted that too large a current ratio imposes an opportunity cost on a university.
Another indicator of financial health is the ratio of fixed assets to long-‐term
debt, which is also shown in Figure 11. This ratio declined from 3.39 in 2001 to 2.28 in 2002 and then rose until 2005. In 2005, the ratio of fixed assets to long-‐term debt was 2.48. In 2006 the ratio declined to 2.06 large due to increased borrowing. In 2007, the ratio increased to 2.21 and in 2008 it was 2.22. In 2009, the ratio increased to 2.26, which is fairly close to the 2002 ratio. In 2010, the ratio of fixed assets to long-‐term debt dropped to 1.78, because the University issued more debt and there was a relatively small increase in the value of fixed assets. In 2011, the ratio rose to 1.98, reflecting the increase in fixed assets and a decline in debt. In 2012 the ratio increased to 2.51 and then fell dramatically to 1.46 in 2013 before rebounding a little to 1.92 in 2014.
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
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Figure 11 RaRos of Assets to LiabiliRes
Current ra4o
Ra4o of Fixed Assets to Long-‐Term Debt Ra4o of Total Assets to Total Liabili4es
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Finally, Figure 11 also shows the ratio of total assets to total liabilities. This ratio declined from 3.52 to 2.68 between 2001 and 2002. Between 2002 and 2005 the ratio increased reaching approximately 3.13 in 2005. In 2006, the ratio of assets to liabilities declined reaching 2.90. Between 2006 and 2009 the ratio rose reaching 3.08 by the end of 2009. The ratio fell to 2.81 in 2010 and then rose to 2.97 in 2011. The ratio of assets to liabilities increased in 2012 and then fell in 2013 but rebounded to 2.43 by the end of 2014.
Total Net Assets
In for profit businesses, the difference between assets and liabilities is
referred to as owner’s equity or stockholder’s equity. In theory, if a business were to sell off all of its assets and pay off all claims against the business, the amount remaining would be the owner’s claims on the business’s resources. In a non-‐profit organization, the difference between assets and liabilities are referred to as net assets. Since net assets are the difference between assets and liabilities, they represent the wealth of an institution. Therefore, net assets are an important indicator of the financial health. In the past, these net assets were referred to as fund balances. There are three general categories of net assets:
1. Net Assets Invested in Capital Assets 2. Restricted Net Assets (these are often broken down into expendable and
non-‐expendable net assets; see below for a discussion). 3. Unrestricted Net Assets
Net assets represent the net accumulation of a university’s assets over a period of time. Large portions of these net assets consist of the value of land, buildings, books and journals and equipment owned by the university or college. Universities and colleges are required to show accumulated depreciation on their balance sheets for certain real assets such as buildings and some equipment. An increase in net assets means that a university has increased its wealth and conversely a decrease in net assets implies that a university’s wealth has decreased. Figure 9 shows the growth of total net assets from 2001 through 2011.
Wealth can be divided into two categories: financial net assets or tangible net assets. Financial assets are pieces of paper that represent ownership or claims on tangible assets outside of the university. Examples of tangible assets are the land, buildings, equipment and library books own by a university or college. A university or college’s wealth can increase either because it has more real assets or because it has more financial assets. In many cases, the purchase of tangible assets is financed partially by state capital appropriations or by gifts. An increase in state capital appropriations or gifts for capital increases the wealth of an institution. However, the capital funds universities and colleges receive from the state or private donors are generally restricted and cannot be used for operations i.e., paying salaries and benefits.
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Table 7 Net Assets
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014 Invested in capital assets, net of related debt $142,649 $145,976 $151,829 $193,687 $210,637 $236,419 Restricted nonexpendable $15,662 $16,836 $18,057 $18,726 $19,735 $23,430 Restricted expendable $38,699 $36,903 $39,818 $35,302 $41,061 $44,791 Unrestricted $94,659 $121,366 $145,793 $145,330 $147,855 $154,199 Total Net Position $291,669 $321,081 $355,495 $393,046 $419,288 $458,839
In addition, to these tangible assets, universities and colleges also own financial assets such as stocks and bonds, CDs and mutual funds. Finally, universities also generally hold small amounts of cash and money in checking and savings accounts.
The net assets of the University are also shown in Table 7 and in Figure 12.
In the past, these net assets were referred to as fund balances. There has been a significant increase in the net assets of the University. Net assets increased from $192.4 million in 2001 to $458.8 million in 2014, an average annual increase of 6.9%.
If an increase in total net assets is exclusively due to increases in the value of
land, buildings and equipment, the increase in wealth while real, does not give a university or college added flexibility with respect to operations. Once a university or college invests money in its physical plant it is unusual for it to sell that asset. If a university or college changes its priorities and accordingly wishes to change its asset allocation it would most likely reallocate its non-‐plant assets. Thus, liquid net assets also are an indication of how well a university or college can react to unforeseen financial emergencies. Moreover, the rate of increase in liquid net assets reflect certain spending priorities at an institution. The term liquid refers to the ease with which an asset can be converted into cash.
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Figure 13 shows the University’s net assets excluding investment in plant i.e.,
liquid net assets. In 2001, Oakland University had liquid net assets of $56.2 million. Liquid net assets increased between slightly in 2002 and 2003 and then increased more rapidly in through 2008. By the end of 2008, Oakland University had liquid net assets of $148.8 million. Between 2008 and 2009 liquid net assets increase by only $252,529 so that liquid assets remained essentially flat. In 2010 and 2011 liquid net assets were up sharply, increasing from $149 million at the end of 2009 to $203.7, by the end of FY 2011. In 2012 there was a small decrease in liquid net assets and then liquid net assets increased in the next two years, ending 2014 at $222.4 million. Since 2001 liquid net assets have increased at an average annual rate of 11.2%.
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Figure 12 Net Assets
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Figure 13 Liquid Net Assets
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Restricted and Unrestricted Net Assets Restricted net assets are assets net of related liabilities held by the University that are designated for specific purposes by external entities, either government agencies or private donors. Unrestricted net assets are funds that can be spent at the discretion of the institution. Clearly, unrestricted net assets give universities more flexibility than restricted net assets. However, one should not assume that just because an asset is restricted that it cannot be used for reallocation. For example, a university may be spending a significant amount of unrestricted funds on scholarships and then replace that funding with endowed scholarships. In this case, there would be no change in unrestricted funds but there would be an increase in restricted funds. However, the unrestricted funds that were being used for scholarships have now been freed up and are available for reallocation.
Figure 14 shows the net assets divided into restricted and unrestricted funds. From 2001 to 2005 unrestricted net assets increased from $35.9 million to $67.8 million, an increase of 89 percent. Then between 2005 and 2008, unrestricted net assets increased $34.6 million, reaching a total of $102.3 million, an increase of 51 percent. In 2009, unrestricted net assets declined to $94.6 million. Then in 2010 unrestricted net assets increased to $121.3 million and in 2011 they reached $145.8 million. In 2012, there was a slight decrease in unrestricted net assets but by the end of 2014 unrestricted net assets had reached $154.2 million.
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Figure 14 Restricted & Unrestricted Net Assets
Restricted Unrestricted
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An institution can use unrestricted assets for any lawful purpose. Many universities, including Oakland University, report that the Board of Trustees or management has designated most unrestricted net assets for specific purposes. Some of these designations may result from funds being collected by special fees. Other designations simply reflect the strategic goals of decision makers at an institution. Whether a designation is associated with a special fee or not, all designations are always a matter of Board or administrative policy and therefore subject to change. Designations reflect the priorities of Board members or administrators. Table 8 shows board designated unrestricted funds.
