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					An Update Analysis of the Financial Statements

                      of

        University of New Hampshire

           Fiscal Years 2001-2010



             Prepared for AAUP

                     By

             Rudy Fichtenbaum
           Professor of Economics
          Department of Economics
           Wright State University
             Dayton, OH 45435

               (937) 775-3085

         rfichtenbaum@sbcglobal.net
                                        Introduction

        In my initial report, I provided an analysis of the financial status of the University
System of New Hampshire for the fiscal years 2001 through 2005. One year later, in
2006, I updated my initial report. Following my 2006 update, I did subsequent two-year
update analyzing the financial statements for the University System of New Hampshire
for 2007,2008 and 2009. This one-year update is for the year 2010. The graphs in this
update will contain data from 2001 through 2010. However, due to space limitations,
most of the tables in this update will contain only six years of data (2005-2010). The
supporting data for earlier years can be found in my initial report and previous updates.
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
Statements of the University System of New Hampshire 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 the
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, 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.

         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.



                                              1
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. 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. Consequently, some percentage of budgeted positions
either gets spent elsewhere or accumulates and becomes part of the university’s net
assets. Budgets also depend on making projections regarding enrollment and
assumptions about raises and the general rate of inflation. Changing any of these
assumptions can drastically alter a budget. Finally, almost all budgets are balanced and
this creates the impression that universities 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 and every year they will 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 represent 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 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. Non-profit
organizations, such as universities, 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 incur expenses. The difference between the revenues that come
into a university and its expenses is known as a change in net assets. If a university takes
in more revenue then it expends there is a positive 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.

        Beginning in 2002, universities were required to make some important changes in
the way they reported on their financial status due to the implementation of GASB 34 &
35. For example, what had been referred to as a change in fund balances is now referred
to as a change in net assets. The purpose of the change in financial reporting was to
make college and university financial statements easier to understand and to provide



                                             2
management with better information to manage universities as business entities. Since
the University System of New Hampshire restated its 2001 financial statements this
update covers the period from 2001-2009.

        Financial data is reported either as a stock or flow. A stock means measurement
takes place in dollars without respect to time. For example the amount of money in your
savings account is a stock. Flows are measurements that have a time dimension. For
example income is a flow because it is measured as a certain number of dollars per year.

        Universities have three main financial statements. First there is a balance sheet or
a statement of net assets. Balance sheets have three main components: assets, liabilities
and net assets. Assets are things of value owned by the university. Liabilities are claims
against the 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. This financial statement shows how the university’s finances are
changing over a period of time, namely a fiscal year which normally runs from July 1 to
June 30 of the following year. Fiscal years are always associated with the calendar year in
which the fiscal year ends. So for example, from July 1, 2007 to June 30, 2008 is known
as fiscal year 2008. This statement deals with flows and measures how the university’s
revenues and expenses are changing over time.

        There is a relationship between stocks and flows or between the balance sheet and
the statement of revenues, expenses and changes in net assets. 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 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 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. The third section of this report will
provide an analysis of the University’s cash flow statement.




                                             3
        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. 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 University of New
Hampshire 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.




                                              4
                                        What is the Wealth of the University?

Assets and Liabilities

        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. Liabilities
are claims on an institution’s resources. In Figure 1, we show the total assets of
University System of New Hampshire for the years 2001-2009. Supporting data for the
graph are found in Table 1 for the years 2004-2009. Data for 2001-2003 can be found in
previous reports.


                                                   Figure 1
                                                 Total Assets
                    $1,800,000
                    $1,600,000
                    $1,400,000
   thousands of $




                    $1,200,000
                    $1,000,000
                     $800,000
                     $600,000
                     $400,000
                     $200,000
                            $-
                                 2001    2002   2003   2004   2005   2006   2007   2008   2009   2010


       Figure 1 shows that the total assets of the System increased slowly between 2001
and 2003. In the years 2002-2003 the average rate of growth in assets was about 2
percent. Starting in 2004 there was a dramatic increase in the rate of growth in assets. The
growth in assets was particularly pronounced in 2005 and 2006. Total assets increased
14.5 percent and 19.2 percent in 2005 and 2006, respectively. In 2007 and 2008, assets
continued to grow, increasing 7.7 percent in 2007 and 5.2 percent in 2008. In 2009, the
growth of total assets slowed markedly. In 2001 the System had total assets of $851.2
million and the System’s assets increased to $1.5 billion by 2008, making the compound
annual growth rate in assets from 2001-2008, 8.2 percent a year. In 2009 total assets
increased by only $4 million or about 0.3 percent but in 2010 total assets increased $82.3
million or about 5.5 percent.

        The System’s assets can be divided into current and non-current assets. Current
assets consist of assets that will be used up during the course of a year. The major items


                                                          5
        that comprise current assets are cash and cash equivalents, short-term investments,
        accounts receivable, pledges and leases receivable and prepaid expenses.



                                                          Table 1
                                             Assets, Liabilities and Net Assets
                                                      Thousands of $
                                               For the year ending June 30

                                      2005            2006           2007           2008         2009         2010
ASSETS
Current Assets
Cash and cash equivalents            $182,078        $174,513        $194,346      $218,848     $213,326     $256,293
Accounts receivable                   $27,739         $21,699         $21,085       $18,467      $18,443      $26,632
Accounts receivable from the                                           $2,979        $4,518      $16,802       $5,947
State of NH
Pledges receivable-current             $1,481           $1,287         $1,072        $1,445         $538         $583
portion
Notes receivable - current             $2,693           $2,974         $3,202        $3,392       $3,259       $3,378
portion
Prepaid expenses and other             $5,441           $4,780         $5,300        $5,154       $6,033       $6,315
current assets
Total Current Assets                 $219,432        $205,253        $227,984      $251,824     $258,401     $299,148
Non-current Assets
Investments held by bond              $47,540        $112,176         $48,334       $32,195      $22,034       $2,735
trustee
Long term operating                    $5,755          $27,550        $31,945        $6,830       $5,042       $5,539
investments
Endowment and similar                $108,584        $128,355        $159,878      $182,519     $155,246     $173,481
investments - campuses
Endowment and similar                $102,644        $116,231        $135,205      $129,760     $107,413     $117,488
investments - affiliated entities
Pledges receivable                      $1,939         $1,012          $1,053           $885         $473       $1,169
Notes receivable                       $20,361        $18,668         $18,769        $18,686      $18,646      $19,838
Property and equipment, net           $587,993       $693,675        $781,805       $854,679     $914,524     $935,493
Other assets                            $2,450         $3,880          $2,719         $2,760       $2,545      $30,334
Total Non-current Assets              $877,266     $1,101,547      $1,179,708     $1,228,314   $1,225,923   $1,286,077
TOTAL ASSETS                        $1,096,698     $1,306,800      $1,407,692     $1,480,138   $1,484,324   $1,585,225




                                                              6
                                              Table 1 Continued
                                      Assets, Liabilities and Net Assets
                                               Thousands of $
                                        For the year ending June 30
                               2005          2006            2007            2008        2009     2010
LIABILITIES
Current Liabilities
Accounts payable and            $42,879       $36,669       $38,557         $29,912    $35,644    $46,806
accrued expenses
Construction services           $14,672       $14,593       $11,835         $13,150     $9,302     $6,047
payable
Deposits and deferred           $30,573       $32,863       $35,016         $35,581    $35,508    $37,489
revenues
Accrued employee benefits        $5,627        $4,615        $5,785          $6,544     $7,612     $6,012
- current portion
Postretirement medical           $4,750        $5,758        $5,080          $5,117     $5,170     $4,706
benefits - current portion
Long term debt - current         $6,510        $5,042        $7,164          $8,583    $71,090    $70,046
portion
Total Current Liabilities      $105,011       $99,540      $103,437         $98,887   $164,326   $171,106
Noncurrent Liabilities
Obligations under life           $1,634        $2,706        $2,799          $2,664     $2,620     $2,593
income agreements
Government advances             $17,355       $17,218       $16,732         $16,805    $16,418    $16,339
refundable
Accrued employee benefits       $27,413       $28,344       $27,543         $29,991    $30,900    $33,430
Postretirement medical          $39,911       $43,100       $46,426         $46,305    $42,030    $42,608
benefits
Deferred obligations -                                                                 $18,601    $27,966
interest rate swaps
Long term debt                 $272,571      $412,437      $411,880        $449,612   $403,788   $394,257
Total Noncurrent Liabilities   $358,884      $503,805      $505,380        $545,377   $495,756   $517,193
TOTAL LIABILITIES              $463,895      $603,345      $608,817        $644,264   $660,082   $688,299
NET ASSETS
Invested in Capital Assets,    $351,628      $386,119      $410,520        $432,454   $476,041   $487,512
net of related debt
Restricted Nonexpendable       $126,314      $136,465      $145,637        $162,452   $178,976   $187,059
Restricted Expendable           $91,462      $109,608      $137,982        $116,491    $54,903    $73,189
Unrestricted                    $63,399       $71,263      $104,736        $124,477   $114,322   $149,166
TOTAL NET ASSETS               $632,803      $703,455      $798,875        $835,874   $824,242   $896,926

        Current assets increased from $174.6 million in 2001 to $193.9 million in 2002
largely because of increases in short-term investments. In the following year current
assets declined due to a sharp decline in short term assets. Then, in 2004, current assets
increased to $189.6 million, due largely to an increase in cash and cash equivalents. Also
beginning in 2004, the System shows no short-term investments. Given the substantial
increase in cash and cash equivalents it is likely that the System moved its short-term
investments into cash or reclassified all of its short-term investments as cash and cash


                                                  7
equivalents. In 2005, current assets increased to $219.4 million again due to increases in
cash and also due to a small increase in accounts receivable. In 2006, current assets
actually declined due to a decrease in cash and cash equivalents and a decrease in
accounts receivable. However, most of the decline in current assets was offset by a
substantial increase in long-term operating investments. In 2007and 2008, current assets
rose substantially reaching $251.8 million with the increases due almost entirely to
changes in cash and cash equivalents. In 2009 current assets increased 2.6 percent and in
2010 they increased 15.8 percent.

