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Financial Trends and Highlights

VIEWS: 8 PAGES: 18

									Minnesota State Colleges and Universities




    Financial Trends
     and Highlights
 Preparation Guidelines--Non-Audited Colleges




                                            FY 2010
                        Fiscal Year 2010 Financial Trends and Highlights
       Non-audited College Preparation Guidelines – Please Complete by December 31, 2010


This guideline contains the instructions and explanations necessary for preparing Fiscal Year 2009
Financial Trends and Highlights using accrual financial statement data. Please prepare the financial
performance measures for fiscal years 2008 - 2010 by December 31, 2010. This should provide
time for analysis and development of commentary. Similar to last year we will plan to hold
regional meetings for small groups of colleges in early calendar 2010.

Fiscal Year 2010 Review Approach

Trends and Highlights calculation of CFI excludes the several MnSCU adjustments included in
years prior to 2009. This change allows institutional CFI data to match requirements of the
subsequent spring’s Higher Learning Commission (HLC) Annual Institutional Data Update.

FY 2010 review participants will include presidents and CFOs plus people from other areas based
on each year’s agenda items and/or each president’s determination. We will again look to group
from 3 –6 colleges per meeting; trends and highlights information will be used to trigger good
discussion regarding a wide variety of pertinent topics. Please come prepared to generate good
discussion and share ideas across the colleges’ presidents, CFOs, and others. Meeting logistics
information will be determined and distributed later through a separate communication.

College accrual financial statements for FY2010 should be final by mid November. Financial
Reporting will provide those to you in late November or early December. Each college will need to
compute the following FY2010 performance measures (Attachments C and D include instructions):

      Composite Financial Index (CFI) section (Attachment G upper right)
      Margin and Unrestricted Net Asset Trends (Attachment G lower right)

Financial Reporting will provide in late November or early December the FY2010 performance
measures (without prior MnSCU adjustments) for the two sections directly below, although you will
be able to compute several of the measures locally as pointed out on Attachments A and B. This
same data for FY2008 & FY2009 was provided to you in the prior year.

      Per Full Year Equivalent Student Data section (Attachment G upper left)
      Capital Assets—Investment, Age and Maintenance section (Attachment G lower left)

Tie-in to Higher Learning Commission Financial Review

The HLC has implemented an annual review of institutional financial health. The review uses
financial data reported in the spring by each member college and university through the HLC
Annual Institutional Data Update. Reporting of institutional and component unit financial data
allows the HLC to compute a Composite Financial Index (CFI) score for each member institution.
Attachment H contains additional comments on this annual financial review process.




                                              Page 2
                       Fiscal Year 2010 Financial Trends and Highlights
      Non-audited College Preparation Guidelines – Please Complete by December 31, 2010


Performance Measures

The following information, including attachments, explanations, formulas and certain prior years’
data modified to remove adjustments (contained on a separate Excel spread sheet), will help with
preparation of the performance measures section of the trends and highlights document.

The Fiscal Year 2010 Financial Trends and Highlights template has the same four performance
measure sections as last year. Reporting common performance measures across System institutions
over a period of years will allow us to 1) establish individual benchmarks by institution to assess
financial health, 2) develop a common understanding of the measures themselves, including the
economic factors most prone to produce significant positive or negative change, and 3) link college
strategic and programmatic planning to financial health. The four sections and instructions, as well
as other help material, are contained on attachments as indicated below.

       Per Full Year Equivalent Student Data—see Attachment A
       Capital Assets—Investment, Age and Maintenance—see Attachment B
       Composite Financial Index—see Attachment C
       Margin & Unrestricted Net Asset Trends—see Attachment D
       Financial Performance Narrative Preparation Guidelines—Attachment E
       Where to Find Performance Measure Adjustments—see Attachment F
       Fiscal Year 2010 Financial Trends and Highlights Template Example—Attachment G
       Summary of HLC Review of Institutional Finances—see Attachment H

The Composite Financial Index (CFI) discussed on Attachment C is taken from the Strategic
Financial Analysis for Higher Education (Sixth Addition), jointly developed and sponsored by the
firms of Prager, Sealy & Co., LLC, KPMG LLP and BearingPoint, Inc. This is the CFI calculation
used by the HLC for all public colleges and universities. A pdf version of the referenced
publication is available at the HLC website or from your Financial Reporting contact.

