Minnesota State Colleges and Universities
Financial Trends
and Highlights
Preparation Guidelines—Audited Colleges and
Universities
FY 2010
Fiscal Year 2010 Financial Trends and Highlights
Audited College and University Preparation Guidelines This guideline document contains the instructions and explanations necessary for preparing Fiscal
Year 2010 Financial Trends and Highlights using accrual financial statement data. Please prepare
the financial performance measures and narrative for fiscal years 2008 - 2010 for presentation at the
audit exit meeting.
Fiscal Year 2010 Review Approach
Starting with fiscal year 2010, the Trends and Highlights calculation of CFI will exclude the several
MnSCU adjustments included in past years. This change will allow institutional CFI data to match
requirements of the subsequent spring’s Higher Learning Commission (HLC) Annual Institutional
Data Update.
Each audited college and university should prepare and present a summary of Fiscal Year 2010
financial results at this year’s audit exit meeting. Provide comparative data for fiscal years 2008
through 2010 and additional performance measures or supplemental data that may help illustrate or
enhance understanding of issues specific to your college or university. Provide a copy of this
presentation to your audit firm in advance of the exit meeting as they will want to coordinate their
presentation with yours to avoid duplication.
Tie-in to Higher Learning Commission Financial Review
The HLC has implemented an annual review of institutional financial health using financial data
reported by each member college and university in the HLC Annual Institutional Data Update
completed each spring. This reporting of specific institutional and component unit 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.
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
and university 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
Page 2
Fiscal Year 2010 Financial Trends and Highlights
Audited College and University Preparation Guidelines 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
FY04-08 Trends data-noadj, an Excel file containing calculations without adjustments for
the measures outlined on attachments A - D will be sent as an attachment to the transmittal
distributing these guidelines.
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 on the HLC website at:
http://www.ncahlc.org/index.php?option=com_docman&task=cat_view&gid=67&Itemid=236
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 and university 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
The audit exit meeting narrative should feature important elements of institutional mission,
including the impact of demographics and other factors, and how financial results are positively or
negatively impacted, or conversely how economic factors have facilitated or impeded your
institution’s achievement of mission-related objectives.
Attachment E contains guidelines for preparation of a performance narrative. You are encouraged
to include comments comparing actual results against your budget and other planning tools
currently in use. Each institution should be able to provide comments regarding the significant
factors that had a material impact on FY2010 results, and provide thoughts on how FY2010 events
and planned future actions, especially those contained in integrated planning components, are likely
to impact FY2010 and beyond. Summarize the expected 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.
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
Page 3
Fiscal Year 2010 Financial Trends and Highlights
Audited College and University Preparation Guidelines 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
2009
2008
2007
Total Operating Expense
Direct Studen t Expense
Percent direct student expense
S tudent-based Revenue
% of total revenue*
A ppropriation Revenue
% of total revenue*
Op erating Margin
% Change in student FYE
* Includes all capital appropriation for capitalized projects; this may
cause significant annu al 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.‖
Discuss
Current Financial
Health revenue (total dollars, not the per FYE number) by total
% of total revenue is computed
by dividing
total student-based
revenue—the sum of all revenue items as found on the Statements of Revenues, Expenses, and Changes in Net Assets
how
collegein’syour
or university’s
(this total revenue numberAssess
may also
be the
presented
MD&A). current financial he alth ha s positively or negatively impacted co
2009. Did financia l health, as mea sured b y the Composite Financial Index pe rform ance indicators a nd o
ial trends
and highlights
summarfrom
y, improve
or dete riorate
and why?
See the Fiscal Ye ar 2009 Fin
Appropriation Revenue is financ
computed
by dividing
―Appropriations‖
the ―Nonoperating
Revenues
(Expenses)‖
Preparation
Guidelinesand
forChanges
a dditional
suggestions.
section of the Statements of
Revenues, Expenses,
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.