        Generally, the pattern of growth in non-current assets has followed the overall
pattern of growth in assets. Non-current assets for the System decreased from between
2001 and 2002. This decrease is explained by a substantial decline in the value of
endowment and similar investments for the campuses. In the following two years, non-
current assets increased an average of 7.2 percent a year. In 2005 and 2006 non-current
assets increased dramatically rising 14.3 percent in 2005 and 25.5 percent in 2006, due to
increases in investments and the growth in the value of property and equipment. Non-
current assets continued to grow in 2007 and 2008, increasing 7.1 percent in 2007 and 4.1
percent in 2008. Over the entire 8 year period, non-current assets increased at an average
annual rate of 8.9 percent a year growing from $676.5 million in 2001 to nearly $1.2
billion in 2008. In 2009 non-current assets actually declined about 0.2 percent. This
decline was due entirely to declines in the value of the System’s endowment. In 2010
there was an increase in non-current assets of about 3.3 percent, as endowment
investments recovered a substantial portion of the losses experienced in 2009.

         Figure 2 shows the total liabilities for the University System of New Hampshire.
Table 1 also shows the liabilities for the System for the years 2005-2010. Between 2001
and 2004 the liabilities of the System were fairly flat. In 2005, there was a sharp increase
in liabilities followed by another sharp increase in 2006. Over this two-year period, total
liabilities increased by nearly 60 percent. In 2007, liabilities remained essentially flat and
then increased by about 6 percent in 2008. In 2001 total liabilities for the University
System were $347.2 million and by 2009 the University System increased its total
liabilities to $660.1 million. In 2010 total liabilities increased $9.6 million.

         Liabilities can also be divided in current and non-current liabilities. Current
liabilities consist of liabilities that are due within a year. The current liabilities for the
University System increased from $58.8 million in 2001 to a peak of $105 million in
2005. Since then current liabilities have been relatively stable declining slightly to $98.8
million in 2008. The major factors driving the increase in current liabilities were
increases in accounts payable and accrued expenses, deposits and deferred revenues and
the current portion of long-term debt. In 2009 there was a huge increase in the current
portion of long-term debt. The size of the current portion of long-term debt in 2010 was
slightly lower than in 2009 although it was still far above the values it had been in
previous years.

        The non-current liabilities consist primarily of capitalized lease obligations and
long-term debt obligations. From 2001 to 2005 long-term debt increased from $205.5



                                              8
million to $272.5 million. In 2006, there was another substantial increase in long-term
debt with debt increasing to $412.4 million. In 2007 long-term debt decreased slightly
and then increased again in 2008, reaching $449.6 million. Between 2001 and 2005 the
sum of accrued employee benefits and post-retirement benefits was fairly stable
increasing by only 4.7 percent. Between 2005 and 2008 the liabilities for these benefits
increased 13.3 percent with most of the increase being drive by changes in postretirement
medical benefits. In 2009 non-current liabilities actually decreased due to a large
decrease in long-term debt and a decrease in post-retirement medical benefits. Long-term
debt decreased by $45.8 million and post-retirement medical benefits decreased by $4.3
million. In 2010 there was long-term debt continued decreasing and the liability for post-
retirement medical benefits increased by only a $.5 million. Thus the major factor
increasing non-current liabilities was a substantial increase in deferred obligations
associated with an interest rate swap.


                                               Figure 2
                                            Total Liabilities
                   $800,000
                   $700,000
                   $600,000
   Thousand of $




                   $500,000
                   $400,000
                   $300,000
                   $200,000
                   $100,000
                         $-
                              2001   2002   2003   2004       2005   2006   2007   2008   2009   2010



        Net assets are the difference between assets and liabilities and 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. Figure 3 shows the
net assets for the University System of New Hampshire. The net assets of the University
System decreased between 2001 and 2002 but then increased between 2002 through
2008. In 2003, net assets increased by 5.6 percent. Over the next four years from 2004
through 2007 the average increase in net assets was 11.2 percent and in 2008 net assets
increased 4.6 percent. Over the entire period from 2001-2008 the average annual rate of
increase in net assets was 7.5% per year. In 2009 net assets decreased by $11.6 million
but then rebounded increasing by $72.7 million in 2010.

        An increase in net assets means that a university has increased its wealth and
conversely and decrease in net assets implies that a university’s wealth has decreased.
However, wealth can be divided into two categories: financial and physical. This
division is a reflection of the fact that state universities often receive two pots of money.



                                                          9
One consists of capital funds for building and renovation and the other consists of
operating funds for example state subsidy. Money that is received for capital projects is
often times restricted and cannot be used for operating i.e., paying for salaries and
benefits. Thus, while it can appear that a university is increasing its wealth when it’s net
assets increase, and therefore should have more resources available to expend for
operations, this may not be the case.


                                                 Figure 3
                                                Net Assets
                    $1,000,000

                     $800,000
   Thousands of $




                     $600,000

                     $400,000

                     $200,000

                            $-
                                 2001   2002   2003   2004    2005   2006   2007   2008   2009   2010


         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 university
added flexibility with respect to operations. To the extent that a university uses funds it
generates through operations, to purchase land, building and equipment, it can decide to
reallocate these funds for alternative uses. However, when it uses capital funds from the
state or from private sources for purchases of land, buildings and equipment cannot
reallocate that money for other purposes. Also, once universities purchase land and put
up buildings it is unlikely that they will sell these assets to generate funds, which could
be used for other purposes. Moreover, it should be noted that when buildings are
constructed, using capital funds, there are implications for operating expenses in the
future. As universities add new buildings they will be required to spend additional funds
on maintenance and utilities, thereby increasing their operating expenses.

        Figure 4 shows several key ratios for the years 2001-2009. These key ratios are
also reported in Table 2 for the years 2004-2009. First is the ratio of current assets to
current liabilities for the University System. 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




                                                             10
collected in one fiscal year that pays for services offered in a subsequent fiscal year.
Liabilities that are not due during the current year are non-current liabilities.


                                               Table 2
                                    Ratios of Assets to Liabilities
                                     for the year ending June 30
                                    2005       2006         2007      2008   2009      2010
Current Ratio                       2.09       2.06         2.20      2.55   1.57      1.75
Fixed Assets to Debt                2.11       1.66         1.87      1.87   1.93      2.01
Total Assets to Total Liabilities   2.36       2.17         2.31      2.30   2.25      2.30



        The ratio of current assets to current liabilities decreased from 2.97 in 2001 to
2.06 in 2006. In 2007, the current ratio increased to 2.2 and then to 2.55 in 2008. In 2009
there was a sharp drop in the current ratio due primarily to the increase in liabilities
associated with the increase in the current portion of long-term debt. A current ratio of
1.57 implies that the University System has current assets to cover 157 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. In the past, some of the current
ratios for the system tended to be on the high side. The current ratio for 2009 is
considerably lower than in 2008 but is certainly in the normal range and indicates no
cause for alarm. In 2010 the current ratio increased substantially showing a strengthening
of the University’s liquidity position.

        Another indicator of financial health is the ratio of fixed assets to long-term debt,
which is also shown in Figure 4. This ratio increased from 1.87 in 2001 to 2.45 in 2003.
In 2004 it was nearly unchanged and then fell to 2.11 in 2005. The decline in 2005
reflects primarily the growth in debt, which occurred between 2004 and 2005. In 2006
there was a further decline in the ratio of fixed assets to debt because of the substantial
increase in debt taken on by the University System. In 2007, the ratio increased and
remained stable in 2008. In 2009 and in 2010 there were slight increases in the ratio of
fixed assets to liabilities.

       Figure 4 also shows the ratio of total assets to total liabilities. Between 2001 and
2004 this ratio was increasing. However, in both 2005 and 2006 the ratio has decreased.
This decrease primarily reflects the growth of long-term debt. In 2007, there was an
increase in the ratio of total assets to total liabilities and it remained stable in 2008. In
2009 there was a slight decrease in the ratio of total assets to total liabilities resulting
from almost no growth in assets and an increase in liabilities. In 2010 the ratio returned to
2.30, which was the same as it had been in 2008.