The single largest designation for unrestricted net assets is for capital
projects and repair reserves. Between 2001 and 2014, unrestricted net assets, with this designation, have increased from $7.4 million to $54.3 million, an average annual increase of 16.5%. The next largest category is funds designated for departmental use, which increased from $20 million to $28.9 million in 2014. Funds designated to function as endowment declined to $17.9 million by the end of 2014. Interestingly, in 2011 this category of designated funds was the second largest and now it is the fourth largest. It is also worthwhile to note that in 2012 there was a significant decline in institutional reserves and in the following year a decline in funds functioning as endowment and an increase in institutional reserves. Although it is impossible to tell from simply looking at the designations whether money is transferred back and forth between categories it is certainly a possibility. The bottom line however, is that all of these funds are unrestricted.
Table 8 Designated Net Assets
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014
Auxiliary Enterprises $3,717 $5,325 $8,337 $9,457 $3,728 $3,222 Capital projects & repair reserves $27,869 $36,902 $40,368 $57,729 $54,361 $54,270 Funds designated for departmental use $20,000 $20,462 $24,539 $25,264 $29,282 $28,926 Funds functioning as endowment $18,794 $22,021 $26,907 $26,545 $16,078 $17,929 Institutional reserves $6,010 $17,004 $27,286 $18,808 $23,619 $27,705 Retirement and insurance reserves $(1,367) $(2,009) $(3,006) $(4,960) $6,280 $8,019 Encumbrances and carry forwards $5,241 $8,490 $9,053 $9,016 $11,178 $12,765 Other unrestricted $14,395 $13,171 $12,309 $3,471 $3,329 $1,363 Total unrestricted $94,659 $121,366 $145,793 $145,330 $147,855 $154,199
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There is nothing inherently wrong with designating unrestricted funds;
however, faculty may believe that designating fewer funds for a given purpose is a better use of resources. The point that faculty need to understand is that current policies with respect to unrestricted net assets reflect the priorities of the governing board and/or management and may not reflect the priorities of faculty. While faculty cannot collectively bargain over the specific designation of unrestricted net assets, collective bargaining can cause the governing board or management to change its priorities resulting in the reallocation of these funds.
Expendable and Non-‐Expendable Net Assets: In addition to dividing net assets between restricted and unrestricted, net assets can also be categorized as expendable or non-‐expendable. Expendable net assets consist of assets that legally could be used for operations or plant expenditures. Non-‐expendable net assets are funds that would not be spent for operations, for example the endowment fund. Quasi-‐endowments are funds that the Board of Trustees set aside to be used in the form of an endowment. These funds along with unrestricted plant funds are generally accumulated by transferring funds from current funds. As mentioned previously, these funds are available for the University to spend for any lawful purpose, which means that the University is not obligated to treat funds in a quasi-‐endowment as if they were an endowment nor are they obligated to spend designated plant funds on capital projects.
Table 8 shows the University’s quasi-‐endowment listed under the category of “Funds functioning as endowment.” In 2009 Oakland University had $18.8 million in quasi-‐endowments. In 2011, Oakland’s quasi-‐endowment reached $26.9 million. By the end of 2014, the value of funds designated in this category declined to $17.9 million. This decline more likely reflects changes in priorities than returns on investment. When it comes to endowment, Oakland University like many state universities had its endowment split. The University held some of the endowment and some was held in a private not-‐for-‐profit foundation. In 2006, the Foundation transferred nearly all of its assets and liabilities, about $8.7 to the University, so that the University now holds the entire endowment. This accounts for some of the increase in investment held by the University in 2006. In 2008, the University had an endowment of $50.5 million. The value of the endowment declined by about $10 million in 2009 leaving it at $40.5 million. In 2010, the endowment increased to $46.7 million and then grew to $56.9 million in 2011. In 2012 the value of the endowment fell slightly to $55.5 million and then increased in the following two years having value of $80.6 million at the end of 2014.
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Table 9 shows expendable and non-‐expendable net assets. Both expendable
and non-‐expendable net assets at the University have generally trended upward over the period from 2001 to 2014. The increase in expendable net assets flattened out in 2009 and then increased dramatically in both 2010 and 2011. Figure 15 shows expendable and non-‐expendable net assets.
The jump in non-‐expendable net assets in 2006 was due to the transfer of
funds from the University’s foundation to the University. Non-‐expendable net assets, which were flat before 2006, increased from 11.6 million to 15.6 million between 2006 and 2009. In 2010 and 2011, non-‐expendable net assets increased to $16.8 million and $18.1 million respectively. Non-‐expendable net assets increased in 2012, 2013 and 2014. By the end of 2014 they stood at $23.4 million.
Expendable net assets have increased from $51.4 million to $133.8 million
between 2001 and 2008. In 2009, expendable net assets decreased by nearly a half million dollars ending up at $133.4 million. In 2010, expendable net assets jumped to $158.3 million and then to $185.6 million in 2011. In 2012 expendable net assets decreased ending the year at $180.6 million. In the following two years expendable net assets increased and at the end of 2014 were $199 million.
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Figure 15 Expendable & Non-‐Expendable Net Assets
Expendable Non Expendable
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Table 9 also shows two ratios that are commonly calculated as indicators of financial health. The first is known as the viability ratio, which is the ratio of expendable net assets to long-‐term debt. After declining sharply between 2001 and 2002, the viability ratio rose between 2002 and 2005. The viability ratio declined by a moderate amount in 2006 and then rose in 2007, 2008 and 2009. In 2010, the viability ratio dropped to 1.2, despite the rise in expendable net assets. The main reason for this decline was the increase in the University’s debt. In 2011, the viability ratio increased to 1.45. In 2012 the viability ratio remained at 1.45 and then dropped significantly to 0.79 in 2013 before rising to 0.85 in 2014.
The main reason for the fall in the viability ratio in 2013 was the huge
increase in debt. A viability ratio of 0.85 means the University had sufficient expendable net assets to pay 85% percent of its debt. This viability ratio would be characterized as being neither high nor low. The changes in Oakland University’s viability ratio can also be seen in Figure 16.
Table 9 Expendable and Non-‐Expendable Net Assets
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014 Expendable Net Assets $133,358 $158,269 $185,610 $180,632 $188,916 $198,990 Non-‐Expendable Net Assets $15,662 $16,836 $18,057 $18,726 $19,735 $23,430 Liquid Assets $149,020 $175,105 $203,667 $199,358 $208,651 $222,420 Debt $100,418 $131,361 $127,902 $124,270 $240,393 $234,923 Operating Expenses & interest payments $209,715 $227,545 $235,198 $248,231 $263,961 $280,737 Ratios: Viability Ratio 1.33 1.20 1.45 1.45 0.79 0.85 Primary Reserve Ratio 0.64 0.70 0.79 0.73 0.72 0.71
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The second ratio presented in Table 9 is the primary reserve ratio, which
measures the ratio of expendable net assets to operating expenses. The primary reserve ratio is calculated by dividing expendable net assets by the sum of operating expenses and interest payments on long-‐term debt.
The primary reserve ratio was flat between 2001 and 2003 and then rose
sharply in 2004, 2005 and 2006. In 2007 and 2008 the primary reserve ratio continued rising, albeit at a slower rate. In 2009, the primary reserve ratio declined to 0.64. In 2010 and 2011 the primary reserve ratio increased reaching 0.79. Since 2011, the primary reserve ratio has trended down slightly and ending 2014 at 0.71.
A primary reserve ratio of 0.71 implies that the University has enough
expendable net assets to meet 71 % of its operating expenses or enough reserves to operate for about 8.5 months. So the decline in the primary reserve ratio from 0.79 to 0.71 means those reserves have declined from 9 months to 8.5 months, a relatively small decline. Figure 17 shows the changes in the primary reserve ratio.