Discuss
Plans that
t Future
Financial
Operating Margin is computed
by dividing
thewill
sumImpac
of ―Income
(Loss)
BeforeHealth
Other Revenues, Expenses, Gains, or
Losses‖ from the Statements of Revenues, Expenses, and Changes in Net Assets by student FYE for each year
Discuss the a ppropriaten ess of the c ollege ’s or unive rsity’s mission and strategic goa ls in light of c urren
presented.
designed to increase fina ncia l health, programs expected to be funded by expe ndable net assets (i.e., rese
looking ahe ad from early fiscal ye ar 2010, how well m atc he d are mission, strategic goals, a nd financial
Change in Student FYE is computed as the percentage increase or decrease in reported student FYE between fiscal year
steps are pla nned to bring about be tte r a lignme nt? See the Fiscal Ye ar 2098 Financial Trends and High
periods.
for additional suggestions, including the Attac hment H Guidelines to Assess the Li nkage of Financial Health
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
2009
2008
2007
Ratios:
A dditions to beginning depreciable
cost (investment)
E nding accumulated d epreciation to
depre ciation expense (age)
Facilities maintenance ratio
Op erations and Mai ntenance
expense per square fo ot*
*Est. x.x, y.y and z.z mill ion sq.ft. for 2009 - 2007, 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
D ISCUSSBalance‖
CURRENT
F INANC
H EALTH
―Increases‖ column by the ―Beginning
of ―Total
capitalIAL
assets,
depreciated.‖ The value computed is a percentage
measurement of investment in capital assets and the trend of such investment over the periods presented.
Assess how the college’s or univ ersity’s current financial health has positively or negativ
Ending accumulated depreciation
to depreciation
expenseDid
(age)financial
is computedhealth,
from dataas
found
in the ―Capital
Assets‖
footnote byFinancial Index p
in fiscal
year 2009.
measured
by the
C omposite
dividing the ending balance (―Ending Balance‖ column) of ―Total accumulated depreciation‖ by the increase (―Increase‖ column)
and other
indicators
on same
the as
financial
trends
and
summary,
improv e or deteriora
in ―Total accumulated depreciation‖
(this should
also be the
depreciation
expense
for highlights
the year as found
in the ―Statements
Fiscal inYear
2009 Financial
Trendsis and
Highligh
ts Preparation
Guidelines
for additional
of Revenues, Expenses, and Changes
Net Assets.‖)
The value computed
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
D ISCUSS
LANS
THAT
WILL
I MStatements
PACT FUTURE
F INANC
IAL H
EALTH
Functional Classification‖ footnote
by thePsum
of all
revenue
on the
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 grantDiscu
revenue
interest
income).
ss+ the
appropriateness
of the college’s or university’s mission and strategic
goals in
health,
steps
designed
to
increase
financial
health,
programs
expected
to
be
funded
by exp
Operations and maintenance expense per square foot* is computed by dividing ―Operation & maintenance of plant‖ from the
reserves),
etc.
In
other
words,
looking
ahead
from
early
fiscal
year
2010,
how
well
match
―Operating Expenses by Functional Classification‖ footnote by the square footage of all campus facilities for the appropriate year.
goals, and financial resources? If necessary, what steps are planned to bring about better
* Revenue Fund institutions should
any RevenueTrends
Fund operation
& maintenance
expense includedGuidelines
in the
Fiscalconsider
Year including
2009 Financial
and Highligh
ts Preparation
for additional
―auxiliary enterprises‖ line in the ―Operating Expenses by Functional Classification‖ footnote if material.
the Attachment H Guidelines to Assess the Linkage of Financial Health, Mission and Acc
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, and the Statements of Revenues, Expenses, and Statements of Changes in Net Assets.
Composite Financial Index
2009
2008
2007
P rimary reserve
Return on net assets
V iability
Op erating ma rgin
Composite
Note: The values above are all weig hted 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.
cial Health
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.
e’s or university’sViewed
current financial
hea lthhigher
has positive
or negatively
pactedfinancial
core mission
in fiscHowever,
al yea r
in isolation,
CFI ly
scores
denote im
greater
health.