Calculations in Strategic Financial Analysis for Higher Education include component units; we
have excluded component units at this point to keep the focus on college financial health. You are
encouraged to compute a second version of CFI that includes your foundation as the HLC Annual
Institutional Data Update does include component unit data. Including your foundation and
comparing CFI with and without foundation data provides one measure of how well foundation
assets and operations support institutional financial health, and it provides some insight as to how
the HLC will view overall financial health.

Performance Narrative

Attachment E contains guidelines for preparation of a performance narrative. You are encouraged
to provide comments comparing actual results against your budget and other planning tools
currently in use. Provide comments regarding the significant factors that had a material impact on
FY2010 results, and how FY2010 events and planned future actions, especially those contained in
integrated planning components, are likely to impact FY2011 and beyond. Summarize the expected



                                               Page 3
                       Fiscal Year 2010 Financial Trends and Highlights
      Non-audited College Preparation Guidelines – Please Complete by December 31, 2010


impact of future appropriation reductions, one-time federal stimulus money and other known factors
on programs, faculty and staff, student services, and other components of institutional mission.

As part of your commentary, please include comments on the following two questions. We will
capture and share this information in anticipation that it may prove helpful to all.

       What are several innovative steps you have taken to deal with current and future budget
       constraints that may have applicability at other institutions?

       What is your current, most perplexing budget related challenge?

Keep in mind that year-to-year fluctuations in capital project activity, including HEAPR project
activity, may cause significant variances in one or more of the component ratios. This is a natural
part of capital investment, repair and replacement, and such activity may be a part of explaining
performance measure variance between years.

Attachment H includes a series of questions that focus on the interrelationship of financial health
and HLC accreditation criterion. This too may be useful in developing a performance narrative.




                                               Page 4
                             Fiscal Year 2010 Financial Trends and Highlights
                                  Preparation Guidelines—Attachment A
                                   Per Full Year Equivalent Student Data
The performance measures presented below in the ―Per Full Year Equivalent Student Data‖
section are discussed by line item in the instructions further below. You will need the final FYE
student number for each year as reported to the Budget Unit in the Office of the Chancellor.

                                  Per Full Year Equivalent Student Data
                                                               2010          2009          2008
                     Total Operating Expense
                     Direct Student Expense
                         Percent direct student expense
                     Student-based revenue
                         % of total revenue*
                     Appropriation Revenue
                         % of total revenue*
                     Operating Margin
                     % Change in student FYE
                              Includes all capital appropriations for capitalized projects. This
                              may cause significant annual fluctuations.

Per Full Year Equivalent Student Data Instructions:
Total Operating Expense is computed from the ―Operating Expenses by Functional Classification‖ footnote. Divide
―Total Operating Expense‖ by student FYE for each year presented.

Direct Student Expense is also computed from the ―Operating Expenses by Functional Classification‖ footnote.
Add the ―Instruction,‖ ―Academic support‖ and ―Student services‖ totals to compute ―Direct Student Expense.‖
Divide this ―Direct Student Expense‖ total by student FYE for each year presented.

Percent direct student expense is computed by dividing ―Direct Student Expense‖ per FYE by ―Total Operating
Expense‖ per FYE.

Student-based Revenue is found on the Statements of Revenues, Expenses, and Changes in Net Assets. Sum the
operating revenue lines titled ―Tuition, met,‖ ―Fees, net,‖ ―Sales, services and other, net,‖ and ―Restricted student
payments, net.‖

% of total revenue is computed by dividing total student-based revenue (total dollars, not the per FYE number) by
total revenue—the sum of all revenue items as found on the Statements of Revenues, Expenses, and Changes in Net
Assets (this total revenue number may also be presented in your MD&A).