0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 16 Viability RaRo
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In summary, in 2011 Oakland University had total net assets (net position) of $458.8 million with $222.4 million in liquid assets. These liquid assets were divided between $199 million in expendable funds and $23.4 million in non-‐expendable funds. In general, an analysis of the University’s Statement of Net Assets suggests that between 2011 and 2014 the University’s balance sheet has weakened but is still fairly strong.
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Figure 17 Primary Reserve RaRo
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The Income Statement
The second major financial statement is the statement of revenues, expenses
and changes in net assets or the statement of activities. This financial statement shows how the a college or university’s finances are changing over a period of time, namely a fiscal year that normally runs from July 1 to June 30 of the following year. Again, fiscal years are always associated with the calendar year in which the fiscal year ends. So for example, from July 1, 2013 to June 30, 2014 is known as fiscal year 2014. This statement deals with flows and measures how the college or university’s revenues and expenses are changing over time. Figure 18 shows the basic structure of the statement of revenues, expenses and changes in net assets.
Figure 18. There are two ways of keeping track of revenues and expenses. The cash method
is the one most of us are familiar with. Using the cash method if a paycheck were deposited in a person’s checking account on January1, 2014 for work done in December of 2013, it would have been considered income for 2014. Similarly if a person purchased a good or service and paid for it in December 23, 2013 but the good or service delivered on January 5, 2014 it would have been considered an expense incurred in 2013.
Opera4ng Revenues
Opera4ng Expenses
Opera4ng Loss
Non-‐opera4ng revneues and expenses
Income (loss) before other revenue
Other Revenue
Change in Net Assets
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Most businesses, including universities, account for revenues and expenses, using the accrual method of accounting. This means they book revenues and expenses in the year the good or service is delivered, which may differ from the year when cash is received. For example, a paycheck received on January 1, 2014 for work performed in December of 2013 would count as revenue in 2013. Similarly, the expense paid for in 2013 for a service delivered in 2014 would count as an expense in 2014, because that is when the good or service was delivered. Accrual accounting is used because it provides a more accurate picture of a university’s financial situation.
Revenue is the inflow of resources to a university for the services it provides.
Revenues at public universities are divided into “operating revenues” and “non-operating” revenues. Operating revenues come primarily from student tuition and fees. Other sources of operating revenues are grants and contracts, sales, and auxiliaries. Sales occur when a university provides some sort of a service to the community and charges for offering that service. Auxiliaries are operations that generate revenue that are unrelated to the core mission of a university such as parking, intercollegiate athletics, running a student union, food service or running a bookstore.
Non-operating revenues include state appropriations, gifts and investment income.
Recently, GASB has started counting Pell Grants as non-operating revenue, so at a number of institutions it appears that operating revenue from Federal grants declined. However, this reclassification has no effect on a university’s bottom line; it simply involves moving a portion of federal grants and contracts to another section of the income statement (Statement of Revenues, Expenses and Change in Net Position).
When looking at investment income great care must be taken. Investment income
includes interest and dividends but it also includes capital gains and losses. Investments are valued at “fair market” value, which means when stock or bond prices go up the value of an institution’s investments go up and when stock or bond prices go down the value of an institution’s investments go down. In most cases, large swings in the value of investments are due to unrealized gains or losses, meaning that they are paper gains or losses. For that reason, when calculating “net income” for universities many bond rating services subtract the value of investment income and add 4% of the value of investments taken over a three-year rolling period. These paper gains or losses are often quite large, but they do not give us any insight into the financial operations of an institution.
Expenses for the most part represent an outflow of resources from a university (costs incurred). There are operating and non-operating expenses. Operating expenses include instructional expenses, expenses for public service, administrative services such as academic support and institutional support, plant operations and maintenance, scholarships and fellowships, expenses for auxiliary operations and depreciation. Operating expenses can be listed by functional categories such as those discussed above or they can be listed as natural categories such as wages and benefits or purchases of goods and services. It is often the case that the “natural classification,” which contains personnel costs, are not reported in the main financial statements, but are reported in the notes to the financial statements. Non-operating expenses consist primarily of interest paid on debt.
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The difference between operating revenues and operating expenses is known as the operating loss. In publicly funded or assisted colleges the difference between operating revenues and operating expenses will always be negative. This is because public institutions of higher education rely on state appropriations and Pell grants, which are not counted as part of operating revenue. This is simply an accounting quirk. If an administrator claims that a university is running an operating loss, faculty members should be aware of the fact that virtually all public institutions run operating losses and these losses, in and of themselves, are meaningless. The difference between non-operating revenues and non-operating expenses is known as net non-operating revenues. The sum of operating losses and net non-operating revenues is known as income (loss) before other revenue and can be thought of as “net income.” Net income can be an important indicator of how well a university is performing financially. However, there are three other major sources of revenue for universities. These are capital appropriations, capital grants and gifts and additions to permanent endowments. These sources of revenue are restricted and either the corpus (principal) cannot be spent or the funds are earmarked specifically for capital projects and as such cannot be used to support salary and benefits directly. Nevertheless, when colleges receive capital appropriations and gifts, it frees up funds generated through operations which otherwise would have to be used to support capital projects. Therefore, funding for capital projects, whether by state appropriation or by gift, is an important source of revenue.
Unfortunately, capital appropriations and gifts tend to be lumpy (high in some years, very small in others) and so it may be difficult to count on them as part of a regular revenue stream. However, most universities have a fairly good idea of a certain minimum level of increases in their permanent endowment as well as capital appropriations and gifts and can factor these revenues into their spending plans. The sum of Income (losses) before other revenue (“net income”) along with capital appropriations and gifts and increases to permanent endowment is equal to the increase or decrease in net assets. The change in net assets is in effect the bottom line for a college in a given year. If there is an increase in net assets the flow of revenue into the university has been greater than expenses and if there is a decrease in net assets the university has experienced a loss. A final issue that demands our attention in trying to understand revenues and expenses is the treatment of non-cash expenses such as depreciation. Historically (pre GASB-34), universities did not account for depreciation of fixed assets. Therefore, at the end of a fiscal year if revenues and other additions exceeded expenditures, universities experienced an increase in “fund balances.” An increase in fund balances was the equivalent to an increase in net assets except that net assets also account for depreciation.
When colleges or universities purchase a fixed asset that will be used over a long period of time, the amount of money they spend on construction is not considered an expense on the income statement. What universities do is to break up the money they
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spend on construction and renovation by allocating that expenditure over a fixed period of time. The amount of time depends on the particular type of asset being purchased. The expenditure on a building is typically allocated as an expense over a 30-year period. The allocation of this expenditure over a period of time is known as depreciation. Thus, depreciation is a way of allocating the cost of fixed assets over the useful life of those assets. It is an expense and therefore it reduces the net assets of a university.
Each year when a college or university calculates the value of its net assets
invested in plant and equipment is subtracts the depreciation for that year. The sum of all the depreciation that has been subtracted is known as accumulated depreciation. Often people have the impression that depreciation is a way of funding future investments i.e., that accumulated depreciation somehow represents a savings account or reserves for future investments and the use the term “funding depreciation.” There is no such thing as funding depreciation. It is the case, that colleges and universities can set aside unrestricted funds that are designated for future investment in plant and equipment but this has nothing to do with depreciation per se.
