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Messiah College
Institutional Planning & Finance
May 30, 2007
Understanding Higher Ed Finance
Understanding Higher Ed $$$
• Understanding Financial Statements– Statement of Activities (Operating Stmt)– Statement of Financial Position (Balance
Sheet)– Statement of Cash Flows
• Why not-for-profits need surpluses
• Contextualizing Financial Performance– Comparative Performance– Composite Financial Index (CFI)
• Summary
Three External Financial Statements
– Statement of Activities (Operating Stmt)• Summarizes the institutional financial
performance during the course of one fiscal year
– Statement of Financial Position (Balance Sheet)
• Summarizes the institutional financial performance “life-to-date” by organizing financial data into assets, liabilities, and net assets
– Statement of Cash Flows• Displays one year’s financial activity by
summarizing the sources and uses of cash
Messiah CollegeStatement of Activities
Year Ending June 30, 2006Temporarily Permanently FY06
Unrestricted Restricted Restricted TOTAL
45,207,176 45,207,176 1,732,754 - 1,732,754
965,025 1,377,306 2,342,331 5,123,647 5,123,647 4,311,701 4,311,701
17,227,448 17,227,448 926,152 (926,152) -
75,493,904 451,154 - 75,945,057
48,280,134 - - 48,280,134 15,374,846 15,374,846 10,703,568 10,703,568
74,358,548 - - 74,358,548 1,135,355 451,154 - 1,586,509
4,148,770 700,011 1,098,072 5,946,853 6,360,232 1,450,563 20,940 7,831,735
443,929 (885,695) 532,854 91,088 10,952,931 1,264,879 1,651,866 13,869,676 (1,613,965) (1,613,965)
10,474,321 1,716,033 1,651,866 13,842,220
149,738,463 11,821,125 16,889,568 178,449,156 160,212,784 13,537,158 18,541,434 192,291,376
Operating revenues and other additions:Net tuition and feesGovernment grants and appropriationsGifts and grants
Contributions for long-term purposesEndowment investment return, net of operations desg.
Endowment return designated for operationsOther sourcesAuxiliary enterprisesNet assets released from restriction
Net assets, end of year
Total revenues and other additions
Educational and generalAuxiliary enterprisesInstitutional support Total expenses and other deductionsChange in operating net assets
Total non-operating
Operating expenses and other deductions:
Non-operating revenues and expenses:
Cumulative effect in change in accounting principle
Total change in net assets
Other non-operating
Net assets, beginning of year
Activity & Asset Categories
• Unrestricted: Assets that are not subject to donor-imposed stipulations; can be designated by trustees or limited by contractual relationships
• Temporarily Restricted: Assets subject to donor-imposed directions that can be fulfilled by the College, or that expire at some future date;
Example: Grants that stipulate the activities or assets that must be funded by the grant.
Activity & Asset Categories
• Permanently Restricted: Assets that donors stipulate must be maintained permanently by the College, although the College generally has the use of part or all of the income earned on the assets
Example: Donors’ endowment gifts
Activity & Asset Categories
• Note that the ONLY way anything can be categorized as a Temporarily or Permanently Restricted Asset is IF it is donated, and IF the donor has specifically restricted its use. Revenues from all other sources such as fees, sales, et cetera have to be recorded as Unrestricted.
• At the end of each fiscal year, the net of all unrestricted income and expense is “closed out” to Unrestricted Net Assets on the Statement of Financial Position, and a new fiscal year begins.
What Happens at Year-End?