                                                 11
        Table 3 shows the total debt and lease obligations as well as interest and principal
payments. In 2001, it had a total debt and lease obligations of $208.5 million. Between
2001 and 2003, total debt and lease obligations declined to $205.6 million primarily due
to declines in bonds issued by the state of New Hampshire and a small decline in the
value of capital leases.



                                 Figure 4
                       Ratio of Assets to Liabilities
        3.50
        3.00                                                               Current Ratio

        2.50
        2.00
                                                                           Fixed Assets to
        1.50                                                               Debt
        1.00
        0.50
                                                                           Total Assset to
        0.00                                                               Total
               2001 2002 2003 2004 2005 2006 2007 2008 2009 2010           Liabilities




       In 2006, there was again another increase in debt, primarily in the form of revenue
bonds, which increased from $252.8 million to $392.4 million. In 2007, there was a
moderate increase in revenue bonds and a more substantial increase in 2008. Table 3 also
shows that interest payments have increased sharply since 2001, with most of the increase
coming between 2006 and 2008. In 2005 interest payments were $9.5 million and by
2008 interest payments had nearly doubled reaching $18.9 million. In 2009 and 2010
there were modest increases in both principal and interest payments. Figure 5 shows the
bond and capital lease obligations of the University System.




                                             12
                                                      Table 3
                                              Debt and Debt Service
                                                  Thousands of $
                                            For the year ending June 30
                                         2005        2006         2007             2008         2009        2010

NHHEFA Revenue Bonds                    $252,782      $392,374     $396,079       $437,331    $455,837     $446,487
Bonds Issued by the State of NH           $3,136        $2,206       $1,373           $655
Capital Leases                           $23,163       $22,899      $21,592        $20,209     $19,041      $17,816

Total Bonds & Leases                    $279,081      $417,479     $419,044       $458,195    $474,878     $464,303

Principal paid on capital debt &             $6,702     $5,964          $5,224      $7,890      $8,938      $10,752
leases
Interest paid on capital debt &              $9,500    $15,257      $17,349        $18,930     $18,946      $20,722
leases




                                              Figure 5
                                        Bonds & Capital Leases
                    $500,000

                    $400,000
   Thousands of $




                    $300,000

                    $200,000

                    $100,000

                          $-
                               2001   2002     2003    2004      2005      2006    2007      2008   2009     2010




        Table 4 shows future principal and lease payments and obligations under capital
leases that are expected between 2009 and 2014. Clearly there is a difference between
this version of Table 4 and the version presented in my initial report. The figures for
2009-2014 are generally higher that the figures in my initial report reflecting the burden
of the additional debt taken on by the University System. Thus, it is likely that the higher
level of in interest payments seen in 2009 will continue over the next five years. In
addition, projected principal payments expected to increase substantially.




                                                          13
                                              Table 4
                           Future Obligations Related to Debt and Leases
                                          Thousands of $
                                   For the year ending June 30

                     2010           2011          2012              2013             2014            2015
Principal         $12,336        $12,438       $13,138           $13,628          $10,113      $32,182
Interest          $17,115        $16,355       $18,335           $17,538          $19,326      $18,626

Total             $29,451        $28,793       $31,473           $31,166          $29,439          $50,808



       Table 5 shows the University System’s investments in plant and equipment. The
numbers in the table represent the original cost as opposed to market value or
replacement cost. Looking at Table 5 one can see that in general the value of the
System’s plant and equipment has been increasing. In the last four years, there have been
major increases in spending on buildings. The increase in the book value of capital assets
is shown in Figure 6.


                                                Table 5
                                  Investments in Plant and Equipment
                                            Thousands of $
                                      For the year ending June 30

                               2005         2006          2007             2008         2009            2010


Land                           $10,117      $10,518       $10,709       $11,767          $11,936        $12,212
Buildings and                 $795,785     $827,397      $961,740    $1,092,337       $1,210,979     $1,324,096
Improvements
Equipment                     $125,777     $117,291      $121,887     $121,451         $126,573       $123,769
Construction in Progress       $80,887     $184,048      $163,527     $137,437         $113,129         $56,077
Total Property and                                      $1,257,863   $1,362,992       $1,462,617     $1,516,154
Equipment                   $1,012,566   $1,139,254

Less: Accumulated           $(424,573)   $(445,579)     $(476,058)    $(508,313)      $(548,093)     $(580,661)
Depreciation

Property and Equipment,       $587,993     $693,675      $781,805      $854,679        $914,524        $935,493
Net




                                                   14
                                                    Figure 6
                                        Book Value of Plant & Equipment
                      $1,000,000

                        $800,000
     Thousands of $




                        $600,000

                        $400,000

                        $200,000

                                 $-
                                         2001   2002    2003   2004   2005   2006   2007   2008   2009    2010




        According to the Cash Flow Statement the University System spent a total of
$905.6 million on purchases of property, plant and equipment between 2001 and 2010.
Of this amount, $180 million came from state capital appropriations and $41.5 million
came from plant gifts and grants with the remainder being financed from operating funds
(including interest and principal payments). Annual spending for purchases of property,
plant and equipment, by source is shown in Figure 7.




                                                           Figure 7
                                                       Capital Spending

                      $140,000                                                                Capital Projects
                                                                                              Funded from
                      $120,000                                                                Operating Funds
  Thousands of $




                      $100,000
                                                                                              Gifts & Grants for
                       $80,000                                                                Capital Projects

                       $60,000

                       $40,000                                                                State Financing for
                                                                                              Capital Projects
                       $20,000

                            $-
                                      2001 2002 2003 2004 2005 2006 2007 2008 2009 2010




                                                                 15
Total Net Assets

         In for profit businesses, the difference between assets and liabilities is referred to
as owner’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 was traditionally referred to as a fund balance. However, after implementation
of GASB 34 & 35 the difference between assets and liabilities is now referred to as net
assets. Therefore any changes either in the value of assets or liabilities will affect the
University System’s 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 college. Beginning in 2002 with GASB 34 & 35
universities are required to show accumulated depreciation on their balance sheets for
certain real assets such as buildings and some equipment.

         When the state gives the University money to purchase or renovate a building in
the form of a capital appropriation, or a donor gives the University a gift to put up a new
building, the value of the University’s assets increase. Typically, capital appropriations
and gifts cover only a portion of the costs of new construction and renovations. To cover
the remainder of the costs the University can use unrestricted net assets, transforming
liquid assets fixed assets or it can borrow money by selling bonds. When the University
sells bonds it incurs a liability and the difference between the increase in the value of the
assets and the increased liability represents the increase in net assets invested in plant.

         Since the University is purchasing a fixed asset that will be used over a long
period of time the amount of money it spends on construction is not considered an
expense on the income statement. What the University does is to break up the money it
spends on construction and renovation by allocating that expenditure over a fixed period
of time. The amount of time depends on the particular 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 the 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 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.




                                              16
          Historically, universities did not depreciate fixed assets. Most universities did not
start depreciation assets until them implemented GASB 34 which calls on universities to
start accounting for depreciation. 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 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 the University the business divides this expenditure over the useful life of the asset
by depreciating the asset. Thus for the business depreciation is an expense which reduces
their 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 for a for-profit company, is questionable. The main difference between
the way investments are financed in universities and in for-profit businesses is that in the
case of universities, a portion of the cost of the investment is covered by capital
appropriations from the state and by private gifts. In that sense, one could argue that
depreciation overstates the cost of investment for universities in comparison to for-profit
businesses.

        In addition, to these real assets, universities 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. These financial assets
would not include cash that has been accumulated as a result of claiming depreciation on
plant and equipment.

        Once a university invests money in its physical plant it is unusual for it to sell that
asset. Thus, if a university changes its priorities and accordingly wishes to change its
asset allocation it would most likely reallocate its non-plant assets. For that reason
Figure 8 shows the University System’s net assets excluding investment in plant i.e.,
liquid net assets.

        In 2001, the University System had liquid net assets of $231.2 million. Liquid net
assets decreased between 2001 and 2002 reaching $215.7 million. Since 2002 liquid net
assets have been increasing, with substantial increases occurring in 2004, 2005, 2006 and
2007. By the end of 2008 liquid net assets had increased to $403.4 million. In 2009, there
was a decline in liquid assets, which was the first time that liquid assets had declined
since 2002. In 2010, liquid assets rebounded surpassing their previous high mark of
$403.4 in 2008, reaching $409.4 million.




                                              17
                                                  Figure 8
                                             Liquid Net Assets
                    $450,000
                    $400,000
                    $350,000
   Thousands of $




                    $300,000
                    $250,000
                    $200,000
                    $150,000
                    $100,000
                     $50,000
                          $-
                               2001   2002    2003   2004    2005   2006   2007   2008   2009   2010




Restricted and Unrestricted Net Assets

         Restricted net assets are assets net of related liabilities held by a university that
are designated for specific purposes by external entities, either government agencies or
private donors. Unrestricted net assets are assets net of related liabilities 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 such a 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 are available for
reallocation. The same can be said for capital appropriations. Capital appropriations
before they are spent are a restricted net asset. They cannot be spent to fund other
expenses. However, in the absence of these restricted funds the University would have to
spend unrestricted funds for investment. Thus one way of viewing restricted funds is that
they either free up unrestricted funds for other uses or that in their absence the University
would forgo the activities funded by restricted funds.