To pay for new investments for-profit businesses, use retained earnings (reserves
accumulated from past profits), issue new stock to shareholders or borrowing by selling bonds. Like colleges and universities when they put up a new building there is a large expenditure of cash but again since the fixed asset is going to last a long period of time this large outlay of cash is not considered an expense. As is the case with a college or university, the business divides this expenditure over the useful life of the asset by depreciating the asset. Thus for a business depreciation is an expense, which reduces its net income. Since there is a relationship between expenses on the income statement and liabilities on the balance sheet, whenever expenses go up there will be an increase in liabilities and hence a decline in net assets.
However, in the case of a university, whether this diminution of net assets
represents a real decline in the wealth of an institution, in the same way as it represents a decline in wealth in a for-profit company, is questionable. The main difference between the way capital is financed in universities and in for-profit businesses is that universities receive a portion of the cost of purchasing capital assets from state capital appropriations and from private gifts. In that sense, one could argue that depreciation overstates the cost of capital assets for universities in comparison to for-profit businesses.
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Other non-cash expenses can also distort the actual health of an institution. In a for profit business it is more important that any post-retirement benefits be funded by assets. Post-retirement benefits are a liability because a business or institution has promised to pay these benefits in the future. As long as the benefits are not too large relative to overall expenses and the institution or business continues to exist it can meet its obligations from current expenses. This is a pay as you go situation. However, if a business or institution were to go bankrupt having not set aside sufficient assets to meet future claims (liabilities) then retirees would loses some or all of their retirement benefits. However, no public institutions of higher education have gone bankrupt since they started offering post retirement benefits and many have post-retirement benefits that are totally unfunded i.e., no assets have been set aside to meet future obligations. Forcing public institutions to abandon pay as you go is simply a pretense for cutting public pensions and post retirement health benefits.
Total Revenue and Total Expenses
Table 10 shows the consolidated position of the University for the years 2009-2014. Figure 19 shows total revenue and total expenses for the University. (The lower end of the graph has been scaled to start at $150 million to make it easier to see the distinct lines in the graph). Total revenue has risen every year, except for 2003 and 2005. Total expenses increased every year except 2004. In general total revenues exceed total expenses.
$150,000
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2006
2007
2008
2009
2010
2011
2012
2013
2014 Th
ousand
s
Figure 19 Total Revenue and Total Expenses
Total Revenue Total Expenses
35
Revenue
Revenues for Oakland University are shown in Table 10. In 2001 total operating revenues were $91.7 million and in 2014 they were $212.2 million, an average annual increase of 6.7%. The most important source of operating revenue is tuition and fees. The tuition and fee shown in Table 10 are net of scholarships. In 2001 tuition was $52.1 million and in 2014 it had risen to $165.8 million, an average annual increase of 9.3%.
Under GASB 34 & 35 state appropriations are not treated as operating revenue, although clearly they are one of the most important sources of revenue to fund the operations of a state university. In 2001, state appropriations were just slightly larger than tuition and fees at $52.9 million. However, by 2004 state appropriations had declined to $46.6 million. In 2005 and 2006 there were increases in state appropriations, but in 2007 state appropriations fell to $46.6 million. Then in 2008, state appropriations increased by more than $10 million, surpassing the 2001 level of state appropriations for the first time. However, this increase reflected in part a $4.8 million payment for state appropriation that was originally appropriated in 2007 but the state delayed payment, giving this money to the University in 2008. In 2009, state appropriations declined by $4.2 million, ending up at $52.5 million. In 2010, state appropriations declined another $1.7 million and in 2011 state appropriations were essentially unchanged. In 2012, state appropriations plunged to just $43.1 million before increasing to $45 million in 2013 and $45.6 million in 2014.
In 2001 for every dollar in tuition and fees collected the University it
received $1.01 in state subsidy. By 2011, state appropriations were no longer the largest source of revenue and for every dollar collected in tuition and fees the University only received $0.37. By 2014, for every dollar collected in tuition, the University received on $0.28. Figure 20 shows the decline in state support.
36
Another important source of revenue for the University are Federal grants
and contracts, which increased from $10.2 million in 2001 to $13.3 million in 2006. Then in 2007 Federal grants and contracts decline to $7.4 million before rebounding slightly in 2008 to $8.1 million. This decline in Federal grants, however, is deceptive because a significant portion of what had been classified as Federal grants was reclassified as non-‐operating revenue. Under a change in accounting rules, universities now classify Pell grants as non-‐operating revenue. If one combines Pell grants with other Federal grants and contracts then Federal grants and contracts declined by just about a half million dollars in 2007 and increased in both 2008 and 2009. In 2009, combined Federal grants and contracts along with Pell grants were $18.2 million. In 2010, Federal grants and Pell grants combined increased to $27.5 million and in 2011 these combined categories reached $34.6 million. Since 2011, Federal grants and contracts have decline and Pell grants flatten out so that be 2014 the total of Federal grants and contracts plus Pell grants was equal to just $30.5 million, a decline of 11.8%.
Another important source of revenue was revenue from auxiliary operations.
However, in between 2009 and 2011 revenue from auxiliary operations was fairly flat. However, since 2011 auxiliary revenue has increased from $22.6 million to $24.9 million an increase of 10.1%.
$-‐
$0.20
$0.40
$0.60
$0.80
$1.00
$1.20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 20 Dollars in State Support per Dollar of TuiRon
37
Table 10
Revenues, Expenses and Change in Net Position Thousands of $
For year ending June 30 2009 2010 2011 2012 2013 2014 Tuition and fees $119,397 $130,318 $137,613 $149,095 $155,967 $165,846 Federal grants and contracts $9,968 $11,168 $14,524 $11,824 $10,215 $8,968 State, local and private grants and contracts $6,196 $3,912 $3,244 $3,412 $4,180 $4,455 Departmental activities $5,384 $5,229 $5,470 $5,998 $8,664 $7,815 Auxiliary activities $21,261 $21,304 $22,598 $23,424 $24,113 $24,888 Other operating revenues $428 $430 $418 $269 $249 $249 Total operating revenues $162,633 $172,360 $183,868 $194,022 $203,388 $212,221 Operating expenses Instruction $90,732 $93,405 $99,012 $104,180 $110,296 $114,260 Research $7,148 $8,230 $9,531 $11,253 $10,297 $9,081 Public service $2,289 $3,303 $2,943 $3,709 $4,251 $4,616 Academic support $15,850 $17,099 $19,127 $20,589 $28,066 $30,212 Student services $15,977 $16,641 $17,368 $18,604 $28,381 $28,104 Institutional support $27,280 $28,600 $28,752 $32,583 $23,345 $24,759 Operation and maintenance of plant $17,377 $17,741 $17,891 $18,877 $21,021 $20,056 Depreciation $12,123 $11,913 $12,040 $12,556 $13,710 $15,255 Student aid $10,659 $11,225 $12,888 $13,211 $13,127 $13,719 Auxiliary activities $23,323 $22,766 $23,743 $23,872 $22,437 $22,497 Other expenditures $12 $18 $16 $13 $17 $19 Total operating expenses $222,771 $230,941 $243,312 $259,445 $274,948 $282,579 Operating Loss $(60,137) $(58,581) $(59,444) $(65,424) $(71,560) $(70,358)
38
Table 10 Continued Revenues, Expenses and Change in Net Position
Thousands of $ For year ending June 30
2009 2010 2011 2012 2013 2014 Non-‐operating revenues (expenses) State appropriations $52,452 $50,691 $50,761 $43,145 $44,964 $45,652 Gifts $19,076 $4,126 $4,295 $5,806 $4,853 $9,650 Investment income (net of investment expense) $(12,552) $17,884 $20,879 $1,471 $14,685 $22,358 Interest on capital asset related debt $(4,774) $(4,256) $(4,919) $(4,515) $(5,789) $(4,398) Pell grants $8,265 $16,366 $20,038 $21,037 $20,726 $21,517 Other $142 $135 $142 $147 $450 $565 Net non-‐operating revenues $62,609 $84,945 $91,196 $67,090 $79,889 $95,343 Net Income $2,471 $26,364 $31,752 $1,667 $8,329 $24,985 Capital appropriations $-‐ $-‐ $-‐ $30,427 $10,073 $10,770 Capital grants and gifts $13 $38 $1,497 $4,929 $7,674 $216 Additions to permanent endowments $688 $1,054 $1,226 $588 $965 $3,581 Total other revenues $701 $1,091 $2,723 $35,945 $18,713 $14,566 Increase in net assets $3,104 $27,395 $34,414 $37,550 $27,042 $39,551 Net Assets, beginning of year -‐ restated $290,583 $293,686 $321,081 $355,495 $392,246 $419,288 Net Assets, end of year $293,686 $321,081 $355,495 $393,046 $419,288 $458,839
Investment income can be fairly volatile. In some years when equity and bond prices rise rapidly investment income can also rise rapidly. When securities prices fall, investments can show a loss from the perspective of the income statement this is an expense. However, these gains and losses are for the most part unrealized gains and losses i.e., gains and losses on paper. A method for removing some of this volatility when trying to measure investment income is to smooth it by assuming a fixed rate of return on investments over time. In this report, we assume a 4.5% rate of return on investments. From 2001 to 2014 the total investment income of the University was $102.6 million. If the University had earned an average of 4.5% on its investments over this period its total investment income would have been $101.7 million, which is reasonably close to the actual investment income over this period. We refer to this as adjusted investment income.