Appropriation Revenue is computed by dividing ―Appropriations‖ from the ―Nonoperating Revenues (Expenses)‖
section of the Statements of Revenues, Expenses, and Changes in Net Assets by student FYE for each year
presented.

% of total revenue is computed the same as above except use ―Appropriation Revenue‖ (total, not the per FYE
number) as the numerator.

Operating Margin is computed by dividing the sum of ―Income (Loss) Before Other Revenues, Expenses, Gains, or
Losses‖ from the Statements of Revenues, Expenses, and Changes in Net Assets by student FYE for each year
presented.

Change in Student FYE is computed as the percentage increase or decrease in reported student FYE between fiscal
year periods.



                                                        Page 5
                              Fiscal Year 2010 Financial Trends and Highlights
                                   Preparation Guidelines—Attachment B
                              Capital Assets—Investment, Age and Maintenance
The performance measures presented below in the ―Capital Assets—Investment, Age and
Maintenance‖ section are discussed by line item in the instructions further below. You will need
total estimated square footage on campus by year presented (make sure the square footage
numbers match those provided to the Facilities Unit in the Office of the Chancellor).

                             Capital Assets--Investment, Age and Maintenance
    Ratios                                                                          2010             2009             2008
    Additions to beginning depreciable cost (investment)
    Ending accumulated depreciation to depreciation expense (age)
    Facilities maintenance ratio
    Operations and maintenance expense per square foot*
          Est. x.x, y.y and z.z million sq. ft. for 2010-2008, respectively

Capital Assets—Investment, Age and Maintenance Instructions:
Additions to beginning depreciable cost (investment) is computed from data found in the ―Capital Assets‖ footnote by dividing
the sum of increases to (construction in progress + buildings and improvements + equipment + and library collections) from the
―Increases‖ column by the ―Beginning Balance‖ of ―Total capital assets, depreciated.‖ The value computed is a percentage
measurement of investment in capital assets and the trend of such investment over the periods presented.

Ending accumulated depreciation to depreciation expense (age) is computed from data found in the ―Capital Assets‖ footnote by
dividing the ending balance (―Ending Balance‖ column) of ―Total accumulated depreciation‖ by the increase (―Increase‖ column)
in ―Total accumulated depreciation‖ (this should also be the same as depreciation expense for the year as found in the ―Statement
of Revenues, Expenses, and Changes in Net Assets.‖) The value computed is a measure of the composite age in years of
depreciable capital assets.

Facilities maintenance ratio* is computed by dividing ―Operation & maintenance of plant‖ from the ―Operating Expenses by
Functional Classification‖ footnote by the sum of all revenue on the Statements of Revenues, Expenses, and Changes in Net
Assets above the ―Income (Loss) Before Other Revenues, Expenses, Gains, or Losses‖ line (i.e., the total of operating revenue +
appropriations + private grant revenue + interest income).

Operations and maintenance expense per square foot* is computed by dividing ―Operation & maintenance of plant‖ from the
―Operating Expenses by Functional Classification‖ footnote by the square footage of all campus facilities for the appropriate
year.

* Revenue Fund institutions should consider including any Revenue Fund operation & maintenance expense included in the
―auxiliary enterprises‖ line in the ―Operating Expenses by Functional Classification‖ footnote if material.




                                                            Page 6
                       Fiscal Year 2010 Financial Trends and Highlights
                            Preparation Guidelines—Attachment C
                                  Composite Financial Index
The performance measures presented in the ―Composite Financial Index‖ (CFI) box directly
below are discussed in more detail further below. Data sources include the Statements of Net
Assets, the Statements of Revenues, Expenses, and Statements of Changes in Net Assets.


                                    Composite Financial Index
                                                   2010          2009          2008

                     Primary reserve

                     Return on net assets

                     Viability

                     Operating margin

                     Composite

                     Note: the values above are all weighted strength factor values



What is CFI and how can it be used to manage the institution? The composite value and
individual components offer important insights regarding financial strengths and weaknesses.