       Table 6 shows the net assets divided into restricted and unrestricted funds. From
2001 to 2003 unrestricted net assets decreased from $54.6 million to $41.4 million.
However, in both 2004 and 2005 unrestricted net assets increased reaching $65.5 million
in 2005. Between 2006 and 2008 unrestricted net assets continued to increase reaching
$124.5 million. In 2009 unrestricted net assets declined by about $10.1 million. However,
in 2010 unrestricted net assets rebounded reaching $149.2 million, surpassing their
previous high, reached in 2008, by $24.7 million.




                                                            18
       Restricted net assets decreased from $176.5 million in 2001 to $168.9 million in
2002. After 2002 restricted net assets increased steadily and by 2005 were $217.8
million. Restricted net assets continued to increase reaching $283.6 million in 2007. In
2008 there was a decline in restricted net assets followed by another decline in 2009.

         In my previous report I pointed out that most of this decline was probably due to
the stock market crash in 2008 and predicted that the System would see at least a partial
recovery in restricted net assets in 2010 due to increases in the stock market in the second
half of 2009. Restricted net assets increased from a low of $233.8 million in 2009 to
$260.2 million about 93 percent of the level reached in 2007. Given the fact that the S &
P 500 has risen approximately 23% since June 28 it is likely that in FY 2011 the
University System will have recovered all of its losses and restricted net assets will likely
reach a new all time high. Figure 9 shows the changes in the unrestricted and restricted
assets for the University System of New Hampshire.

                                             Table 6
                              Unrestricted and Restricted Net Assets
                                  For the year ending June 30
                                         Thousands of $

                                 2005        2006        2007        2008       2009        2010

Unrestricted                   $63,399     $71,263     $104,736    $124,477    $114,322    $149,166
Restricted                     $217,776    $246,073    $283,619    $278,943    $233,879    $260,248

Investment in Plant and        $351,628    $386,119    $410,520    $432,454    $476,041 $487,512
Equipment
Total Net Assets               $632,803    $703,455    $798,875    $835,874    $824,242    $896,926

         The institution can use unrestricted assets for any lawful purpose. Many
universities claim that most and in some cases the Board of Trustees or management has
designated all unrestricted net assets for specific purposes. For example, a Board may
designate some portion of unrestricted net assets to be used for deferred maintenance.
Some of these designations may result from funds being collected by special fees. This
type of statement is misleading in the sense that all of the designated fees are the result of
board or management policy and that policy can be changed. Few institutions have funds
that are undesignated. 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. For example, while spending
money on deferred maintenance may be worthwhile, faculty may believe that a university
can address issues of deferred maintenance over a longer period of time making
unrestricted funds available for other items faculty believe are more important. 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.




                                             19
        In general unrestricted net assets grew more quickly that restricted net assets
improving the financial flexibility of the University System. Between 2001 and 2008 the
ratio of unrestricted to restricted funds increased from .31 to .45, reflecting the faster
growth of unrestricted net assets. In 2009 the ratio of unrestricted to restricted net assets
increased to .49 reflecting the fact that the relative decrease in restricted net assets was
greater than the relative decrease in unrestricted net assets. In 2010 the ratio of
unrestricted to restricted net assets was .57 showing the faster growth of unrestricted net
assets.


                                            Figure 9
                              Restricted & Unrestricted Net Assets
                   $300,000
                   $250,000
   Thousand od $




                   $200,000
                   $150,000                                                        Unrestricted
                   $100,000                                                        Restricted
                    $50,000
                         $-
                               2001 2002 2003 2004 2005 2006 2007 2008 2009 2010




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. Expendable net
assets are one of the key variables that bond rating agencies like Moody’s look at when
they give universities bond ratings. The advantage to a university of having a higher bond
rating is that it allows them to borrow (sell bonds) at a lower interest rate reflecting the
assessment that the probability of default is less likely than in an institution with a lower
bond rating. Non-expendable net assets are funds that would not be spent for operations,
for example the corpus of the endowment fund. Before GASB 34 & 35 universities,
including the University System of New Hampshire presented their balance sheets by
fund group. Universities generally have five fund groups: current funds, loan funds,
endowment and similar funds, plant funds and agency funds. Endowment funds generally
have three categories: endowment, quasi-endowments and term endowments, life income
and annuity funds. Plant funds are generally divided into four categories unexpended
plant funds, funds for renewal and replacement, funds for the retirement of indebtedness
and investment in plant net of debt. Given these categories expendable net assets are
normally calculated by taking the sum of current funds, quasi-endowments, unexpended



                                                        20
plant funds, funds for renewal and replacement, and funds for the retirement of
indebtedness.

        When it comes to endowment, the University System like many state universities
has a substantial portion of its “endowment” in not-for-profit foundations. The University
System’s endowment is reported on two lines in Table 1. The first line shows the
endowment of the University System’s campuses and the second line shows the
endowment held by affiliated entities. These endowments are also shown in Figure 10.



                                              Figure 10
                                             Endowments
                  $200,000
                  $180,000                                                       Endowment
                                                                                 and similar
                  $160,000
                                                                                 investments -
                  $140,000                                                       campuses
  Thouands of $




                  $120,000
                  $100,000                                                       Endowment
                   $80,000                                                       and similar
                   $60,000                                                       investments -
                                                                                 affiliated
                   $40,000
                                                                                 entities
                   $20,000
                        $-
                             2001 2002 2003 2004 2005 2006 2007 2008 2009 2010



       The endowment held by the campuses declined between 2001 and 2002 and then
began increasing reaching $108.6 million by 2005. Since 2005 the endowment held by
the campuses increased $73.9 million reaching $182.5 million by the end of 2008. In
2009 the endowment held by the campuses decreased $27.2 million. The endowment
managed by foundations increased from 2001-2007 rising from $69.1 million to $135.2
million in 2007. The endowment managed by foundations decreased $5.4 million and
$22.3 million in 2008 and 2009 respectively. In the last two years, the University system
has spent between 5.7 percent and 5.5 percent of a 12 quarter moving average of the
market value of investments. In 2010 the University spent between 3.8 percent and 4.8
percent of a 12 quarter moving average of the value of investments. Given the lower rate
of spending and the rebounding of the stock market it is likely that the value of the
endowment will increase substantially in 2011. However, this will also likely result in a
moderate decline in endowment spending in 2011.

       Table 7 shows expendable and non-expendable net assets for the University
System. Expendable net assets for the University System declined between 2001 and
2003 from $136.7 million to $105.6 million. Between 2003 and 2006, expendable net


                                                     21
assets increased by approximately $75.2 million. In 2007, expendable net assets increased
$61.9 million and then declined slightly in 2008. In 2009 expendable net assets dropped
by more than $71 million. Non-expendable net assets have also continued increasing
going from $110.6 million in 2003 to $162.4 million in 2008. In 2009 non-expendable
net assets increased a little more than $16 million. Figure 11 shows expendable and non-
expendable balances for the University System.



                                                             Table 7
                                            Expendable and Non-Expendable Net Assets
                                                   For the year ending June 30
                                                         Thousands of $
                                             2005          2006           2007       2008      2009       2010


Expendable Net Assets                      $154,861     $180,871      $242,718     $240,968   $169,225   $222,355
Non-Expendable Net Assets                  $126,314     $136,465      $145,637     $162,452   $178,976   $187,059

Liquid Net Assets                          $281,175     $317,336      $388,355     $403,420   $348,201   $409,414

Debt                                       $279,081     $417,479      $419,044     $458,195   $474,878   $464,303
Operating Expenses & Interest
Expenses                                   $535,368     $569,827      $589,084     $627,020   $652,340   $663,860


          Viability Ratio                      0.555        0.433        0.579        0.526      0.356         0.479
          Primary Reserve Ratio                0.289        0.317        0.412        0.384      0.259         0.335




                                            Figure 11
                              Expendable & Non-Expendable Net Assets
                   $300,000

                   $250,000                                                                   Expendable Net
                                                                                              Assets
   Thousand of $




                   $200,000

                   $150,000                                                                   Non-Expendable
                                                                                              Net Assets
                   $100,000

                    $50,000

                         $-
                               2001 2002 2003 2004 2005 2006 2007 2008 2009 2010




                                                          22
        Table 7 also shows two ratios, calculated for the University System, which 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. Declines in the
viability ratio in 2002 and 2003 were due primarily to decreases in expendable net assets.
In 2004 despite an increase in debt the viability ratio increased due to a substantial
increase in expendable net assets. In the following two years the viability ratio fell as the
University system dramatically increased its debt. In 2007 the viability ratio rebounded
due to a large increase in expendable net assets and then fell slightly in 2008 due to
increased debt. In 2009 there was a sharp drop in the viability ratio due primarily to the
decline in expendable net assets. As expected the viability ratio increased in 2010 due to
the large increase in expendable net assets combined with a decline in debt. For 2010, the
viability ratio was 0.479, which meant the University System had sufficient expendable
net assets to pay 47.9 percent of its debt. The changes in the viability ratio are also shown
in Figure 12.