39
The sources of revenue for the University are shown in are shown in Figure 21. Figure 21 clearly shows that tuition is an increasingly important source of revenue and that the importance of state appropriations has diminished over time.
The University still has a diversified base of revenue, although it has become less diversified over time and is now much more heavily dependent on tuition. One way of measuring the diversification of revenue is to look at the Herfindahl Index of income concentration. The Herfindahl Index is calculated as the sum of squared shares of revenue from each source. The index runs from 1/n to 1 where 1/n represents each source of revenue having an equal share and 1 would be when all revenue comes from a single source. The Herfindahl index can also be normalized as
follows: so that it varies between 0 and 1. Figure 22 shows the
normalized Herfindahl Index. The year 2009 seems to be a bit of an anomaly due to a large rise in gift
income. In general, however, the index has been rising, which means that the University’s sources of income are becoming more concentrated.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 21 Sources of Revenue
Adjusted Investment Income
State appropria4ons
Other opera4ng revenues
Gi?s
Auxiliary ac4vi4es
Departmental ac4vi4es
Grants & contracts
Tui4on and fees
H * =si2 −1 n
i=1
n
∑⎛⎝⎜⎞⎠⎟
1−1 n( )
40
Expenses Expenses for the most part represent an outflow of resources from a university (costs incurred). There are operating and non-‐operating expenses. Operating expenses include instructional expenses, expenses for public service, administrative services such as academic support and institutional support, plant operations and maintenance, scholarships and fellowships, expenses for auxiliary operations and depreciation. Operating expenses can be listed by functional categories such as those discussed above or they can be listed as natural categories such as wages and benefits or purchases of goods and services. It is often the case that the “natural classification,” which contains personnel costs, are not reported in the main financial statements, but are reported in the notes to the financial statements. Non-‐operating expenses consist primarily of interest paid on debt.
Operating expenses are also shown in Table 10. Overall, operating expenses
increased from $146.9 million in 2001 to $282.6 million in 2014. The largest single operating expense is for instruction. Spending for instruction increased from $57.9 million to $114.3 million, an average annual increase of about 5.4%. However, during this period enrollment grew at an average annual rate of 2.1% so spending on instruction after adjusting for enrollment increased at an average annual rate of 3.1%, which was probably not much above the average level of inflation for this period.
Using data from IPDES, Figure 23 shows instructional salaries as a percent of
total instructional spending. This data is only available from 2002 through 2013. However, the trend is unmistakable, and it shows that faculty salaries as percent of instructional spending are declining.
0.00
0.05
0.10
0.15
0.20
0.25
0.30
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 22 Normalized Herfindahl Index
41
Spending on academic support increased at an annual rate of 7.2 percent
from $9.6 million to $19.1 million. Between 2008 and 2011 spending for academic support increased by about $5.9 million, an increase of nearly 44.7 percent. Since 2011 spending on academic support has increased from $19.1 million to $30.2 million, an increase of 58%. Spending on institutional support increased at an average annual rate of 3.4% percent, going from $16 million in 2001 to $24.8 million in 2014.
There was also a substantial increase in spending on operation and
maintenance of plant, which rose from $10.3 million in 2001 to $20.1 million in 2014, an average annual increase of 5.2%. Spending on student aid has increased at an annual rate of 11.1 percent going from $3.5 million in 2001 to $13.7 million in 2014. Finally, auxiliary expenses actually decreased from 2001 through 2005 going from $20.9 million to $18.9 million, but then rose from 2005 through 2009 reaching $23.3 million. Since 2009 auxiliary expenses have remained flat.
Excluding depreciation, which is a non-‐cash expense, Figure 24 shows how
expenses are allocated at Oakland University. The largest single expense in both years is for instruction. In 2005 instruction accounted for 44.2% of expenses but this percent declined to 42.7% in 2014.
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Figure 23 InstrucRonal Salaries as a Percent of Total InstrucRonal
Spending
42
Spending on instruction relative to spending on academic support and institutional support, the two major categories of administrative spending, has shifted. Figure 25 shows the ratio of instructional spending to administrative spending.
0% 10% 20% 30% 40% 50% 60% 70% 80% 90%
100%
Figure 24 DistribuRon of Spending
Other expenditures
Auxiliary ac4vi4es
Student aid
Opera4on and maintenance of plant Ins4tu4onal support
Student services
Academic support
Research & Public Service Instruc4on
$1.70
$1.80
$1.90
$2.00
$2.10
$2.20
$2.30
$2.40
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 25 InstrucRonal v. AdministraRve Spending
43
In 2001 for every $1 spent on administrative spending the University spent $2.26 on instruction. This ratio rose to $2.33 by 2003. Since 2003 the ratio has trended down and was $2.08 in 2014. To see the impact of the shift from instructional to administrative spending, we calculated the additional dollars that would have been spent on instruction if the ratio had remained at its 2003 level. If the University had spent $2.33 on instruction for every $1 on administration the University would have spent an additional $4.1 million on instruction in 2014. Operating Losses The difference between operating revenues and operating expenses is known as the operating loss. At publicly funded or assisted universities, the difference between operating revenues and operating expenses will always be negative. This is because public institutions of higher education rely on state appropriations, which are not counted as part of operating revenue. This is simply an accounting quirk. If an administrator claims that a university is running an operating loss, faculty members should be aware of the fact that all public institutions run operating losses and these losses in and of themselves are meaningless.
The operating losses shown in Table 10 are purely artifacts of the GASB 34 & 35 reporting format. Virtually all state universities and colleges show an operating loss because state appropriations are not included with operating revenues.
0%
10%
20%
30%
40%
50%
60%
70%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Figure 26 OperaRng Loss as Percent of OperaRng Revenue
44
The operating loss was much larger in relative terms in 2001-‐2003 than it was from 2004-‐2009. In 2001 the loss was 60 percent of operating revenue. In 2004 the operating loss as percent of operating revenue fell to 36 percent has fluctuated between 34 and 39 percent. In 2009, the operating loss as a percentage of operating revenue was 37 percent. In 2014, operating losses as a percentage of operating revenue declined to 33 percent. Figure 26 shows operating losses as a percent of operating revenues. The decline in this percentage means that the University has been improving its performance.