   The two current operating measures, return on net assets and operating margin, demonstrate
   the level of return on net assets and the extent to which operating revenues do or do not cover
   operating expenses, respectively. Operations face many pressures that may not be subject to
   the organization’s control; a strong surplus in one year is good, but it takes a string of such
   surpluses to build a strong, liquid net asset position. One year of good operating
   performance may not indicate sustainable financial strength. For these reasons, the two
   operating measures are weighted a modest 30 percent in CFI.
   The primary reserve and viability ratios measure an organization’s liquid net assets that are
   available directly, or through additional borrowing, to cover emergency expenditures or
   invest in innovation. Representing available liquidity or borrowing capacity, these measures
   are not dependent on current operating results in the short-term, are good indicators of
   financial health, and are weighted 70 percent in CFI.

Viewed in isolation, higher CFI scores denote greater financial health. However, CFI should not
be assessed in isolation but in the context of how well financial resources have supported and
will continue to support an institution’s mission. Conversely, mission must be affordable,
including allowance for maintaining adequate resources as protection against some level of
business interruption and allowing for some level of opportunity investment. A Finance Master
Plan that is part of an integrated planning process will provide this assessment and help balance
competing objectives.




                                                 Page 7
                             Fiscal Year 2010 Financial Trends and Highlights
                                  Preparation Guidelines—Attachment C
                                        Composite Financial Index
The CFI Calculation Matrix table below summarizes the actual calculation. Line (1) requires the
computed ratio value. Line (2) shows the base strength factor for each component. Line (3) is
the computed strength factor value for the college or university. Line (4) contains set weighting
factors that allow calculation of a single, weighted-average CFI value. Line (5) is the weighted
component value that when added across sums to the CFI value. Instructions for computing the
actual ratio values needed in line (1) follow the matrix.


                                            CFI Calculation Matrix
                                               Primary        Return On                        Operating
           Calculation Step                    Reserve        Net Assets       Viability        Margin          CFI
 1. Ratio value (compute)
 2. Base Strength factor (set)*                  0.133            0.02           0.417           0.007           n/a
 3.  = [1. 2.] Computed
    Strength factor (compute)**
 4. Weighting factor (set)                      0.35           0.20            0.35      0.10            1.0
 5. = [3. * 4.] Weighted value                                                                          Sum
    (compute)                                                                                          across
         A set base value denoting a borderline or minimal level of financial health.
    ** Following HLC protocol, these values are capped at -1.0 and + 10.0 for computed strength factor
         values below -1.0 or above +10.0.



 The primary reserve ratio numerator is ―Expendable Net Assets‖ computed from the Net Assets section of the
 Statements of Net Assets as 1) ―Total Net Assets‖ less 2) ―Invested in capital assets, net of related debt.‖ The
 denominator is computed from data on the Statements of Revenues, Expenses, and Changes in Net Assets‖ and
 includes 1) total operating expense plus 2) interest expense.

 Expendable net assets                          Total expenses                             Expendable net assets
 +Total net assets                              + Total operating expenses                 + Total expenses
 - Invested in capital assets, net              +Interest expense                          = Primary reserve ratio
 = Expendable net assets                        = Total expenses

 The primary reserve ―ratio value‖ is used for item (1) in the calculation table above.



 The return on net assets ratio numerator is ―Change in net assets‖ computed by taking the ―Change in net assets‖
 from the Statements of Revenues, Expenses and Changes in Net Assets. The denominator is ―Total net assets;‖
 use beginning net assets (i.e., prior year ending net assets).

 Change in net assets                          Total net assets                     Change in net assets
 + Change in net assets                        + Beginning net assets               + Total net assets
 = Change in net assets                        = Total net assets                   = Return on net assets ratio

 The return on net assets ―ratio value‖ is used for item (1) in the calculation table above.