         Over the entire period from 2001 to 2010 the University System has had
fluctuations in its viability ratio and there appears to be a slight downward trend in this
ratio. Borrowing that ultimately results in new revenue or improves the quality of the
institution can be viewed as an investment, although clearly it comes with a cost in the
form of increased interest and principal payments and reduced financial flexibility. While
the decline in the viability ratio is not a cause for alarm it would be prudent for the
System to refrain from taking on new debt unless it can offset that debt with new sources
of revenue that exceed additional expenses associated with generating that revenue.



                                    Figure 12
                                  Viability Ratio
  0.700
  0.600
  0.500
  0.400
  0.300
  0.200
  0.100
  0.000
           2001    2002    2003    2004   2005    2006    2007    2008    2009    2010



        The second ratio presented in Table 7 is the primary reserve ratio, which measures
the ratio of expendable net assets to operating expenses and interest payments. The
primary reserve ratio is calculated by dividing expendable net assets by the sum of
operating expenses, non-operating expenses and interest payments. Although there was a
drop in the primary reserve ratio for the University System between 2001 and 2003 it


                                             23
trended upward between 2003 and 2007. In 2008, there was a slight decrease in the
primary reserve ratio due to a slight decline in expendable net assets and a significant
increase in expenses. In 2009 there was a sharp decline in the primary reserve ratio again
due to the decline in expendable net assets. Again as expected, the primary reserve ratio
rebounded in 2010 due to a substantial increase in expendable net assets. A primary
reserve ratio of 0.335 implies that the University had enough expendable net assets to
meet 33.5 percent of its operating expenses or that the University System has enough
reserves to cover expenses for about 4 months. Figure 13 shows the changes in the
primary reserve ratio.



                                 Figure 13
                           Primary Reserve Ratio
  0.450
  0.400
  0.350
  0.300
  0.250
  0.200
  0.150
  0.100
  0.050
  0.000
          2001    2002    2003    2004   2005    2006    2007    2008   2009    2010



        In summary, in 2010 the University System of New Hampshire had total net
assets of $896.9 million with $409.4 million in liquid assets, and increase of $61.2
million. These liquid assets were divided between $222.4 million in expendable net
assets and $187.1 million in non-expendable net assets. In general, an analysis of
Statement of Net Assets suggests that between 2009 and 2010 the University System’s
financial status has improved, which was to be expected given the rebound in the stock
market. In my previous update I noted that the deterioration in 2009 did not reflect any
fundamental change in financial health of the University System and I believe the results
in 2010 confirm this conclusion.




                                            24
               What is the income and expenditures of the University?

Total Operations

       Revenues and expenses for the University are listed on the statement of Changes
in Net Assets. In effect this is the University’s income statement or its profit and loss
statement.

         Revenue is the inflow of resources to a university for the services it provides.
Revenues 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, food service or running a bookstore. Non-
operating revenues include state appropriations and investment income.

        Expenses for the most part represent an outflow of resources from a university.
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. Non-operating expenses consist primarily of interest paid on debt.

        The difference between operating revenues and operating expenses is known as
the operating loss. In 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 heavily 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 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 can be referred to as “net income.” Net income can be an important indicator
of how well a university is performing financially.

          However, there are two other major sources of revenue for the University. These
are capital appropriations and capital grants and gifts. These sources of revenue 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



                                            25
appropriation or by gift, is an important source of revenue. Unfortunately, capital
appropriations and gifts tend to be lumpy 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 capital appropriations and gifts and can factor these revenues
into their spending plans.

        Net income plus capital appropriations and gifts are 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 universities did not account for
depreciation of fixed assets. Therefore, at the end of a fiscal year if revenues 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.

         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 a cash payment 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 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.

        The basic data on revenue, expenses and net income are shown in Table 8. The
University System has restated its 2001 financial statements so that they are compatible
with financial statements for 2002 and beyond.

       A major source of revenue comes from tuition and fees. Tuition and fee revenue
increased between 2001 and 2008 at an average compound rate of 8.3 percent per year. In



                                             26
2009 tuition revenue increased 6.6 percent and in 2010 it increased 8.9 percent. Net
tuition and fees, after subtracting student financial aid also increased at an average annual
compound rate of 8.3 percent between 2001 and 2008. Again in 2009 net tuition and fees
increase 6.8 percent so tuition appears to be increasing faster than student financial aid. In
2010 there was a substantial increase in student aid i.e., tuition discounting so that net
tuition revenue increased by 4.1 percent.

        In 2001, total operating revenues were approximately $346.9 million and by 2010
they were approximately $612 million. Other important sources of revenue were grants
and contracts, which increased from $96.1 million in 2001 to $142.7million in 2010 and
sales and services of auxiliary enterprises, which increased from $98.3 million to $187.6
million between 2001 and 2010.

        State appropriations are another important source of income. In 2002 and 2003
state appropriations increased about 5 percent each year. In 2004 there was no increase in
state appropriations. In 2005 state appropriations went up by 3 percent and then increased
by 2 percent in 2006. Finally, in 2007 and 2008 state appropriations increased by 5.5
percent and 4.1 percent respectively. In 2009 state appropriations increased 4.1 percent.
In 2010 state appropriations were flat. Despite the fact that in most years, state
appropriations were generally increasing, the University System has increased its reliance
on tuition as shown in Figure 14. This figure shows a steady decline in the ratio of state
subsidy to net tuition. In 2001 for every dollar in tuition and fees collected the University
received $0.57 in state subsidy. In contrast by 2010 for every dollar collected in tuition
and fees the University System received only $0.38.6 in state appropriations.



                                  Figure 14
                         Ratio of Subsidy to Tuition
  0.6

  0.5

  0.4

  0.3

  0.2

  0.1

    0
         2001    2002     2003    2004    2005     2006    2007     2008    2009     2010




                                             27
                                                     Table 8
                                   Revenues, Expenses and Changes in Net Assets
                                                 Thousands of $
                                           For the year ending June 30
                                           2005         2006        2007        2008        2009         2010
OPERATING REVENUES
Tuition and fees                          $246,330     $265,428    $291,967    $317,554    $338,390     $368,656
Less: student financial aid               $(64,255)    $(64,905)   $(75,179)   $(84,210)   $(89,257)   $(109,272)
Net tuition and fees                      $182,075     $200,523    $216,788    $233,344    $249,133     $259,384
Grants and contracts                      $121,792     $131,353    $132,348    $134,251    $135,326     $142,683
Sales of auxiliary services               $128,385     $137,343    $152,501    $166,906    $176,444     $187,588
Other operating revenues                   $25,252      $25,412     $22,262     $23,593     $21,351       $22,708
Total Operating Revenues                  $457,504     $494,631    $523,899    $558,094    $582,254     $612,363
OPERATING EXPENSES
Employee compensation and benefits        $352,794     $370,318    $388,062    $411,386    $427,956     $443,708
Employee separation incentives              $6,033       $1,127        $432      $4,037      $3,949         $750
Supplies and services                     $135,944     $146,054    $152,451    $163,388    $168,458     $174,144
Utilities                                  $17,934      $23,586     $24,269     $24,453     $26,023      $18,338
Subcontracts on grants and contracts
Depreciation                               $32,672      $37,920     $36,594     $39,683     $43,873      $47,776
Total Operating Expenses                  $545,377     $579,005    $601,808    $642,947    $670,259     $684,716
Operating loss                            $(87,873)    $(84,374)   $(77,909)   $(84,853)   $(88,005)    $(72,353)
NONOPERATING REVENUES
(EXPENSES)
State of New Hampshire general             $85,583      $87,450     $92,250     $96,000    $100,000     $100,000
appropriations
Gifts                                      $10,498      $11,117     $11,565     $12,483      $9,419       $8,444
Operating investment income                 $4,846       $7,460     $16,851      $1,248      $(332)      $14,707
Endowment return used for                   $8,046       $9,533     $10,724     $11,628     $13,301
operations
Other Investment Income                                                                       $9,021     $11,811
Interest expense, net                     $(10,009)     $(9,178)   $(12,724)   $(15,927)   $(17,919)    $(20,856)
Other non-operating income                                 $184                                         $(24,462)
Net Income                                 $11,091      $22,192     $40,757     $20,579     $25,485      $17,291
OTHER CHANGES IN NET
ASSETS
State of New Hampshire capital             $22,660      $21,940      $8,084     $20,235     $28,929      $22,135
appropriations
Plant gifts, grants, and other changes,        $62       $1,702      $6,487      $8,931      $7,799       $8,330
net
Endowment gifts                             $9,295      $10,414      $8,851     $16,849     $16,531       $8,223
Endowment return, net of amount            $11,226      $17,541     $31,241    $(27,595)   $(80,977)     $16,705
used for operations
Other                                                   $(3,137)                $(2,000)    $(7,000)
Change in Net Assets                       $54,334      $70,652     $95,420     $36,999     $(9,233)     $72,684
Net assets at beginning of year           $578,469     $632,803    $703,455    $798,875    $833,475     $824,242
Net assets at the end of year             $632,803     $703,455    $798,875    $835,874    $824,242     $896,926



                                                  28
        Expenses are reported in two formats. In Table 8 expenses are shown by natural
category e.g., compensation and benefits, supplies and services, utilities and depreciation.
Universities are labor-intensive institutions and the University System of New Hampshire
is no exception. Approximately 70 percent of operating expenses (excluding
depreciation) are accounted for by compensation and benefits. The next most important
category of expenses is supplies and services.