Income (Loss) before Other Revenues The difference between non-‐operating revenues and non-‐operating expenses is known as net non-‐operating revenues. The sum of operating losses and net non-‐operating revenues is known as income (loss) before other revenue and can be referred to as “net income.” Net income can be an important indicator of how well a university or college is performing financially. Figure 27 shows the net income of the University.
In 2001 the University’s net income was $3.1 million. In each of the next two
years the University had losses of ($186,775) and ($398,852). In 2004, the University’s net income was $11.1 million and in 2005 it was $8.7 million. It appears as if the losses in 2002 and 2003 were caused by declines in investment income and declines in state support. The rebound in net income in 2004 and 2005 was due primarily to faster growth in revenue combined with slower growth in operating expenses, which substantially reduced the operating loss. Increased investment earnings in 2004 and 2005 also helped increase net income.
Net income in 2006 was slightly lower than 2005 at $10.6 million. Net
income rose in both 2007 and 2008 reaching $11.8 million in 2008. In 2009 there was a sharp drop in net income with net income falling to $2.4 million. As was the case in 2002 and 2003, the main factor in the decline in net income was a $12.5 million loss in investment income. (In a previous report this was reported as a $13.6 million loss as shown in the 2009 financial statements. However, this number was corrected in the 2010 financial statement and the loss was reported as being $12.5 million). This loss was due to a decline in the fair market value of investments and was essentially a paper loss. Over the next two years investment income rebounded and net income was reported at $26.4 million in 2010 and $31.7 million in 2011. In 2012 net income was 1.7 million but in 2013 it was $8.3 million and in 2014 it was $25 million.
45
Changes in the fair market value of investment, resulting in unrealized losses
and gains can cause significant fluctuations in investment income. Figure 18 “adjusted net income” presents an alternative measure of net income designed to reduce variation in net income, caused by fluctuations in reported investment income. Adjusted net income is calculated by taking 4.5 percent times the value of investments and using this adjusted investment income in place of the actual investment income. The 4.5 percent rate of return was chosen so that the average value of actual investment income was nearly equal to the average value of adjusted investment income over the period from 2001-‐2014. This has the effect of smoothing out fluctuations in investment income. In addition, $4.8 million was subtracted from revenue in 2008 and added to revenue in 2007 as part of the adjustment. This adjustment was made to correct for a delayed state appropriations payment of $4.8 million, which the University received in FY 2008.
$(10,000)
$-‐
$10,000
$20,000
$30,000
$40,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Thou
sand
s
Figure 27 Net Income
$-‐ $5,000.00 $10,000.00 $15,000.00 $20,000.00 $25,000.00
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Thou
sand
s
Figure 28 Adjusted Net Income
46
The adjusted net income shows low net income in 2001 and 2002 with a loss
in 2003. In 2004, there was a substantial increase in adjusted net income largely due to a reduction in operating expenses coupled with an increase in operating revenues. Adjusted net income increased in 2005 and was just slightly higher in 2006. In 2007, there was a decline in adjusted net income due largely to increases in operating expenses. In looking at the reported net income (see Figure 27), this drop in net income does not appear, because it was offset by investment income of $14.5 million. In 2008, adjusted net income rebounded slightly due to a 9 percent growth in operating revenue coupled with a 5 percent growth in operating expenses, which reduced the University’s operating loss by about $2.5 million.
In 2009, the University had a net income of $2.4 million, which included a
$12.5 million loss on investments and $19.1 in gift income. After adjusting for investment income and using the average level of gift income the adjusted net income for the University in 2009 was $6.8million. In 2010, the University had an adjusted net income $17.7 million and $20.8 million in 2011. Adjusted net income fell in 2012 and 2013 to $9.7 million and then 8.4 million respectively. In 2014 adjusted net income rose to $14.9 million. Changes in Net Assets In addition to the revenues discussed above, there are three other major sources of revenue for colleges and universities. These are capital appropriations, capital grants and gifts and additions to permanent endowments. These sources of revenue are restricted and either the corpus (principal) cannot be spent or the funds are earmarked specifically for capital projects and as such cannot be used to support salary and benefits directly. Nevertheless, when universities receive capital appropriations and gifts, it frees up funds generated through operations which otherwise would have to be used to support capital projects. Therefore, funding for capital projects, whether by state appropriation or by gift, is an important source of revenue.
Unfortunately, capital appropriations and gifts tend to be lumpy (high in some years, very small in others) and so it may be difficult to count on them as part of a regular revenue stream. However, most colleges and universities have a fairly good idea of a certain minimum level of increases in their permanent endowment as well as capital appropriations and gifts and can factor these revenues into their spending plans. Finally, another source of revenue that is included in the calculation of the change in net assets are transfers. The transfer of the Foundation’s resources to the University are shown as revenue but cannot be considered a regular source of revenue to the University.
47
The sum of Income (losses) before other revenue (“net income”) along with capital appropriations and gifts and increases to permanent endowment is equal to the increase or decrease in net assets. The change in net assets is in effect the bottom line for a university in a given year. If there is an increase in net assets the flow of revenue into the university has been greater than expenses and if there is a decrease in net assets the university has experienced a loss. A final issue that demands our attention in trying to understand revenues and expenses is the treatment of depreciation. Historically (pre GASB-‐34), colleges and universities did not account for depreciation of fixed assets. Therefore, at the end of a fiscal year if revenues and other additions exceeded expenditures colleges and universities experienced an increase in “fund balances.” An increase in fund balances was the equivalent to an increase in net assets except that net assets also account for depreciation.
Depreciation is an expense but it is a non-‐cash expense. Depreciation is a way of allocating the cost of fixed capital over the useful life of an asset. In theory, the cost related to the use of a fixed asset in a given year depends on the wear and tear on fixed assets. It is important for any business to take into account the cost of producing a good or service so that it can charge a price for the good or service that at a minimum covers the cost of production. However, unlike other expenses, depreciation does not involve making cash payments to some entity external to a college. When a college has an expense for wages or utilities it has to write a check to cover that expense which reduces a university’s cash holdings. When a college claims depreciation as an expense, it reduces its net income or the change in net assets on paper but there is no actual outflow of cash. One question that should be raised is whether depreciation in colleges and universities is a legitimate cost. Unlike private for profit businesses universities receive capital appropriations and gifts to fund renewal and replacement of assets. If the cost of a building is covered entirely by capital appropriations and gifts then there is no cost incurred by the university and so there is nothing to allocate. In contrast, for profit business, at least in theory, are supposed to fund renewal and replacement of assets without the assistance of government or private donors. Therefore in looking at the net income of universities one should probably discount depreciation as an expense.
48
Figure 29 shows the change in net assets for the University. In looking at the
data on changes in net assets one can see that changes were positive each year. In 2001, the University had a $12.6 million increase in net assets. This was followed by an increase in net assets of $18.5 million in 2002. In 2002, the main reason for the large increase in net assets was an $18.6 million capital appropriation from the state. In 2003, the University had a $4.3 million increase in net assets following by increases of $11.9 and $15.8 in 2004 and 2005 respectively. In 2006, the transfer of funds from the University’s Foundation drove the sharp increase in the change in net assets. In 2007 and 2008 the change in net assets was largely driven by net income since there were no substantial transfers and the University has not received a capital appropriation since 2005. In 2009, the decline in the change in net assets was driven by the loss in investment income and the change in net assets was $3.1 million. In 2010 and 2011 the change in net assets was $27.4 million and $34.4 million respectively. In 2012 the change in net assets was $37.5 million. It fell to $27 million in 2013 before rebounding to $39.6 million in 2014.