• So at the beginning of FY06, we had $178 million in net assets, our net assets increased by $14 million so the year-end value was $192 million, a healthy increase of 7.8%
Temporarily Permanently FY06Unrestricted Restricted Restricted TOTAL
10,474,321 1,716,033 1,651,866 13,842,220
149,738,463 11,821,125 16,889,568 178,449,156 160,212,784 13,537,158 18,541,434 192,291,376
Total change in net assets
Net assets, beginning of yearNet assets, end of year
Assets June 30, 2006 June 30, 3005Cash and cash equivalents 25,232,852 20,838,782Accounts receivable 5,417,585 5,217,419Prepaid expenses and other 1,183,718 790,661Investments 119,511,508 109,186,133Assets held in trust 22,747,572 22,691,474Deposits with trustees 5,295,072 5,080,716Property and equip, net of depr 111,011,705 113,704,583 Total Assets 290,400,012 277,509,768
Liabilities and Net AssetsLiabilities:Accounts payable 4,946,005 5,181,083Deposits 1,279,478 1,186,174Deferred revenue 416,608 392,793Annuities & trusts payable 19,665,985 19,801,891Long-term debt 64,885,516 67,261,050Other Liabilities 6,915,044 5,237,621 Total Liabilities 98,108,636 99,060,612
Net assets:Unrestricted 160,212,784 149,738,463Temporarily restricted 13,537,158 11,821,125Permanently restricted 18,541,434 16,889,568 Total Net Assets 192,291,376 178,449,156
Total Liabilities and Net Assets 290,400,012 277,509,768
Statement of Financial PositionFor years ending June 30, 2006 and 2005
Statement of Financial Position
• Assets - Liabilities = Net Assets
– OR
• Assets = Liabilities + Net Assets
– OR
• What you own, less what you owe, equals your net worth
2006Cash flows from operating activities:
Change in net assets $ 13,842,220 Adjustments to reconcile change in net assets to net cash provided by
operating activities:Depreciation and amortization 7,976,706 Net realized and unrealized gains on investments (11,105,252) Net gain on sales of property & equipment and loss of debt refunding — Cumulative effect of change in accounting principal 1,613,965 Contributions for long-term purposes (5,946,853) Increase in other assets (1,100,316)
Total adjustments (8,561,750) Net cash provided by operating activities 5,280,470
Cash flows from investing activities:Net proceeds & purchases of investments 449,709 Net proceeds & purchases of property and equipment (4,985,508) Other cash flows from investing activities 173,822
Net cash used in investing activities (4,361,977) Cash flows from financing activities:
Principal payments on long-term debt (2,290,000) Contributions for long-term purposes 5,946,853 Other cash flow from financing activities (181,276)
Net cash provided by financing activities 3,475,577 Net increase in cash and cash equivalents 4,394,070
Cash and cash equivalents, beginning of year 20,838,782 Cash and cash equivalents, end of year $ 25,232,852
MESSIAH COLLEGEStatements of Cash FlowsYear ended June 30, 2006
If we’re a non-profit, why do we have (or need) surpluses?
• Not-for-profit is a better term:– Distinguishes us from for-profits whose
primary reason for existence is to provide a monetary return on money invested
– Not-for Profits exist to provide a public service
• Both types of corporations will have missions that further distinguish them
If we’re a non-profit, why do we have (or need) surpluses?
