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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
"Financial Trends and Highlights"