                                                         Page 8
                             Fiscal Year 2010 Financial Trends and Highlights
                                  Preparation Guidelines—Attachment C
                                        Composite Financial Index


The viability ratio numerator is ―Expendable Net Assets,‖ the exact same value used as the numerator for the
primary reserve ratio calculation. The denominator is ―Long-term Debt‖ computed from the Statements of Net
Assets‖ by adding 1) the current and 2) noncurrent portions of long-term debt.

Expendable net assets                                Long-term debt                               Expendable Net Assets
+ Total net assets                                   + Noncurrent portion of long-term debt       + Long-term debt
  Invested in capital assets, net of related debt    + Current portion of long-term debt          = Viability ratio
= Expendable net assets                              = Long-term debt

The viability ―ratio value‖ is used for item (1) in the calculation table above.



The operating margin ratio numerator is ―Income (Loss) Before Other Revenues, Expenses, Gains, or Losses‖ from
the Statements of Revenues, Expenses and Changes in Net Assets.‖ The denominator is 1) the total of all operating
revenues plus 2) all non-operating revenue from the Statements of Revenues, Expenses and Changes in Net Assets.

Inc/Loss Before Other R, E, G, or L     Operating & Non-operating Revenue          Operating Margin:
+ Inc/Loss Before Other R, E, G, or L   + Total operating revenues                 ÷ Operating. & Non-operating Revenues
= Operating Margin                      + All non-operating revenues               = Operating Margin Ratio
                                        = Operating & Non-operating Revenues

The operating margin ―ratio value‖ is used for item (1) in the calculation table above.



The ―Explanation of CFI Components and Computed Values‖ in the table on the next page
provides commentary regarding the CFI components and related values. The CFI Calculation
Matrix further above demonstrates how strength factors and weighting factors are applied in
determining the composite score.

In Strategic Financial Analysis for Higher Education (Sixth Addition), a CFI value of 3.00 is
more or less the good financial health demarcation line and could be considered a benchmark.
However, the relatively wide diversity of institutions and related levels of financial strength
within the System suggest each institution should benchmark against its own historic CFI values.

Attachment H, Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation,
contains a summary of the Higher Learning Commission’s annual financial health assessment
process and potential measures taken when member institutions experience significant and
sustained declines in financial health as measured by CFI. Note that institutions with a CFI at or
below 1.0 are subject to a series of financial health assessment steps up to and including an HLC
Focused Visit.




                                                        Page 9
                               Fiscal Year 2010 Financial Trends and Highlights
                                    Preparation Guidelines—Attachment C
                                          Composite Financial Index

                             Explanation of CFI Components and Computed Values
   CFI Component & Values                                             Explanation
Primary Reserve Ratio              The base strength factor ratio of .133 represents 1.6 months of operating
                                   expense coverage while a ratio of 0.40 represents nearly 5 months of operating
Base strength factor = .133        expense coverage. A ratio of .40 (or higher) is regarded by Strategic Financial
Weighting factor = 0.35            Analysis for Higher Education to be a sufficient level of internal resources to
CFI value = (actual                meet short-term cash needs through existing resources, maintain a reasonable
value/.133)*.35 = weighted value   investment level in repairs and maintenance, and manage moderate,
                                   unforeseen, adverse circumstances.

                                      The weighting factor of 0.35 places a significant emphasis on this particular
                                      measure of financial health (a measure of balance sheet strength) in the
                                      calculation of the CFI value.

Return on Net Assets Ratio            The base strength factor ratio of 0.02 represents a level of growth in net assets
                                      that is flat, or perhaps even negative, after inflation (i.e., the ―real‖ rate of
Base strength factor = 0.02           return is flat or negative) and would not allow replenishment of reserves that
Weighting factor = 0.20               may be spent down. A ratio of 0.06 (or higher) is regarded by Strategic
CFI value = (actual                   Financial Analysis for Higher Education to be adequate to allow for a .03 or
value/.02)*.20 = weighted value       .04 real rate of return. This higher level provides a reasonable degree of
                                      financial protection against year-to-year volatility in earnings and should build
                                      balance sheet strength.