Margin Ratios
Figure 20 shows three margin ratios for the University from 2001 to 2014. The net income ratio is the ratio of net income to operating revenue and non-‐operating revenue. The second ratio is the net asset ratio, which is the ratio of the change in net assets to total revenue from all sources. The third ratio is the adjusted net income ratio that shows the ratio of adjusted net income to operating and non-‐operating revenue.
$-‐
$10,000
$20,000
$30,000
$40,000
$50,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Thou
sand
s
Figure 29 Change in Net Assets
49
The rates of return for the most part mirror the actual levels of income in
their patterns. All three ratios follow the same pattern with the exceptions of the net asset ratios in 2002 and 2006, which increased while the other two ratios decreased and the adjusted net income ratio, which increased in 2009. These anomalies were caused by the $18 million capital appropriation, which the University received in 2002, and the $8.7 million transfer from the University’s Foundation to the University in 2006 and the $13.6 million loss on investments in 2009.
The margin ratios increased dramatically in 2010 and 2011 before dropping
precipitously in 2012. Much of this decline was due to unrealized losses on investments. This is shown in the adjusted net income ratio, which while falling in in 2012 also fell in 2013. In 2014 all of the margin ratios were up.
Overall, looking at the statement of revenues, expenses and changes in net
assets we can see stable performance, but with some increased volatility compared to earlier years, especially the years between 2004 and 2008.
-‐2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Figure 30 Margin RaRos
Net Income Ra4o
Net Asset Ra4o
Adjusted Net Income Ra4o
50
The Cash Flow Statement The third financial statement is the statement of cash flows. Universities and
colleges use a system of accrual accounting, which means they book revenues when they earn them and book expenses when they are incurred. However, recognizing revenue is not always the same as collecting cash. For example a university may send a bill to a student for tuition but not immediately collect the money that is owed. This shows up on the university’s balance sheets as an increase in accounts receivable and is booked on the statement of revenues, expenses and changes in net assets as revenue. While the university shows an increase in revenue it does not actually have more cash. Hence the role of the cash flow statement is to show the inflows and outflows of cash. Looking at the Statement of Cash Flows one can see another picture of the flows of resources into and out of a university or college. The basic outline of the statement of cash flows is found in Figure 31.
Figure 31.
The Statement of Cash Flows at public colleges and universities has four
major components. First, cash flows from operations, which includes inflows in the form of tuition and fees, grants and contracts, sales and services and outflows in the form of payments to employees, suppliers and students. The second major component is cash flows from non-‐capital financing activities. The most important item in this category is state appropriations. Also now shown in this category are Federal direct lending receipts and Federal direct lending disbursements as well as gift and grants for non-‐capital purposes. Third are cash flows from capital and related financing activities which include inflows in the form of capital appropriations and capital grants and outflows in the form of purchases of capital assets as well as outflows for principal and interest payments. Finally, there are cash flows from investing activities such as the purchase and sale of investments and interest received on investments. The sum of each of the categories of cash flow results in an increase or decrease in cash held by the college or university.
Cash Flows from Opera4ng Ac4vi4es
Cash Flows from Non-‐Opera4ng Ac4vi4es
Cash Flows from Capital Financing Ac4vi4es
Cash Flows from Investment Ac4vi4es
Net Increase (Decrease) in Cash
51
Table 11 Cash Flows
Thousands of $ For the year ending June 30
2009 2010 2011 2012 2013 2014 CASH FLOWS FROM OPERATING ACTIVITIES: Tuition and fees $119,811 $129,661 $136,863 $147,972 $159,557 $168,251 Grants and contracts $16,618 $13,108 $17,787 $15,127 $15,859 $11,998 Payments to suppliers $(50,252) $(51,528) $(54,132) $(60,121) $(67,636) $(70,483) Payments to employees $(147,309) $(154,679) $(158,591) $(169,798) $(179,616) $(187,316) Payments for scholarships and fellowships $(10,659) $(11,225) $(12,888) $(13,211) $(13,127) $(13,719) Loans issued to students and employees $(119) $(190) $(198) $(258) $(317) $(423) Collection of loans from students and employees $290 $271 $322 $355 $266 $313 Auxiliary enterprise charges $21,133 $21,205 $22,197 $23,337 $24,939 $24,941 Other receipts $3,930 $6,496 $4,930 $6,367 $7,658 $7,277 Net cash used by operating activities $(46,557) $(46,882) $(43,710) $(50,231) $(52,417) $(59,161) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES: State appropriations $52,358 $51,011 $50,748 $44,530 $44,633 $45,527 Federal direct lending receipts $75,530 $91,481 $100,126 $106,844 $106,482 $109,510 Federal direct lending disbursements $(75,530) $(91,481) $(100,126) $(106,844) $(106,482) $(109,510) Gifts and grants for other than capital purposes $13,982 $21,743 $26,115 $27,953 $27,367 $33,281 Endowment gifts $688 $1,054 $1,226 $588 $965 $6,881 Net cash provided by noncapital financing activities $67,028 $73,808 $78,090 $73,071 $72,966 $85,689
52
Table 11 (Continued) Cash Flows
Thousands of $ For the year ending June 30
2009 2010 2011 2012 2013 2014 CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: Proceeds from capital debt $-‐ $33,650 $-‐ $-‐ $138,099 $-‐ Capital appropriations $-‐ $-‐ $-‐ $18,287 $22,213 $-‐ Capital grants and gifts received $17 $-‐ $1,497 $4,784 $7,142 $353 Purchases of capital assets $(9,881) $(14,286) $(33,161) $(49,385) $(54,128) $(95,709) Principal paid on capital debt and leases $(2,857) $(2,952) $(3,704) $(3,865) $(26,157) $(4,708) Interest paid on capital debt and leases $(5,450) $(3,519) $(4,583) $(4,343) $(7,049) $(4,068) Net cash provided (used) by capital financing activities $(18,171) $12,893 $(39,951) $(34,522) $80,119 $(104,132) CASH FLOWS FROM CAPITAL FINANCING ACTIVITIES: $-‐ $33,650 $-‐ $-‐ $138,099 $-‐ CASH FLOWS FROM INVESTING ACTIVITIES: $-‐ $-‐ $-‐ $18,287 $22,213 $-‐ Proceeds from sales and maturities of investments $2,036 $1,493 $117,962 $67,664 $69,372 $64,675 Investment income $745 $2,185 $6,333 $4,464 $6,394 $10,762 Purchases of investments $(4,365) $(4,948) $(159,037) $(56,059) $(51,907) $(101,839) Net cash provided by investing activities $(1,584) $(1,270) $(34,743) $16,069 $23,859 $(26,402) Net Increase in Cash and Cash Equivalents $716 $38,550 $(40,314) $4,387 $124,528 $(104,007) CASH AND CASH EQUIVALENTS, beginning of year $33,766 $34,483 $73,033 $32,718 $37,106 $161,634 CASH AND CASH EQUIVALENTS, end of year $34,483 $73,033 $32,718 $37,106 $161,634 $57,627
The net cash from operations can be reconciled with the university or
college’s operating loss. The operating loss minus depreciation and losses on the disposal of capital assets (another non-‐cash expense) plus change in assets and liabilities equals the net cash used for operating activities.
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The cash flow from operations shows the actual inflow and outflow of resources used to fund the operation of a college or university. At public institutions operating cash flow is the sum of cash flows from operations plus cash flows from non-‐capital financing activities minus interest payments on debt.
