STANDARD 9 - FINANCIAL RESOURCES

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As part of the University system, UMass Dartmouth engages in a five-year financial planning process that utilizes pro forma financial statements to generate specific financial ratios that allow Trustees and others to examine the institution in terms of financial stability. Quoting from the FY 1996 Financial Indicators packet, "In July 1995, the Trustees approved guidelines for financial viability for the University, along with five-year targets for financial indicators for each campus. These actions were the culmination of a year-long process that was intended to give trustees and others a clear, concise picture of the financial performance expectations of the University and its component parts. The FY 1996 financial indicators provide the first annual update of the initial projections." The ratios used for this exercise are:

Operating Margin Ð a measure of institutional ability to generate revenue in excess of expenditures and mandatory transfers. It is a short term measure that can fluctuate from year to year and is best viewed over time.

Financial Cushion Ð a measure that reflects long term financial health of an institution and its ability to weather, or "cushion," itself from short term operational ups and downs.

Current Ratio Ð the most commonly used measure of an institution's short-term solvency. It indicates the extent to which claims of short term creditors are covered by assets that can be converted to cash short-term.

Debt Service to Operations Ð a measure of the demand that annual commitments to creditors place on the institution's unrestricted operating funds.

Endowment per Student Ð a measure of the long-term financial health of an institution. It reflects a base from which earnings can contribute to current operations. In addition, unrestricted endowments contribute to the expendable fund balance that greatly affects the financial cushion. .

Each campus within the system has developed annual goals for these indicators and, as part of the FY 1997 process, an overall target for each indicator. On an annual basis, these goals and the target are compared to actual results and presented to the Trustees for discussion and action. They are also included in the annual Performance Measurements System report to the Trustees.

As of the last completed and published set of financial indicators (FY 1999), the specific information for UMass Dartmouth was as follows:

The use of this financial ratio model allows a quick and complete assessment of the financial stability and health of the campus. These ratios summarize somewhat complex financial information from the audited financial statements and allow for a historical context for examination of performance on the specific ratios. The model allows for adjustments to plan based upon the projected impact on these ratios. The ratios clearly display the financial stress and the resultant deficit condition that the campus has experienced with its transition. The most obvious indicator of this stress is the Financial Cushion. The campus does not have resources sufficient to carry it through a decline in annual revenues. These resources have been used by the university as it has moved itself into full partnership within the University system. Incremental spending, related to programming issues and technology issues, was not supported by incremental revenues. The incremental spending was supported by the drawing down of cash reserves. It is anticipated that this stress will dissipate as enrollment levels increase to approximately 6,000 students by the year 2002. Review of the same Financial Cushion ratio going forward projects the change of the ratio from a negative to a positive as cash reserves are built back up by the campus.

Targets used in the ratio model were developed through a campus based peer study that developed ratios for institutional peers to inform the setting of the campus targets and to create a normative context for the campus's ratios. Dartmouth's peer institutions are:

Murray State University (Kentucky)
Oakland University (Michigan)
Rowan University (New Jersey)
University of Minnesota, Duluth
University of North Carolina, Wilmington
University of Tennessee, Chattanooga
University of Wisconsin, Eau Claire
Rider University (not a financial peer because private)
Seattle University (not a financial peer because private)

It is unfortunate that the campus financial planning model has been done without substantive broad-based campus input. Within the institutional Budget Office, assumptions were based upon historical performance, inflation expectations, some capital needs, and a limited amount of programmatic change. These assumptions were rolled into the financial planning model without the context of an institutional strategic plan or an open and participatory budget process.

On an annual basis, the university now prepares a full set of audited financial statements. The first set of financial statements was prepared as a compilation in 1991. The financial statements assist the campus with its financial planning and operations. Financial information that is prepared in a consistent manner is now available to Trustees and others. This allows for the development of campus trend analysis and peer analysis and comparisons. It also allows organizations such as Dun and Bradstreet to publish campus information that is comparable to that of other institutions of higher education. This information is used by the debt market to generate interest rates and bond ratings that are used when the University borrows funds or issues bonds. The production of the annual audited financial statements has also created a climate of accountability for financial operations. The new budget process is a reflection of the accountability climate and is designed to be a tool to allow and assist the campus in demonstrating fiscal accountability to institutional stakeholders.