       Between 2001 and 2008 compensation and benefits increases from $281.8 million
to $411.4 or they increased an average of 5.6 percent per year. In 2009, compensation
was $427.9 million; an increase of 4 percent and in 2010 compensation was $443.7
million, an increase of 3.6 percent. Spending on supplies and services between 2001 and
2008 increased from $96.5 million to $163.4 million an average increase of 7.8 percent
per year. In 2009 spending for supplies and services increased 3.1 percent and in 2010 it
increased 3.4 percent. Finally, spending on utilities between 2001 and 2008 increased
from $12.9 million to $24.4 million, an average increase of 9.5 percent per year. In 2009,
spending on utilities increased 6.1 percent. In 2010 there was a dramatic decline on
spending on utilities. Utility expenses declined from $26 million to $18.3 million.

        The operating losses shown in Table 8 are largely 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. However, it is
noteworthy that the University System reduced its operating loss from $88 million in
2009 to $72.3 million in 2010. This is by far the smallest operating loss in the ten-year
period from 2001-2010 and speaks to the ability of the University System to increase its
revenue while controlling the increase in operating expenses. In 2010 the percentage
increase in operating expenses was only 2.2% by far the smallest percentage increase in
operating expenses in the last 10 years.

        A better indicator of a university’s balance between revenues and expenses is net
income, which is the change in net assets due to operations. This number is the
difference between revenues and expenses, excluding the revenues a university receives
for capital equipment and buildings as well as unrealized gains and losses on investments.
The University System refers to this number a net income from recurring operations in
the Management Discussion and Analysis in the 2010 financial statements.

        Figure 15 shows the net income of the University System. In eight of the nine
years examined in this update, the University System had a positive net income. In 2001,
the University System made $14.8 million and in 2002 it made $1.4 million. In 2003, the
System lost $3.4 million before returning to having a positive net income in 2004 and
2005. In 2005, the System had a net income of $11.1 million and in 2006 its net income
doubled reaching $22.2 million. In 2007, the net income of the University System nearly
doubled again reaching $40.7 million before declining to $20.5 million in 2008. In 2009,
despite the challenging economic environment the University System had a net income of
$25.5 million, exceeding its net income of 2008. Since 2005 the University system has
dramatically increased its net income. The performance in 2007 was unusually high and
was driven largely by investment income. However, in 2009 the University System had



                                            29
the lowest investment income of any year during the entire nine-year period from 2001-
2009 and still had the second highest level of net income. Given the fact that operating
losses were significantly lower one would expect an increase in net income in 2010.
However, net income in 2010 was $17.9 million down from $25.5 million in 2009. What
explains the decline in net income? In 2010 the University took a one-time charge of
$24.5 million to make a voluntary contribution to the State of New Hampshire to help
offset its deficit. This charge is explained in note 16 of the 2010 Audited Financial
Statements. In the absence of that charge the University would have had a net income of
$41.8 million.




                                                 Figure 15
                                                Net Income
                     $45,000
                     $40,000
                     $35,000
                     $30,000
   Thousands of $




                     $25,000
                     $20,000
                     $15,000
                     $10,000
                      $5,000
                           $-
                     $(5,000)   2001   2002   2003   2004    2005   2006   2007   2008   2009   2010
                    $(10,000)



        Finally, we look at the change in net assets, which is the University System’s
bottom line. The change in net assets takes into account not only regular sources of
revenue but also capital gifts, capital appropriations as well as unrealized gains or losses
on the value of investments. Capital gifts and capital appropriations are important
sources of revenue and to the extent that money can be raised to finance capital
expansion or replacement it frees up funds in the operating budget for other uses.




                                                            30
                                              Figure 16
                                         Change in Net Assets
                    $120,000

                    $100,000

                     $80,000
   Thousands of $




                     $60,000

                     $40,000

                     $20,000

                          $-
                                2001   2002   2003   2004    2005   2006   2007   2008   2009   2010
                    $(20,000)



         The change in net assets is shown in Figure 16. In looking at the data on changes
in net assets one can see that there were positive changes in net assets in eight out of the
last ten years. Both of the years in which the University System had a negative change in
net assets were associated with stock market crashes and significant declines in
investment income. In both instances the vast majority of these losses were due to
unrealized (paper losses) losses in the value of investments.

        In 2001, the University had an $11.8 million increase in net assets. This was
despite having significant losses in investments due primarily to declines in stock market
performance. These losses account for most of the negative numbers listed under other in
the category of “Other Changes in Net Assets.” In 2003 the losses were much smaller and
in 2004 the value of the System’s investments increased significantly, which can be seen
in the “endowment return, net of amount used for operations.” In 2005, the University
had an increase in net assets with change in net assets reaching $54.3 million and in 2006
the change in net assets reached $70.7 million. In 2007, the change in net assets reached
$95.4 million and in 2008 the change in net asset dropped to approximately $37 million.
In 2009 the change in net assets was negative $9.2 million and once again the major
factor in the change in net assets was the loss in investment income. In 2009 the
University System showed a loss of $81 million in investment income. In 2010 rather
than experiencing a loss in investment income the University System showed a gain of
$16.7 million in investment income and a $72.7 million change in net assets. The
increase in net assets of $72.7 million was the second highest increase in net assets in a
single year since the University System adopted the GASB 34 accounting changes.
Moreover, were it not for the one-time charge of $24.5 million the University System
would have had a change in net assets of $97.2 million surpassing the $95.4 million it
made at the peak of the stock market and real estate bubble in 2007 when its investment



                                                            31
income (setting aside the investment income used for operations) was nearly twice the
size of investment income in 2010.

Total Operations Ratios

        Figure 17 shows several income ratios for the University System from 2001 to
2010. 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 rates of return for the most part mirror the actual levels of income in their
patterns. The first ratio, the net income ratio declined between 2001 and 2003 turning
negative in 2003. It then rose in from 2004 through 2007. In 2008 there was a sharp
decline in the net income ratio and since 2008 the ratio has been relatively stable
increasing in 2009 and decreasing in 2010. However, it is important to note that the
decline in 2010 was due solely to the one-time $25 million charge in the form of
“voluntary contribution to the State of New Hampshire to help mitigate fiscal issues at
the state level.” (See p. 22 of the USNH Annual Report)

         The decline in the net income ratio, in 2002, reflected slower growth in operating
revenue relative to the growth in operating cost. In subsequent years relative growth in
operating revenues was greater than the relative growth in operating costs. The negative
net income ratio in 2003 was primarily the result of declines in investment income and
endowment returns used for operations. In 2004, the decline in investment income
continued but was offset by the growth of revenue, which significantly reduced the
operating loss and led to a positive rate of return for 2004. In 2005 through 2007, strong
revenue growth and a rising investment income dramatically increased the net income
ratio to 6 percent, which is extraordinarily high. In 2008, the net income ratio declined to
3 percent and then in 2009 rose to 3.6 percent, which is still a relative high net income
ratio. In 2010 the net income ratio declined to 2.3 percent but would have been 5.7
percent without the $25 million one-time charge.

         The net asset ratio declined from 2001 to 2002 becoming negative in 2002. In
2003 there was a dramatic increase in the net asset ratio. The main factor responsible for
the increase in 2003 was a nearly fivefold growth in State of New Hampshire capital
appropriations. These capital appropriations remained at fairly high levels through 2006.
In 2007, there was a drop in capital appropriations but this was more than offset by
increases in return on endowment so that the net asset ratio continued to rise. In 2008, the
net asset ratio declined but still remained at a relatively high level. In general, the higher
levels of capital appropriations, along with the growth in net income, account for the
increase in the net asset ratio in during the period from 2004-2008 compared to the period
from 2001-2003. In 2009 the net asset ratio was negative, again because of the decline in
investment income. In 2010, investment income turned around, there was an larger
increase in revenue than in 2009 and the University had a relatively modest increase in
operating expenses resulting in a large increase in the net asset ratio. The net asset ratio
was also affected by the $25 million one-time change and in the absence of this charge



                                             32
the net asset ratio would have been 12.1 percent, nearly as high as the net asset ratio in
2007, before the beginning of the Great Recession and the accompanying meltdown in
financial markets.


