WHITE PAPER
ON
RESERVES
FOR
MINNESOTA STATE COLLEGES AND UNIVERSITIES
CHIEF FINANCIAL OFFICERS CONFERENCE
November 2012
Colleges and universities have been working for many years to establish and maintain general
fund, auxiliary and revenue fund reserves. The purpose of this paper is to provide background
information on the nature and importance of reserves to a college or university’s financial future.
Board policy addresses both general fund, auxiliary and revenue fund reserves (eg. housing,
bookstore, foodservice, parking). The policies have different standards but the same objectives;
namely to insulate the college/university from:
1) Sudden revenue shortfall – Colleges and universities have general, auxiliary and revenue
fund reserves that has been used to assist colleges and universities with financial
challenges. The presence of reserves prevents sudden tuition increases or service
reductions when revenue falls short.
2) Unanticipated expenses – College and university reserves are critical to the financial
health of a college or university in order to respond to unexpected events without having
to impact current operating plans.
3) Financial protection –
a. A Composite Financial Index (CFI) methodology is used by the Higher Learning
Commission (accreditation agency) as a gauge of member institutions’ financial
health. Financial stress can put the college’s or university’s accreditation (and
access to federal financial aid for students) at risk. The system’s auditor has
suggested 3 months of expenses as a reserve. The board’s policy for general fund
reserves establishes 5-7% of annual revenues as the target, this level equals less
than 4 weeks of expenses in reserves.
b. National credit rating agencies evaluate the financial health of the Revenue Fund
every year and every time the system sells new revenue bonds. The presence of
reserves in each college and university revenue fund program is a requirement for
outstanding bonds and necessary for a new competitive bond rating.
4) National Best practices - Reserves are also required by rating agencies in order for
MnSCU to retain the AA- rating on the system’s revenue fund debt issues. A lower
credit rating raises the cost to students for residence hall and student union related
capital improvements. Rating agencies look at cash and investment levels, “unrestricted
resources” which include cash reserves and “expendable resources” which also include
cash reserves. The evaluation also takes general fund reserves into consideration as an
indication of overall financial integrity and discipline.
FREQUENTLY ASKED QUESTIONS
1. Where do the balances in the revenue fund get "counted?" Are they part of the reserves,
or are they accounted for separately?
The revenue fund is not counted on the spreadsheet we circulate with reserves by
college/university. The revenue fund is counted in the “primary reserve” provided the
Board as a part of the system’s audited financial statements. The Revenue fund reserves
are also counted when the rating agencies look at a proposed new bond sale.
2. My college or university seems to be holding on to a lot of money in their reserve fund.
Why is the number so big?
Your college or university should have Reserves levels in compliance with the Board’s
policy of 5-7 percent of the annual operating budget which is equal to about a month of
expenses. While it may look like a big number, you should ask your CFO to relate it to
weekly or monthly estimated expenditure levels.
3. If a college or university has reserves, why does it need to raise tuition?
Reserve funds are only available to spend once, and then they are gone. The reserves are
intended to be used when something happens unexpectedly.
The annual budget process develops the EXPECTED revenue and expense requirements
for planned activities. Tuition is one component of the expected revenue.
4. Why do colleges and universities need reserves, if the system has them too?
Board policy requires the colleges and universities as well as the system office, on behalf
of the entire system, to hold reserves. College and university reserves are available to the
institution for its unexpected events. The system reserves provide a second level of
protection in case institution reserves are not enough.
To put the numbers in perspective, Based upon FY2012 financial statements, current total
system general fund budget reserves including both the system reserve, and all the
college and university reserves, would support 3 to 4 weeks of expenses or approximately
2 payroll cycles.
5. Why can’t we use reserves for building improvements or equipment purchases? If we
have extra funds, shouldn’t we spend them?
Reserves are intended to protect a college or university from having to act quickly in case
of a surprise event. The annual budget process is the place to look for funds to support
regular building improvements or equipment purchases. The reserves might be used if
there was a surprise building improvement or equipment requirement that came up
unexpectedly.
Minnesota State Colleges and Universities
Board Policies
Chapter 5 - Administration
Policy 5.10 Reserves and Year-End Balances
Part 1. Authority. Pursuant to Minnesota Statute 136F.06, subd. 1, the Board shall possess all
powers necessary to govern the state colleges and universities and all related property. Those
powers shall include adopting suitable policies for the institutions it governs. Board Policy 7.1,
Finance and Administrative Authority of Board, Chancellor and Presidents, delegates authority
to the chancellor to develop procedures and guidelines which implement the Board's policies for
the administrative and financial management of the system, including all colleges and
universities.
Part 2. Overview It is the policy of the Board that the Minnesota state colleges and universities
shall maintain an appropriate portion of general fund balances designated as a reserve for which
no use is presently planned.
Part 3. Accountability/Responsibilities The system office is responsible for maintaining a
portion of the overall system resources as a system reserve. The office may maintain a system
general fund reserve of up to two percent of the annual Minnesota State Colleges and
Universities state appropriation, which can be used at the discretion of the chancellor.
The president at each college and university is responsible for maintaining a portion of the
college or university resources as a reserve. A college or university general fund reserve should
be five to seven percent of the previous year's general fund operating revenues.
Procedure 5.10.1 General Operating Fund Reserve
Part 3. Purpose of Reserves. System and/or institution reserves may be called upon in cases
where other reasonable methods have been insufficient to maintain a balanced budget. Generally,
there are three primary uses for reserves: 1) to protect the system and individual institutions in
cases of sudden shortfalls in revenue, (e.g., unforeseen shortfall in enrollment or a reduction in
state appropriation within the biennium); 2) to cover unanticipated expenses (e.g., one-time legal
fees, major disasters, unanticipated increases in utility costs); and 3) to provide for extraordinary
one-time investments.
Part 4. Level of Reserves. Any college or university with a general fund reserve below five (5)
percent shall report to the vice chancellor - chief financial officer information on current fiscal
conditions with a detailed plan to achieve a minimum level. Any institution seeking to maintain
reserves above seven (7) percent must have a plan approved by the vice chancellor-chief
financial officer.
Part 5. Conditions of Use. Consistent with the policy, the system reserve can be used at the
discretion of the chancellor and college/university reserves can be used at the discretion of the
president. Reserves must be properly accounted for in the accounting system and records of use
maintained. Prior approval by the vice chancellor- chief financial officer is required when an
institution seeks to reduce its general fund reserve below three percent.
Part 6. Assistance from the system office. If an institution exhausts its reserve or may
potentially exhaust its reserve, the president can seek assistance from the system office through a
formal request to the vice chancellor- chief financial officer. The president and the vice
chancellor- chief financial officer will determine the size and form of the assistance.
Chapter 7 – General Finance Provisions
Procedures 7.3.2 Auxiliary Operations
It is recommended that unrestricted net assets designated as reserves equal 3 months of the prior
year's average monthly operating expenses (excluding depreciation and including cost of goods
sold).
Submitted by Laura M. King, Vice Chancellor of Finance - CFO