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The Myths and Perils of Carryforward Balances

The Myths and Perils of Carryforward Balances Maria Anguiano, University of California , Riverside Kelly M. Ratliff, University of California, Davis Su-Lin Shum, University of California, Davis. Agenda. Systemwide perspective Campus background and context Campus approach.

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The Myths and Perils of Carryforward Balances

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  1. The Myths and Perils of Carryforward Balances Maria Anguiano, University of California, Riverside Kelly M. Ratliff, University of California, Davis Su-Lin Shum, University of California, Davis

  2. Agenda Systemwide perspective Campus background and context Campus approach

  3. The University of California includes 10 Campuses, 5 Academic Medical Centers and 3 National Laboratories Established in 1868 and Governed by a 26-member constitutionally autonomous Board of Regents Educated over 235,000 full-time equivalent studentsin FY2012-2013 Employs 140,000 full-time equivalent employees UC’s assets total $53 billion UC’s research enterprise includes more than 800 research centers, institutes, laboratories and programs

  4. Operational Liquidity THINGS TO CONSIDER Daily/ monthly & seasonal needs (debt service) Reserving for extraordinary circumstances Incoming cash flow patterns Balancing investments vis-à-vis timing of operational needs Framing institution’s policy for various constituent groups Rating impacts Opportunity costs Institutionalizing requirements

  5. UC’s financial strength benefits from diverse revenue streams which flow in throughout the year Revenues in FY2012-13 Over the past five years, UC has consistently focused on optimizing liquidity Key questions: What is the “right” level of liquidity to maintain on hand, given our operational needs and ratings agency requirements? How do we evaluate the trade-off of holding liquidity vs. investing in longer term assets? Given a target level of liquidity, how can we work with campuses to ensure those targets are met? Other 6% Student Tuition & Fees 14% State 10% DOE Labs 4% Supplies 9% Grants & Contracts 22% Medical Centers & Auxiliaries 45% Total $24.3 Billion

  6. UC’s Target Liquidity Policy Investments should be sufficient and liquid enough to cover daily operating needs (such as payroll, debt service, etc) Remainder moved to longer-term investment vehicles to increase potential returns as risk profile permits Funds should cover “extraordinary” liquidity needs and comparable metrics of days cash to other universities Short-term assets should hold enough rating agency defined investments to meet daily and weekly coverage requirements

  7. UC has 2 Investment Vehicles for Current Funds: The Short-Term Investment Pool (STIP) & Total Return Investment Pool (TRIP) TRIP STIP • Total Return Investment Pool (TRIP) was launched in 8/2008 as an alternative investment to STIP • TRIP is designed to maximize return on long-term working capital, subject to an acceptable level of risk, by investing across a broad range of asset classes • Target Return Rate: 4.75% • Asset Allocation: 50% Public Equity; 20% Fixed Income; 30% Alternatives • Short-Term Investment Pool (STIP) is the investment vehicle for all operating funds of the University • All revenues flow into STIP, and all expenditures (operations, payroll, debt service) are paid from STIP • Target Return Rate: 2.4% • Asset Allocation: 100% Fixed Income

  8. UC Liquidity is a vast ocean with ripples on top The most significant inflows and outflows of liquidity are planned, and represent large expenses such as payroll and debt service Since 2004, we have not had a “black swan” scenario affect liquidity STIP Daily Inflow/Outflow as a % of Total 2004-2012 99% of the time between 6% (+/-)

  9. Liquidity is aggregated into STIP each day, and then a portion is invested in TRIP Med comp Sales & Service Gifts & Endowment Fees All campus funds are aggregated into one “pot” of working capital Grants & Contracts Reserves General funds Plant Funds used across campus STIP: Aggregated Working Capital Working capital all goes into STIP Money gets moved to TRIP as a % of total cash, not fund by fund TRIP STIP

  10. We have gone through a multi-year process to move “excess” investments in short-term assets into TRIP UC STIP/TRIP Ratios Former (2010) Future (2014) From Oct 2010 – June 2013, we moved $2 billion to TRIP  Resulted in incremental $100 mm in interest income over that period Liquidity optimization work in 2012 / 2013 identified remaining ~$2 billion over-investment in short-term assets  Currently moving $2 billion from STIP to TRIP