                                      The weighting factor of 0.20 places somewhat less emphasis on this particular
                                      measure of financial health (a measure of single year operating strength) in the
                                      calculation of the CFI value.

Viability Ratio =                     The base strength factor of 0.417 represents very marginal ability to assume
                                      additional debt. The viability ratio is primarily a measure of an organization’s
Base strength factor = 0.417          capacity to incur additional debt, and the perspective is that of the lender. The
Weighting factor = 0.35               base strength value of .0417 suggests less debt capacity at a higher interest rate.
CFI benchmark value =                 The benchmark level of 1.25 represents much greater institutional flexibility to
(1.25/.417)*.35 = 1.05                incur debt at reasonable rates in support of strategic objectives.

                                      The weighting factor of 0.35 places a significant emphasis on this particular
                                      measure of financial health (a measure of balance sheet strength) in the
                                      calculation of the CFI value.

Operating Margin Ratio =              The base strength factor of 0.007 represents an institution whose operations are
                                      just barely breaking even. The results of a single year are less important than
Base strength factor = 0.007          the trend over a number of years, but operating consistently below this base
Weighting factor = 0.10               level likely suggests that mission cannot be sustained. A ratio of 0.02 is
CFI benchmark value =                 regarded by Strategic Financial Analysis for Higher Education to be adequate
(.02/.007)*.10 = 0.30                 to keep pace with or slightly exceed the growth in operating expenses.

Note: This ratio is termed Net        The weighting factor of 0.10 places relatively light emphasis on this particular
Operating Revenues Ratio in           measure of financial health (a measure of single year operating strength) in the
Strategic Financial Analysis for      calculation of the CFI value.
Higher Education.




                                                       Page 10
                        Fiscal Year 2010 Financial Trends and Highlights
                             Preparation Guidelines—Attachment D
                            Margin & Unrestricted Net Asset Trends
The lower right, or fourth quadrant on the trends and highlights template (Attachment G), shows
the trends of both operating margin and change in unrestricted net assets. A sustainable, positive
operating margin over a period of years is the primary method through which an institution can
build greater financial health and program flexibility. A financially healthy institution making
significant investments in new programs or capital assets will likely see a drop in unrestricted net
assets and may experience a drop in operating margin to the extent additional expenditures are
reflected as expenses and not capitalized.

The operating margin should be taken directly from the ―Income (Loss) Before Other Revenues,
Expenses, Gains, or Other Losses‖ line on the Statements of Revenue, Expenses, and Changes in
Net Assets. This is also the numerator used in computing the Operating Margin Ratio within the
CFI calculation. One source of possible fluctuation between years is any revenue from capital
appropriation related to HEAPR projects where the cost was expensed, not capitalized. This will
generally come from HEAPR projects with a total cost of under $250,000.

The graph below shows how this might look using sample values; both operating margin and
unrestricted net assets show positive growth. It is unlikely this improvement ―just happened;‖ a
number of steps were planned and then implemented to achieve the results. The audit exit
meeting presentation should include a discussion of the significant planned and unplanned
economic factors responsible for the results, good or bad.

             Margin & Unrestricted Net
                                                                           Operating Margin
              Asset Trends (millions)
                                                                           Unrestricted net
                                                                           assets


 $20.0

 $15.0

 $10.0

  $5.0

  $0.0
                      2008                        2009                       2010
All colleges should be engaged in a formal or informal integrated planning process to address
fiscal 2011 and beyond appropriation reductions, reduced funding that may well continue beyond
the biennium. This process identified steps necessary to match institutional mission with
financial resources; describe some of the more innovative or painful steps.




                                              Page 11
                       Fiscal Year 2010 Financial Trends and Highlights
            Financial Performance Narrative Preparation Guidelines—Attachment E
                    ―Summary of Financial Expectations and Performance‖

The outline below provides guidelines to be used in developing narrative as part of the FY 2010
Financial Trends and Highlights report. Focus on the key positive and negative factors.