                              Figure 17
                     Net Income & Net Asset Ratios
   0.150


   0.100


   0.050


   0.000
           2001    2002     2003    2004    2005    2006     2007       2008   2009   2010
  -0.050

                               Net Income Ratio       Net Asset Ratio




                                The Cash Flow Statement

        To some extent the net income and the change in net assets gives a somewhat
distorted view of a university’s earnings because of its treatment of depreciation as an
expense.. The important thing to remember about depreciation is that while it is an
expense it is a a non-cash expense. Normally, when a university incurs an expense it
must cover that expense by writing a check. This results in an outflow of cash from the
university. In the case of depreciation, no cash flows out of the university. In other
words, it is an expense only on paper. This is one of the major differences between
accrual account, which is the basis for preparing the balance sheet (Statement of Assets,
Liabilities and Net Assets) and the income statement (Statement of Revenues, Expenses
and Changes in Net Assets).




                                              33
                                                           Table 9
                                                          Cash Flow
                                                 for the year ending June 30

                                         2005            2006           2007        2008         2009         2010
CASH FLOWS FROM
OPERATING ACTIVITIES
Tuition and fees, net                $182,270        $203,980       $214,959    $232,895     $249,736     $260,473
Grants and contracts                 $125,023        $131,759       $130,600    $137,489     $132,824     $136,444
Sales of auxiliary services          $129,701        $136,262       $152,981    $166,972     $177,076     $187,010
Other operating revenues              $25,998         $25,896        $23,709     $23,275      $22,540      $21,833
Payments to or on behalf of
employees                           $(349,182)      $(374,034)
Payments to Employees                                             $(294,280)   $(311,617)   $(321,177)   $(324,927)
Payments for Employee Benefits                                     $(94,048)   $(108,660)   $(110,372)   $(115,263)
Payments to suppliers and
subcontractors                      $(151,646)      $(180,539)    $(172,747)   $(192,509)   $(193,185)   $(191,186)
NET CASH USED IN
OPERATING ACTIVITIES                 $(37,836)       $(56,676)     $(38,826)    $(52,155)    $(42,558)    $(25,616)
CASH FLOWS FROM
NONCAPITAL FINANCING
ACTIVITIES
State general appropriations          $85,583         $87,450        $92,250     $96,000     $100,000     $100,000
Gifts                                 $11,288         $12,223        $11,723     $12,174       $9,414        $8,401
Grants and Contracts                                                                             $546          $538
Other non-capital activity                                                                                $(25,000)

NET CASH PROVIDED BY
NONCAPITAL FINANCING
ACTIVITIES                            $96,871         $99,673       $103,973    $108,174     $109,960      $83,939
CASH FLOWS FROM
CAPITAL FINANCING
ACTIVITIES
State appropriations for plant
projects                              $18,338         $26,402         $8,608     $18,697      $16,645      $32,989
Plant gifts and grants                   $547          $1,022         $7,603      $8,931       $7,799       $8,233
Endowment gifts                        $6,779         $12,970         $9,162     $16,741      $16,424       $8,052
Purchases of property, equipment,
and construction services            $(78,090)      $(133,339)    $(128,321)   $(108,213)   $(110,022)    $(71,935)
Proceeds from sale & disposal of
property & equipment                                    $686            $186        $515                      $233
Proceeds from issuance of debt        $65,130        $231,438         $6,789     $46,519     $108,652         $171
Retirement of debt through
defeasance                                           $(87,480)                               $(83,106)
Debt principal payments               $(6,702)        $(5,964)      $(5,224)     $(7,890)     $(8,938)    $(10,752)
Interest expense                      $(9,500)       $(15,257)     $(17,349)    $(18,930)    $(18,946)    $(20,722)
Other expenses                                                                   $(2,000)     $(7,000)
NET CASH USED IN
CAPITAL FINANCING
ACTIVITIES                            $(3,498)        $30,478     $(118,546)    $(45,630)    $(78,492)    $(53,731)




                                                         34
                                              Table 9 continued
                                                  Cash Flow
                                         for the year ending June 30

                                            2005          2006         2007         2008         2009         2010
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of investments       $337,882      $431,535     $718,005     $466,532     $262,228     $265,184
Purchase of investments
                                       $(381,511)    $(517,925)   $(666,741)   $(462,704)   $(238,447)   $(239,945)
Endowment investment yield                 $4,411        $5,482       $6,285       $6,959       $3,939       $3,441
Operating investment income                $4,289        $7,293      $11,302      $11,765       $(225)      $14,731
Investment income on bond proceeds           $292        $2,525       $4,172       $1,749          $59          $53
NET CASH USED IN INVESTING
ACTIVITIES                              $(34,637)     $(71,090)     $73,023      $24,301      $27,554      $43,464
Increase (decrease) in cash and cash
equivalents                              $20,900        $2,385      $19,624      $34,690      $15,918      $48,056
Beginning cash and cash equivalents      $74,923       $95,823       98,208      117,832     $152,522     $168,440
ENDING CASH AND CASH
EQUIVALENTS                              $95,823       $98,208     $117,832     $152,522     $168,440     $216,496



          As an alternative to the income statement one can also look at the inflows and
  outflows of cash from a university. The inflows and outflows of cash are shown in the
  University Statement of Cash Flows. The Statement of Cash Flows 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. Second are cash flows from non-capital
  financing activities, the largest being state appropriations. 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.

          Table 9 shows the cash flows for the University System from 2005-2010 and
  Figure 18 shows the net increase in “operating cash flows” from 2001 to 2010 calculated
  in two ways. The first method takes the sum of net cash used in operating activities and
  net cash provided by non-capital financing activities. The second method is more
  conservative, subtracting from the first method interest payments on debt. Clearly, in
  each of the ten years the University System had a positive operating cash flow. Using the
  first method, in 2001 the System had an operating cash flow of $22.2 million and by 2010
  it had an operating cash flow of $58.3 million. Using the second method the University
  had an operating cash flow of $15.9 million in 2001 and $37.6 million in 2010. Again
  both the numbers in 2010 reflect the $25 million one-time charge in the form of
  “voluntary contribution to the State of New Hampshire to help mitigate fiscal issues at
  the state level.”



                                                35
                                               Fgigure 18
                                          Operating Cash Flows
                   $80,000
                   $70,000
                   $60,000
   Thousand of $




                   $50,000
                   $40,000
                   $30,000
                   $20,000
                   $10,000
                        $-
                             2001     2002    2003    2004      2005   2006    2007    2008     2009       2010

                         Operating Cash Flow without interest          Operating Cash Flow with interest


        The increase in cash flow 2004 was due largely to stronger growth in revenue and
a slight decrease in payments to suppliers and subcontractors, which helped to offset a
decline in gifts. In 2005, strong revenue growth again increased operating cash flow. In
2006 there was a decline in operating cash flow due to a significant jump in payments to
suppliers and sub-contractors. In 2007, there was again a significant increase in operating
cash flow again due to strong revenues and a decrease in payments to suppliers and sub-
contractors. In 2008, there was a substantial increase in payments to suppliers and sub-
contractors resulting in a decrease in operating cash flow. Some of the movement in cash
flow due to changes in payments to suppliers and sub-contractors is likely to be
influenced by timing of payment issues as opposed to major changes in spending from
year to year. However, there has generally been a substantial improvement in operating
cash flow in the years 2004-2010 compared to the years 2001-2003.

        Moreover, in the absence of the $25 million charge operating cash flow calculated
using either method would have been at an all time high. Using the first method it would
have been $83.3 million and using the second method it would have been $62.6 million.
So looking at the cash flow picture for the University System in 2010 one must conclude
that cash flow for the University System, based on fundamentals, improved despite being
somewhat lower than in 2009. Using method 2, the more conservative of the two one
could conclude that the inflow of cash from operations exceeded the outflow of cash for
operations by $37.6 million and this number would have been $62.6 million in the
absence of the one-time charge.




                                                           36
Sources of Revenue:

        The Income ratios in Figures 19 and 20 show the major sources of revenue for the
University System for 2001 and 2010. In 2001 the largest source of revenue was tuition
comprising 30 percent of revenues. The next largest source of revenue was sales of
auxiliary services accounting for 22 percent of revenue followed very closely by grants
and contracts accounting for 21 percent of revenue. The fourth largest source of revenue
was state of New Hampshire general appropriations accounting for 17 percent of
revenues. In 2010 one can clearly see a shift in sources of revenue. The share of revenue
accounted for by tuition has increased to 35 percent while the share of revenue accounted
for by state of New Hampshire general appropriations has declined to 13 percent. The
share of revenue accounted for by sales from auxiliary services is has also increased
from 22 to 25 percent.


           Figure 19
   Sources of Revenue, 2001
                                                             Net tuition and fees
                           10%
                                        30%
             17%                                             Grants and contracts


                                                             Sales of auxiliary services
              22%                       21%
                                                             State of New Hampshire general
                                                             appropriations
                                                             Other revenues




           Figure 20
   Sources of Revenue, 2010                                     Net tuition and fees

                                                                Grants and contracts
                                 8%
                     13%                    35%                 Sales of auxiliary services

                                                                State of New Hampshire
               25%                                              general appropriations
                                      19%                       Other revenues




                                              37
Allocation of Expenses

        Figures 21 and 22 show how functional expenses are allocated within the
University System of New Hampshire for both 2001and 2010. Over this time period, the
allocation of expenses has been fairly stable. However, in 2010 it appears that the
University System has reallocated some expenses across functional categories because
the functional expenses they report for 2008 in the 2009 financial statements are different
from what was reported in the 2008 financial statement. Thus, there may be some
inconsistencies when comparing 2010 to previous years. The largest single expense in
both years is for instruction accounting for 31 percent of expenses in 2001 and 34 percent
of expenses in 2010. The next largest expense is for auxiliary student services followed
by research and sponsored programs.