One of the major differences between operating cash flows and income (loss)
before other revenue (net income) is that net income includes depreciation as an expense. However, since depreciation is a non-‐cash expense it does not represent an outflow of cash i.e., it is an expense only on paper. Another difference is that it excludes unrealized gains and losses on investments. Thus, operating cash flow is one of the most important indicators of how a college or university is doing from a financial perspective.
Looking at the Statement of Cash Flows for the University for the years 2001-‐
2014 one can see another picture of the flows of resources into and out of the University. Table 11 shows the cash flow statements.
To some extent the income (loss) before other revenue (net income) and the change in net assets can give a somewhat distorted view of the actual flow of resources into and out of the University because it counts depreciation as an expense and it also counts unrealized gains and losses as revenues and expenses respectively.
Normally when a university has an expense it must cover that expense by
writing a check. This results in an outflow of cash from a university. In the case of non-‐cash expenses, no cash flows out of a university. In other words, it is an expense only on paper. Therefore an alternative measure of operating performance can be found by looking at operating cash flows.
Table 11 above shows the Statement of Cash Flows for the University from
2009-‐2014 and Figure 31 shows the operating cash flows for the University from 2001-‐2014. In general, one can see an upward trend in operating cash flows. In 2001 the operating cash flow for the University was $9.2 million and in 2014 the operating cash flow was $22.5 million. Over the fourteen-‐year period, the operating cash flow varied between a low of $6.9 million in 2002 to a high of $29.8 million in 2011.
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Overall, looking at cash flow from operations the University has maintained a
fairly consistent level of operating cash flows. The average of the cash flow ratio between 2012-‐14 is somewhat lower than it was between 2009-‐11 but this is largely due to the volatility in operating cash flows and does not represent any fundamental change in the University’s operating cash flows. This can be seen by looking at the cash flow ratio in Figure 33, which shows the ratio of operating cash flows to total revenue.
$-‐ $5,000
$10,000 $15,000 $20,000 $25,000 $30,000 $35,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Thou
sand
s
Figure 32 OperaRng Cash Flow
0.0%
5.0%
10.0%
15.0%
Figure 33 Cash Flow RaRo
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Summary Indices and Conclusion
In 2014 Moody’s gave Oakland University an A1 rating with a stable outlook. The basis for this high rating was that Oakland University had growing enrollment, high levels of unrestricted reserves and a strong economic impact on the southeast part of Michigan. Moody’s notes that the University continues to generate operating surpluses in spite of cuts in state appropriations.
If the financial statements are like report cards, summary indices are like a GPA. These indices can be used to summarize the overall financial status of the institution. One popular summary index is the composite index similar to one developed by Moody’s. The Ohio Board of Regents (OBR) has adapted a version of this composite index. The composite index used by OBR assign scores to three ratios and then use a weighted average of those scores to create a composite index indicating the financial health of an institution (http://www.regents.state.oh.us/financial/sb6.html#Methodology).
The first is the ratio is known as the viability ratio, which is the ratio of expendable net assets to long-‐term debt. The second ratio is the primary reserve ratio, which measures the ratio of expendable net assets to operating expenses. The net asset ratio is the change in net assets divided by total revenues (operating and non-‐operating).
Scores for each of the three ratios are whole numbers from 0 to 5 with 5 being the highest score. Table 11 below shows the how scores are assigned to each ratio. A weighted average of these scores is then used to calculate a composite index that reflects the overall financial health of the institution. The weights used by OBR are 50% for the primary reserve score, 30% for the viability score and 20% for the net asset score. Assigning the smallest weight to the net asset score is recognition of the fact that there is significant variability in the change in net assets for many institutions largely due to fluctuations in the value of investments and fluctuations in capital appropriations.
Under Ohio law an institution with a composite index of 1.75 or less for two
consecutive years will be placed on fiscal watch. This allows the governor to replace trustees and in effect put an institution in receivership.
Although SB 6 index used by the Ohio Board of Regents is a good index it does
have certain deficiencies. The three main deficiencies of this index are that it uses a step function for scoring, so that relatively small changes in any ratio can cause a particular score to jump up or down, it gives a to high a weight to the primary reserve ratio and totally ignores cash flows. With increasing volatility in financial markets, changes in the market value of investments have caused increased volatility in the change in net assets. However, in many cases these changes in net assets reflect only unrealized gains and losses in investments.
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This report also uses an index developed by the author and Howard Bunsis a Professor of Accounting at Eastern Michigan University that avoids these pitfalls. The scores for each ratio are assigned making use of the scores in Table 12 and a piecewise continuous function, so that small changes in ratios are reflected in small changes in scores. In addition, Fichtenbaum-Bunsis index lessens the effects of volatility in financial markets, by including a cash flow ratio. The viability ratio is given a weight of 22.5%, the primary reserve ratio a weight of 45%, the cash flow ratio a weight of 20% and the net asset ratio a weight of 12.5%. Table 13 shows the ratio scores for the University from 2009-2014 and Figure 35 shows the composite scores for the University from 2002-2014.
Table 12 Ratio Scores
0 1 2 3 4 5 Viability Ratio < 0 0 to .29 .30 to .59 .6 to .99 1.0 to 2.5 > 2.5 or
N/A Primary Reserve Ratio
< -‐.1 -‐.1 to .049 .05 to .099
.10 to .249
.25 to .49 .5 or greater
Cash Flow Ratio
< -‐.05 -‐.05 to 0 0 to .009 .01 to .029
.03 to .049
.05 or greater
Net Asset Ratio
< -‐.05 -‐.05 to 0 0 to .009 .01 to .029
.03 to .049
.05 or greater
Table 13 Composite Scores
For the year ending June 30 2009 2010 2011 2012 2013 2014 Viability Score 4 4 4 4 3 3 Primary Reserve Score
5 5 5 5 5 5
Net Asset Score 3 5 5 5 5 5 SB 6 Composite Score
4.3 4.7 4.7 4.7 4.4 4.4
Viability Score 3.72 3.64 3.80 3.80 2.96 3.12 Primary Reserve Score
5.00 5.00 5.00 5.00 5.00 5.00
Cash Flow Score 5.00 5.00 5.00 5.00 4.19 5.00 Net Asset Score 2.67 5.00 5.00 5.00 5.00 5.00 F-‐B Composite Score 4.42 4.69 4.73 4.73 4.38 4.58
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Table 12 shows the individual scores for each ratio and composite scores for
Oakland University from 2009 to 2014. The scores for the viability ratio declined between 20011 and 2014 using SB 6 scores. Using the Fichtenbaum-‐Bunsis, method, which generates continuous scores, the viability score declines in 2013 and then increases somewhat in 2014, although it is still below the 2012 level. The main factor behind the decline in the viability score in 2013 was the increase in debt. Even with this decline, the University still has a manageable level of debt and that is one of the reasons Moody’s gave them an A1 rating with a stable outlook.
The primary reserve score remained constant from 2009 through 2014 and
using both the SB 6 and Fichtenbaum-‐Bunsis scoring it is a 5, which is the highest score. This score is a reflection of the high level of unrestricted reserves held by the University, again something that Moody’s mentions in the rationale it provides for giving the University an A1 rating.
The net asset score and cash flow scores are also very high and have been
high since 2001. Figure 34 provides a graphical view of the composite scores for the period 2001-‐2014. The overall composite score, using either the SB 6 methodology or the Fichtenbaum-‐Bunsis methodology show the same results. The University has consistently high composite scores.
In conclusion, since my last report, which covered the years 2009-‐2011, the University’s financial condition has remained stable and it remains in excellent financial condition.
0.00
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5.00
2001
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Figure 34 Composite Scores
Fichtenbaum-‐Bunsis Composite Score
Moody's Type of Composite Score