CFI should not
ealth, as measured by the Com posite Financial Index performa nce indicators and othe r indica tors on the
in isolation
in the
of Ye
how
wellFinancial
financialTrends
resources
have supported and
ghlights summary,be
imassessed
prove or deteriorate
a ndbut
why?
Seecontext
the Fiscal
ar 2009
and Highlights
will
continue
to
support
an
institution’s
mission.
Conversely,
mission
must
be affordable,
s for additional suggestions.
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.
Impact Future Financia
l Health
ene ss of the college’s
university’s
mission
and strategic
goalssummarizes
in light of c urre
financ ial
he alth, ste psLine (1) requires the
TheorCFI
Calculation
Matrix
table below
thent actual
calculation.
na ncial health, progra ms e xpecte d to be funded by expenda ble net assets (i.e ., rese rves), e tc. In other words,
computed ratio value. Line (2) shows the base strength factor for each component. Line (3) is
rly fisc al yea r 2010, how we ll m atche d a re mission, strate gic goals, and fina ncia l resources? If nece ssary, wha t
the computed
strength
factor2098
value
for theTrends
college
orHighlights
university.
Line (4) Guideline
containssset weighting
ing about better alignme
nt? See the
Fiscal Year
Financial
and
Preparation
ons, including the Attachm ent H Guid eli nes to Assess th e Lin kage of Fina ncia l Healt h, M ission an d Accred itatio n.
Page 7
Fiscal Year 2010 Financial Trends and Highlights
Preparation Guidelines—Attachment C
Composite Financial Index
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.
Calculation step
(1) Ratio value (compute)
(2) Base Strength factor (set)*
(3) = [(1) ÷ (2)] Computed
Strength factor (compute)**
(4) Weighting factor (set)
(5) = [(3) * (4)] Weighted value
(compute)
CFI Calculation Matrix
Primary
Return on
Viability
Reserve
Net Assets
Operating
Margin
0.133
0.02
0.417
0.007
0.35
0.20
0.35
0.10
CFI
n/a
n/a
n/a
1.00
sum
across
* A set base value denoting a border-line or minimal level of financial health.
** Following HLC protocol, these values are capped at -1.0 for 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 Net Assets
– Invested in Capital Assets, Net
= Expendable Net Assets
Total Expenses:
+ Total operating expenses
+ Interest expense
= Total Expenses
Expendable Net Assets
÷ Total Expenses
= Primary Reserve Ratio
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:
+ Change in net assets
= Change in net assets
Total 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.
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 Asset:
+ Total Net Assets
– Invested in Capital Assets, net of related debt
= Expendable net assets
Long-term Debt:
Expendable Net Assets:
+ Noncurrent portion of long-term debt ÷ Long-term Debt
+ Current portion of long-term debt
= Viability Ratio
= Long-term debt
The viability ―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 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:
+ Inc/Loss Before Other R, E, G, or L
= Operating Margin
Operating & Non-operating Revenue:
+ Total operating revenues
+ All non-operating revenues
= Operating & Non-operating Revenues
Operating Margin:
÷ Operating. & Non-operating Revenues
= Operating Margin Ratio
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 below 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.
Explanation of CFI Components and Computed Values
Explanation
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.
CFI Component & Values
Primary Reserve Ratio
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.
Page 9
Fiscal Year 2010 Financial Trends and Highlights
Preparation Guidelines—Attachment C
Composite Financial Index
Explanation of CFI Components and Computed Values
Explanation
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.
CFI Component & Values
Return on Net Assets Ratio
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 =
Base strength factor = 0.417
Weighting factor = 0.35
CFI benchmark value =
(1.25/.417)*.35 = 1.05
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
capacity to incur additional debt, and the perspective is that of the lender. The
base strength value of .0417 suggests less debt capacity at a higher interest rate.
The benchmark level of 1.25 represents much greater institutional flexibility to
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 =
Base strength factor = 0.007
Weighting factor = 0.10
CFI benchmark value =
(.02/.007)*.10 = 0.30
Note: This ratio is termed Net
Operating Revenues Ratio in
Strategic Financial Analysis for
Higher Education.