          Figure 21                                         Instruction
Allocation of Resources, 2001                               Research & Sponsored Programs

                                                            Public Service
                        22%            31%                  Academic Support
        4%
             7%                                             Student Services

                                        18%                 Institutional Support
                        9%     4%
             5%                                             Operations & Maintenance

                                                            Auxiliary Student Services




            Figure 22                                         Instruction

  Allocation of Resources, 2010                               Research & Sponsored Programs

                                                              Public Service

                        23%            34%                    Academic Support
        4%
                                                              Student Services
              7%
                   6%                                         Institutional Support
                         8%          17%
                                                              Operations & Maintenance

                              1%                              Auxiliary Student Services




                                              38
                                        Conclusion

         This report shows that the financial condition of University System has remained
fairly stable over the period from 2001-2008. In 2009, there was deterioration in the
financial condition of the University System. This deterioration is likely temporary,
similar to the deterioration in 2002. In both 2002 and 2009 the deterioration was caused
largely by a decline in investments due to sharp declines in the stock market. The
University System appears to have a fairly stable base of revenue, which has become
more dependent on tuition but is still fairly diversified. The major source of fluctuations
in revenue and in net income over the past eight years is primarily the result of
fluctuations in investment earnings. Under normal circumstances, ups and downs in
financial markets would not appear to have any long-term implications for the financial
health of the University System. In fact, the System has demonstrated that it has more
than adequate reserves to manage temporary declines in revenues due to unforeseen
events.

        Looking at three key ratios we can summarize the University’s financial
condition. These ratios are often used by bond rating agencies to assess the credit
worthiness of an institution. The Ohio Board of Regents has developed a methodology to
assign scores these three 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). This methodology
uses some of the key ratios that Moody’s uses in assigning its credit ratings.

       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 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. A weighted average of these scores is then used to calculate a composite
index that reflects the bond rating that would be given to an institution. These bond
ratings reflect the overall financial health of the institution.


                                            Table 10
                                       Composite Scores
                                  for the year ending June 30

                          2001   2002   2003   2004     2005    2006   2007   2008   2009   2010

Viability Score             3     2      2       3       2       2      2      2      2      2
Primary Reserve Score       4     3      3       4       4       4      4      4      4      4
Net Asset Score             3     1      5       5       5       5      5      5      1      5

Composite Score            3.5   2.3    3.1     3.9      3.6    3.6    3.6    3.6    2.8    3.6




                                               39
        Table 10 shows the individual scores for each ratio and composite scores for
University System from 2001 to 2010. To understand the scores it is useful to think
about the period from 2001-2004 as being distinct from the period 2005-2010. In the
early period the viability score and the primary reserve score declined and then increased
due almost entirely to movements in expendable net assets. In the later period, from
2005-2010, expendable net assets generally increased but at the same time the University
System took on substantial amounts of debt. It is the increase in debt, which more than
doubled between 2004 and 2008, that explains why the viability score declined between
2004 and 2005 and has remained at a relatively low level.

        In 2009 there was a sharp drop in the viability ratio although the viability score
for the University System remained at 2. At the same time, in 2009 there was a decline in
the net asset score, which was almost entirely driven by the decline in investments. In my
previous report I wrote that the increase in the stock market in the fall of 2009 it is likely
that the net asset score will improve in 2010 and this is precisely what happened.

          Figure 23 shows the composite scores for the overall financial health of the
University System. The main reasons for the fluctuations in the individual scores and
therefore in the composite scores from 2001-2010 can be attributed largely to the
volatility of investment earnings. The income performance of the University System
over the past five years has improved significantly compared to its performance in 2002
and 2003. Adding to this improved income performance has been a significant increase in
capital appropriations, which have remained relatively stable and significantly increased
the change in net assets over the last six years. The only exception was 2007, when there
was a significant drop in state capital appropriations that was offset by a large increase in
operating investment income. The University System in recent years has relied more on
endowment income for operations so the decline in endowment may present some
challenges to the University System. However, to put things in perspective, even if the
University System totally eliminated endowment income it still would have had a net
income of $12.1 million in 2009. This is fundamentally different from the situation that
the University System faced from 2002-2004 following declines in investment income. In
2010 there was a substantial increase in net assets and so the net asset score increased
from 1 to 5.

        Overall, the composite scores from 2001 through 2010 paint a picture of a
University System that is fundamentally stable and in good financial condition. This
conclusion is supported by Moody’s ratings of the University of New Hampshire System.
Moody’s has generally rated the University System as A1 between 2001 and 2009.
Moody’s uses nine generic categories for rating and 3 modifiers for categories two
through 8 (1 - high, 2 - medium and 3 - low) to categorize credit rise. So out of 23
categories Moody’s places the University System in the 5th highest category A1, which
means that the System’s debt is considered at the high end of upper medium grade and
subject to low credit risk. In its last rating of the University System which was February
of 2009 Moody’s concluded as it had in previous years that the outlook for the University
System was stable. In looking at the University System’s strengths Moody’s made note of
the multi-year operating surpluses of the University System, its stable market position



                                             40
and the stabilization of its debt through debt restructuring. In assessing challenges
Moody’s noted relatively low state support, an increasing level of debt resulting in a
more leveraged balance sheet and modest fund raising. Moody’s concludes that the main
factors that could lead to a downgrade in its credit rating would be weaker student
demand and additional debt without liquid reserves and additional revenue to service the
debt.


                                   Figure 23
                                Composite Scores
  4.5
    4
  3.5
    3
  2.5
    2
  1.5
    1
  0.5
    0
         2001    2002    2003    2004     2005    2006    2007     2008    2009    2010




        Another important component of financial health is student enrollment.
Universities that have growing enrollment have another source of revenue, which can
offset temporary declines in revenue due to the volatility of investment income. The
University System of New Hampshire has had fairly steady growth in enrollment.
Between 2001 and 2008 enrollment in the University System has grown at a compound
annual rate of 2.4 percent. Figure 25 shows the increase in FTE enrollment. In addition,
the University of New Hampshire, which accounts for the largest portion of enrollment
for the University System has become more selective while maintaining a fairly stable
rate of matriculation yield. The selectivity ratio is the percentage of applicants accepted
and the matriculation ratio is the percentage of accepted student who end up entering the
University System. The selectivity ratio and matriculation yield are shown in Figure 26.




                                            41
                                  Figure 24
                               FTE Enrollment
  30000

  25000

  20000

  15000

  10000

   5000

      0
           2001    2002    2003     2004    2005    2006    2007     2008    2009




        Figure 24 shows the selectivity and matriculation ratios for the Durham campus.
The decline in the selectivity ratio, between 2001 and 2007, means that the University
System became more selective. As I noted in an earlier report becoming more selective
allows the University System to have better control over the number of student it admits.
At the same time, the stable matriculation yield means that the University System means
that the University System can be fairly confident that it can control its enrollment and
that gives the University System additional flexibility in dealing with change in the
economic environment. Table 2 in the Management Discussion and Analysis of the 2010
Annual Financial Report shows that while the number of freshman applicants at the
Durham campus decreased slightly from 16,246 to 16,132 acceptances increased from 65
percent to 72 percent and the matriculation yield remained at 26 percent so the number of
first year students increased from 2,746 in 2008 to 3,020 in 2009 and overall enrollment
at the Durham campus increased from 13,925 to 14,250.




                                           42
                              Figure 24
                Selectivity and Matriculation Ratios
  100

   80

   60

   40

   20

    0
         2001     2002    2003       2004      2005      2006      2007   2008   2009

                            selctivity ratio        matriculation yield




        In conclusion, over the last 10 years the University System’s financial condition
has remained fundamentally unchanged. Its financial status deteriorated in 2002 and 2003
and then recovered in 2004 remaining stable until 2009. The underlying causes of the
deterioration from 2002-2003 and in 2009 did not represent a change in the fundamental
drivers of expenses and revenues, which have remained stable. The University System
has been investing heavily to improve its capital infrastructure by taking on significant
levels of debt. The University System has had a positive net income for the last seven
years and its cash flow from operations has been increasing. In 2009 there was a decrease
in net assets, similar to the decrease in 2003. In my last report I noted that since the
University System was able to deal with significant declines in investment earnings in the
early part of the decade and emerge with strong earnings and the ability to finance capital
improvements meant it was well positioned to deal with any declines in income due to
the current economic crisis. The results for 2010 support this conclusion. The University
System had positive net income from operations and a significant increase in net assets
and well as high levels of cash flows from operations. It continues to have a high level of
reserves relative to its expenses and despite having a relatively high level of debt; the
University System is in very good financial condition.




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