Discuss Current Financial Health

Assess how current financial health positively or negatively impacted core college or university
mission in Fiscal Year 2010. As applicable:

       Summarize factors having significant impact on financial results and financial position,
       including comparisons against expectations for the year. Were there pleasant or
       unpleasant surprises? To what extent were such factors the result of planned actions,
       perhaps transitional steps to bridge fiscal 2010 to the next biennium and beyond,
       compared to events largely beyond the college’s or university’s control?
       Describe current financial health in terms of impacts on students, on academic programs,
       on staff, etc. What is and is not adequately supported and how will this impact the future,
       especially in light of the mix of reduced state appropriation funding and one-time federal
       stimulus funding?
       Did unrestricted net assets change significantly and if so to what extent was this part of
       an intentional financial plan?
       Comment on the fixed assets performance measures, in particular comment on how the
       level of investment in fixed assets, including operations and maintenance expenditures,
       supports (or fails to support) the college’s or university’s mission and strategic plans.

Discuss Plans that will Impact Future Financial Health

Discuss the appropriateness of the college’s or university’s mission and strategic goals in light of
current financial health, steps designed to increase financial health, programs expected to be
funded by expendable net assets (i.e., reserves), etc. In other words, forecasting forward from
early Fiscal Year 2011, how well matched are mission, strategic goals and financial resources?
What steps are planned to bring about better alignment? How do state appropriation cuts and
one-time federal stimulus funding impact both mission and financial health?

       Summarize financial plans and expectations for FY2011 and beyond. What economic
       variables are most likely to significantly impact financial health and what if any steps are
       planned to manage these variables? How will the material change in future funding
       impact strategic plans? Have unexpected positive consequences been identified?
       To what extent will planned changes impact performance measures such as CFI
       (individual components and the composite)? Use your institution’s historical
       performance measure values as benchmarks. Looking at Attachment H, do you anticipate
       CFI values in or below the HLC red flag zone?




                                              Page 12
                     Fiscal Year 2010 Financial Trends and Highlights
              Where to Find Performance Measure Adjustments—Attachment F



Source file: "FY10 CAP Financial Statements.xls", which nonaudited colleges and universities
will receive from Financial Reporting. The CAP R&M information as indicated below will
allow each institution to judge if the amount of HEAPR project dollars expensed in computing
operating margin is significant enough to warrant comment in explaining trends across years.


CAP R&M- tab "OS 6.30.10", row "R&M"




                                           Page 13
        Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation
                                        Attachment H


Each spring the Higher Learning Commission asks member institutions to input certain data
through an exercise called the HLC Annual Institutional Data Update. One section of the
Update requires certain financial data from the most recently completed fiscal year for the
institution and any component units, which allows the Commission to compute a Composite
Financial Index (CFI) value using the methodology contained in the Strategic Financial Analysis
for Higher Education (Sixth Addition).

There is a strong relationship between an organization’s financial health and capacity to
implement and sustain mission.

   Strong financial health greatly facilitates organizational capacity to carry out mission
   Poor financial health is one good indicator that organizational mission may be at risk

Commission staff screens institutional CFI values computed within the data update referenced
above. Computed CFI values are used to identify institutions at increased risk of having
insufficient financial health to adequately sustain institutional mission. The table below shows
the CFI composite values likely to trigger further financial data requests and reviews:



                 Public Institutions


            Zones           Composite Index Range                 Financial Panel Review
       Above the Zone               1.1 to 10.0              No review

       In the Zone                     0 to 1.0              Review if 2 or more consecutive years;
                                                             request additional financial documents

       Below the Zone                  -1.0 to 0             Review if 1 year; request additional
                                                             financial documents



Commission staff further analyze and review data for institutions with CFI values ―in the zone‖
or ―below the zone‖ as indicated in the table above. Institutions assessed to be at relatively low
financial risk are excluded; for example, institutional data may indicate that a low CFI value is
temporary and financial health is likely to rebound. Presidents of the remaining institutions will
receive a letter from the Commission asking for a report addressing or including the following:
    Reasons for the low composite score(s)
    An outline of institutional plans to raise component ratio values in the future
    Copies of the latest audit report including any auditor required communications to the
    institution’s board, auditor’s management letter and institutional response, and the A-133
    federal funds/grants audit report.