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
the trend over a number of years, but operating consistently below this base
level likely suggests that mission cannot be sustained. A ratio of 0.02 is
regarded by Strategic Financial Analysis for Higher Education to be adequate
to keep pace with or slightly exceed the growth in operating expenses.
The weighting factor of 0.10 places relatively light emphasis on this particular
measure of financial health (a measure of single year operating strength) in the
calculation of the CFI value.
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.
Mar gin & Unr es tr ic te d Ne t
As se t Tr e nds (m illions)
O p e r at in g
M ar g in
U nr e st r ic t e d
ne t ass et s
$20.0
$15.0
$10.0
$5.0
$0.0
2007
2008
2009
All colleges and universities have engaged in a formal or informal integrated planning process to
address fiscal 2010 – 2011 biennial 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 2010, 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 FY2010 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 audited colleges and universities will
receive in August/September. 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 6.30.09", row "R&M Total"
Page 13
Fiscal Year 2010 Financial Trends and Highlights
Template Example—Attachment G
[Insert university / college name]
Fiscal Year 2009 Financial Trends and Highlights
Per Full Year Equivalent Student Data
2009
2008
Composite Financial Index
2009
2008
2007
2007
Total Operating Expense
Primary reserve
Direct Student Expense
Percent direct student expense
Return on net assets
Student-based Revenue
% of total revenue*
Viability
Appropriation Revenue
% of total revenue*
Operating margin
Operating Margin
% Change in student FYE
Composite
* Includes all capital appropriation for capitalized projects; this may
Note: The values above are all weighted values and reflect HLC
cause significant annual fluctuations.
strength factor caps (-1.0 or +10.0) applied before weighting.
Capital Assets--Investment, Age and Maintenance
2009
2008
2007
Margin & Unrestricted Net
Asset Trends (millions)
Ratios:
Additions to beginning depreciable
cost (investment)
O p er at i ng
M ar g i n
U nr est r i ct ed
net asset s
$20.0
Ending accumulated depreciation to
depreciation expense (age)
$15.0
Facilities maintenance ratio
$10.0
Operations and Maintenance
expense per square foot*
$5.0
*Est. x.x, y.y and z.z million sq.ft. for 2009 - 2007, respectively.
$0.0
2007
2008
2009
Summary of Financial Expectations and Performance
D ISCUSS C URRENT F INANCIAL H EALTH
Assess how the college’s or university’s current financial health has positively or negatively impacted core mission
in fiscal year 2009. Did financial health, as measured by the Composite Financial Index performance in dicators
and other indicators on the financial trends and highlights summary, improve or deteriorate and why? See the
Fiscal Year 2009 Financial Trends and Highlights Preparation Guidelines for additional suggestions.
D ISCUSS P LANS THAT WILL IMPACT F UTURE F INANCIAL H EALTH
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, looking ahead from early fiscal year 2010, how well matched are mission, strategic
goals, and financial resources? If necessary, what steps are planned to bring about better alignment? See the
Fiscal Year 2009 Financial Trends and Highlights Preparation Guidelines for additional suggestions, including
the Attachment H Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation.
Page 14
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 screen 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
Above the Zone
1.1 to 10.0
Financial Panel Review
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 15
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
Composite Financial
Index Component
Primary Reserve
Return on Net Assets
HLC
Red
Flag
Value*
0.133
0.02
Weighted
Strength
Factor
Value
What does this mean in practical terms?
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.
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.
Operating Margin
0.007
0.10 Operating margin at this level equates to $7,000 per
$1,000,000 of operating revenue. This near breakeven margin provides almost no capacity to incur
additional expenses (e.g., unexpected expenses
Page 16
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
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 17
Guidelines to Assess the Linkage of Financial Health, Mission and Accreditation
Attachment H
Page 18
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, 2010
Workshop on Red Flags, Ratios and Resources: Commission Perspectives on Institutional
Finances.
Page 19