  11. Campus Perspective

  12. There’s an Elephant in the room We call him Carry Forward

  13. What has UC Davis done to get him out in the open?

  14. UC DavisCampus Facts • Started in 1905as the "farm" for UC Berkeley. Founded as a separate campus in 1959. • Students as of fall 2013: 34,000 • 4colleges, 6professional schools • 99undergraduate majors • 90 graduate programs • 23 intercollegiate sports (NCAA Division I) • UC Davis accounts for $6.9 billion and 69,000 jobs • 22,500employees (4,100 academic, 14,900 staff, 3,500 students) • Research Funding: • 13th among U.S. ranked public universities • 21ndamong public and private universities Member of the Association of American Universities 1st in the world for agriculture and forestry (QS World University Rankings, 2014) 9th ranked public university by U.S. News & World Report 1st in Sierra Magazine 2012 “Cool Schools” Survey • Health System: • Top Hospital and"A" Hospital Safety Award, Leapfrog Group • Consumer Choice Award, National Research Corporation

  15. New Budget Model

  16. 2020 Initiative

  17. What are Carryforward Balances? • Unexpended balances at the end of the year • net revenue, plus prior year balances • designated use is not easily reflected in the balance • often the result of salary or other savings • occur in most fund sources

  18. Why are Carryforward Balances Important? Fiscally responsible management practice Secure funds for multi-year commitments in advance Manage financial risk Note: few formal mandates prohibiting balances at UC

  19. A Look BackCarryforward Balances Highly decentralized management of funds No uniform policy or guidance about appropriate levels Multiple approaches about management of funds Inconsistentinformation

  20. MYTHS What we Hear in the Absence of Carryforward Guidance Lack of understanding Units: “We have no money!” Leadership: “Why is there so much money?” Entitlement “This is my money!” “I/my department have critical plans” Fear “You are going to take it all!”

  21. Disclaimer ! We had to centrally assess carryforward funds in 2012 as a result of a significant budget shortfall; this practice is not viewed as routine.

  22. PERILS What we Risk in the Absence of Carryforward Balances Lack of stewardship for our students, citizens, other funders Inconsistent reporting limits strategic planning Mismatchbetween priorities and funding sources

  23. What we Wanted Strategic decision making Consistency Transparency Flexibility Current and future fiscal scenarios Impact to student fees New budget model 2020 Initiative Enrollment growth Campus and unit priorities While Considering

  24. OVERVIEW What Did we Do? 1. Researched best practices 2. Engaged the education advisory board 3. Partnered with accounting and key campus units to establish methodology 4. Issued guidance – white papers Policy Framework Reporting and Recording Guidance 5. Consulted with key campus stakeholders 6. Repeat step 5

  25. Options Considered

  26. APPROACH TAKEN B with Guidance 10-15% (30-60 DAYS CASH) For funds managed through campus budget model (state, tuition) and all student fees 25% (90 DAYS CASH) For funds with a higher degree of volatility e.g., indirect costs, patent funds, unrestricted funds, etc.

  27. COBL and KOBL RECORDING FUTURE COMMITMENTS Consistent process to account for funds already committed COMMITTED OBLIGATIONS (COBL) Hard commitments that restrict the use of funds and/or may be legally binding KNOWN OBLIGATIONS (KOBL) Potential expenditures

  28. Examples Start-up funding for faculty recruitment and retentions Graduate fellowships Endowed chairs Contract employees Equipment Renovation Bridge funding

  29. Process STEP ONE Create a standard reporting template

  30. Process STEP TWO Spring review

  31. Process STEP THREE Fall review

  32. Process STEP FOUR Strategic decisions

  33. What we are Seeing USE OF CARRYFORWARD FUNDS Engaging in new conversations with decision-makers Investments to meet local priorities Better timing of budget information Advancing Chancellor and Provost goals

  34. Resources • Budget and Institutional Analysis:http://budget.ucdavis.edu • Carryforward White Papers:http://budget.ucdavis.edu/analyses-reports-white-papers/carryforward.html • Education Advisory Board:http://www.eab.com/Research-and-Insights/Business-Affairs-Forum/Custom/2012/08/Calculating-and-Communicating-Carry-Forward-and-Reserve-Policies

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