                                                   Page 14
        Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation
                                        Attachment H


Financial data submitted by institutions at financial risk are in turn provided to the Commission’s
Financial Panel for review. This panel is comprised of accounting and financial professionals
drawn from member institutions. The Financial Panel Timeline several pages below outlines
financial review process steps, timeline and possible recommendations resulting from
Commission Staff and Finance Panel review.

As indicated above, poor financial health is one good indicator that organizational mission may
be at risk. Low CFI values as defined in the table above are red flags indicating an increased
possibility that an institution’s financial capacity to support mission is at relatively high risk.
The table below provides some sense for the marginal financial health for an institution with a
composite score of 1.0. The Finance Panel process allows for increased, targeted
communications and planning between the Commission and the institutions; institutional
reporting and/or Commission monitoring allow for both timely assessment of progress and
implementation of additional recovery actions if needed.

            Marginal Financial Health at the HLC “Red Flag” Composite Score of 1.0
                            HLC     Weighted
 Composite Financial        Red     Strength
                            Flag     Factor
  Index Component          Value*    Value
                                                     What does this mean in practical terms?
Primary Reserve            0.133       0.35 An institution with this score ended the year in
                                            question with total restricted and unrestricted net
                                            assets (―expendable net assets‖) equal to 1.6 months
                                            of operating expenses.

Return on Net Assets        0.02       0.20 This measure of ―bottom line‖ surplus or deficit
                                            indicates a surplus equal to $20,000 for every
                                            $1,000,000 of total revenue, including Capital
                                            Appropriation revenue.

Viability                  0.417       0.35 The underlying ratio of 0.417 indicates debt 2.4
                                            times greater than expendable net assets (the same
                                            numerator used to compute primary reserve). There
                                            is generally a strong correlation between a low
                                            viability value, reduced availability of credit and a
                                            higher cost of borrowing. This is a difficult ratio to
                                            assess in a MnSCU GO Bond environment, but it
                                            holds true for the Revenue Fund through credit
                                            rating agency use of Revenue Fund financial ratios.




                                               Page 15
        Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation
                                        Attachment H


         Marginal Financial Health at the HLC “Red Flag” Composite Score of 1.0

Operating Margin           0.007      0.10 Operating margin at this level equates to $7,000 per
                                           $1,000,000 of operating revenue. This near break-
                                           even margin provides almost no capacity to incur
                                           additional expenses (e.g., unexpected expenses
                                           whether new or just unexpectedly high) without
                                           spending down reserves.

 Weighted CFI               n/a       1.00 In short, this composite value suggests an
                                           organization that may be walking a fine line
                                           between financial solvency and insolvency (or using
                                           increasingly extraordinary measures to finance
                                           operations). It is for this reason that a CFI value at
                                           or below 1.0 is considered a red flag by the HLC.


To what extent is an institution’s poor financial health impacting capacity to continue its mission
and in turn the institution’s accreditation? The financial review process outlined above assesses
financial health with the objective of informing Commission judgment on this one variable
among multiple variables that may impact accreditation. The last page of this attachment
contains questions that help assess the linkage between financial health and the five accreditation
criterion.




                                             Page 16
Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation
                                Attachment H




                                   Page 17
        Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation
                                        Attachment H


          HLC Criteria for Accreditation:

1. Mission and Integrity   2. Preparing for the Future   3. Student Learning and Effective Teaching

4. Acquisition, Discovery and Application of Knowledge 5. Engagement and Service




Note: The list above was extracted from a handout provided at the HLC April 19, 2009
Workshop on Red Flags, Ratios and Resources: Commission Perspectives on Institutional
Finances.



                                               Page 18

								
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