CFI Speed Topic Agenda CFO Conference November 30, 2012 1. What is CFI? (p. 2) 2. Why does CFI matter? a. Higher Learning Commission vs. MnSCU Financial Health Indicators (p. 3) b. Meaningful, averaged CFI (p. 4) 3. How CFI is affected by capital projects a. Capital Project Types (p. 5) b. Journal Entry Story (p. 6) 4. How to improve your CFI (p. 7) GO GREEN: PLEASE LEAVE THE PACKETS AT THE TABLE; IT IS AVAILABLE ONLINE. PLEASE HELP YOURSELF TO A CARD THAT SHOWS WEBSITE AND MY CONTACT INFO. THANKS FOR JOINING ME! Questions? Metody.Popov@so.mnscu.edu 651‐201‐1738 Gina.Hochsprung@so.mnscu.edu 651‐201‐1733 Please contact Gina if you’d like a tour of the ‘CFI Sensitivity Analysis with Capital Projects Emphasis’ tool, or if you need your debt service schedule. What is CFI? 
Updated versions of the tool are uploaded to SharepointMnSCU system2012 CFI Sensitivity Analysis… 
For suggestions, comments, errors, questions, or a tour of the tool, please contact Gina.Hochsprung@so.mnscu.edu or 651‐201‐1733. CFI Component & Values Primary Reserve Ratio (financial flexibility) Base strength factor = 0.133 Weighting factor =35% Raw Ratio = Expendable Net Assets/Total Expenses PRR = (Raw Ratio/.133)*35% Return on Net Assets Ratio (asset return & performance) Base strength factor = 0.020 Weighting factor = 20% Raw Ratio = Change in Net Assets/Beginning Net Assets RNAR= (Raw Ratio/.020)*20% Viability Ratio (cover debt w/ available resources) Base strength factor = 0.417 Weighting factor = 35% Raw Ratio = Expendable Net Assets/Long Term Debt VR = (Raw Ratio/.417)*35% Operating Margin Ratio (operating performance) Base strength factor = 0.013 Weighting factor = 10% Raw Ratio = Income Before Other/Total Oper&Nonoper Revenue OMR = (Raw Ratio/.013)*10% Explanation of CFI Components and Computed Values
Explanation
The base strength factor ratio of .133 represents 1.6 months of operating expense coverage. A
primary reserve ratio (PRR) of 0.40 represents nearly 5 months of operating expense coverage. A PRR of 0.40 (or higher) is regarded by Strategic Financial Analysis for Higher Education to be a sufficient level of internal resources to meet short‐term cash needs through existing resources, maintain a reasonable investment level in repairs and maintenance, and manage moderate, unforeseen, adverse circumstances. The weighting factor of 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. The base strength factor ratio of 0.020 represents a level of growth in net assets that is flat, or perhaps even negative, after inflation (i.e., the “real” rate of return is flat or negative) and would not allow replenishment of reserves that may be spent down. A RNAR of 0.06 (or higher) is regarded by Strategic Financial Analysis for Higher Education to be adequate to allow for a .03 or .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 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. 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 VR benchmark level of 1.25 (or higher) represents much greater institutional flexibility to incur debt at reasonable rates in support of strategic objectives. The weighting factor of 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. The base strength factor of 0.013 represents an institution whose operations are just above 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 OMR of 0.02 (or higher) 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 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. Note: A.K.A. Net Operating Revenues Ratio Fiscal Year 2010 Financial Trends and Highlights, Preparation Guidelines—Attachment C, Composite Financial Index (updated for Operating Margin Ratio Base strength factor increase used in FY11 from 0.007 to 0.013). Why does CFI matter? Higher Learning Commission vs. MnSCU Financial Health Indicators HLC Zones Above the Zone In the Zone Below the Zone CFI Range Financial Panel Review 1.1 to 10.0 No review