The nine year period (FY91 to FY99) since the last self study has shown an increase in Unrestricted Revenues on a cash basis:

Over this 9 year period, the State Appropriation increased by $14,490,000, an increase of 50%. Reviewing the change in the State Appropriation between FY91 and FY99, the increase in constant dollars (a measure of spending ability) is actually only 4.6%. Approximately 89% of the State Appropriation were spent on personnel costs in FY99. Student Fee Revenues increased by 144% as compared to the 50% increase in the State Appropriation. The campus continues to increase its various student fees to accommodate the failure of the Commonwealth to appropriately fund campus operations and capital needs. Total Unrestricted Revenues were up overall by 68% arithmetically. On a constant dollar basis, this increase was 6.0%. This steady but limited increase in Unrestricted Revenues is providing the campus a level of stable revenues that it is using to fund its mission.

On the expenditure side, overall spending increased by 63% during this time period. Instructional expenses represent approximately 31% of total expenditures plus transfers for FY91 and 29% for FY99. Student Financial Aid went from 8% of FY91 expenditures to 11% for FY99. This increase is the result of the campus commitment to fund institutional student aid from the increased student fees charged. The increases in student fees were negotiated with the students and the student support of the increases included a campus commitment to use approximately 25% of the increases to fund institutional student financial aid .

During FY97 and FY99, the campus adjusted its budget during the fiscal year. Cost centers were asked to reduce budgets by, respectively, 5.5% and 4%. In FY97, the campus was able to accommodate this request and the fiscal results for FY97 were positive. The results for FY99 were a $318,679 deficit on a cash basis and a $1,002,000 deficit on an accrual basis.

A review of the Unrestricted Fund Balance activity for the period from FY91 through FY99 indicates that during this period the campus has spent at a rate that exceeds its revenues. The Unrestricted Fund Balance went from a positive balance of $2,854,000 in FY91 to a negative balance of $3,942,000 in FY99, a decrease of approximately $6,796,000.

Driving this decline in the Unrestricted Fund Balance have been an internally funded early retirement program, deferred maintenance on the existing campus infrastructure, capital projects that historically would have been funded by the Commonwealth, and strategic initiatives and priorities that were not supported by internal fund reallocations. Again, the lack of institutional planning and budgeting processes has had an impact on the financial results of operations. The demand for increases in spending levels was not offset by proportionate increases in revenue levels and by institutional reallocations and this has resulted in the need to use campus cash reserves which over time has eroded the Unrestricted Fund Balance (see table, p. 93).

The campus and the University are concerned about the negative Unrestricted Fund Balance. In response to the University's concerns about Dartmouth's financial condition, a new administrative and fiscal model has been set in place. The current Interim Vice Chancellor for Administrative and Fiscal Services has a direct reporting line to the campus Chancellor and a dotted line reporting responsibility to the system's Vice President for Management and Fiscal Affairs and Treasurer. This Vice President works from the system office and reports directly to the President of the University. The Dartmouth campus's response to its concerns is embedded in the new budget model and we expect that the model will assist the campus in responding to this concern. An additional and critical response to the campus concern has been the development of the new position, Assistant Provost for Planning, Programming, and Academic Budgeting. A core responsibility of this new position is the development of a campus Strategic Planning process and the related institutional assessment activities. Open and participatory campus strategic planning and operational budgeting are expected to put in place the appropriate forums for institutional discussion of resource allocations, the appropriate controls for the institutional monitoring of institutional resource utilization, and institutional assessment capabilities. The new planning and budgeting model is expected to allow the campus to manage its resources more holistically and to monitor and control spending to ensure that surpluses are generated that will, over time, improve the Unrestricted Fund Balance to an appropriate positive balance. Within these expectations, the campus is committed to guaranteeing that the financial results of operations do not become the driving force behind campus operations and decisions and that the mission of the institution is maintained as the driving force behind those campus operations and decisions.

The many projection and budget tools now used by the President's Office, the campus management, and the campus budget office will assist the campus in achieving financial stability over time. The financial impact of decision-making can be quantified and the expected outcome of specific decisions displayed within the framework of the many modeling tools that are now being used.

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