Investment Earnings: Recording, Reporting and Payback

1. Investment Earnings:Recording, Reporting and Payback October 24-25, 2007 Lorlie Leetham

2. Investment Earnings • For 2006/07, RMP Interim Operating Guidelines were developed: • CSU Fund 499 setup as Internal Service Fund • Used for CSU working capital fund (campus direct vendor pay, advances, etc.) • Used for recording of pooled investment activity for SCO Fund 0948: • investment earnings (interest, gains and losses), & distributions/transfers out of investment earnings within Fund 0948.

3. Investment Earnings • 2006/07, Continued: • Distribution of earnings to other CSU funds in 948 recorded as Transfer Out/In on legal basis books, using unique FIRMS object codes • Investment earnings were to be transferred to CSU Fund 485 only when there were planned expenditures within any given year. • Campuses had latitude in distribution policies, such as what costs to charge against investment earnings, percentage of earnings to distribute, which funds received their own earnings.

4. Investment Earnings • Review of results: • Fund integrity goal not being met • Investment activity not recorded in owner funds • CSU Fund 499 not acting as true Internal Service Fund • Legal entries required analysis and reclassification for GAAP • Management goals not being met

5. Investment Earnings Effective July 1, 2007: • New CSU Fund 541 – Pooled Investment Activity • Internal Service Fund • Campus quarterly allocation of investment earnings from SWIFT are to be recorded originally in the Pooled Investment Fund 541 • Using FIRMS object code for investment earnings, 508001

6. Investment Earnings Effective July 1, 2007, continued: • Earnings will be allocated to CSU funds in 948 based on campus allocation model • Using investment earnings FIRMS object code • All Net Earnings allocated • CSU will no longer use Transfer In/Out – Investment Earnings object codes • CSU will allocate investment earnings to campuses on a quarterly basis • Quarters redefined to meet reporting needs

7. Investment Earnings Why redefine the quarters: • In order to record all investment earnings consistently across the campuses • To record in timely manner for legal basis close • CSU will allocate quarterly in September, December, March, and June • CSU CMO will notify campuses of June earnings by July 20th of each year for GAAP adjustment purposes

8. Investment Earnings • The quarters will be defined as follows: • First Quarter • June, July, August • Second Quarter • September, October, November • Third Quarter • December, January, February • Fourth Quarter • March, April, May

9. Investment Earnings What is gained with the changes: • Ensure appropriate distribution of earnings to Fund 485 • Preserves accounting integrity of CSU fund categories and types as defined in EO 1000 • Supports recently adopted CSU Carry-forward policy that adds flexibility to use of Fund 485 investment earnings • Supports timely legal close • Supports consistent GAAP entry for all campuses

10. Accounting Procedures • CSU allocates interest to campuses from SWIFT • Campus records in Fund 541 as income • Investment expenses will be charged in Fund 541, netted against the income • Net income, after allowable charges, is allocated to campus funds according to campus allocation policy • Net income in Fund 541 is zero (no fund balance) at end of each year • GAAP entry will be made to record June earnings and classify appropriately.

11. Accounting Procedures Allowable charges in Fund 541: • The costs of banking and CSU investment activity shall be recorded as follows: • Wells Fargo charges shall be recorded in the campus Pooled Investment Fund prior to campus allocation of investment earnings • Campus allocation will be net of these costs • Chancellor’s Office charges shall be recorded in the campus Pooled Investment Fund prior to campus allocation of investment earnings • Campus allocation will be net of these costs

12. Accounting Procedures Charges NOT allocable to CSU Fund 541: • Charges for the State payback of investment earnings • These charges shall be recorded in CSU Fund 485 – CSU Operating Fund • Any future charges from the State Controller for audits of the student fees in the CSU Operating Fund • These charges shall be recorded in CSU Fund 485 – CSU Operating Fund

13. Accounting Entries In CSU Fund 541, Pooled Investment Fund: • SWIFT allocation to Campus of $1,500,000: • Credit Fund 541, Acct 508001, Income from External Investments $1,500,000 • Debit Fund 541, Acct 108090, Investments $1,500,000 • Wells Fargo Charges to campus of $2,500: • Debit Fund 541, Acct 660046, Wells Fargo Bank Chgs $2,500 • Credit Fund 541, Acct 108090, Investments $2,500 • CO Cash Management Charges to campus of $10,000: • Debit Fund 541, Acct 660047, CO Cash Mgt Overhead $10,000 • Credit Fund 541, Acct 108090, Investments $10,000