0 to 1.0
‐1.0 to 0
Review if 2 or more consecutive years; request additional financial documents Review if 1 year; request additional financial documents MnSCU Financial Health Indicator Triggers related to CFI 
Negative net operating revenue for two consecutive years 
Primary reserve level of less than 1.6 months for 2 consecutive years 
A CFI score less than 1.5 (based on a two‐year moving average) OR a CFI score under 0.5 for the most recent year o
For a complete list of Financial Health Indicator triggers: http://www.mnscu.edu/board/procedure/703p16.html Composite Financial Index (CFI)
Averages and Changes
Institution
Rainy River Community College
Dakota County Technical College
North Hennepin Community College
South Central College
Hennepin Technical College
St. Cloud Technical & Community College
Ridgewater College
Normandale Community College
Inver Hills Community College
Minnesota West Community & Technical College
Mesabi Range Community & Technical College
Saint Paul College
Anoka Technical College
Metropolitan State University
Anoka-Ramsey Community College
Minnesota State University Moorhead
MnSCU Systemwide
Minnesota State Community and Technical College
Bemidji State University
Riverland Community College
Pine Technical College
Minnesota State University, Mankato
St. Cloud State University
Century College
Fond du Lac Tribal & Community College
Winona State University
Minnesota State College - Southeast Technical
Northland Community & Technical College
Minneapolis Community & Technical College
Itasca Community College
Vermilion Community College
Rochester Community & Technical College
Lake Superior College
Alexandria Technical & Community College
Hibbing Community College
Central Lakes College
Southwest Minnesota State University
Type
4 Year
Average
Other
Other
Other
Other
Audited
Other
Other
Audited
Other
Other
Other
Other
Other
Audited
Other
Audited
Audited
Audited
Other
Other
Audited
Audited
Audited
Other
Audited
Other
Other
Audited
Other
Other
Audited
Other
Other
Other
Other
Audited
5.90
5.25
5.13
5.12
4.52
4.19
4.13
3.86
3.85
3.60
3.31
3.07
3.02
2.93
2.92
2.62
2.57
2.57
2.53
2.53
2.50
2.39
2.39
2.33
2.24
2.24
2.23
2.11
2.05
1.94
1.91
1.90
1.78
1.66
1.36
1.26
0.77
2012
7.42
4.62
5.62
4.53
1.85
4.30
5.08
4.45
3.07
3.46
4.25
3.47
3.18
3.69
4.36
2.57
2.78
1.95
2.68
1.98
1.87
2.23
3.58
1.53
2.76
2.99
3.27
2.48
1.14
2.50
2.04
3.53
2.67
1.46
1.38
0.86
0.48
2011
6.94
5.50
6.15
6.69
4.26
4.82
4.91
3.90
3.77
4.96
3.72
2.45
1.53
2.42
2.45
2.89
2.70
3.37
2.33
2.82
4.68
2.28
2.00
1.78
2.82
2.15
2.61
1.80
2.43
2.27
3.95
1.82
3.60
1.60
2.60
1.97
0.83
2010
6.79
5.56
5.12
5.57
6.45
4.25
3.90
3.81
4.33
4.40
3.31
3.09
4.00
4.00
3.29
3.37
2.89
3.10
2.44
3.06
2.95
2.90
2.43
3.94
1.04
2.40
2.37
1.77
2.31
1.91
1.78
1.33
1.99
1.15
0.52
1.17
1.40
2009
2.45
5.30
3.61
3.71
5.51
3.41
2.62
3.29
4.23
1.56
1.95
3.28
3.36
1.63
1.58
1.66
1.91
1.86
2.68
2.26
0.49
2.13
1.53
2.07
2.36
1.42
0.68
2.39
2.30
1.09
-0.11
0.93
-1.12
2.43
0.96
1.05
0.38
Change
FY12-FY11
0.48
-0.88
-0.53
-2.16
-2.41
-0.52
0.17
0.55
-0.70
-1.50
0.53
1.02
1.65
1.27
1.91
-0.32
0.08
-1.42
0.35
-0.84
-2.81
-0.05
1.58
-0.25
-0.06
0.84
0.66
0.68
-1.29
0.23
-1.91
1.71
-0.93
-0.14
-1.22
-1.11
-0.35
Observations:
Our systemwide CFI was flat between FY12-FY11.
Twice as many institutions below the average had a major decrease to their CFI compared to institutions aboue the average.
The reverse is true for major increases to CFI.