• However, both for-profits and not-for-profits have to generate cash and profits if:– They wish to grow or fund new initiatives– They incur debt which has to be repaid– They have capital assets (buildings and
equipment) that need to be replaced at a cost that has increased since they were originally purchased
Contextualizing Financial Performance
• Comparative Performance– Net Assets (From Stmt of Financial Position)– Net Assets Per Student
• Represents assets institution has acquired that help defray the current cost to the student
– Increase in Net Assets (Stmt of Activities)
• Composite Financial Index (CFI)– CCCU– CIC
Net AssetsFY98 to FY06 Net Assets
vs. Median of Competitor and Benchmark Groups
0
25,000
50,00075,000
100,000
125,000
150,000175,000
200,000
225,000
Messiah 151,345 163,812 183,293 170,983 161,658 154,974 167,376 178,449 192,291
Competitors 44,576 52,146 57,026 61,775 63,124 63,746 69,733 74,710 81,658
Benchmarks 120,722 138,743 155,234 154,681 157,006 157,078 172,855 187,566 207,449
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06*
Net Assets per Student
FY98 to FY05 Net Assets per Student vs. Median of Competitors and Benchmark Groups
20,000
30,000
40,000
50,000
60,000
70,000
80,000
MC 59,196 61,839 68,181 62,018 57,380 54,320 57,379 61,919
Competitor 34,155 35,019 36,432 37,321
Benchmark 37,778 40,759 46,850 47,215 45,673 44,430 49,917 58,040
Messiah Ranking 7 8 8 9 9 9 10 9
FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05
Cumulative Change in Net Assets
FY98 to FY05 Median Increase in Net Assets
17.9%
53.0%46.6%
37.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Messiah Competitors Benchmarks Gen Bacc's
19% 18%
65%
93%
0%
20%
40%
60%
80%
100%
CP I Total NetAssets
MC Expenses MC Net Tuition
CUMULATIVE INCREASE IN KEY FINANCIAL DATA FY98 TO FY05
Why has Messiah Financial Performance Lagged in Recent
Years?• We invested $75 million in new
buildings and building repairs, about $20 million more than our benchmark group . . . which added to depreciation expense . . . (though other benefits)
• We received an average of $2,000 per year per student in private gifts versus $5,000 for benchmark institutions, and $2,600 for competitor institutions
Calvin, Susquehanna, & Hope
Why has Messiah Financial Performance Lagged in Recent
Years?• We increased our endowment
spending rate in 2000• A combination of fewer gifts, higher
spending rate, and slightly below average returns = median long-term investments of benchmark group increased by $15 million more than did Messiah’s
• We had small or non-existent operating surpluses Elon
BUT!
• Messiah still has approximately the same net assets per student as its benchmark group;
• It still has more net assets per student than its nearest Competitors;
• And it ranks at approximately the 75th percentile in both the CCCU and the CIC in a broader measure of financial health called the “Composite Index”
Composite Financial Index
• An attempt to calculate a single number that represents an institution’s relative financial health
• Consists of a weighted average of four financial ratios– Return on Net Assets (20%)– Net Operating Revenue Ratio (10%)– Primary Reserve Ratio (35%) - Exp. NA/TL Exp– Viability Ratio (35%) - Exp. NA/LT Debt
Composite Financial Index - CCCU
CFI BY YEAR: CCCU PERCENTILES
-2
0
2
4
6
8
10
1998 1999 2000 2001 2002 2003
CFI
SC
OR
E
75th Percentile
50th Percentile
25th Percentile
MESSIAH
What do the numbers mean?
2000 2001 2002 2003 2004 2005 range
9 to 10
8.07 to 8
6.4 6.45 to 6
3.9 3.4 3.9 3 to 4
1 to 2
-1 to 0
deploy resources to achieve robust mission
allow experimentation with new initiatives
re-engineer the institution
assess viability to survive
focus resources to compete in future statedirect resources to allow transformation
strategy
Composite Financial Index - CIC
CFI BY YEAR: NATIONAL PERCENTILES
-2
0
2
4
6
8
10
1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005
75th Percentile
50th Percentile
25th Percentile
MESSIAH
Threshold
Summary
• The Operating Plan only summarizes a portion of Messiah’s financial picture. Other important items include:– Restricted gifts (gifts to endowment,
capital projects, and other restrictions)– Return on endowment and trust
investments– Sufficient cash flow– Portion of net assets that are unrestricted
Summary
• We need to generate surpluses so we can:– Pay the principal payments on our debt– Generate the cash needed to replace
aging assets– Remain competitive (tuition pricing and
quality program and facilities)
Summary
• The Composite Index represents one vehicle for measuring relative financial position and health
• Strategies for strengthening our financial strength might include:– Increase net operating revenue– Enhanced gifts (including endowment and capital)– Enhance investment returns on endowment– Gradually decrease endowment spending– Control costs to improve Messiah’s pricing
position relative to competitors
Summary
• Messiah financial position is strong, but we need to improve annual financial results if we are to remain strong