14. Accounting Entries In CSU Fund 541, Pooled Investment Fund, cont: • Campus allocation of interest to other funds: $1,000,000 - $2,500 - $10,000 = $1,487,500 • Debit Fund 541, Acct 108090, Investments $1,487,500 • Credit Fund 541, Acct 508001, Income from External Investments $1,487,500 Important: Fund Balance in CSU Fund 541 should be zero at year end, no due to or due from entries required

15. Accounting Entries • Campus allocation of interest to other funds: In CSU Fund 485, CSU Operating Fund: • Debit Fund 485, Acct 108090, Investments $700,000 Credit Fund 485, Acct 508001, Income from External Investments$ 700,000 Other CSU Funds in 948: • Debit to CSU funds in 948, Acct 108090, Investments $ 787,500 Credit to CSU funds in 948, Acct 508001, Income from Ext Investments $ 787,500 IMPORTANT: CSU Fund 485 gets its full share of net earnings, less allowable capitalization costs (ex.,Fund 499)

16. Major Changes • State interest payback – change in method of allocating and recording between CO and campuses • CSU Carry-Forward Fund policy allows for Investment earnings in CSU Fund 485 – CSU Operating Fund, to be transferred out to CSU Fund 491 – Special Projects, for the purpose of funding capital programs. • Net of state interest payback

17. Interest Payback to State Negotiated Agreement with the State: • CSU agreed to pay any lost interest earnings (at SMIF rates) back to the state each year. • In 2006/07: • Campus’ portion of the estimated pay-back to the state was reduced “off the top” of 2006-2007 final budget allocations. • Some campuses passed this “reduction” on to campus departments • Other campuses established revenue budget line for this within CSU Fund 485 for the amount of the reduction, keeping the effect on campus CSU Operating Fund expense budgets neutral.

18. Interest Payback to State • In 2007/08: • 07/08 Campus’ state general fund (Fund 0001) support appropriation restored for amount that was reduced off the top in 06/07. • Campuses to cover their share of annual state interest pay back from interest earnings transferred into Fund 485. • The amount of the annual state interest pay back will be included each year in the Final Budget Allocation memo from the Chancellor’s Office Budget Office.

19. Interest Payback to State • 2007/08, continued: • CO will issue quarterly Cash Posting Orders (CPO) transferring cash from each campus to the CO within CSU Fund 485. • The sum of the quarterly transfers will equal the annual interest payback for each campus. • Unique FIRMS object code has been established for recording interest payback

20. Interest Payback to State 2007/08, continued: • Campus receives budget allocation that includes interest payback for year, $200,000 • Campus receives first quarter CPO: • Debit Fund 485, Acct 660048, Interest Payback to the State $ 50,000 • Credit Fund 485, Acct 108090, Investments $ 50,000 • Second, third, and fourth quarter the same

21. Allowable transfer to CSU Fund 491 • Campus calculates earnings available for transfer to CSU Fund 491, Special Projects: • Annual Investment earnings to 485 = $ 1,100,000 • State interest payback = $ 200,000 • Available for transfer to fund capital programs = $900,000 • In CSU Fund 485, Debit Acct 680336, Transfer Out to CSU Fund 491 • Offset to Acct 108090, Investments • In CSU Fund 491, Credit Acct 506335, Transfer In from CSU Fund 485 • Offset to Acct 108090, Investments

22. Summary of Changes • New internal service fund, CSU Fund 541, Pooled Investment Activity • Investment earnings recorded in FIRMS object code for investment earnings (NOT transfers) • Recorded first in CSU Fund 541 • Allowable investment and CMO charges expensed in CSU Fund 541 • Net earnings allocated to other CSU Funds in 948, using same investment earnings FIRMS object codes

23. Summary of Changes Summary of changes, continued: • Quarters redefined for SWIFT investment earnings allocations from the CMO • Allows for timely legal close • No fund balance in CSU Fund 541, Pooled Investment Fund at year-end • CSU Fund 485 to be allocated all of its net earnings, less allowable capitalization costs (ex., Fund 499, Revolving Fund) • Net Earnings allocated to other CSU Funds in 948 per other regulatory and campus allocation policy

24. Summary of Changes Summary of changes, continued: • June investment earnings to campuses by July 20 in order to record as GAAP entry • Quarterly CPO’s for State interest payback to be recorded in CSU Fund 485 and charged to 660048, Interest payback to state • Investment earnings in Fund 485, less interest payback to state, may be transferred to CSU Fund 491 to fund capital programs • QUESTIONS/DISCUSSION?

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