S:\FINANCE\FIN_DATA\12fin_st\Financial Performance Indicators\CFI 4 years
11/29/2012
How CFI is Affected by Capital Projects: Capital Project Types Assump ons: Flat changes in net assets, no new capital projects Results: CFI increases from 1.87 to 3.92 over five years (ave CFI 3.08) Why? ASSETS: Capital assets, net decrease with deprecia on. LIABILITIES: As debt service is paid, bonds payable decreases (at a slower rate than the decrease to capital assets) EQUITY: Invested in capital assets, net of related debt decreases as capital assets, net decreases due to deprecia on The decrease to Invested in capital assets, net of related debt increases expendable net assets, which increases the most heavily weighted ra os: Primary Reserve & Viability Realis c? No, this is why the CFI tool is meant to be a short‐term projec on. Most ins tu ons do not go 5 years between capital projects. Assump ons: Flat changes in net assets, 1 GO Project (spent 50% FY13, 50% FY14) Results: CFI ranges from 1.87 to 1.89 over five years (ave CFI 1.98) Why? YR 1: Spike in CFI caused by increase to capital appropria ons. When $ spent on GO, 2/3 of spent is capital appropria on & 1/3 is bonds payable. YR 2: 2nd half of capital appropria on is allocated to the inst, 1st 1/2 year of deprecia on begins once project is 90% complete YR 3: 1st full year of deprecia on; no capital appropria on 2/3 FREE 1/3 PAID YR 4: Begins the “No Project” increase, where debt is being paid down with no new debt being added, which increases expendable net assets. YR 5: Con nues the “No New Projects” increase. Project Magnitude: 27% of Total Assets Assump ons: Flat changes in net assets, 1 HEAPR Project (spent 50% FY13, 50% FY14) Results: CFI ranges from 1.87 to 3.91 over five years (ave CFI 3.12) Why? Since HEAPR projects are much smaller than GO, their effects (100% capital appropria on, no debt, and small increases to deprecia on) on CFI are also much smaller. That is why this resembles the “No New Projects” graph. 100% FREE Project Magnitude: 5% of Total Assets Assump ons: Flat changes in net assets, 1 REV Fund Project (spent 50% FY13, 50% FY14) Results: CFI ranges from 1.87 to 0.81 over five years (ave CFI 0.94) Why? YR 1: ASSETS: Increase in restricted cash equal to the project cost. 50% of restricted cash spent, reclassed to CIP LIABILITIES: Bonds payable increased by 100% of project cost EQUITY: Invested in capital assets decreases drama cally STUDENT FUNDED due to the increase in bonds payable. This increases expendable net assets, which boosts Primary Reserve. Project Magnitude: 27% of Total Assets YR 2: Move from restricted cash—> restricted CIP—>capital assets, net The increase to capital assets, net, also spikes EQUITY‐ invested in capital assets, net This decreases expendable net assets, and plummets Primary Reserve and Viability YR 3: Begins the “No New Projects” graph The Journal Entry Story: A HEAPR Project
Below is an example of how journal entries work for HEAPR. This is the basis for other project types too, although each type has defining differences.
HEAPR
DB: Repairs and Maintenance CR: Cash
To record spending on HEAPR projects
DB: Cash
CR: Capital Appropriations
To record received Capital Appropriation that corresponds with the speed of spending
DB: Construction in Progress (CIP)
CR: Repairs and Maintenance
To reclass HEAPR spending at a rate of 60% of total spending (not every HEAPR dollar spent will be capitalized)
DB: Capital Assets
CR: Construction in Progress (CIP)
To reclass the asset from CIP (to capitalize) when the project is 90% complete. (Since only 60% of spending was reclassed from R&M to CIP, only 60% of spending will end up in Capital Assets.)
DB: Depreciation Expense
CR: Accumulated Depreciation
To depreciate the asset, beginning with a 1/2 year of depreciation, when the project is 90% complete
No debt service entry is needed since HEAPR projects are not repaid.
How to Improve Your CFI
Prepared by Denise Kirkeby and Metody Popov
What Would Improve the Ratios?
(Factors Institutions Have More Control Over)
Primary Reserve
Expendable net assets
Total expenses
Numerator
Denominator
Increase to reserves, with no corresponding liability
Reduction in salaries and benefits expense
…or, Reduction in other expenses (less of an impact due to the % of total expenses)
Return on Net Assets
Change in net assets
Beginning net assets
Numerator
Denominator
Increase to tuition revenue / Reduction in salaries and benefits expense
Although a smaller net asset # will benefit this ratio, it might adversely affect the other ratios
Viability Ratio
Expendable net assets
Long term debt
Numerator
Denominator
Increase to reserves, with no corresponding liability
Reduction in long term debt / No new GO bond debt, or revenue bond projects that increase debt significantly
Operating Margin Ratio
Income/Loss before other
Numerator
Increase to tuition revenue / Reduction in salaries and benefits expense
…or, Increase to other revenue sources or decrease to other expenses (less of an impact due to the % )
Total operating/nonoperating revenue
Denominator
Increase to tuition revenue
…or, Increase to other revenue sources (less of an impact due to the % )
(Factors Institutions Have Less Control Over)
Other Significant Revenue Sources:
State appropriation revenue
Federal grant revenue
Capital appropriation revenue
Affects return on net assets and operating margin ratios
Affects return on net assets and operating margin ratios (denominator)
Affects return on net assets and operating margin ratios
(Other Factors)
‐ GAAP basis statements include some expenses/liabilities not included in your budgetary planning
‐ Salaries and benefits include the net impact/change from compensated absences, other post employment benefits and workers compensation benefits ‐ Capital appropriation revenue has a positive impact in the year the revenue is accrued, but future years will have a negative impact related to the depreciation and interest expense as well as principal payments
‐ Fluctuations in interest rates ‐ Environmental issues (asbestos)
‐ Unplanned opportunities and challenges
GO GREEN: PLEASE LEAVE THE PACKETS AT THE TABLE (Unless this is the last round)
IT IS AVAILABLE ONLINE.
PLEASE HELP YOURSELF TO A CARD THAT SHOWS THE WEBSITE AND MY CONTACT INFO.
THANKS FOR JOINING ME!